Update: Senate Passes Bill with Expiring Housing Tax Provisions

Today the Senate voted 81-19 to approve H.R. 4853, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The legislation now moves to the House of Representatives, with a vote expected December 16, 2010.  (Updated 12.17.10 – The House of Representatives has approved H.R. 4853 by a vote of 277-148.  The legislation will be signed into law by the president during the afternoon of December 17.)

We previously identified housing sector-specific expiring tax rules that were under debate. The following are worth noting:

  • Section 45L $2,000 tax credit for the construction and sale/lease of a new energy efficient home would be extended for two years: retroactively for 2010 and for qualified homes in 2011
  • The deduction for private mortgage insurance (PMI), as well as FHA, RHA and VA insurance premiums would be extended through the end of 2011, but as under prior law, only for contracts entered into after December 31, 2006. The deduction would still be subject to an income phase-out beginning at $100,000 of adjusted gross income (AGI) ruling out its use for anyone with more than $110,000 of adjusted gross income.
  • The popular section 25C $1,500 tax credit for certain energy-efficient remodeling activities is extended for 2011. However, under the rules passed in H.R. 4853, 25C would be substantially changed (reverted to pre-2009 rules).  The rules are very complicated, so the following listed changes are just broad-strokes:  (1) The credit is scaled back from a 30% credit to a 10% credit for qualified building envelope components; and (2) Qualified installed property must meet increased IECC 2009 requirements, except for windows and skylights which must meet Energy Star requirements.  The installed property must be reasonably expected to last at least five years and must be installed in a principal residence. Building envelope components include insulation, windows, doors and roofing materials.  For other items, a fixed, maximum dollar amount of tax credit is available: $50 for each qualified fan, $150 for each qualified furnace or hot water boiler, and $300 for qualified heat pumps, air conditioners, water heater or biomass stoves. Finally, the $1,500 maximum is replaced with a $500 maximum, with no more than $200 attributable to windows. The $500 cap applies back to the beginning of the 25C program, so taxpayers having claimed between $500 and $1,500 in 25C credits will not be eligible for 25C credits in 2011.  No tax credit is permitted if subsidized by another Federal, State or local government program.
  • The LIHTC exchange program extension for 2010 and 2011 was not included in the legislation.
  • The placed-in-service requirement for GO-Zone LIHTC tax credits would be extended for one year, through the end of 2011.
  • Section 198 brownfield environmental remediation cost expensing would be extended for two years, through the end of 2011.

For non-housing related tax rules, H.R. 4853 proposes:

  • AMT patch (higher exemption amount and allow claim for personal credits) for 2010 and 2011 ($137 billion) (Updated – the 2010 AMT patch included in H.R. 4853 means that the 25C credits for 2010 can be claimed against AMT liability)
  • For 2011 only, reduces the employee FICA tax 2 percentage points from 6.2% to 4.2% ($112 billion)
  • Extends the present-law income tax rates (top rate of 35%) and eliminates the Pease and PEP phaseouts for 2011 and 2012 ($207 billion)
  • Retains the $1,000 child tax credit for 2011 and 2012 ($72 billion)
  • Marriage penalty relief for 2011 and 2012 ($27 billion)
  • Retains the 15% rates for dividends and capital gains for 2011 and 2012 ($53 billion)
  • Estate tax rate of 35% with $5 million exemption for 2011 and 2012 (2010 estates may elect to use EGTRRA rules from 2001) ($68 billion)
  • Increased section 179 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. ($307 million)
  • 100% expensing in 2011 and 50% expensing (bonus depreciation) in 2012  for qualified property (property with recovery period of less than 20 years – no structures) ($21 billion)

The final score for the bill is approximately $858 billion.