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HIGHLIGHTS
Congress Passes Extenders Package,
Over 50 Extenders ABLE Act; Cuts IRS Budget
I
More Than 500 Code Changes
n a flurry of year-end activity, Congress has IMPACT The extenders package appears
State And Local Sales Tax De- approved the Tax Increase Prevention Act to have been passed sufficiently early to
duction Extended of 2014 (HR 5771). The new law extends give the IRS adequate time to reprogram
Mortgage Debt Forgiveness the so-called “tax extenders” retroactively for its return processing systems for the new
Exclusion Extended one year (through 2014). It also includes the law. Previously, IRS Commissioner John
Achieving a Better Life Experience (ABLE) Koskinen warned that late legislation
50 Percent Bonus Depreciation Act, creating tax-favored savings accounts for would likely delay the start of the filing
Extended individuals with disabilities along with some season. Koskinen recently indicated that
Research Tax Credit Available tax-related offsets. Before adjourning, Con- mid-December passage of the extenders
For 2014 gress also approved an Omnibus Spending would be workable for the IRS.
Agreement for fiscal year (FY) 2015, which
Many Energy Incentives Renewed cuts funding for the IRS. President Obama
has indicated that he will sign both the Omni- INDIVIDUAL EXTENDERS
Tax-Favored Accounts For Indi-
viduals With Disabilities bus Agreement and H.R. 5771 bills as soon as
they reach his desk. The Tax Increase Prevention Act renews the
Inflation-Adjustments For individual extenders through 2014. These
Civil Penalties IMPACT The one-year retroactive exten- extenders include:
sion of the tax extenders effectively allows
FY 2015 Budget Cut For IRS taxpayers to claim the popular but tem-
porary incentives on their 2014 returns
State And Local Sales Tax Deduction
filed in 2015. Without this, individuals After December 31, 2013, the election
would be unable to claim, for example, to claim an itemized deduction for state
the state and local sales tax deduction, and local general sales taxes in lieu of
INSIDE higher education tuition deduction, and state and local income taxes expired. The
Individual Extenders...............................1 the exclusion for discharge of mortgage extenders package extends the election
debt. Business and energy incentives, through 2014.
Business Extenders ................................ 2 most notably the research tax credit, bo-
nus depreciation and the production tax IMPACT The election is not only poten-
Energy Extenders ................................... 4 credit, would otherwise be unavailable. tially beneficial to taxpayers in states
Technical Corrections ........................... 5 without an income tax. Taxpayers who
IMPACT In the weeks before passage, there make a big ticket purchase, such as a
ABLE Act .................................................. 5 were discussions of making permanent motor vehicle, before year-end could
a number of extenders, especially the re- benefit by weighing the deduction
IRS Budget .............................................. 5 search tax credit and some charitable giv- for state and local general sales taxes
ing incentives. The Tax Increase Preven- against their deduction for state and lo-
tion Act does not make permanent any of cal income taxes.
the extenders –nor extends any of them
for the usual two-year period customary COMMENT As in past years, the IRS
for most recent extenders legislation. In- is expected to release Optional State
stead, the new law punts the ultimate fate Sales Tax Tables for 2014 to shortcut
of the extenders for the 2015 tax year and taxpayers’ need to use the actual re-
beyond to the 114th Congress. ceipts method.
2014 Legislation Update
2
Higher Education Deduction foreclosure, short sale or loan modifi- Transit Benefits Parity
cation could be treated as taxable in-
The higher education deduction allows tax- come. The existing insolvency exclusion, The Tax Increase Prevention Act of 2014 ex-
payers to deduct – above-the-line – quali- as well as an exclusion when mortgage tends “transit benefits parity” through 2014.
fied tuition and fees for post-secondary edu- debt is considered nonrecourse, contin- This extension provides that the income ex-
cation. The extenders package extends the ues to remain available. clusion for employer-provided mass-transit
deduction through 2014. and parking benefits will remain on equal
footing for 2014: at $250/month.
IMPACT The maximum deduction is
Mortgage Insurance
$4,000 for taxpayers with AGI not exceed- Premium Deduction IMPACT Parity will become an immedi-
ing $65,000 ($130,000 for a joint return), ate issue again in 2015 when, under the
$2,000 for taxpayers with AGI $65,000- This provision in the extenders package law, mass-transit pre-tax benefits will be
-$80,000 ($130,000--$160,000 for joint treats mortgage insurance premiums as de- capped at $130 and parking at $250 (as
filers) and $0 for other taxpayers. Under ductible interest that is qualified residence adjusted for inflation).
regulations, expenses paid by year-end for interest subject to AGI phaseout. The ex-
an academic term starting on or before tenders package extends this special treat- COMMENT After the most recent ex-
March 31 of the following year qualify for ment through 2014. tension of transit benefits parity (for
the deduction in the year paid. 2012 and 2013), the IRS provided
special rules for application of the ret-
roactive increase in excludable transit
Teachers’ Classroom Expense “The Tax Increase benefits. In certain cases, employers
Deduction
Prevention Act does not could make adjustments on their Form
941, Employer’s Quarterly Federal Tax
The teachers’ classroom expense deduction make permanent any of Return. The IRS is expected to provide
allows primary and secondary education pro- the extenders and punts similar relief for 2014.
fessionals (grades K-12, including school ad-
ministrators and assistants) to deduct – above- the ultimate fate of the
Contribution Of Real Property For
the-line – qualified expenses up to $250 paid extenders to the 114th Conservation Purposes
out-of-pocket during the year. Qualified
expenses must be reduced by any reimburse- Congress…”
ments from the taxpayer’s employer. The A special rule allows contributions of capital
extenders package extends the teachers’ class- gain real property for conservation purpos-
room expense deduction through 2014. es, with the contribution to be taken against
Charitable Distributions From IRAs 50 percent of the contribution base. The
IMPACT. Substantiation for qualified ex- extenders package extends this special rule
penses remains a requirement. Expenses Individuals age 70 1/2 and older will con- through 2014.
beyond the $250 limit may be deducted as tinue to be allowed to make tax-free dis-
an itemized deduction only, subject to the tributions from individual retirement ac-
overall 2 percent adjusted gross income floor counts (IRAs) to a qualified charitable BUSINESS EXTENDERS
on miscellaneous itemized deductions. organization. The treatment is capped at
a maximum of $100,000 per taxpayer The Tax Increase Prevention Act extends
each year. This incentive is now extended many business tax incentives for one year
Mortgage Debt Exclusion through 2014. retroactively to January 1, 2014. These ex-
Unless excluded, cancellation of indebted- tenders include:
ness income is included in income. The Tax IMPACT If a taxpayer is married and
Increase Prevention Act of 2014 excludes files a joint income tax return, his or
from income cancellation of mortgage debt her spouse can also have a qualified de- Bonus Depreciation
on a principal residence of up to $2 million duction and exclude up to $100,000.
($1 million for a married taxpayer filing a Amounts in excess of $100,000 must Bonus depreciation allows taxpayers to
separate return) through 2014. be included in income but may be claim an additional first-year depreciation
taken as an itemized charitable deduc- deduction. The Tax Increase Prevention
IMPACT Without an extension, debt tion, subject to the usual AGI annual Act of 2014 extends 50-percent bonus de-
that is forgiven in 2014 through a caps for contributions. preciation through 2014 (through 2015 for
certain property with a longer production IMPACT The Tax Increase Prevention Act of enhancing the credit, the extenders pack-
period and certain aircraft). 2014 also extends through 2014 the special age contains no enhancements, leaving
rule allowing off-the-shelf computer software them to the 114th Congress.
IMPACT Qualified property must be to be treated as Code Sec. 179 property.
depreciable under the Modified Acceler- COMMENT The research tax credit was
ated Cost Recovery System (MACRS) identified as one key incentive to be made
and have a recovery period of 20 years or
Qualified Leasehold/Retail permanent in the failed House-Senate ne-
less. Property must be new and placed in Improvements, Restaurant Property gotiations in November. As in past negotia-
service before January 1, 2015 (January tions, the cost of a permanent credit emerged
1, 2016 for certain longer production pe- Qualified leasehold improvements, quali- as one of the greatest stumbling blocks.
riod property and certain aircraft). fied retail improvements and qualified res-
taurant property may be treated as Code
IMPACT The extension of 50-percent bonus Sec. 179 property, but with a lower dollar
Work Opportunity Tax Credit
depreciation effectively results in an $8,000 cap. The extenders package extends this Employers that hire military veterans and oth-
increase in first year depreciation caps for treatment through 2014. er qualified individuals may be eligible for the
vehicles purchased in 2014. As a result of Work Opportunity Tax Credit (WOTC). The
this extender, the luxury auto depreciation IMPACT Under the extenders pack- credit amount is generally equal to 40 percent
limit under Code Sec. 280F for passenger age, taxpayers may elect to treat up to of up to $6,000 (higher for some veterans) in
automobiles placed in service in 2014 is $250,000 of qualified leasehold/retail qualified first-year wages. The Tax Increase
now $11,160 (rather than only an infla- improvement, restaurant property as Prevention Act of 2014 extends the WOTC
tion-adjusted $3,160); and for trucks and Code Sec. 179 property. through 2014, for employees who begin work
vans first placed in service during the 2014 for the employer before January 1, 2015.
calendar year, it is now $11,460 (rather
than only $3,460) for 2014.
Research Tax Credit
The research tax credit may be claimed for
100-Percent Exclusion For Gain
COMMENT Taxpayers claim bonus de- increases in business-related qualified re- On Qualified Small Business Stock
preciation in the tax year that a qualify- search expenditures and for increases in
ing asset in placed in service. This may payments to universities and other qualified The 100-percent exclusion allowed for gain
not necessarily be the same tax year that organizations for basic research. The Tax In- on the sale or exchange of qualified small
the asset is acquired. Only new property is crease Prevention Act of 2014 extends the business stock held for more than five years
eligible for bonus depreciation. research tax credit through 2014. by non-corporate taxpayers has been ex-
tended for one more year, applicable to
IMPACT The extenders package also ex- IMPACT The research credit generally stock acquired before January 1, 2015.
tends the election to accelerate the use of allows taxpayers a 20-percent credit for
AMT credits in lieu of bonus depreciation. qualified research expenses or a 14 percent IMPACT Stock acquired after 2014 will be
alternative simplified credit. Although entitled to only a regular 50 percent exclu-
there had been last-minute discussions of sion if not extended again by Congress.
Code Sec. 179 Expensing
Enhanced Code Sec. 179 allows taxpayers to COST OF SELECTED EXTENDERS*
immediately deduct, rather than gradually de-
preciate, the cost of qualified assets, subject to Research Tax Credit $7.629 billion
certain limitations. The extenders package sets Mortgage Debt Forgiveness $3.143 billion
the Code Sec. 179 dollar limit at $500,000 for
State And Local Sales Tax Deduction $3.142 billion
2014 with a $2 million overall investment limit.
15-Year Recovery Leasehold/Retail Improvement, Restaurant Property $2.382 billion
IMPACT Absent Congressional action, the Work Opportunity Tax Credit $1.375 billion
dollar limit for Code Sec. 179 expensing
was $25,000 for 2014 with an invest- Incentives For Biodiesel And Renewable Diesel $1.297 billion
ment limit of $200,000. Code Sec. 179 Code Sec. 25C Residential Energy Credit $832 million
expensing has been at the $500,000/$2
million level since 2010. It returns to the Tuition And Fees Deduction $300 million
$25,000/$200,000 level in 2015 with- Source: Joint Committee on Taxation, December 3, 2014
out further action by Congress. *cost over 10 years ($81.369 billion cost in 2015); $41.599 billion over 10 years)
Tax Briefing
2014 Legislation Update
4
Excise tax credits for alternative fuels; and two times each year. The change is effective for collect unpaid taxes. The change is effective
Credit for alternative fuel vehicle refuel- tax years beginning after December 31, 2014. for levies issued six months after enactment.
ing property.
Tax Briefing