Expiring Tax Provision at the End of 2012

Unless Congress acts, numerous tax provisions adopted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) are scheduled to expire at the end of 2012. They were originally scheduled to expire at the end of 2010, but the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the provisions for another two years. The following is a summary of some of the more important tax provisions scheduled to expire.

Individual Tax Rates
EGTRRA created a 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. Thus, under EGTRRA, the tax rates are 10, 15, 25, 28, 33, and 35 percent. Unless Congress acts, for tax years after 2012, the tax rates will go back to the pre-EGTRRA rates of 15, 28, 31, 36, and 39.6 percent.

Marriage Penalty Relief
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. The basic standard deduction for a married taxpayer filing separately continued to equal one-half of the basic standard deduction for a married couple filing jointly; thus, the basic standard deduction for unmarried individuals filing a single return and for married couples filing separately are the same.

After 2012, the law will revert to married couples filing jointly receiving a standard deduction which is 167 percent of the deduction for single individuals rather than 200 percent. Individuals filing as married filing separately will receive half of that amount.

EGTRRA also increased the size of the 15-percent regular income tax rate 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. After 2012, the upper limit of the 15 percent bracket for married individuals filing jointly is scheduled to be 167 percent of the upper limit for single individuals, rather than 200 percent.

Child Tax Credit
EGTRRA increased the child tax credit from $500 to $1,000. After 2012, the credit is scheduled to revert to $500. In addition, the more favorable rules relating to the amount of the credit that is refundable are scheduled to expire in 2012.

Overall Limitation on Itemized Deductions
EGTRRA repealed the overall limitation on itemized deductions. The repeal was phased-in over five years. EGTRRA provided: (1) a one-third reduction of the otherwise applicable limitation in 2006 and 2007: (2) a two-thirds reduction in 2008, and 2009; and (3) no overall limitation on itemized deductions in 2010, 2011, and 2012. Thus in 2009, for example, the total amount of otherwise allowable itemized deductions (other than medical expenses, investment interest, and casualty, theft, or wagering losses) was reduced by 3 percent of the amount of the taxpayer’s AGI in excess of $166,800 ($83,400 for married couples filing separate returns). Then the overall reduction in itemized deductions was phased-down to 1/3 of the full reduction amount (that is, the limitation was reduced by two-thirds). Pursuant to the general EGTRRA sunset, the phased-in repeal of the limitation sunsets and the limitation becomes fully effective again in 2013.

Personal Exemption Phase-out for Certain Taxpayers
EGTRRA repealed the personal exemption phase-out (PEP) for certain taxpayers with the repeal phased-in over five years. EGTRRA provided: (1) a one-third reduction of the otherwise applicable limitation in 2006 and 2007: (2) a two-thirds reduction in 2008, and 2009; and (3) no PEP in 2010. This was extended for another two years through 2012. However, absent new legislation, the PEP becomes fully effective again in 2013.

Dependent Care Tax Credit
Currently, the maximum dependent care tax credit is $1,050 (35 percent of up to $3,000 of eligible expenses) if there is one qualifying individual, and $2,100 (35 percent of up to $6,000 of eligible expenses) if there are two or more qualifying individuals. The 35-percent credit rate is reduced but not below 20 percent, by one percentage point for each $2,000 (or fraction thereof) of adjusted gross income (AGI) above $15,000. Therefore, the credit percentage is reduced to 20 percent for taxpayers with AGI over $43,000.

Under the extended EGTRRA sunset rules, the percent of eligible expenses is reduced from 35 percent to 30 percent and the AGI limitation is reduced from $15,000 to $10,000 for tax years beginning after December 31, 2012.

Capital Gains and Dividends
EGTRRA reduced the tax rate on net capital gains to 15 percent for gain other than gains relating to collectibles, qualified small business stock and unrecaptured Section 1250 income, if the regular tax rate that would otherwise apply is 25 percent or higher and 0 percent for the same type of gains if the regular tax rate that would otherwise apply is lower than 25 percent. Qualified dividend income is subject to the same maximum capital gain rates as net capital gains. The reduced maximum capital gains and dividend rates of 15 percent and 0 percent are scheduled to expire for tax years beginning after December 31, 2012.

Education Incentives
Effective for tax years beginning after December 31, 2012, the changes made by EGTRRA to Coverdell education savings accounts no longer apply. The EGTRRA changes scheduled to expire are: (1) the increase in the contribution limit to $2,000 from $500; (2) the increase in the phaseout range for married taxpayers filing jointly to $190,000-$220,000 from $150,000-$160,000; (3) the expansion of qualified expenses to include elementary and secondary education expenses; (4) special age rules for special needs beneficiaries; (5) clarification that corporations and other entities are permitted to make contributions, regardless of the income of the corporation or entity during the year of the contribution; (6) certain rules regarding when contributions are deemed made and extending the time during which excess contributions may be returned without additional tax; (7) certain rules regarding coordination with the Hope and Lifetime Learning credits; and (8) certain rules regarding coordination with qualified tuition programs.

Effective for tax years beginning after December 31, 2012, the changes made by EGTRRA to the student loan interest deduction provisions no longer apply. The EGTRRA changes scheduled to expire are: (1) increases that were made in the AGI phaseout ranges for the deduction and (2) rules that extended deductibility of interest beyond the first 60 months that interest payments are required. With the expiration of EGTRRA, the phaseout ranges will revert to a base level of $40,000 to $55,000 ($60,000 to $75,000 in the case of a married couple filing jointly), but adjusted for inflation since 2002.

Under the sunset provisions of EGTRRA, the exclusion from gross income and wages for the NHSC Scholarship Program and the Armed Forces Scholarship Program will no longer apply for tax years beginning after December 31, 2012.

The specific exclusion for employer-provided educational assistance was originally enacted on a temporary basis and was subsequently extended 10 times. EGTRRA deleted the exclusion’s explicit expiration date and extended the exclusion to graduate courses. However, those changes are subject to EGTRRA’s sunset provision so that the exclusion will not be available for tax years beginning after December 31, 2012. Thus, at that time, educational assistance will be excludable from gross income only if it qualifies as a working condition fringe benefit (i.e., the expenses would have been deductible as business expenses if paid by the employee). To meet such requirement, the expenses must be related to the employee’s current job.

Adoption Credit
The EGTRRA sunset provisions would also reduce the adoption credit available by reducing the dollar limitation on qualified adoption expenses that may be taken into account as well as reducing the modified adjusted gross income limitation, which would affect the number of individuals eligible for the credit.

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