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'Sunsets' Cast Shadow Over Tax Planning


The big tax cut passed by Congress last month will put a few extra dollars in the pockets of most taxpayers, but it's a bust for anyone who wants to do long-term financial planning. The reason: Tax deductions and credits you count on today could be gone tomorrow.

Within 10 years, so-called sunset provisions could wipe away every one of the 440 changes that the Economic Growth and Tax Relief Reconciliation Act of 2001 makes to the already voluminous tax code.

What's at stake? Bigger tax credits for small children, relief from the so-called marriage penalty, more generous deductions for retirement savers, repeal of the estate tax and a variety of savings incentives for financing college. All of these and more will disappear on or before Dec. 31, 2010, unless Congress votes to extend them.

It's a situation that leaves tax experts sputtering.

"These are the kinds of things that add a staggering amount of complexity to the tax code and drive people crazy," said Scott Hodge, executive director of the Tax Foundation in Washington. "It builds cynicism, it builds frustration among taxpayers, and it ultimately costs people a lot of money."

Added William Massey, editor of the newsletter RIA Federal Taxes Weekly Alert, "How do you plan with something like this?"

Steve Wilson, a Silicon Valley purchasing manager, understands the problem all too well. When he went back to night school several years ago, his employer agreed to pay for many of his work-related classes. The employer-paid education assistance was even more valuable because Wilson didn't have to pay tax on it, thanks to a special tax break.

Unfortunately, this break was on a regular sunset and sunrise cycle, which caused Congress to review it every few years. The result: Part of the tax break was taken away for graduate students like Wilson, who consequently will have to pay about $2,000 in federal income taxes this year.

Ironically, the new tax bill extends the tax break for employer-provided education assistance through 2010 and reinstates it for graduate students beginning next year.

"There are just too many mixed signals," Wilson said.

Tax sunset provisions have been around since the mid-1980s, when Congress created a formula for speeding so-called reconciliation bills through Congress.

Reconciliation bills have to conform with tax and spending levels already approved in earlier budget resolutions. That often requires putting strict time limits on the bill's provisions. In return, reconciliation bills can't be delayed by a filibuster or loaded up with unrelated amendments--tools that foes often use to kill pending legislation.

In today's closely divided Congress, reconciliation protection allowed the then-Republican majority to pass the new tax law in record time. The trade-off was a landmark piece of tax legislation that could disappear in a decade.

The situation is particularly jarring with the new tax law because it affects all taxpayers and virtually every portion of the tax code. That's a change from the past, when sunset provisions involved a handful of narrowly targeted breaks, such as research and development tax credits and tax breaks for adoption.

Nonetheless, sunset provisions do have some supporters.

"Sunsetting is a way to set a goal for when Congress will look at what a program is doing and whether it's working," said Danielle Doane, director of government relations for Citizens for a Sound Economy, a Washington-based group that advocates less government.

"I think having a sunset provision is a good way to get rid of something that has completed its purpose or is a bad program," Doane said.

Despite the furor that sunsets have caused in the planning community, it's not at all clear that Congress will actually allow all of these new tax breaks to expire.

"We are not worried that any of these provisions are not going to exist in 2011," said Dan Danner, senior vice president for federal public policy at the National Federation of Independent Business, a small-business advocacy organization.

"We think most of them will be made permanent long before that."

That's wishful thinking, countered Martin Sullivan, an economist who once worked on the staff of Congress' Joint Committee on Taxation and now writes a column for Tax Notes, a weekly magazine on federal tax developments.

"It is going to be tremendously difficult to extend this bill," he said. "To extend it, Congress will have to figure out how to pay for it again and how to get the votes again. Republicans no longer control the Senate, and there's not as much money in the surplus anymore."

Many breaks in the new tax bill, including those affecting college savings, retirement and estates, require long-term planning. But because of sunset stipulations, the breaks may turn out to be strictly short-term.

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