Midyear tax tip #3: Adjust withholding
First-time homebuyer tax credit extension is no sure thing

Tax extenders moving (maybe) in Senate

Senate Finance Committee Chair Max Baucus is trying yet again.

He's released a third take on the American Jobs and Closing Tax Loopholes Act of 2010, aka H.R. 4213 aka the tax extenders (and much more) package.

This latest version comes after his Senate colleagues balked at two earlier iterations.

This time the Montana Democrat further tweaks the provision that would change the treatment of carried interest income, as well makes as further cuts in spending provisions so that the bill won't add as much to the federal deficit.

A Senate vote to end debate and approve the latest Chairman's Amendment could happen tomorrow. There's even talk of an expedited process that could get the bill to the floor today.

Note "could," especially in connection with the prospect of quicker action, since that would require consent of Senate Republican leadership. When's the last time we saw that happen?

Carried interest carries on: The most work has been done on the carried interest provisions.

Senate Extenders 2.0 called for taxing these earnings as 50 percent ordinary and 50 percent pass-through treatment when from the disposition of assets held at least five years.

Under Senate Extenders 3.0, that even taxation split remains, but differences are noted for investment services partnership interests (ISPIs) and section 197 intangibles. There also are provisions for inventory items for section 751 purposes and partners who dispose of a publicly traded partnership (PTP) interest that is not an ISPI.

OK, that's all I got here. I'm not a business tax expert and I'm not going to insult potentially affected entities by trying to fake it. I'm going to pass the buck.

As soon as my blogging colleagues who are fluent in these tax provisions decipher the latest extenders language, I'll gladly point you to those posts.

S corp taxes: The other area that's caused a lot of concern is changes to the taxation of S corps. This looks to be substantially the same in 3.0 as in earlier versions.

Shareholder-employees of a personal service S corporation would be required to pay employment tax on their full share of allocated earnings.

The second revisions (June 16) called for the taxation system to apply to an S corporation engaged in a professional service business if 80 percent or more of its gross income is attributable to the service.

That's still in 3.0. 

Home buyers get through September: And yes, the housing industry lobbyists win again.

Under 3.0, the first-time homebuyer credit would be available for residential purchasers who had a binding sales contract on April 30 and who officially close on the home by Sept. 30.

I particularly love that this sop to big PAC contributors tax credit extension proposal coincides with the Treasury Inspector General for Tax Administration's latest report detailing continuing fraud in connection with the first-time homebuyer tax break.

Advance EITC outta there: In order to raise a bit more money, 3.0 would get rid of the advance payments via workplaces of the Earned Income Tax Credit (EITC).

Currently, certain low- and moderate-income individuals can claim this refundable tax credit. Most do so when they file their annual tax returns, but they've also had the option to get the credit in periodic payments throughout the year by having their employers reduce their amount of payroll withholding.

Administering this benefit has been a hassle for workplaces. And when it is done, the error rate is high.

Getting rid of the early EITC payment option, says Baucus, will affect few individuals. Even better for the extenders package, the elimination of advance payments will produce an estimated $1.2 billion in revenue over the next decade.

Individuals extenders still there: While all this wrangling over more esoteric provisions is going on, individual taxpayers might think the tax benefits that could save them some tax dollars have been forgotten. They haven't.

The individual tax breaks that would be extended, retroactively since they expired at the end of 2009, are the itemized deduction for state and local sales taxes, the additional standard deduction for state and local real property taxes and the above-the-line deductions for qualified tuition and related expenses and educators' out-of-pocket expenditures.

And yes, the tax-free rollover option for IRA distributions to charities is still there, too.

Of course, these extensions are just for 2010, which is half over. So we'll go through all this again in 2011.

Detailed info can be found in the Senate Finance Committee's summary of the latest major changes to the bill, as well as the bill's legislative language. Both are PDF files.

Then there's the House: Of course, even when (if?) the Senate OKs a version of H.R. 4213, the House then gets its say on changes made to the extenders package it approved in May.

That could cause some new problems.

Ways and Means Committee Chairman Sander Levin (D-Mich.), while reportedly being kept in the loop while Baucus has made changes to the bill, could decide he still likes his version better and hold firm against Senate changes.

So, as I've said way too many times before, we wait.

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