Individuals

Expiring Tax Break

Description

Will it Be Extended?

1. Reduced Social Security Tax Rate

The Social Security tax for 2011 was imposed on the first $106,800 of 2011 wages and/or self-employment income.

For 2011, the withholding rate for the employee's share of the Social Security tax is temporarily reduced by 2 percent, from the usual 6.2 percent to only 4.2 percent.

For self-employed individuals, the Social Security tax component of the self-employment tax is also temporarily reduced by 2 percent, from the usual 12.4 percent to only 10.4 prediction.

The 2 percent rate cut was extended by Congress through February 2012. (For 2012, the Social Security tax will hit the first $110,100 of wages and/or self-employment income).

Lawmakers will have to pass another law to extend the payroll tax cut for the rest of 2012.

2. Alternative Minimum Tax Patch

Every year, Congress "patches" the AMT rules to prevent millions more households from getting socked with this add-on tax.

The annual patch job consists of allowing bigger AMT exemptions and allowing various personal tax credits to offset the AMT.

We are still waiting for the 2012 patch.

Without a new patch for 2012, lots more taxpayers will be unhappy with Congress, and 2012 is an election year. While it's a virtual certainty that a new patch will be installed for 2012, no one knows exactly when that might happen.

3. Higher Education Tuition Deduction

For 2011, this write-off can be up to $4,000 or $2,000 for higher-income folks.

It is likely to be extended through 2012.

4. Option to Deduct State and Local Sales Taxes

For 2011, individuals have the option of claiming an itemized deduction for general state and local sales taxes instead of claiming an itemized deduction for state and local income taxes. This option can be beneficial if your state has no personal income tax or you pay a very low state income tax rate.

It is likely to be extended through 2012.

5. The $500 Energy-Efficient Home Improvement Tax Credit

For 2011, you can claim a tax credit of up to $500 for certain energy-saving improvements to your principal residence.

The odds don't favor an extension.

6. Charitable Donations from IRAs

For 2011, IRA owners who have reached age 70 1/2 are allowed to make charitable donations of up to $100,000 directly out of their IRAs. The donations count as IRA required minimum distributions. So charitably inclined seniors with more IRA money than they need can reduce taxes by arranging for IRA donations to take the place of taxable required minimum distributions.

It seems likely that this break will be extended through 2012.

7. Charitable Qualified Conservation Contributions

Liberalized deduction rules for qualified conservation contributions to charities are scheduled to expire on December 31, 2011. Qualified conservation contributions are donations of real property interests (including remainder interests and easements) that restrict the use of real property. For individuals, the maximum write-off for 2011 qualified conservation contributions of long-term capital gain property was increased from the normal 30 to 50 percent of adjusted gross income. In addition, qualified conservation contributions were not counted when calculating an individual's allowable 2011 write-offs for other charitable contributions. Qualified conservation contributions in excess of what can be written off in 2011 could be carried forward for 15 years (only a five-year carryover period is allowed under the normal rules). For an individual who was a qualified farmer or rancher, the qualified conservation contribution write-off for 2011 donations of farm or ranch real property could be as much as 100 percent of the donor's adjusted gross income.

It is unclear if these favorable provisions are likely to be extended.

8. Deduction for Teachers' School Expenses

For 2011, teachers and other personnel at K-12 schools can deduct up to $250 of school-related expenses they pay for out of their own pockets --whether they itemize or not.

This break is highly likely to be extended through 2012.

9. Deduction for Home Mortgage Insurance Premiums

For 2011, eligible taxpayers are allowed to treat qualifying personal residence mortgage insurance premium amounts as deductible home mortgage interest.

It is unclear if this break will be extended.

10. Larger Salary Reduction Opportunity for Transit Passes

Your employer may allow you to sign up to reduce your taxable salary to pay for transit passes to get to and from work. In 2011, the maximum monthly amount you could set aside on a tax-free basis was $230. The maximum monthly amount for 2012 is scheduled to drop to only $125 unless Congress continues to allow a larger amount (which would be $240 for 2012).

It is unclear right now.

Businesses

11. Research and Development Credit

This long-standing break for increasing qualifying R&D expenditures

The R&D credit will almost certainly be extended through at least 2012. 

12. The Work Opportunity Credit and other business credits

The Work Opportunity Credit is a long-standing tax break for hiring members of certain targeted groups such as veterans, ex-felons, high-risk youths, food stamp recipients and others.

In addition, the credit for manufacturing energy-efficient appliances, the credit for constructing energy-efficient homes, and the new markets credit are all scheduled to expire.

It is fairly certain that the Work Opportunity Credit will be extended through at least 2012.

It is unclear whether the other business tax credits will be extended

13. 100 Percent First-Year Bonus Depreciation

For qualifying new assets that are placed in service (hooked up and ready for use) by December 31, 2011, business taxpayers can write off the entire cost in the first year. Qualifying assets include most software, vehicles, and equipment. Used assets do not qualify.

At this time, it is not clear if this provision will be extended.

14. Liberalized Section 179 Deductions

For tax years beginning in 2011, eligible small and medium-sized businesses can immediately write off up to $500,000 of qualifying new and used assets--including most software, certain "heavy" vehicles, most equipment, and up to $250,000 of qualifying real estate improvements. Assets must be placed in service (hooked up and ready for business use) by the end of the tax year beginning in 2011 to be eligible. For tax years beginning in 2012, the maximum Section 179 deduction is scheduled to fall to only $139,000, and Section 179 deductions for real estate improvements are scheduled to disappear.

It is unclear if these provisions are likely to be extended.

15. S Corporation Built-In Gains Tax Exemption

If you operate a corporation that converted from C to S status a few years ago, you probably know that a corporate-level built-in gains tax (known as the BIG tax) may apply when certain S corporation assets (including receivables and inventories) are turned into cash or sold within the recognition period. The recognition period is normally the 10-year period that began on the date when the corporation converted from C to S status. For gains recognized in tax years beginning in 2011, however, there is an exemption from the BIG tax. The exemption applies if the fifth year of your corporation's recognition period had gone by before the start of the tax year beginning in 2011.

It is unclear if this provision is likely to be extended.

16. Zero Percent Tax Rate on Future Gains from Qualified Small Business Stock

For qualified small business corporation (QSBC) stock that is issued in calendar year 2011, a 100 percent federal gain exclusion break is potentially available. That equates to a 0 percent federal income tax rate on future profits from selling QSBC shares down the road. You must hold the shares for more than five years to be eligible, and many companies will fail to meet the definition of a QSBC. Also, C corporation shareholders are ineligible.

For QSBC shares issued in 2012, the gain exclusion percentage is scheduled to drop to 50 percent, but it appears there is a decent chance of the 100 percent gain exclusion being extended through 2012.

17. Seven-Year Depreciation for Motorsport Property

Seven-year depreciation is allowed for qualifying property used for land improvement and support facilities at motorsports entertainment complexes placed in service in 2011.

It is not clear if there will be an extension.

18. Fifteen-Year Depreciation for Leasehold Improvements, Restaurant Property, and Retail Space Improvement

Fifteen-year straight-line depreciation is allowed for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail space improvements placed in service in 2011.

At this time, it is unclear if this will be extended.

19. Suspension of 100 Percent-of-Net-Income Limitation on Oil and Gas Percentage Depletion

A provision that would limit deductions for marginal oil and gas well percentage depletion to 100 percent of net income has been suspended for a number of years.

It is not clear if the suspension will be extended.

20. Larger Deductions for Certain Business Charitable Donations

The following are scheduled to expire December 31, 2011.

• The enhanced deduction for non-C-corporation businesses that donate "wholesome" food. It equals the lesser of:

   1. Basis plus one-half the value in excess of basis; or
   2. Two times the basis (the same enhanced deduction rule has been available to C corporations for years).

• An enhanced deduction for C corporations donating books to schools (intended for those with book inventories such as publishers and retailers). It equals the lesser of:

   1. Basis plus one-half the value in excess of basis; or
   2. Two times the basis.

• Enhanced deductions allowed for C corporations that donate computer equipment and technology to qualifying educational organizations and libraries. It equals the lesser of:

   1. Basis plus one-half the value in excess of basis; or
   2. Two times the basis. Items must be donated within three years after they were acquired new or constructed by the donor.

• Enhanced deductions allowed for qualified conservation contributions by C corporation farming and ranching operations. This involves charitable donations of real property interests (including remainder interests and easements) that restrict the use of real property. For qualified C corporation farm and ranch operations, the maximum write-off during tax years beginning in 2011 is increased from the 10 percent of adjusted taxable income to 100 percent of adjusted taxable income. Qualified contributions in excess of what can be written off in the tax year beginning in 2011 can be carried forward for 15 years.
• A favorable shareholder basis rule allowed for stock in S corporations that make charitable donations of appreciated assets. For such donations, each shareholder's tax basis in his or her S corporation stock is only reduced by the shareholder's pro-rata percentage of the company's tax basis in the donated assets.

It is unclear if these provisions are likely to be extended.