Congress Ramps-Up Tax Legislation at Mid-Year Mark

Whitlock Company Media & Resources

Congress Ramps-Up Tax Legislation at Mid-Year Mark

June 30th, 2009

A new administration brings a flurry of activity to Washington, D.C., and the Obama administration is no exception. Almost immediately after taking office, President Barrack Obama and Congress passed a massive stimulus bill, the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act). Since passage of the 2009 Recovery Act, Congress has been busy debating a host of other tax bills, such as health care reform, an overhaul of the individual income tax rates, the future of the federal estate tax, business tax reform, and more. Lawmakers have reached mid-year 2009 with a full plate of tax bills to enact.

John Defeo Photo

2009 Recovery Act

You’re probably familiar with many of the tax breaks in the 2009 Recovery Act. Among the highlights are:

New Making Work Pay credit;
Extended and expanded first-time homebuyer credit;
New deduction for state and local sales taxes for purchases of motor vehicles;
Enhanced child tax credit;
COBRA premium assistance;
Enhanced transportation fringe benefits;
Increased energy tax breaks; and
Extended net operating loss carryback for small businesses.

As is always the case after Congress passes new tax laws, the IRS must interpret them. Many of the IRS’s interpretations of the new incentives are very taxpayer-friendly. For example, the IRS recently determined that taxpayers in states without a sales tax can take advantage of the deduction for motor vehicle purchases.

Many members of Congress would like to extend or make some of the tax incentives permanent. One probable candidate for extension is the first-time homebuyer credit. Under current law, the credit will expire after 2009. There is even talk of raising the credit from $8,000 to $15,000. There is also support in Congress to make permanent the enhanced child tax credit. The White House would like to make permanent the Making Work Pay credit but many members of Congress balk at its $500 billion price tag.

Health care reform

How to pay for health care reform is the billion-dollar question on Capitol Hill. Under current law, employer-provided health insurance is not counted as income for tax purposes and the amount of health care benefits that are counted as tax-free is unlimited.

Several lawmakers have floated the idea of eliminating or reducing the exclusion. One proposal would cap the exclusion based on the value of the health insurance policy or income level of the employee eligible for the exclusion. Another proposal would be to convert the exclusion to a tax credit or deduction. Coupled with a possible exclusion would be expanded tax breaks for small businesses.

The Obama administration has proposed other ways to raise the money needed for health care reform. The president would overhaul the international tax rules to generate more revenue. Revenue from proposed climate change legislation would also help to pay for health care reform under the administration’s plans.

The White House is urging Congress to pass health care reform this year. Several House committees have already unveiled blueprints of health care reform. Our office will keep you posted of developments.

Tax rates

After 2010, tax rates for all individuals are scheduled to increase. The Obama administration has asked Congress to make permanent all of the current lower rates except for the top two rates. They would rise to 36 and 39.6 percent.

Congress is expected to go along with the president’s proposals to raise the tax rates for higher-income individuals. The White House defines higher-income individuals as single taxpayers with incomes over $200,000 and married couples with incomes over $250,000. It is unclear if Congress will pass legislation this year or wait until 2010.

Business taxes

The news for businesses is mixed. Congress is expected to approve some enhancement of the current extended net operating loss (NOL) carryback. Lawmakers could make more businesses eligible for the special treatment but they are unlikely to extend the relief to all businesses, regardless of size. Under current law, this tax break is limited to small businesses.

Large businesses, especially multi-nationals, will likely pay higher taxes. The White House has proposed overhauling the international tax rules, with special emphasis on the rules that allow certain corporations to defer paying U.S. taxes on foreign-source income. The president unveiled these proposals in May and the response on Capitol Hill was lukewarm. But the government’s need for revenue could convince some lawmakers to embrace them.

Estate tax

After 2009, the federal estate tax is abolished. However, it reappears in 2011. To complicate matters even more, the 2011 estate tax will mirror the 2001 estate tax. The lower rates and higher exclusions available between 2001 and 2009 will disappear after 2011.

Several bills have been introduced in Congress to extend or make permanent the estate tax as it applies this year. Lawmakers could vote this fall.

More legislation

Along with health care, individual, business, and estate tax reform, lawmakers are considering hundreds of other tax-related bills. Among them are:

A temporary alternative minimum tax (AMT) patch for 2009;
Help for cash-strapped pension plans;
Higher capital gains and dividends taxes for wealthy individuals;
Automatic enrollment in IRAs;
Enhanced Earned Income Tax Credit;
Repeal/reduction of the Code Sec. 199 domestic production tax credit;
Limiting itemized deductions for higher-income individuals;
Imposition of more information reporting to close the “tax gap;” and
Repeal of the last-in, first-out (LIFO) accounting method.

The second half of 2009 is certain to be busy in Congress. If you have any questions about these or any other tax bills in Congress, please contact our office.