With the two-year extension of all of the 2001 and 2003 Bush-era tax cuts as its centerpiece, Congress this week approved a major tax-cut package negotiated by President Obama and top Senate Republicans that is designed to provide tax relief for all working Americans and spur job growth.
H.R. 4853 — The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 — cleared the Senate by an overwhelmingly 81-to-19 margin on Dec. 15 and was approved by the House a day later by a vote of 277 to 148. President Obama signed the bill into law this afternoon.
Though imperfect, NAHB supported the legislation because it will provide a measure of stability for American working families and home builders.
The tax package — estimated to cost $858 billion over 10 years — includes several positive provisions for NAHB members. It will:
Extend the 10%, 15%, 25%, 28%, 33% and 35% federal income tax rates through 2012. Had no action been taken, all of the marginal tax rates would have risen in January, with the top rate jumping to 39.6%.
Renew the expired estate taxes for two years at a rate of 35%. Adjusted for inflation, the first $5 million of an individual’s estate would be passed on to heirs tax-free and couples could exempt $10 million of their estate’s value.
While NAHB would have preferred to see the estate tax eliminated, this was the best proposal available. House Democrats failed in an attempt to lower the estate tax exemption to $3.5 million and impose a stiffer tax rate of 45% above that level. Except for the temporary repeal of the estate tax this year, the rate has not been less than 45% since 1931. Without congressional action, the estate tax would have returned in 2011 with a top rate of 55% for estates larger than $1 million for individuals and $2 million for couples.
Provide an estimated 21 million middle-class households and small businesses relief from the Alternative Minimum Tax (AMT) through 2011. In 2010, individuals can exempt $47,470 ($72,450 for couples filing jointly) in income from the AMT. Those exemption amounts will increase to $48,450 and $74,450, respectively, in 2011.
Maintain the current long-term tax rate on dividends and capital gains through 2012. Had no action been taken, the highest capital gains rate of 15% was expected to rise to 20% next year and dividend payments could have been taxed at a rate as high as 39.6% for top earners.
Renew the New Energy Efficient Home Tax Credit (45L credit) for 2010 and extend it through the end of 2011. The section 45L tax credit is the only federal incentive available for efficiency in new home construction; about 10% of all new homes sold in 2009 qualified. The program provides $2,000 tax credits to builders and developers for the construction and sale of homes that achieve a 50% reduction in their energy consumption.
Allow businesses to write off the full cost of capital investments (excluding residential and commercial buildings) after Sept. 8, 2010 and through the end of 2011. Normally, businesses would be required to depreciate those expenses over many years.
Provide a 50% bonus depreciation in 2012. Under the American Recovery and Reinvestment Act of 2009, Congress temporarily allowed businesses to recover the costs of certain capital expenditures made in 2008 and 2009 more quickly than under ordinary depreciation schedules by permitting those businesses to immediately write off 50% of the cost of certain depreciable property (rental residential real estate, in general, is excluded) placed in service in those years. The new law extends the provision for 50% bonus depreciation through 2012.
Extend the increased small business expensing limits through the end of 2012. Under the legislation, qualified businesses may expense up to $125,000 of property placed in service, and this amount is reduced dollar for dollar by the amount of property placed in service that exceeds $500,000.
Extend the expensing of brownfields remediation costs through 2011.
Eliminate the Pease itemized deduction phase-out through 2012. The Pease rule reduces the value of itemized deductions such as the mortgage interest deduction and the real estate tax deduction for upper adjusted gross income taxpayers.
Extend the tax deductions in the Gulf Opportunity Zone for an additional two years beyond the placed-in-service date.
Extend the deductibility of Private Mortgage Insurance through 2011; however the existing adjusted gross income limitation of $110,000 remains.
The package would also:
Extend unemployment benefits for an additional 13 months.
Provide a temporary, one-year payroll tax holiday of 2% for all workers by cutting Social Security taxes from 6.2% to 4.2% on the first $106,800 of wages. This tax cut applies only to employees, not employers.
Extend the college tuition and child care tax credits for two years.
Extend an option allowing taxpayers to deduct state and local general sales taxes in lieu of state and local income taxes for those who itemize their deductions.
Provide a marriage penalty relief extension through 2012. The bill ensures that the standard deduction for couples is exactly twice the amount for single filers.
Low Income Housing Tax Credit
Despite an intensive push by NAHB lobbyists, the tax cut package omitted a key provision championed by the association. It failed to include an extension of the Section 1602 “exchange” provision for the Low Income Housing Tax Credit (LIHTC) program that would allow state housing finance agencies to trade in a portion of their tax credit allocation for grant dollars to support local affordable housing.
In the days leading up to the vote, NAHB was in constant contact with lawmakers from both sides of the political aisle and sent a letter to the House and Senate leadership expressing strong disappointment “that a critical program for the Low Income Housing Tax Credit, the 1602 exchange, was excluded from the bill.” The letter called on Congress to restore this “job creating provision to H.R. 4853.”
Smaller Tax Incentive for Energy Retrofits
At the same time, NAHB was calling on lawmakers to reverse last-minute changes to the Existing Home Retrofit Tax Credit (25C credit) that will greatly diminish its value.
Although H.R. 4853 does include an extension of the 25C credit through 2011, modifications were made reducing the credit value to its 2006-2007 levels of 10% of the installed costs with maximum credit for all qualified retrofits of $500. The legislation also reinstates lifetime credit caps that disqualify any home owner who has claimed more than $500 in 25C tax credits since Jan. 1, 2005, from any further credits. As a result, this offers little practical incentives for home owners or remodelers.
In its letter to lawmakers, NAHB said that the reduced benefits of the 25C tax credit for consumers who undertake certain energy efficient upgrades would “place thousands of remodeling jobs at risk” and urged lawmakers to adjust the 25C credit to its 2009-2010 levels, which allow taxpayers to claim up to $1,500 for installing eligible energy-saving retrofits in their homes.
In the end, lawmakers acted to keep the plan agreed upon by the White House and Republicans virtually unchanged, because any moves to alter the package would have risked unraveling the tenuous deal altogether.
In the waning days of the lame duck session, NAHB continues to meet with lawmakers and explore other options for extending the LIHTC exchange and restoring the 25C tax credit to its previous levels and rules under the American Recovery and Reinvestment Act. However, as Congress looks to wrap up its work, there are likely few, if any, opportunities available to move these housing priorities forward. If not, NAHB remains committed to addressing these issues when the 112th Congress convenes in January.
For more information on the tax package, see NAHB’s Eye on Housing blog.
To read the legislation, click here and enter H.R. 4853 in the box at the upper center of the page.
For more information call J.P. Delmore at NAHB, 800-368-5242 x8412.