by: Sandy Furuya
Prior to adjourning, the Senate approved the Tax Increase Prevention Act of 2014, which the House had previously passed on December 4th. The President signed into law on Friday, December 19th. This Act extends the individual, business, and energy tax extenders for one year; that is, retroactive to January 1, 2014.
Below are the highlights of the act and how they may affect you:
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 provides 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 large 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. The decision to deduct sales tax vs. withholding can be made when you file the 2014 tax return.
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. Please note 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.
The non-business 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 energy 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. Please note 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.
Business Owners, Bonus Depreciation:
The 50% bonus 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% 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 Section 179 expensing and investment limitations are increased by the extenders package for tax years beginning in 2014. Small businesses can deduct the total cost of the purchase of personal property as long as it meets 51% business usage. 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 Section 179 property.
Leasehold, Retail Restaurant Property:
Great news for restaurants! 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 15-years vs. 39 years.
There are many other provisions in this act; but these are the ones that we felt would affect you.