With Republicans soon to be in control of Congress and the White House, the tax focus has shifted to a major rewrite of the Internal Revenue Code.
But this legislative approach means that more than 30 temporary tax provisions will disappear from the tax code on Jan. 1, 2017.
Whether they are resurrected in any new tax overhaul depends on how persuasive the various laws’ lobbyists are, how committed Senators and Representatives are to streamlining the tax code and how much tax revenue is gained or lost by their continued absence or revival.
Extenders usually long lives: These tax laws, which over the years ballooned to more than 50, are known collectively as extenders because they usually are renewed, or extended, for a year or two, sometimes retroactively, by Congress.
Last December, many expiring/expired extenders were made a permanent part of the tax code as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015.
Thirty-six provisions, however, were extended only through this or a few more years.
They include special interest tax breaks that, over the last decade or so, have received much public attention and derision. , such as special depreciation rates for race horses and NASCAR and other motorsports tracks; specific expensing rules for television, movie and theater performances (thanks “Hamilton“); and special excise tax rates for rum made in Puerto Rico and the U.S. Virgin Islands.
But also among the tax laws expiring at the end of 2016 are four that affect millions of individual taxpayers. Three are connected to residences; the fourth is used by students and/or their families. Below is a closer look at the exiting extenders.
Tuition and fees deduction: This is an adjustment to income, also known as an above-the-line deduction that can be claimed without the hassle of itemizing expenses on Schedule A. With this deduction, which is found at the bottom of page 1 of both the long Form 1040 and slightly shorter Form 1040A, eligible taxpayers can deduct up to $4,000 in higher education expenses paid for themselves, their spouse or dependents during the year.
Mortgage insurance premium deduction: This law lets homeowners who have private mortgage insurance (PMI) as part of their mortgage deduct these monthly premiums as interest on Schedule A. Typically, homeowners must purchase a PMI policy if they can’t come up with at least a 20 percent down payment on their home. The ability to deduct PMI was first enacted in 2006 and has been extended for the last decade. It’s popular not only with affected homeowners, but also the housing industry.
Mortgage debt relief exclusion: In the wake of the bursting housing bubble, this law was created to provide relief to some homeowners who had their mortgage restructured or debt forgiven due to a foreclosure or short sale. In most canceled debt situations, the forgiven amount is considered taxable income. But consumer advocates convinced lawmakers that this saw was too punitive for homeowners looking to keep their homes by working with their lenders to obtain more payable terms, and the Mortgage Debt Relief Act was enacted in 2007. It has been extended for subsequent tax years … until now.
Credit for energy-efficient home improvements: This credit has been around in various forms since 2005. It allows homeowners to write off part of the cost of certain energy-efficient improvements, such as insulation, some roofs and exterior windows and doors. This latest iteration of the law that applies to specific residential energy upgrades has a lifetime credit cap of $500 and they must be in place by Dec. 31.
Better tax policy practice: The individuals and businesses that benefit from the soon-to-expire tax extenders are no doubt freaking out a bit.
But the evaluation of special-interest extenders separately, rather than in an end-of-year rush as part of a large package, is a positive tax policy move.
“It’s really not ideal when you have a Congress that only acts on things when it has to,” says Scott Greenberg, an analyst with the Washington, D.C.-based Tax Foundation.
“Some are good tax provisions,” says Greenberg of the extenders. “Some are unideal, but on balance more good than bad. Some are straight up not worth being in the tax code at all.”
Rather than consider them as a take them all or leave them all group, Greenberg thinks it’s better to “just leave them alone, don’t expend the political energy.”
“The preferable approach,” he says, “is to examine each provision one by one and decide which should be kept.”
In or out of reform: Will all the expired extenders be dealt with as part of tax reform? Possibly. But not in the way that their supports hope.
They are just as likely to be jettisoned as extended. The incoming president-elect has, after all, said that any part of tax code overhaul should reduce or eliminate most of the deductions and loopholes available to the wealthy.
And if they don’t make it into any code revision, many tax policy experts believe that wouldn’t necessarily be a bad thing. Their thinking is that there’s no need to junk up a new, presumably less convoluted tax code with temporary provisions.
Cost of a complex tax code: Greenberg agrees that the costs of an inefficient tax code need to be taken into account during the tax reform debate.
“When talking about taxes, we tend to have a laser focus on revenue. That’s not a bad thing. The most important job of a tax code is to raise money,” says Greenberg. “But looking at other associated costs of tax policy, the lack of efficiency or tax complexity have their own costs.”
This includes the time taxpayers must spend to determine if they qualify for a tax break. There’s also the inefficiency effect of changing provisions, he says.
“There is very little rationale to have temporary tax provisions hanging around. A tax code should be stable. Individuals and businesses need certainty about what you’re going to be paying this year and next year,” Greenberg says. “A stable tax code is good for economy and helps people make the best the decisions for the long run.”
In the coming months, we’ll see what time frame will guide Congress as it re-envisions our tax laws.
For now, though, if any of the expiring extenders apply to you, claim the tax break while you can.