Latest Updates on the Tax Increase Prevention Act of 2014

On December 16, 2014, Congress passed what is known as an extenders package including more than 50 of the tax credits that expired at the end of 2013. President Obama has signed the Act on December 19, 2014 and it is effective for the 2014 tax year only.

Some of the most prominent tax credits are: state and local sales tax deduction, higher education tuition deduction, and the exclusion for discharge of mortgage debt, business and energy incentives, most notably the research tax credit, bonus depreciation and the production tax credit.

In the past, these short-term tax credits were usually set to expire in 2 years.  However, this changed in 2014 due to President Obama preemptive threat to veto should these tax credits got renewed for another 2 years. The president wanted to allocate more tax money to make permanent tax credits that favored working family instead.

The short term extenders that president Obama expected to sign will allow individuals to claim the following:

State and Local sales tax deduction.  This deduction will allow taxpayers to itemize deduction for state and local general sales taxes in stead of state and local income taxes.  It is particularly beneficial for taxpayers in states that do not have to pay income tax.

Higher Education Deduction. The maximum deduction is $4,000 for taxpayers with AGI not exceeding $65,000 ($130,000 for a joint return), $2,000 for taxpayers with AGI $65,000-$80,000 ($130,000–$160,000 for joint filers) and $0 for other taxpayers. Note that 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.

Mortgage Debt Exclusion. This will allow taxpayers to excludes from their income cancellation of mortgage debt on a principal residence of up to $2 million ($1 million for a married taxpayer filing a separate return) for another year.

Charitable Distribution from IRAs. Individuals age 70 1/2 and older will continue to be allowed to make tax-free distributions from individual retirement accounts (IRAs) to a qualified charitable organization. The treatment is capped at a maximum of $100,000 per taxpayer each year.

The short term extenders will also allow businesses to claim the following:

Bonus Depreciation. Bonus depreciation allows taxpayers to claim an additional first-year depreciation deduction. Qualified property must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less. Property must be new and placed in service before January 1, 2015. Taxpayers claim bonus depreciation in the tax year that a qualifying asset in placed in service. This may not necessarily be the same tax year that the asset is acquired and only new property is eligible for bonus depreciation.

Code Sec. 179 Expensing. This will allow taxpayers to immediately deduct, rather than gradually depreciate the cost of qualified assets.

Research Tax Credit. The research tax credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The research credit generally allows taxpayers a 20-percent credit for qualified research expenses or a 14 percent alternative simplified credit.

These extensions cost $81.4 Billion for 2015 and an additional $41.6 Billion for the next 10 years, according to Joint Committee on Taxation.

On top of the Tax extensions, Congress also passed an Omnibus Funding Agreement that cut funding to the IRS an additional of $346 million. This could hugely impact the customer service helpline as well as enforcement according to IRS Commissioner John Koskinen.

 

Please contact Peter Soh at peter@advisellp.com for questions.

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