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Tax Update - Tax Extender

Originally Published 2015-01-02

On December 16, 2014, the Senate passed the “Tax Increase Prevention Act of 2014”, H.R. 5771. The House had passed the legislation on December 3, 2014.

The law extends the following tax provisions that had expired on December 31, 2013. This legislation only extends the deductibility of these items for a one year period and, therefore, are to expire on December 31, 2014. This limited decision will demand further review this next year and if these provisions are to continue for the 2015 tax year another bill will need to be passed in 2015. I will summarize a few of the provisions that may be relevant to you or those that you know.

State and local sales taxes—This is especially important to Washington State residents and other states that do not have a state income tax. State income taxes have been deductible for years and in those states with income tax, we deduct the higher of the state income tax or the state sales tax.

Tuition and fees deduction—A taxpayer can deduct as an above-the-line adjustment certain qualified education expenses paid for eligible students. The deduction is claimed on Form 8917, Tuition and Fees Deduction, and Form 1040, line 34.

Charitable contributions of IRA distributions---As I emailed my clients in December after the Bill’s passing, a qualified charitable distribution of up to $100,000 made directly by the trustee of the taxpayer’s IRA to an eligible charitable organization was extended for the 2014 tax year. This distribution is not included in income as a regular IRA distribution would be; however, the contribution is not deducted as a charitable contribution.

Educator expenses---Eligible educators can deduct up to $250 of qualified out-of-pocket expenses paid during the year for books, supplies, equipment and other materials used in the classroom.

Qualified principal residence debt---In general, the cancellation of debt produces taxable income. Taxpayers may exclude income from the cancellation of qualified principal residence indebtedness. The exclusion is limited to $2 million of acquisition debt.

Mortgage insurance premiums---Premiums paid for acquisition indebtedness for an insurance contract on a first or second home are treated as deductible mortgage interest, subject to phase-out rules.

Some of the important provisions that may affect those of you who own businesses---

Section 179 expense deduction---Businesses can elect to expense the cost of property placed in service during the year rather than depreciating the cost over the property’s class life. The expense limit was $500,000 for property placed in service during tax years 2010 to 2013 and will be extended for 2014. Had this provision not passed this amount would have gone back to $25,000 so is definitely significant for the businesses that are impacted.

Special depreciation allowance---The special depreciation allowance, also called bonus depreciation, allows taxpayers to recover 50% of the cost of qualified property placed in service during the tax year. The property must be new property with its original use beginning with the taxpayer (used property does not qualify).

There are numerous other provisions including several energy tax credits that were extended and several additional business related provisions such as “built-in gains tax for S Corporations” and “railroad track maintenance credit” that have been in effect since 2010, were expected to expire at the end of 2013, and have now been extended for one year. If there is a particular issue that you are concerned about, please contact me and we will review your situation specifically.

As a final note, IRS Commissioner Koskinen announced that he doesn’t think the late passage of the one-year tax extenders bill will delay the start of the tax filing season because the extension was straightforward. However, he is concerned about the continued budget cuts, saying that “the cuts are past the “fat” now and into the “muscle” headed toward the “bone”. Refunds may be delayed, agency telephone assistance will be difficult to obtain, and the audit ratio will drop even further.” An interesting perspective when so many of us are now paying the Net Investment Income Tax, the Additional Medicare Tax on our wages, and paying more for our medical insurance premiums. Where are those tax cuts???

I hope you find this informative and that you all had a delightful Holiday Season!!!

Happy New Year!!!

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