The Tax Increase Prevention Act of 2014 (the Act) was passed on December 16, 2014. Thankfully, the Act retroactively extends most the federal income tax breaks that would have affected many individuals and businesses, but only for one year through 2014. This leaves precious little time to take advantage of these tax breaks. The Act also includes another bill, the “Achieving a Better Life Experience Act (ABLE) of 2014.” ABLE establishes a new type of tax-advantaged account for disabled individuals, allowing them to save money for future needs while remaining eligible for government benefit programs. Here is a quick summary of the most important tax changes—starting with those that affect individuals.
Extended Tax Breaks for Individuals
Qualified Tuition Deduction. This write-off, which can be as much as $4,000 or $2,000 for higher-income folks, expired at the end of 2013. The Act retroactively restores it for 2014.
Tax-free Treatment for Forgiven Principal Residence Mortgage Debt. For federal income tax purposes, a forgiven debt generally counts as taxable Cancellation of Debt (COD) income. However, a temporary exception applied to COD income from cancelled mortgage debt that was used to acquire a principal residence. Under the temporary rule, up to $2 million of COD income from principal residence acquisition debt that was cancelled in 2007–2013 was treated as a tax-free item. The Act retroactively extends this break to cover eligible debt cancellations that occur in 2014.
$500 Energy-efficient Home Improvement Credit. In past years, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. The credit equals 10% of eligible costs for energy-efficient insulation, windows, doors, and roof, plus 100% of eligible costs for energy-efficient heating and cooling equipment, subject to a $500 lifetime cap. This break expired at the end of 2013, but the Act retroactively restores it for 2014.
Mortgage Insurance Premium Deduction. Premiums for qualified mortgage insurance on debt to acquire, construct, or improve a first or second residence can potentially be treated as deductible qualified residence interest. The deduction is phased out for higher-income taxpayers. Before the Act, this break wasn’t available for premiums paid after 2013. The Act retroactively restores the break for premiums paid in 2014.
Option to Deduct State and Local Sales Taxes. In past years, individuals, who paid little or no state income taxes, had the option of claiming an itemized deduction for state and local general sales taxes. The option expired at the end of 2013, but the Act retroactively restores it for 2014.
IRA Qualified Charitable Contributions. For 2006–2013, IRA owners who had reached age 70½ were allowed to make tax-free charitable contributions of up to $100,000 directly out of their IRAs. These contributions counted as IRA Required Minimum Distributions (RMDs). Thus, charitably inclined seniors with more IRA money than they needed could reduce their income tax by arranging for tax-free QCDs to take the place of taxable RMDs. This break expired at the end of 2013, but the Act retroactively restores it for 2014, so that it’s available for qualifying distributions made before 2015.
$250 Deduction for K-12 Educators. For the last few years, teachers and other eligible personnel at K-12 schools could deduct up to $250 of school-related expenses paid out of their own pockets—whether they itemized or not. This break expired at the end of 2013. The Act retroactively restores it for 2014.
Qualified Conservation Contribution Breaks. Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. Liberalized deduction rules applied through 2013 that increased the maximum write-off for these contributions. The Act retroactively restores these liberalized rules for contributions made in 2014.
100% Gain Exclusion for Qualified Small Business Corporation (QSBC) Stock. The Act retroactively restores the temporary 100% gain exclusion (within limits) and the exception from alternative minimum tax preference treatment for sales of QSBC stock acquired in 2014. Note that you must hold QSBC shares for more than five years to be eligible for the 100% gain exclusion privilege.
Extended Cost Recovery Provisions
50% Bonus Depreciation. The Act extends 50% first-year bonus depreciation for an additional year to cover qualifying new (not used) assets that are placed in service in calendar-year 2014. However, the placed-in-service deadline is extended to December 31, 2015, for certain assets that have longer production periods. Under the extended deadline privilege, only the portion of a qualifying asset’s basis that is allocable to costs incurred before 2015 is eligible for 50% bonus depreciation.
For a new passenger auto or light truck that is subject to the luxury auto depreciation limitations, the 50% bonus depreciation provision increases the maximum first-year depreciation deduction by $8,000.
Generous Section 179 Rules. For qualifying assets placed in service in the tax year beginning in 2014, the Act restores the maximum Section 179 deduction to $500,000 (same as for tax years beginning in 2013). Without this change, the maximum deduction would have been only $25,000 for 2014. The Act also restores the Section 179 deduction phase-out threshold to $2 million for tax years beginning in 2014 (same as for tax years beginning in 2013). Without this change, the phase-out threshold would have been only $200,000 for 2014.The temporary rule that allowed up to $250,000 of Section 179 deductions for qualifying real property placed in service in tax years beginning in 2013 was also retroactively restored for tax years beginning in 2014.
15-year Depreciation for Leasehold Improvements, Restaurant Property, and Retail Space Improvements. The Act retroactively restores the 15-year straight-line depreciation privilege for qualified leasehold improvements, qualified restaurant property, and qualified retail space improvements for property placed in service in 2014.
Extended Tax Credit Provisions for Business
Research Credit. The Act retroactively restores the research credit to cover qualifying expenses paid or accrued before 2015.
Work Opportunity Credit Hiring Deadline. The Act retroactively extends the deadline for employing eligible individuals for purposes of claiming the Work Opportunity Tax Credit to cover qualifying hires that begin work in 2014.
Differential Pay Credit for Small Employers. The Act retroactively restores the credit for eligible small employers that provide differential pay to employees while they serve in the military to cover payments made in 2014. The credit equals 20% of differential pay of up to $20,000 paid to each qualifying employee.
Credit for Building Energy-efficient Homes. The Act retroactively extends the $2,000 or $1,000 (depending on the projected level of fuel consumption) per-home contractor tax credit for building new energy-efficient homes in the U.S. to qualifying homes sold by December 31, 2014 for use as a residence.
Credits for Renewable Energy Production Facilities. The Act retroactively restores the renewable energy production credit for one year to cover facilities that begin construction before 2015.
Other Extended Business Provisions
Enhanced Deduction for Food Donations. The Act retroactively restores, for 2014, the enhanced charitable contribution deduction for non-C corporation businesses that donate food (it must be apparently wholesome when donated). This provision is intended for non-C corporation businesses that have food inventories, such as restaurants. For non-C corporation taxpayers, deductions for donated food are normally limited to the taxpayer’s basis in the food or FMV, whichever is lower. In contrast, the enhanced deduction equals the lesser of: (1) basis plus half the value in excess of basis or (2) two times the basis. (The same enhanced deduction rule has been available to C corporations for years.)
Favorable Rule for S Corporation Donations of Appreciated Assets. The Act retroactively restores for tax years beginning in 2014 the favorable shareholder basis rule for stock in S corporations that make charitable donations of appreciated assets. For such donations, each shareholder’s tax basis in the S corporation’s stock is only reduced by the shareholder’s prorata percentage of the company’s tax basis in the donated assets. Without the extended provision, a shareholder’s basis reduction would equal the passed-through write-off for the donation (a larger amount). The extended provision is taxpayer-friendly because it leaves shareholders with higher tax basis in their S corporation shares.
Parity for Employer-provided Parking and Transit Benefits. The Act extends for one year, through 2014, the parity provision that requires the tax exclusion for transit benefits to be the same as the exclusion for parking benefits. Thus, for 2014, employees can be given tax-free transit benefits of up to $250 a month—the same as for tax-free parking benefits.
Break for S Corporation Built-in Gains. When a C corporation converts to S corporation status, the corporate-level built-in gains tax generally applies when built-in gain assets (including receivables and inventories) are turned into cash or sold within the recognition period. The tax is only assessed on built-in gains (excess of FMV over basis) that exist on the conversion date. The recognition period is normally the 10-year period that begins on the conversion date. However, for S corporation tax years beginning in 2012 and 2013, the recognition period was five years. The Act retroactively restores the five-year recognition period for tax years beginning in 2014. In other words, for gains recognized in 2014, the built-in gains tax won’t apply if the fifth year of the recognition period has gone by before the start of 2014.
Energy Efficient Commercial Buildings Deduction. The Act retroactively restores the deduction for the cost of an “energy efficient commercial building property” placed in service during the tax year for one year, for property placed in service before 2015. The maximum deduction for any building for any tax year is the excess (if any) of the product of $1.80, and the square footage of the building, over the total amount of the Section 179 deductions claimed for the building for all earlier tax years.
Beginning in 2015, the Act allows states to establish tax-exempt Achieving a Better Life Experience (ABLE) accounts to assist persons with disabilities in building an account to pay for qualified disability expenses. An ABLE account can be set up for an individual (1) who is entitled to benefits under the Social Security disability insurance program or the Supplemental Security Income (SSI) program due to blindness or disability occurring before the individual reached age 26 or (2) for whom a disability certification has been filed with IRS for the tax year.
Annual contributions are limited to the amount of the annual gift tax exclusion for that tax year ($14,000 for 2015). Distributions are tax-free to the extent they don’t exceed the beneficiary’s qualified disability expenses for the year. Distributions that exceed qualified disability expenses are included in taxable income and are generally subject to a 10% penalty tax. However, distributions can be rolled over tax-free within 60 days to another ABLE account for the benefit of the beneficiary or an eligible family member. Similarly, an ABLE account’s beneficiary can be changed, as long as the new beneficiary is an eligible family member.
Except for SSI, ABLE accounts are disregarded for federal means-tested programs. Also, some ABLE accounts are provided limited bankruptcy protection.
As you can see, the tax extender legislation includes lots of tax changes. We did not cover them all here because we did not want this to turn into a book. If you have questions or want more complete information, please contact us.