Yesterday afternoon the Senate approved by a vote of 76 to 16, the Tax Increase Prevention Act (TIPA) (H.R. 5771) which retroactively reinstates over fifty expired tax provisions.
Although not permanent, the extensions are much-welcome relief for nail-biting taxpayers awaiting certainty before the close of the tax year. The President has announced that he will sign the Act into law shortly.
The Act allows the extensions only for the 2014 tax year. Most likely this means that taxpayers will experience a similar uncertainty in 2015 until similar legislation is passed for next year. Where practical, taxpayers should consider taking advantage of these provisions in 2014 rather than gambling on similar legislation being enacted in 2015 by the 114th Congress. What follows is a summary of the most noteworthy extensions.
Provisions for Businesses
- Fifty percent bonus depreciation. This, along with section 179 expensing, are the most important extensions for many business owners. Bonus depreciation allows businesses to claim an additional first-year depreciation deduction for new property which is placed in service prior to the end of 2014 (or for certain aircraft and longer production property, 2015). As a result, the luxury auto depreciation limit for passenger autos placed in service in 2014 is now $11,160 (rather than $3,160). For trucks and vans the depreciation limit is now $11,460 (rather than $3,460). Note that new property which was acquired previously, but is first placed into service in 2014, still qualifies for bonus depreciation.
- Section 179 expensing. Section 179 allows taxpayers to immediately deduct qualifying assets rather than gradually depreciating them over multiple tax years. TIPA extended the section 179 deduction limit for 2014. Now the expensing limit is reinstated at $500,000 for 2014 rather than the permanent $25,000 limit.
- Qualified leasehold improvements. Qualified leasehold improvements, retail improvements, and restaurant property may be deducted as section 179 property, subject to a special limit of $250,000 rather than the $500,000 limit for other section 179 property.
- Research credit. The research tax credit allows a tax credit of 20% for certain business-related qualified research expenses.
- Five-year built-in gain recapture period for S corporation conversions. The normal ten year period for recapturing built-in capital gains for a C corporation which has converted to an S corporation has been shortened to five years. This is an incentive for C corporations to convert to an S corporation and for recently converted S corporations considering sales of assets.
Provisions for Individuals
- Charitable distributions from IRAs: Individuals over age 70 and a half can make distributions from their IRAs to a charity of up to $100,000 per individual. This distribution is credited toward satisfying the required minimum distribution (RMD) for the taxpayer. This provision is a popular and tax-efficient method for retirees to give to charity and enjoy a tax benefit, even if they do not itemize their deductions.
- State and local sales tax deduction: This gives taxpayers the option of deducting either state and local income taxes or sales taxes. While it is not generally helpful to residents of states with an income tax, such as Pennsylvania, West Virginia, or Ohio, the provision may be helpful in the event of a big-ticket purchase, or for states such as Florida where there is not an income tax.
- Higher education deduction: This permits an above-the-line deduction for tuition and fees for post-secondary education. Because the deduction is above-the-line, a taxpayer does not need to itemize to take advantage of the deduction. The maximum deduction is $4,000 and is completely phased out for married taxpayers with an adjusted gross income (AGI) exceeding $160,000 and single taxpayers with an AGI exceeding $80,000. Deductions can include any expenses paid for an academic term starting March 31 or earlier.
- Teachers’ classroom expense deduction: Teachers can deduct up to $250 of qualified, unreimbursed classroom expenses as an above-the-line deduction, not requiring itemization.
- Mortgage debt exclusion: Up to $2 million of cancellation of indebtedness income from mortgage debt, including a mortgage loan modification is excluded from income.
- Mortgage premium insurance (PMI) deduction: PMI premiums on a qualified residence may be deducted as an itemized deduction much like mortgage interest.
- Contribution of real property for conservation purposes: This extender permits the deduction of the current fair market value of capital gain real estate for conservation purposes. This deduction is limited to 50% of AGI less deductions for other charitable contributions. Any unused deduction may be carried forward for 15 years or until it is exhausted.
- Energy efficient improvements to residential property: This extender allows a lifetime credit of equal to 10% of the cost of qualifying energy efficiency improvements (up to $500).
- ABLE Act: Perhaps the most newsworthy provision passed by Congress yesterday is the ABLE Act. The Act creates tax-favored savings accounts for individuals with disabilities beginning in 2015. Qualifying distributions from an ABLE account used for medical expenses, education, transportation and housing are tax free and up to $100,000 of the account balance is disregarded for purposes of needs-based federal benefits.
For more information regarding TIPA and how it may affect your year-end planning please contact your Metz Lewis tax advisor without delay for practical advice tailored to your unique circumstances.
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