Congress just approved the Tax Increase Prevention Act of 2014, which makes several “tax extender” deductions available through 2014. This long-awaited legislation generally resolves the uncertainty of whether the extender tax breaks will be available for 2014.
Just before Congress went home for the holidays on December 16, the Senate approved H.R. 5771, signed into law by the President on December 19. This legislation, which includes the “Tax Increase Prevention Act of 2014” (“TIPA) extends the individual, business and energy tax extenders for one year (retroactive to January 1, 2014) and provides several year-end tax planning opportunities for individuals and businesses in Columbus, Ohio and throughout the U.S. This article addresses eight of the most beneficial year-end tax planning opportunities that were part of this legislation.
Although the end of 2014 is approaching, there is still time to lower your personal and business income taxes. The experienced tax attorney at Porter Law Office, LLC has been monitoring the progress of the Tax Increase Prevention Act of 2014 (HR 5771) as it moved through the U.S. Congress.
These “extenders” are a varied assortment of more than 50 individual and business tax deductions, tax credits, and other tax-saving laws which have been on the books for years but which technically are temporary because they have a specific end date. The new legislation generally extends these tax breaks, most of which expired at the end of 2013, for one year through 2014. In addition, the legislation provides for a new type of tax-advantaged savings program to help in meeting the financial needs of disabled individuals, the “Achieving a Better Life Experience” (ABLE) program.
Tax Planning Item #1—Local Sales Tax Deduction
The Act extended the state and local sales tax deduction through 2014. This provision is most beneficial to taxpayers in states without an income tax. If you live in a state without an income tax, and you itemize deductions, you can claim state and local general sales taxes in lieu of itemizing state and local income taxes.
If you live in Ohio, which has a state income tax, you may benefit from this deduction if you purchased a big-ticket item in 2014 or if you are considering purchasing such an item. Simply weigh the value of claiming the state and local sales taxes instead of claiming state and local income taxes. Fortunately, you do not have to decide whether to claim the sales tax deduction until you file your 2014 return (generally, April 15th).
Tax Planning Item #2—Higher Education Tuition and Fees Deduction
Are you considering going back to school in 2015? You may be eligible to deduct qualified tuition and related expenses incurred in 2014 by virtue of this tax extender. The deduction is an above-the-line deduction meaning you can take it even if you do not itemize your deductions on Schedule A. 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), then it is phased out for other taxpayers.
You will need to hurry. Per the tax 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.
Tax Planning Item #3—Classroom Expense Deduction
Another above-the-line deduction has been extended through 2014; the deduction for eligible educator expenses. Out-of-pocket costs for certain materials and supplies purchased in 2014 may be deductible. The deduction is not limited to teachers but may be claimed by K through 12 instructors, counselors, principals or aides who work at least 900 hours during a school year. If your employer reimburses you for these expenses, the deduction is reduced accordingly.
Tax Planning Item #4—Tax-Free Distributions from IRAs for Charitable Purposes
The Act also maintains a popular IRA tax break for retirees called the “Qualified Charitable Distribution (QCD) Rule.” The deadline to make qualified charitable donations from an IRA was Dec. 31, 2013, but the Act extended the exclusion through 2014. The Act allows individuals age 70-1/2 and older to exclude from gross income qualified charitable distributions. 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 specific situation.
An added benefit is that a qualified charitable distribution also counts toward satisfying the individual’s required minimum distributions from a traditional IRA, subject to limitations (i.e., the total amount of all qualified charitable distributions from all the individual’s IRAs cannot exceed $100,000 for the tax year—$100,000 for each spouse on a jointly filed return). There are requirements that must be satisfied such as the fact that the distribution must be made directly by the IRA trustee to the charitable organization and the distribution must be completed within the 2014 tax year to qualify.
Tax Planning Item #5—Internal Revenue Code Section 25C Credit
The American Recovery and Reinvestment Act of 2009 established the § 25C nonbusiness energy property credit (click the link to review IRS guidance on the credit presented as 32 questions and answers). The credit was extended until December 31, 2013 by virtue of the American Taxpayer Relief Act of 2012. By passing the Act, the nonbusiness energy property credit is now extended through 2014. The nonbusiness energy property credit under § 25C is one several provisions in the Tax Code that exists to encourage and reward taxpayers who make qualified energy efficiency improvements to residential property.
This extender provides tax planning opportunities for those who are considering energy efficient improvements to their principal residence to take advantage of the § 25C credit. Qualifying improvements under § 25C include adding insulation, energy-efficient exterior windows and doors, certain roofs, certain high-efficiency HVAC systems, and 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.
Tax Planning Item #6—Bonus depreciation
The § 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.
Tax Planning Item #7—Internal Revenue Code Section 179 Expensing
If you are a farmer in or around the Columbus, Ohio MSA, you have been keeping your eye on the state of the § 179 deduction limits. The Act significantly increased the § 179 dollar and investment limitations for tax years beginning in 2014. The Act also extends the qualified real property allowance and computer software deduction through 2014. Up to $250,000 of qualified real property may be treated as § 179 property.
The Act only covers this tax year 2014. Therefore, it may be a good business decision for many to buy or finance equipment immediately to make the December 31, 2014 deadline for the write-off provisions of § 179. Before the end of 2014, you 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.
Tax Planning Item #8—Leasehold, Retail Restaurant Property
Finally, 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).
Contact an Experienced Columbus Tax Attorney
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The tax lawyer at Porter Law Office, LLC is an experienced tax attorney with an advanced degree in taxation. By hiring Porter Law Office, LLC, you will work with a Columbus, Ohio tax attorney who understands the value of proper tax planning. Porter Law Office, LLC is a boutique law firm that specializes in complex tax controversy and tax planning. The firm is conveniently located in the Columbus, Ohio suburb of Gahanna. If you have questions about your 2014 year-end tax planning options, contact Columbus tax attorney Matthew R. Porter, Esq. today to discuss your case.