Tax season is just about to start, and taxpayers will be starting to prepare their returns for the 2018 tax year. Yet even as they do so, lawmakers haven't yet addressed some key provisions of the tax laws that expired at the end of 2017 -- and there's no guarantee that they'll be able to get their act together in time to let taxpayers and the IRS take them into account in their tax filings.
Most tax policy specialists have paid close attention to all the tax reform-related changes from new laws that took effect in 2018. That's pushed some older tax breaks out of the spotlight, and between the government shutdown and the latest incarnation of Washington gridlock, things aren't happening the way they usually do to fix them.
How tax extenders got to be a problem
The tax laws are full of provisions that offer breaks to certain groups of taxpayers for certain activities. Some of them are permanent provisions of the tax code that taxpayers can rely on year in and year out, but others are designed to last for a specific period of time, with firm expiration dates.
Each year, lawmakers face pressure to extend the expiration dates on favored tax breaks. However, doing so comes with a budgetary cost, and that cost can be substantial when tax breaks become permanent. It's cheaper from a budgetary perspective simply to extend the expiration date for a single year, kicking the can down the road into the future.
Recently, Congress has been increasingly late in dealing with tax extenders. For the 2017 tax year, these provisions didn't get extended until February 2018. That was late enough to create challenges for both taxpayers and IRS staff members. Yet it seems that no one's learned from that lesson, and now some think that lawmakers might just give up on the extenders rather than trying to deal with them after the start of tax season.
What are the extenders?
At issue are a number of popular tax breaks, including the following:
- Deductibility of private mortgage insurance (PMI) payments in the same manner as mortgage interest.
- Deductions from gross income for qualified tuition and fees for college.
- Exclusion from income of debt forgiven on a qualifying principal residence.
- Various credits for renewable energy initiatives, including certain electric vehicles.
There are also dozens of breaks that apply largely to businesses, especially in the energy arena.
Even though the extenders have generally had a good track record of getting renewed each year, there's reason to believe that this year could be different. With so many other tax changes having taken effect, it'd be easier to end these provisions without having as many taxpayers notice as they would in a year with fewer tax changes. In addition, some of the provisions have largely run their course. For instance, the exclusion of debt forgiveness was largely tied to the housing crisis in the late 2000s, and a rising housing market in the past decade has made mortgage modifications a lot less common.
It'd be tougher to kill some of the other credits. Electric vehicles have gotten a lot of notoriety from the rise of Tesla (TSLA 4.58%), and even though enough Tesla vehicles have used the credit that the amount of money available has been on the decline, it's still an incentive to further innovation in the industry. Millions of homeowners pay PMI on their mortgages, and although the higher standard deduction might make this deduction less relevant than in past years, it could still be perceived as negative. Similarly, many taxpayers use education provisions other than the tuition deduction, but those who do use it will feel its loss.
Keep your eyes on Washington
It's not too late for lawmakers in Congress to get extensions to these tax provisions passed in time for taxpayers to use them on their 2018 tax returns. But time is running out, and with little progress having been made so far, things are starting to look grim for those who've used these credits and deductions in the past.