Thursday, May 13, 2010

How can we pay for the tax extenders?

Last December, the House passed a measure to keep the tax breaks (such as the deduction for qualified tuition and related expenses or the deduction of state and local general sales taxes and 47 others) beyond their 2009 expiration date, but the Senate didn’t act on the bill until March of 2010. These tax provisions are called extenders because they are temporary and must be extended to remain in the tax code. According to Don’tMessWithTaxes, there were conflicting views about how to pay for the tax extenders so it created some delay while each side hashed it out. The goal for the Senators and Representatives is having the extenders done by the end of May. The official combined bill is now entitled, the Promoting American Jobs and Closing Tax Loopholes Act. The bill will include business and individual tax extenders, money for unemployment benefits, welfare funding to states, and Build America Bonds. It is expected to cost almost $200 billion.

How will we pay for it? Don’tMessWithTaxes’ Kay Bell explains it here:

About $50 billion of that cost will be offset by other taxes or program cuts. Here's a quick look at some of the most likely ways to pay.
  • Carried interest will cost recipients more: negotiators are nearing an agreement to phase in higher taxes on carried interest, a type of compensation paid to managing partners of some partnerships, at the highest individual income tax rate. That's currently 35 percent, scheduled to increase to 39.6 percent in 2011. Now such remuneration is treated as capital gains, meaning it's taxed at 15 percent.

  • Ending foreign tax credit abuses: Tax writers are said to be looking at ways to stop "creative use of the foreign tax credit."
Deloitte Tax LLP reports that Congress is examining a proposal in Obama's fiscal year 2011
budget that seeks to prevent the separation of foreign taxes from associated income.

According to a Treasury Department explanation, the proposal would allow a credit for
foreign taxes "when and to the extent the associated foreign income is subject to U.S. tax in the hands of the taxpayer claiming the credit."

The change would take effect in 2011 and Joint Committee on Taxation numbers crunchers
estimate it would raise an estimated $9.5 billion over 10 years.

  • Other ways to pay for the massive bill might include allowing companies to delay pension funding requirements, imposing payroll taxes on service sector S corporations and barring treaty shopping by multinational companies.

A bank tax, however, is looking less likely as part of the extenders bill.

The only sure thing is that we can expect more -- and more esoteric -- payment provisions to be revealed as full consideration of the bill nears.

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