In addition, the extenders legislation adds “ABLE Accounts” that will help disabled individuals save for their future much like the popular §529 education plans and accounts.
Some of the more popular extenders and the new ABLE program and accounts are summarized below. Please contact us at your earliest convenience to discuss the impact these extenders will have on your 2014 return and 2015 tax planning.
Individual Tax Extenders
- Extension of deduction for certain expenses of elementary and secondary school teachers - The legislation extends for one year (through 2014) the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom.
- Extension of exclusion from gross income for discharge of qualified principal residence indebtedness – Continuing relief for distressed homeowners, the legislation extends for one year (through 2014) the ability to exclude from gross income the amount of mortgage debt on a personal residence discharged as part of a sale, short sale, etc.
- Extension of mortgage insurance premiums treated as qualified residence interest - The legislation extends for one year (through 2014) the ability of homeowners to treat mortgage insurance premiums (MIP) as deductible interest for purposes of the mortgage interest deduction. However, the deduction phases out ratably for taxpayers with adjusted gross income (AGI) of $100,000 to $110,000 (with each income amount reduced 50% for married taxpayers filing separately).
- Extension of deduction of State and local general sales taxes - The legislation allows taxpayers in 2014 to elect to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes.
- Extension of above-the-line deduction for qualified tuition and related expenses - The legislation extends through 2014 the “above-the-line” tax deduction for qualified education expenses. The deduction is capped at $4,000 for individual filers with AGI of $65,000 or less ($130,000 for joint filers) or $2,000 for individual filers with AGI of $80,000 or less ($160,000 for joint filers).
- Extension of tax-free distributions from individual retirement plans for charitable purposes - The legislation extends through 2014 tax-free charitable contributions from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year for taxpayers who are at least 701/2.
Business Tax Extenders
- Extension of increased expensing limitations and treatment of certain real property as §179 property - The legislation extends through 2014 the small business expensing limitation and phase-out amounts in effect from 2010 to 2013 – i.e., $500,000 and $2 million, respectively - to property placed in service during 2014. The special rules that allow expensing for computer software, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property also are extended through 2014.
- Extension of bonus depreciation - The legislation extends 50% bonus depreciation to property acquired and placed in service during 2014 (2015 for certain property with a longer production period). Taxpayers may continue to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2014. A special accounting rule involving long-term contracts and a special rule for regulated utilities also continues through 2014.
- Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements - The special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements for property placed in service in 2014 is extended.
- Extension of research credit – The legislation extends the research credit through 2014.
- Extension of temporary exclusion of 100% of gain on certain small business stock - The exclusion of 100% of the gain on certain small business stock for non-corporate taxpayers is extended to stock acquired before January 1, 2015, and held for more than five years. The provision also extends for one year the rule that eliminates such gain as an AMT preference item.
- Extension of basis adjustment to stock of S corporations making charitable contributions of property - The provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions would exceed such shareholder's adjusted basis in the S corporation is extended through 2014.
- Extension of reduction in S corporation recognition period for built-in gains tax- The rule reducing to five years (rather than 10 years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains is extended to sales of assets occurring during 2014.
Energy Tax Extenders
- Extension of credit for nonbusiness energy property - The 10% credit (maximum of $500) for purchases of nonbusiness energy property is extended through 2014.
- Extension of credit for energy-efficient new homes - The credit for the construction of energy-efficient new homes is extended through 2014.
ABLE Programs and Accounts
ABLE Accounts - The 2014 legislation allows states to create qualified ABLE programs beginning in 2015. Similar to the popular §529 accounts, contributions to ABLE program accounts would grow tax free. Accounts would be available only to individuals diagnosed with a disability before age 26. Beneficiaries would be limited to one ABLE account and would have to be residents of the state administering the program.
Earnings on an ABLE account would be exempt from income tax; distributions also would be exempt so long as they are used for qualified disability expenses. Qualified expenses would include education, housing, transportation, employment training and support, health, assistive technology, legal fees and funeral expenses. Beneficiaries would, either directly or indirectly, dictate how contributions or earnings in an account are invested, but no more than twice a year.
Money distributed from an account that is not used for a qualified purpose would be taxed as ordinary income and would be subject to an additional 10% tax.
Individuals would not be able to deduct their contributions for income tax purposes and any contribution amounts that exceed the annual limit would be subject to a 6% excise tax imposed on the beneficiary.
Contributions would qualify for the annual gift tax exclusion ($14,000 for 2015) and would be exempt from the generation-skipping transfer (GST) tax. Distributions also generally would be exempt from gift and GST taxes.
ABLE accounts generally would not count against income limits for means-tested benefits, such as Supplemental Security Income (SSI) and Medicaid. If the beneficiary's resources from an account exceed $100,000, SSI benefits would be suspended until the account balance is less than that amount. Such a suspension would not affect an individual's eligibility for Medicaid.
In the case of a bankruptcy, contributions by a parent or grandparent of a beneficiary would be protected as long as they were made more than a year before the bankruptcy filing.