Income tax incentives extended for 2014 returns.
The bad news for taxpayers is that all of these tax-saving provisions for individuals were renewed only retroactively for the 2014 tax year. For these provisions to continue to apply for 2015, Congress will again need to decide on each of these measures retroactively before the end of 2015.
The congressional Joint Committee on Taxation (JCT) estimates that, collectively, the Tax Increase Prevention Act will reduce government revenues by $44.7 billion over the 10-year budget window (fiscal years 2015 through 2024).
The Biggest Extenders
Deduction for state and local sales taxes. The extension of the deduction for state and local general sales taxes [IRC section 164(b)] is the most far-reaching provision for individuals. In this section, individuals who itemize may opt to deduct state and local sales taxes they have paid during the year instead of state and local income taxes. Taxpayers can deduct either the actual amount of sales tax paid during the tax year, or an amount prescribed by the IRS (see the an online calculator at http://apps.irs.gov/app/stdc/). The JCT anticipates that this extension alone will lower revenues by $3,142 billion during 2015-2024.
This provision is critical for residents of states that do not levy income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In addition, New Hampshire and Tennessee tax only interest and dividend income. Because residents in these states have no state income tax to deduct, they will choose to deduct their sales taxes.
The option may also be relevant to those in states that do impose income taxes. For example, a retiree who makes a large purchase (such as a boat or an RV) that drives his sales taxes higher than his state and local income taxes might prefer to deduct the sales tax. In New York, retired teachers who are state residents and receive a New York City pension with no state or local income tax can also benefit from the sales tax deduction.
Deduction for teachers' expenses. The legislation also extends an above-the-line deduction of up to $250 for certain expenses of elementary and secondary school teachers [IRC section 62(a)]. This provision incorporates expenses that teachers would otherwise need to itemize for classroom supplies they buy with their own money. Revenues will be lowered by $214 million over 2015-2024 as a result of this provision, the JCT estimates.
Deduction for higher-education expenses. An important deduction for students was extended as well. It continues the above-the-line deduction for qualified tuition, fees and related expenses for higher education (IRC section 222). A taxpayer may take the deduction for himself, a spouse, or his dependents. For individuals whose adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers), the deduction is capped at $4,000; for those whose AGI does not exceed $80,000 ($160,000 for joint filers), the deduction is capped at $2,000. This extension will result in a $300 million revenue reduction over 10 years, according to the JCT.
It is worth remembering that taxpayers who take advantage of this deduction, however, may not claim other kinds of tax incentives for education, such as the Lifetime Learning Credit. Grants, scholarships, and funds withdrawn from tax-advantaged education savings accounts will further reduce the tuition deduction.
Deducting commuting costs. Another extended provision impacting a large proportion of taxpayers is one that affords parity for employer-provided parking and mass-transit benefits [IRC section 132(f)]. Commuters are permitted to reduce their pretax income to offset commuting costs. Previously, those who drove to work and parked could exclude as much as $250 per month for this purpose, but those who used mass transit were only allowed to exclude up to $130 monthly. The extended provision allows commuters who use mass transit to likewise exclude $250 a month. The JCT estimates this extension will reduce revenues by $10 million over 2015-2024.
Mortgage insurance premiums. These amounts continue to be treated as qualified residence interest under another extension (IRC section 163), but the deduction phases out for taxpayers with AGI from $100,000 to $109,000 for joint filers (half these amounts for married taxpayers filing separately). The provision offers the deduction to homeowners who pay mortgage premium insurance and itemize their deductions. The JCT estimates that tax revenues will be reduced by $919 million over 2015-2024 by this provision.
Charitable IRA distributions. Another extension [IRC section 408(d)] allows taxpayers who are at least 10 years old to make qualified charitable distributions from their IRAs and exclude those amounts from their gross income. The exclusion cannot exceed $100,000 per taxpayer in any tax year. A taxpayer will not be able to take a deduction for these charitable contributions, but the distributions are not included in income and they will not be considered in determining AGI, which is used to calculate the taxability of Social Security benefits. The JCT estimates this provision will reduce tax revenues by $384 million over 2015-2024.
Exclusion of discharge of indebtedness.
The extension of the exclusion from gross income of the discharge of qualified principal residence indebtedness (IRC section 108) has become especially important for those affected by the steep decline in home values over the past several years. If a homeowner sells a home for less than is owed to the bank, or if a bank has foreclosed on a home, that bank may forgive the homeowner's remaining debt. Ordinarily, the IRS would consider a forgiven debt to be income, but the extended provision allows for the exclusion of up to $2 million ($1 million if married and filing separately) of discharged principal residence indebtedness. The $3,143 billion estimated reduction in tax revenues over 2015-2024 puts this provision at the top of the fist of extenders in terms of fiscal impact.
Conservation contributions. A final extended provision offers tax incentives for qualified conservation contributions made by individuals [IRC section 170(b)]. It allows an enhanced deduction for contributions of capital gain real property for conservation purposes, with an enhanced deduction for certain individual and corporate fanners and ranchers. To claim this deduction, the taxpayer must make a contribution of teal property interest to a qualified organization and this contribution must exclusively be for conservation purposes. This deduction will lower tax revenues by an estimated $129 million over 2015-2024, according to the JCT.
A new provision attached to the tax-extender bill represents a significant benefit for certain affected taxpayers. The Achieving a Better Life Experience (ABLE) Act provides that people who were disabled before they were age 26, as well as their family and friends, can contribute a combined total of $14,000 a year to a state-run ABLE savings account. This legislation, added to the Tax Increase Prevention Act at the last moment, had been the subject of much speculation.
An ABLE account operates much like a 529 savings account for education expenses. The funds in the account will grow taxfree, and the disabled person will still qualify for federal assistance benefits such as Supplemental Security Income and Medicaid if the money is used exclusively for transportation, housing, education, and wellness. Once the account balance surpasses $100,000, however, SSI payments will be suspended, although Medicaid benefits will continue. Unlike the tax extenders, the provisions of the ABLE Act are not scheduled to expire.
Unfortunately, the last-minute passage of the Tax Increase Prevention Act means that tax-deduction provisions expired within two weeks of their approval. Since they apply only to the 2014 tax year, individuals needed to have anticipated the extension before it was official or quickly taken action before the end of last year. Many taxpayers and preparers are surely hoping that Congress will not wait quite so long to extend these tax incentives in 2015.
Michael Sonnenblick is an editor/author with the tax & accounting business of Thomson Reuters. For further tax planning advice, see the related Thomson Reuters Checkpoint's "Tax Saving Moves for the Rest of 2014," which offers more than 80 tax-saving strategies and planning opportunities, covering retirement planning, corporations and partnerships, ways to shift expenses, expiring tax provisions, estate and gift planning, making the most out of losses, and charitable giving.
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|Title Annotation:||News & Views: federal taxation|
|Publication:||The CPA Journal|
|Date:||Jan 1, 2015|
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