Congress Negotiating over Tax Extenders as Clock Runs Down

Congressional staff reportedly worked over the Thanksgiving weekend on negotiations over tax extenders, the dozens of expiring and already expired tax breaks that perennially occupy Washington just before the end of the year.

As usual, the Internal Revenue Service commissioner has issued a warning that tax season could be delayed next year unless Congress acts on deciding which tax breaks will be allowed. Typically, lawmakers end up deciding to extend the lot of them for another year and put off for another year the more difficult job of deciding which ones should be axed.

Earlier this year, Congress tried to get ahead of the December deadline, but still couldn’t agree. In July, the Senate Finance Committee passed a tax extenders bill, but it has been languishing ever since in the Senate (see Senate Finance Committee Passes Tax Extenders Bill). The House, for its part, took up some individual extender items, voting to make some of the tax breaks permanent, such as the research tax credit (see House Backs Permanent Research Tax Credit over Obama Objections).

Sen. Orrin Hatch, R-Utah, the chairman of the Senate Finance Committee, sounded a cautiously hopeful note Monday, telling reporters, according to The Wall Street Journal, “I think we’ll get it done,” but then he added, “There’s no guarantee we’re going to get it. I’m working hard to do it and we’ll see what happens.”

Lawmakers remain at odds on some issues, such as indexing the Child Tax Credit and the American Opportunity Tax Credit for inflation, and what to do about the production tax credit for wind energy, which may be extended with the proviso that it will be gradually phased out.

Other issues are coming up too, according to the Washington Post, include expanding the Earned Income Tax Credit to include more childless workers, and whether the tax breaks need to be paid for to offset the high cost. Also muddying the negotiations are concerns over several taxes included in the Affordable Care Act, such as the Cadillac tax on high-cost health plans and the medical device tax. Even though they aren’t traditionally included in tax extenders legislation, some lawmakers are hoping the tax deal will include a repeal of these provisions. Congress needs to decide what to do in the next few weeks, and with a highway funding bill and omnibus spending bill also needing to be passed by the end of the year, there’s precious little time to decide.

H&R Block’s Tax Institute has estimated that more than $80 billion in tax breaks are riding on Congress’s action. The expiration of the state and local sales tax deduction alone would affect one out of 15 taxpayers, with nearly 10 million tax returns claiming $16 billion using this deduction. Nearly 4 million tax returns deducted mortgage insurance premiums for $5.8 billion in tax benefits. The educator expenses deduction for teachers totaled more than $869 million on nearly 3.5 million returns. On more than 1.1 million tax returns, students used the tuition and fees tax benefit to deduct $2.7 billion. The mortgage debt relief tax break affected more than 330,000 tax returns, but delivered more than $29 billion in relief.

All in all, there are hundreds of thousands of taxpayers and billions in tax money depending on the decisions that Congress makes in the next few weeks. Chances are, though, most lawmakers will end up putting off those decisions until after next year’s elections.

Michael Cohn is editor-in-chief of AccountingToday.com.