News Archive March 2015
Tax & Business Alert
Welcome to this month's edition of the Tax & Business Alert. Our goal is to provide you with current articles on various tax & business topics. The articles are intended to keep you up to date on trends and issues that may impact your business and personal financial affairs. Please contact us if you have questions about any of the issues discussed.
Abstract: The Tax Increase Prevention Act of 2014 (TIPA) was signed into law on December 19, 2014. It retroactively extends most of the federal income tax breaks that would have affected many individuals and businesses through 2014. This article discusses some of the extended provisions impacting individual taxpayers, such as the qualified tuition deduction, the mortgage insurance premium deduction, and more.
Tax Increase Prevention Act of 2014 (TIPA)
The Tax Increase Prevention Act of 2014 (TIPA) was signed into law on December 19, 2014. Thankfully, TIPA retroactively extends most of the federal income tax breaks that would have affected many individuals and businesses through 2014. So, these provisions may have a positive impact on your 2014 returns. Unfortunately, these extended provisions expired again on December 31, 2014. So, unless Congress takes action again, these favorable provisions won’t be available for 2015.
In this article, we will discuss some of the extended provisions impacting individual taxpayers.
Tax breaks for individuals extended through 2014
Qualified tuition deduction. This write-off, which can be as much as $4,000 for married taxpayers with adjusted gross income up to $130,000 ($65,000 if unmarried) or $2,000 for married taxpayers with adjusted gross income up to $160,000 ($80,000 if unmarried), expired at the end of 2013. TIPA retroactively restored 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 canceled 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 canceled in 2007–2013 was treated as a tax-free item. TIPA retroactively extended this break to cover eligible debt cancellations that occurred 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 TIPA retroactively restored 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 TIPA, this break wasn’t available for premiums paid after 2013. TIPA retroactively restored 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 TIPA retroactively restored it for 2014.
IRA Qualified Charitable Contributions (QCDs). 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 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 TIPA retroactively restored it for 2014, so that it was 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. TIPA retroactively restored it for 2014.
What about 2015?
Unfortunately, as we said at the beginning of this article, none of these favorable provisions will be available for 2015, unless Congress takes further action. This is entirely possible, but far from certain. We’ll keep you posted as the year progresses.
Abstract: The Achieving a Better Life Experience Act (ABLE) of 2014 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. This article discusses details of the act, including who is eligible and contribution limits.
ABLE accounts for disabled individuals
The Tax Increase Prevention Act of 2014 (TIPA) also included 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.
Beginning in 2015, TIPA allows states to establish tax-exempt ABLE accounts to assist persons with disabilities in building an account to pay for qualified disability expenses.
Note: Although states can establish ABLE accounts beginning in 2015, it is likely they won’t be available until after the IRS provides guidance as to how these accounts should be administered. TIPA requires the IRS to provide this guidance by mid-June 2015.
Contributions to an ABLE account aren’t deductible for income tax purposes. However, earnings in the account are deferred until distributed from the account or, if the distributions are used to pay qualified disability expenses, they are tax-free.
Except for Supplemental Security Income (SSI), ABLE accounts are disregarded for federal means-tested programs. Also, some ABLE accounts are provided limited bankruptcy protection.
Eligible individuals. 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 the IRS for the tax year.
Contributions. Annual contributions to an ABLE account are limited to the amount of the annual gift tax exclusion for that tax year ($14,000 for 2015).
Distributions. Distributions from ABLE accounts are tax-free to the extent they don’t exceed the designated beneficiary’s qualified disability expenses for the year. Distributions that exceed the qualified disability expenses for the year are included in taxable income and are generally subject to a 10% penalty tax.
Distributions can be rolled over tax-free within 60 days to another ABLE account for the benefit of the beneficiary or an eligible individual who’s a family member of the beneficiary. Similarly, an ABLE account’s beneficiary can be changed, as long as the new beneficiary is an eligible individual who’s a family member of the beneficiary.
Death of the beneficiary. At the beneficiary’s death, any amounts remaining in the account after Medicaid reimbursements go to the deceased’s estate or designated beneficiary. They are subject to income tax on investment earnings, but not to the 10% penalty.
Abstract: This article describes a variety of business tax breaks that were extended through 2014. They include extended cost recovery provisions, along with certain business credits, a deduction for energy-efficient commercial buildings, and more.
Tax breaks for businesses extended through 2014
Extended cost recovery provisions
50% bonus depreciation. The Tax Increase Prevention Act of 2014 (TIPA) extended 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. 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, TIPA restored the maximum Section 179 deduction to $500,000 (same as for tax years beginning in 2013). 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. TIPA retroactively restored 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 provisions for business
Business credits. TIPA retroactively extended:
- The research credit to cover qualifying expenses paid or accrued before 2015,
- The deadline for employing eligible individuals for purposes of claiming the Work Opportunity Tax Credit to cover qualifying hires that began work in 2014, and
- 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.
Favorable rule for S Corporation donations of appreciated assets. TIPA retroactively restored 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 pro rata 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.
Break for S corporation built-in gains. When a C corporation converts to an S corporation, a 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. TIPA retroactively restored 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. TIPA retroactively restored the deduction for the cost of an energy-efficient commercial building property placed in service during the tax 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.
What about 2015?
Unfortunately, none of these special provisions will be available for 2015 unless Congress takes further action. This is entirely possible, but far from certain. We’ll keep you posted as the year progresses.
Abstract: Using direct deposit for a tax refund offers convenience and security, among other advantages. This article explains why.
4 good reasons to direct deposit your refund
If you are getting a refund this year, here are four good reasons to choose direct deposit:
- 1. Convenience. With direct deposit, your refund goes directly into your bank account. There's no need to make a trip to the bank to deposit a check.
- 2. Security. Since your refund goes directly into your account, there’s no risk of your refund check being stolen or lost in the mail.
- 3. Ease. Choosing direct deposit is easy. You just need to provide us your bank account and routing number and we’ll take care of it.
- 4. Options. You can split your refund among up to three financial accounts. Checking, savings, and certain retirement, health and education accounts may qualify.
You can have your refund deposited into accounts that are in your own name, your spouse’s name, or both, but not to accounts owned by others. Some banks require both spouses’ names on the account to deposit a tax refund from a joint return. Check with your bank for its direct deposit requirements.
Abstract: This article discusses National Taxpayer Advocate Nina E. Olson’s concern that taxpayers this year are likely to receive the worst levels of taxpayer service since at least 2001. She offers several corrective measures.
National Taxpayer Advocate delivers annual report to Congress
National Taxpayer Advocate Nina E. Olson recently released her 2014 annual report to Congress, which expresses concern that taxpayers this year are likely to receive the worst levels of taxpayer service since at least 2001, when the IRS implemented its current performance measures. The report recommends that Congress enact a principles-based Taxpayer Bill of Rights, adopt additional safeguards to make those rights meaningful, and provide sufficient funding to make the “Right to Quality Service” a reality.
The report says the combination of the IRS’s increasing workload, the erosion of public trust, and the sharp reduction in funding have created a “perfect storm” of trouble for tax administration and therefore for taxpayers. “Taxpayers who need help are not getting it, and tax compliance is likely to suffer over the longer term if these problems are not quickly and decisively addressed,” Olson wrote.
The report also urges Congress to enact comprehensive tax reform, pointing out that simplification would ease burdens on taxpayers and the IRS alike.
Tax & Business Alertis designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, please contact us for advice on how the information applies in your specific situation. The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax-related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax-related matter addressed herein. Tax & Business Alert is a trademark used herein under license.