Posted by: Jennifer Foley Posted date: December 29, 2014
By Alan D. Miller, CPA, PFS
Dec. 17, 2014
In a new show of bipartisanship, the lame-duck Senate finally passed the ‘temporary’ one-year extension of a hodge-podge list of about 50 tax provisions that had expired at the end of 2013. The ‘tax extender’ package retroactively reenacts these tax deductions and credits effective Jan. 1, 2014, but they expire Dec. 31, 2014. The House previously passed a two-year ‘extender’ package (which included permanent extensions of certain provisions) that, under a threat of a veto by the President, went nowhere in the Senate. Instead, the House passed a one-year extension last week and after some other important business (including funding the government) adjourned and went home for the holidays. Also wanting to go on vacation (and without the House being in session to consider changes), the Senate voted 74-16 to approve the one-year extension. The President is expected to sign the bill into law.
Individuals, families and business owners, along with their tax and financial advisors can finally get to work planning their 2014 tax situations, largely by looking in the rearview mirror. Cheers! Don’t forget to save time for year-end holiday activities too!
Most of these provisions were previously enacted temporarily, yet have been extended many times in one form or another, one or two years at a time. Some offer significant tax breaks to a very narrow constituency (quick expensing of NASCAR race track improvements and race horses) and others offer small benefits to a broader swath of taxpayers (exclusion of up to $250 of classroom supplies purchased by educators). Some offer tax breaks primarily to residents of certain states (deduction of sales tax paid instead of state income tax paid) or for the benefit of retirees and charities (being able to donate IRA withdrawals directly to a charitable organization).
Some were first passed to stimulate the economy during one financial downturn or another (immediate write off of up to $500,000 of equipment purchases by businesses), but due to the fact that there is a very short time for businesses to actually plan for this deduction for the remainder of 2014, they may have limited economic stimulating effects going forward. Did the owner of the widget factory purchase that 3D widget printer last spring because Congress might allow a juiced-up tax deduction or because her company needed it to keep up with the demand for widgets caused by an improving economy that was already happening? Other provisions were implemented to reward or encourage specific activities (tax deductions and credits for college expenses or for the purchase of energy efficient property).
Depending on which argument you believe in, each provision either cost the government billions of dollars of revenue or saves taxpayers an equal amount of taxes. The cost/saving of this bill is projected to be $42 billion over 10 years. Regardless of the side you take, there are no doubts these provisions and the question whether they will or will not be an ongoing part of tax landscape add to the complexity of the tax law and to the uncertainty with which individuals and businesses deal in planning their financial activities.
Of the many extended tax provisions, those that have the most potential impact on our clients are summarized below (listed in order of the section of the tax code that is affected):
- Deduction for certain expenses of elementary and secondary school teachers: Allows a deduction from adjusted gross income of up to $250 of expenses paid for materials, supplies, technology, etc. for use by an educator in the classroom.
- Deduction of mortgage interest premiums as qualified mortgage interest: Treats mortgage interest premiums as mortgage interest expense deductible as an itemized deduction. This phases out ratably for taxpayers with adjusted gross income in excess of $100,000-$110,000 (half those amounts for married filing separately).
- Deduction of state/local sales tax in lieu of state income tax: Taxpayers may elect to deduct as an itemized deduction state/local sales taxes paid (either actual or amount determined based on income) instead of state income taxes paid. (This may be beneficial to retired taxpayers who pay little or no Michigan income tax or residents of a handful of states that do not impose an individual income tax).
- Above-the-line deduction for qualified tuition and related expenses: Provides for a deduction from adjusted gross income of qualified college tuition, fees, books, etc. of up to $4,000, depending on adjusted gross income and filing status.
- Tax-free distributions from individual retirement accounts for charitable purposes: Allows tax-free distributions from IRAs to charitable organizations of up to $100,000 per taxpayer if at least 70 ½ years old (a married couple may make tax-free distributions of up to $200,000). The amounts contributed in this manner cannot also be deducted as charitable donations.
- Credit for purchase of non-business energy efficient property: This provision continues credit of 10% of the cost of certain energy efficient property (furnaces, water heaters, windows, etc.). The maximum cumulative ‘lifetime’ credit allowed under this provision is $500.
BUSINESS TAXPAYERS (including individuals with small businesses)
- Bonus depreciation: Allows for immediate expensing of 50% of the cost of certain property and equipment placed in service during 2014.
- Increased expensing limitations under Sec. 179/treatment of certain real property as Sec. 179 property: Allows for immediate expensing of up to $500,000 of eligible equipment purchases made in 2014; also allows for special treatment of certain real estate purchases as personal property (specifically aimed at retail and food-service businesses).
There are many other provisions with limited applicability to most individual or small business taxpayers. If you have questions about the items noted above or other extended tax provisions that may affect your specific tax situation please don’t hesitate to contact us.