By George Jones and George L. Yaksick, Jr., CCH News Staff
Just before adjourning on December 16, the Senate approved the Tax Increase Prevention Act of 2014 (HR 5771), which the House had previously passed on December 4 (TAXDAY, 2014/12/17, C.1). The Act extends the individual, business and energy tax extenders for one year; that is, retroactive to January 1, 2014. Although the extenders package is not a two-year extension—or a permanent extension—the Act does provide certainty for 2014.
The extension drew applause from many businesses as well concern about the future of the extenders. “Tax extenders provide an important bridge of predictability for manufacturers until Congress can act on comprehensive tax reform,” Dorothy Coleman, vice president of tax and domestic economic policy, National Association of Manufacturers (NAM), said after the Senate vote.
“A one-year, retroactive extension of the energy efficiency incentives is simply not enough,” Kateri Callahan, president, Alliance to Save Energy, said. “Passage of the tax extenders bill is a welcome relief to farmers as we close our books on 2014,” Wade Cowan, president, American Soybean Association, said. “While it’s not the long-term fix we need, the legislation does include the expensing under Section 179, and bonus depreciation,” Cowan added.
State and Local Sales Tax Deduction
The state and local sales tax deduction is extended one year, through 2014. For taxpayers in states without an income tax, the provision enables them, if they itemized their deductions, to claim their state and local general sales taxes in lieu of itemizing state and local income taxes. Taxpayers in other states who have purchased a big-ticket item in 2014, or are considering such a purchase before year-end, should weigh the value of claiming the state and local sales taxes instead of claiming state and local income taxes. A decision to opt for the sales tax deduction does not need to be made until a taxpayer’s 2014 tax –year return is filed.
Higher Education Tuition and Fees Deduction
The above-the-line deduction for qualified tuition and related expenses is extended for one year through 2014. The maximum deduction is $4,000 for single individuals with adjusted gross income (AGI) not exceeding $65,000 ($130,000 for married couples filing a joint return), $2,000 for single individuals with AGI $65,000-$80,000 ($130,000-$160,000 for married couples filing a joint return) and $0 for other taxpayers. Under the regulations, expenses paid by year-end for an academic term starting on or before March 31 of the following year qualify for the deduction in the year paid.
Teachers’ Classroom Expense Deduction
The above-the-line deduction for eligible educator expenses is extended one year through 2014. Out-of-pocket costs for certain materials and supplies may be deductible. The deduction is not limited to teachers but may be claimed as well by a kindergarten through grade 12 instructor, counselor, principal or aide who works at least 900 hours during a school year. The deduction is reduced by any reimbursements from the taxpayer’s employer.
Tax-Free Distributions from IRAs for Charitable Purposes
The exclusion from gross income of qualified charitable distributions for individuals age 70-1/2 and older is extended one year through 2014. Eligible individuals who are contemplating a gift to a charitable organization or gifts to multiple organizations before year-end should consider using IRA dollars if appropriate to their situation. A qualified charitable distribution also counts toward satisfying a taxpayer’s required minimum distributions from a traditional IRA. The total amount of all qualified charitable distributions from all of the taxpayer’s IRAs cannot exceed $100,000 for the tax year ($100,000 for each spouse on a jointly filed return). The distribution must be made directly by the IRA trustee to the charitable organization and completed within the 2014 tax year to qualify under the extension.
Code Sec. 25C Credit
The Code Sec. 25C nonbusiness energy property credit is extended one year through 2014. Taxpayers considering energy efficient improvements to their principal residence may want to act before year-end to take advantage of the Code Sec. 25C credit. For purposes of the Code Sec. 25C credit, qualifying improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs as well as certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel. The credit is 10 percent of the cost of qualified energy-efficient improvements, up to $500. The credit has a lifetime limit of $500, of which only $200 may be used for windows. A taxpayer may not claim the credits until the year the property is installed, even if the expense is actually paid or incurred in a prior year.
Bonus depreciation
The Code Sec. 168(k) 50-percent depreciation allowance is extended for one year to apply to qualifying property placed in service before January 1, 2015 (or before January 1, 2016, in the case of property with a longer production period and certain noncommercial aircraft). Businesses of all sizes may take advantage of 50-percent bonus depreciation for qualified new property. Original use of the property must begin with the taxpayer and satisfy other requirements. An asset is placed in service (for purposes of computing depreciation) on the date that it is in a condition or state of readiness for a specifically assigned function in a trade or business or the production of income. This is not necessarily the date of acquisition.
Code Sec. 179 Expensing
The Code Sec. 179 dollar and investment limitations are significantly increased by the extenders package for tax years beginning in 2014. Before year-end, taxpayers should weigh the value of electing to treat the cost of qualifying property used in the active conduct of a trade or business as an expense rather than a capital expenditure. The extenders package also extends through 2014 the qualified real property allowance and computer software deduction through 2014. Up to $250,000 of qualified real property may be treated as Code Sec. 179 property.
Leasehold, Retail Restaurant Property
The 15-year recovery period for qualified leasehold and retail improvement property and qualified restaurant property is extended one year to apply to property placed in service before January 1, 2015. The provision allows remodel costs to be capitalized and written off over a 15-year period (rather than a 39-year period).
Tom Garcia, MBA EA
8002 Misty Breeze 204 W Fern Ave.
San Antonio, TX 78250 McAllen, TX 78501-1810
Cell: 956 221-1086 E-Mail: TomGarMba@gmail.com
Please be aware that I do not give free tax advice to non-clients by e-mail, comment response or phone. Tax law has become so complicated that more time is needed to discuss situations. I suggest that you make an appointment to come visit with me.
