What Is a Tax Extender Bill and How Does It Work?

A tax extender bill is legislation Congress passes to continue various tax provisions that are set to expire. These bills temporarily renew existing deductions, credits, and specific tax rules that individuals and businesses rely on. Congress approves these tax cuts for limited periods, sometimes for just a year or two. This temporary nature creates uncertainty for taxpayers, who cannot be sure if a particular tax benefit will be available from one year to the next.

Common Tax Provisions in Extender Bills

Tax extender bills often include provisions that benefit individuals. One common provision is the exclusion from gross income for the discharge of qualified principal residence indebtedness, which helps homeowners who have had mortgage debt forgiven through a loan modification or foreclosure. This tax benefit has been extended through 2025, but the maximum exclusion amount was reduced to $750,000 ($375,000 for a married individual filing separately) for debt discharged after 2020.

Businesses also rely on these provisions, such as the treatment of research and development (R&D) expenses. Since 2022, businesses must capitalize and amortize these costs over five years instead of deducting them immediately. Another provision is accelerated depreciation, where the 100% bonus depreciation established by the Tax Cuts and Jobs Act of 2017 has been phasing out. The rate dropped to 80% in 2023, is 60% for 2024, and is scheduled to be 40% for 2025 before being eliminated.

The Work Opportunity Tax Credit (WOTC) is a business-focused extender that encourages hiring individuals from targeted groups facing barriers to employment. These groups include veterans, ex-felons, and recipients of certain government assistance programs. The WOTC provides a tax credit for a portion of the wages paid to these employees to facilitate their entry into the workforce.

Energy-related tax provisions were once a staple of extender legislation, but many have received long-term stability through the Inflation Reduction Act of 2022. This act extended and restructured residential credits, removing them from the short-term renewal cycle. The credit for nonbusiness energy property was renamed the Energy Efficient Home Improvement Credit and extended through 2032, replacing a $500 lifetime limit with an annual credit of up to $1,200. The Residential Clean Energy Credit was also extended through 2034, offering a 30% credit for qualifying installations before it begins to phase down.

The Legislative Cycle of Tax Extenders

The cycle of tax extenders stems from budgetary and political considerations. Making popular tax cuts permanent would require Congress to account for their substantial long-term cost, which would necessitate offsetting spending cuts or revenue increases to avoid increasing the national deficit. By keeping the provisions temporary, lawmakers can pass them with a much smaller official price tag, as the cost is only calculated for the one or two years of the extension.

Dozens of expiring provisions are bundled into a single “extender” package. This package is attached to a larger, unrelated “must-pass” bill, such as a year-end government funding bill. This strategy increases the likelihood of the extenders passing, as voting against the package would mean voting against essential government operations.

A complication from this cycle is retroactive extension. Congress often fails to renew tax provisions before they expire at the end of a calendar year. Lawmakers then pass legislation in the new year that retroactively applies the tax breaks to the concluded tax year. This challenges taxpayers and tax professionals, who must prepare returns without knowing which deductions and credits will be allowed.

Recent and Pending Extender Legislation

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 was the last major package to address these temporary provisions. This law extended numerous items, providing short-term stability. For instance, it continued the Work Opportunity Tax Credit and the exclusion for certain employer payments of student loans through 2025.

The Tax Relief for American Families and Workers Act of 2024 passed the House of Representatives. The bill aimed to retroactively restore business tax benefits, including 100% bonus depreciation and the immediate deduction for domestic R&D expenses. The bill also included an expansion of the Child Tax Credit, offset by a proposal to end the Employee Retention Tax Credit (ERTC) program early due to concerns over fraudulent claims.

However, the legislation stalled in the Senate and did not pass before the 118th Congress concluded on January 3, 2025. As a result, the bill is no longer active. The failure of this bill means the stricter rules for R&D expensing and the scheduled phase-out of bonus depreciation remain in effect, influencing investment decisions and leaving tax planning uncertain.