Don't Mess With Taxes

Congress clocks back in this afternoon, but it's unclear when they'll finally get around to extending several popular tax breaks that expired on Dec. 31, 2007.

If they don't act soon, we'll have repeat of the confusion that surrounded 2006 returns. Those paper forms didn't include the state sales tax deduction or the above-the-line deductions for tuition and fees and educator classroom supplies. The reason? Congress took so long to reauthorize the tax breaks.

The IRS had to come up with work-arounds, detailed in this blog item, for paper filers. Folks who use tax preparation software had it a bit easier. Even then, software companies were unable to get the changes in the first issues of their software because of Congressional slowness.

Could it be déjà vu all over again?

Work partially complete: The House passed its extenders bill (H.R. 6049) back in May, but the Senate has not yet acted. The problem: how to pay for them. The Administration and Republicans in the Senate oppose any new taxes and the measure has been stalled over the payment provision on that side of Capitol Hill.

Also still up in the air is a way to keep millions of filers off the alternative minimum tax rolls. In June, the House passed H.R. 6275 to provide AMT relief for one year. And, as with the extenders, the Senate is holding up the bill, again because of Republican objections over how to pay for the patch's $60 billion cost.

You remember the AMT. Created almost 40 years ago to ensure that wealthy taxpayers paid at least a minimum level of income tax despite their best loophole using efforts. The AMT now affects millions of middle-class taxpayers. They get caught because the AMT is not indexed for inflation, so for years, Congress has been approving temporary fixes to protect those taxpayers.

Remember, too, the last time Congress was slow in enacting the AMT patch? If not, you can read about it in this blog post.

The change eventually was enacted, but again at taxpayer filing expense. This year, the IRS wasn't able to process more than 13 million returns until mid-February because the taxpayers filed an AMT-related form that had to first be updated.

Other tax measures on tap: Several other tax measures also are likely to be approved … eventually. They include:

• Tax free direct IRA distributions to charity
  This option, which expired at the end of 2007, allowed individuals age 70½ or older to avoid tax on their traditional IRA withdrawals by transferring them straight to a qualified charity.   
  
• Basis reporting by brokers
  Brokers would be required to report the tax basis of securities sold by customers, including stocks, bonds, mutual funds and options so that accurate capital gains tax computations could be made, and checked by the IRS. To give brokers time to set up reporting systems, the measure would apply only to securities bought after 2009.   
• Expanded eligibility for the Child Tax Credit
  This $1,000 per child tax credit is available to most filers who have children younger than 17. But many low-income families do not get the full benefit of the credit; it's not available to families with earnings below $12,050 (indexed for inflation). The House extenders bill would lower the income threshold to $8,500.

Hurry up and wait: While you'd think that enacting popular tax breaks and keeping millions of folks from paying more to the IRS would be a good election-year move, don't be surprised if nothing happens before voters head to the polls.

Congress is scheduled to adjourn again at the end of September so most members can return home to make the case they should keep their jobs.

That means a post-election lame-duck session would be held to enact probably just those provisions that Congress considers "critical," with the especially contentious components dropped to ensure passage.

And we'll have to tune in to the fun and games of the new 111th Congress next year to see what happens to the rest.