Daily Tax Update - December 2, 2010: House Passes Permanent Middle Income Tax Cut Bill

HOUSE PASSES PERMANENT MIDDLE INCOME TAX CUT BILL: Today, by a vote of 234 to 188, the House passed a bill (The Middle Class Tax Relief Act of 2010), which would permanently extend the Bush tax cuts for middle income Americans. The bill extends the 2001 and 2003 Bush tax cut provisions consistent with the provisions of the Statutory Pay-As-You-Go Act of 2010 (i.e., extensions of provisions that apply to adjusted gross income of less than $200,000 ($250,000 in the case of joint filers).

  • On the House floor today, incoming House Ways and Means Chairman Dave Camp said, "Clearly, this bill is going nowhere. Democrats are wasting time, while Americans look for work. Democrats are playing games, while Americans struggle to make ends meet. The American people did not send us here to posture; they sent us here to provide solutions. I had hoped that after the election we would get down to working together to solve the serious problems Americans are facing. That is why I was encouraged by the President agreeing to have Republicans and Democrats, House and Senate members sit down with his Administration to hammer out a deal on these expiring tax rates. I thought: maybe we have turned a corner. Instead of letting that process work itself out, instead of working with Republicans to prevent job-killing tax increases, House Democrats are back at it again – putting politics ahead of everything else. This is a time for serious negotiations and solutions, not political stunts. Far too much is a stake, far too many families are out of work and far too many families will soon see real and sizeable amounts of money taken out of their paychecks if the Democrats continue with these games. I urge my colleagues to reject this Democrat tax hike, this job-killing tax hike."
  • Before today’s vote, incoming House Speaker John Boehner said, "Instead of beating around the bush, the Congress ought to act today to stop all the tax hikes, to cut spending, because it would reduce the uncertainty that's affecting employers all across our country. And if the lame duck Congress is unable or unwilling to cut spending and stop all the coming tax hikes, the new majority in January will." 
  • House Majority Leader Steny Hoyer said that the House vote wouldn't undermine bipartisan negotiations on the tax cuts, adding, "nor is it intended to embarrass or to put Republicans in a difficult place."
  • Senate Finance Chairman Max Baucus said that he still intends to push at least one vote on a stand-alone middle-class tax cut bill. Baucus said, "It’s important to have a vote on middle-class tax cuts." The bill faces an uphill battle in the Senate because it must obtain 60 votes to pass. A compromise is expected to be worked out that temporarily extends all the tax cuts.

The bill includes a:

Two-year extension of alternative minimum tax relief. The alternative minimum tax ("AMT") has the effect of taking back many of the benefits of the 2001 and 2003 tax cuts. In order to ensure that middle-class taxpayers are able to enjoy the benefits of extending these tax cuts, the bill would extend AMT relief for nonrefundable personal credits and increasing the AMT exemption amount to $72,450 for joint filers and $47,450 for individuals in 2010 and 2011. This will protect more than 25 million families from the AMT. This proposal is estimated to cost $134.609 billion over 10 years.

Permanent extension of marginal individual income tax rate reductions for middle-class taxpayers. The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") created a new 10-percent regular income tax bracket for a portion of taxable income that was previously taxed at 15 percent. EGTRRA also reduced the other regular income tax rates of 28%, 31% 36% and 39.6% to 25%, 28%, 33%, and 35%, respectively. These marginal individual income tax rate reductions are scheduled to expire for taxable years beginning after December 31, 2010. The bill would permanently extend the 10%, 25% and 28% rate brackets. It also permanently extends the 33% rate bracket to the extent that this bracket applies to income of $200,000 or less for single filers ($250,000 or less for joint filers). This proposal is estimated to cost $655.414 billion over 10 years.

Permanent reduced capital gains and dividend tax relief for middle-class taxpayers. The bill would make permanent the temporarily reduced rates on capital gain and dividend income for taxpayers with adjusted gross income up to $200,000 for single filers and adjusted gross income up to $250,000 for married couples filing jointly. The bill would maintain the current 15% rate for middle-class taxpayers. For taxpayers with income above $200,000 ($250,000 for married couples filing jointly), the capital gains rate would revert to the pre-tax cut rate of 20%, and the dividend rate would revert to the pre-tax cut ordinary income rates. This proposal is estimated to cost $99.113 billion over 10 years.

Permanent marriage penalty relief for middle-class taxpayers. A "marriage penalty" exists when the combined tax liability of a married filing a joint return is greater than the sum of the tax liabilities of each individual computed as if they were not married. Prior to EGTRRA, numerous marriage penalties existed in the tax code. Among other things, EGTRRA increased the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual filing a single return and also increased the size of the 15% regular income tax bracket for a married couple filing a joint return to twice the size of the corresponding rate bracket for an unmarried individual filing a single return. The bill would permanently extend this tax relief. This proposal is estimated to cost $85.713 billion over 10 years.

Permanent extension of enhanced small business expensing. The bill would make permanent the increased small business expensing amounts set to expire at the end of 2010 that were enacted prior to the ARRA and prior to the "Small Business Jobs Act of 2010." In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write-off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. The bill would provide that small business taxpayers be allowed to write-off up to $125,000 (indexed for inflation) of capital expenditures subject to a phase-out once capital expenditures exceed $500,000 (indexed for inflation). This proposal is estimated to cost $25.474 billion over 10 years.

  • A summary of the bill can be accessed here.
  • The text of the bill can be accessed here.

FINANCE HOLDS TAX REFORM HEARING: Today, the Senate Finance Committee held a hearing titled, "Tax Reform: Historical Trends in Income and Revenue." Witnesses included: Dr. Douglas Elmendorf, Ph.D., Director, Congressional Budget Office; Dr. Thomas Barthold, Chief of Staff, Joint Committee on Taxation; and Dr. Mark Mazur, Deputy Assistant Secretary for Tax Analysis, the Department of Treasury.

  • In his opening remarks, Finance Chairman Max Baucus said, "Today, we look at historical trends in income and in taxes. This will give us useful background, as we roll up our sleeves for tax reform. First, we need to examine where Federal revenue comes from. The composition of Federal revenue has changed significantly since World War II. As a percentage of total revenue, Social Security taxes have increased and corporate and excise taxes have decreased." Baucus continued, "Second, we need to understand the distribution of income and Federal taxes. In 1980, the richest one percent of Americans received about nine percent of total income. By 2006, this share more than doubled, to about 19 percent. Meanwhile, the share of total income received by the 20 percent of households with the lowest incomes fell from about six percent to about four percent." Baucus concluded, "Third, we need to look at how America compares to our global competitors. We need to have a tax code that encourages companies to locate and grow in America. We need to help to create American jobs. We need to ensure that America maintains our global competitiveness. American companies will win when they compete with foreign companies, provided they compete on a level playing field.  But we also need to ensure that our tax code needs to promote the growth of our economy and the creation of jobs. I often hear that we need to change the tax code to level the playing field for American companies. Today, we’ll ask how our tax system compares with our major competitors. And so, let us consider the way that the American economy has changed. Let us think about whether we need to change our tax system, as well. And let us seek to ensure that our tax system expresses the values that we as a society want to put first."
  • Dr. Elmendorf stated, "This testimony addresses revenues collected by the federal government, how taxes affect economic activity, and the tax burden and who bears it. Other elements of the current tax system--such as its complexity and the resulting costs of compliance--are also important but are not addressed here." Elmendorf continued, "Over the past 40 years, federal revenues have ranged from nearly 21 percent of gross domestic product (GDP) in fiscal year 2000 to less than 15 percent in fiscal years 2009 and 2010, averaging 18 percent of GDP over that span. Most of the revenues--about 82 percent in 2010--come from the individual income tax and the payroll taxes used to finance Social Security, Medicare, and the federal unemployment insurance program. Other sources of revenues include corporate income taxes, excise taxes, estate and gift taxes-all together about 13 percent of revenues in 2010-and nontax revenues such as earnings of the Federal Reserve System, customs duties, fines, and various fees. Variation in individual income tax receipts, stemming from both policy changes and economic developments, has generated the largest fluctuations in revenues as a percentage of GDP. Under current law, revenues will rise significantly from their recent low relative to GDP as the economy recovers from the recession and the tax reductions enacted in 2001, 2003, and 2009 expire. The Congressional Budget Office (CBO) projects that under current law, federal revenues will reach 21 percent of GDP in fiscal year 2020, just above their peak share of 10 years ago."
  • Dr. Barthold discussed the Joint Committee on Taxation’s report summarizing the Federal tax system. The report states, "The current Federal tax system has four main elements: (1) an income tax on individuals and corporations (which consist of both a “regular” income tax and an alternative minimum tax); (2) payroll taxes on wages (and corresponding taxes on self-employment income); (3) estate, gift, and generation-skipping transfer taxes, and (4) excise taxes on selected goods and services."
  • Dr. Mazur testified, "Taxes have an effect on the economy in addition to the revenues collected because they cause people to alter their economic behavior, which generally results in a less efficient allocation of resources. Taxpayers can respond in three general ways to taxes: They can change the timing of their activities, for example by accelerating bonus payments or the sale of assets into this year if they think tax rates on earnings or capital gains will increase next year; they can adjust the form of their activities, for example by substituting tax-preferred fringe benefits for cash wages if the tax rate on wages increases; or they can change more fundamental aspects of their behavior, for example by working or saving less if tax rates on earnings or capital income increase. The crucial point is that taxes raise the price of taxed activities and thereby lower the relative price of other things. In particular, the income tax reduces the returns from working (the after-tax wage), which lowers the price of other activities relative to working; it also reduces the returns from saving (the after-tax rate of return), which lowers the price of current spending relative to saving for spending in the future." Mazur continued, "Provisions of the tax code can also affect economic activity by subsidizing certain types of expenditures. Until recently, most federal support for homeownership was provided through the tax code in the form of tax expenditures, which are revenues that are forgone because of special exclusions, exemptions or deductions from gross income, special credits, preferential tax rates, or deferrals of tax liabilities aimed at subsidizing certain activities. The largest and most widely used tax expenditure in the housing area is the deduction from taxable income for mortgage interest on owner-occupied homes, which results in an estimated $573 billion in forgone revenues from 2009 to 2013. That deduction encourages homeowners to buy homes and to take out larger mortgages than they might otherwise be able to afford, resulting in higher household debt, higher home prices in areas where the supply of housing is fixed, and less investment in other assets."
  • Testimony can be accessed here

IRS SENDING LETTERS TO TAX RETURN PREPARERS STRESSING NEED FOR ACCURATE TAX RETURNS: Today, the IRS said that it has "started sending out more than 10,000 letters to tax return preparers nationwide to remind them of their obligation to prepare accurate tax returns on behalf of their clients...The tax agency is sending the letters to paid preparers who completed tax returns in which the IRS has identified common errors. The letter includes an enclosure that reminds tax return preparers of their responsibilities and consequences of filing incorrect returns." The IRS release added, "All paid tax return preparers who prepare all or substantially all of a tax return are required to use the new registration system to obtain a PTIN. Individuals who obtained a PTIN prior to Sept. 28, 2010, need to reapply under the new system but generally will be reassigned the same number."

  • Additional information can be accessed here

MISCELLANEOUS GUIDANCE RELEASED TODAY:
Notice 2010-87 provides transitional relief for determining the timeliness of Federal tax deposits (FTDs) under section 6302 of the Internal Revenue Code. The notice provides that the Internal Revenue Service will not assert penalties under Code section 6656 for FTDs due in calendar year 2011 that are untimely solely because the depositor treated a statewide legal holiday as if it were a legal holiday in the District of Columbia.

Notice 2010-85 provides guidance to specified tax return preparers regarding the format and content of requests for waiver of the magnetic media (electronic) filing requirement due to undue hardship.

Notice 2010-82 provides guidance on the small employer tax credit under section 45R.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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