Happy New Year !
A few weeks ago, we sent to you the tax organizer to help you in gathering the necessary information to prepare your 2014 income tax returns. After we sent out the organizers, Congress enacted legislation that extended certain deductions and tax credits that had expired for the tax year ended December 31, 2013. We wanted to provide you a brief update on these tax extenders included in the most recent tax law that were passed as the provisions in these new laws may apply to you as you compile your information. We also wanted to inform you of changes taking effect in 2015.
These provisions which were set to expire at the end of 2013 have been extended through 2014.
• Eligible elementary and secondary school teachers may claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom.
• Discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately) is excluded from gross income.
• Mortgage insurance premiums paid or accrued by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer’s qualified residence are treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The amount allowable as a deduction is phased out ratably by 10% for each $1,000 by which the taxpayer’s adjusted gross income exceeds $100,000 ($500 and $50,000, respectively, in the case of a married individual filing a separate return). Thus, the deduction isn’t allowed if the taxpayer’s AGI exceeds $110,000 ($55,000 in the case of married individual filing a separate return).
• Taxpayers who itemize deductions may elect to deduct state and local general sales and use taxes instead of state and local income taxes.
• A taxpayer’s aggregate qualified conservation contributions (i.e., contributions of appreciated real property for conservation purposes) are allowed up to the excess of 50% of the taxpayer’s contribution base over the amount of all other allowable charitable contributions (100% for qualified farmers and ranchers), with a 15-year carryover of such contributions in excess of the applicable limitation.
• Eligible individuals can deduct higher education expenses—i.e., “qualified tuition and related expenses” of the taxpayer, his spouse, or dependents—as an adjustment to gross income to arrive at adjusted gross income. The maximum deduction is $4,000 for an individual whose AGI for the tax year doesn’t exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for individuals who don’t meet the above AGI limit, but whose adjusted gross income doesn’t exceed $80,000 ($160,000 in the case of a joint return). No deduction is allowed for an individual whose adjusted gross income exceeds the relevant adjusted gross income limitations, for a married individual who does not file a joint return, or for an individual for whom a personal exemption deduction may be claimed by another taxpayer for the tax year.
• Taxpayers who are age 701/2 or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per year. These distributions aren’t subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer’s return.
• For qualified energy property placed in service before 2015, a taxpayer may claim a credit up to a $500 lifetime limit (with no more than $200 from windows and skylights) over the aggregate of the credits allowed to the taxpayer for all earlier tax years ending after Dec. 31, 2005. The credit equals the sum of: (1) 10% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during the tax year, and (2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during the tax year. The credit for residential energy property expenditures can’t exceed: (i) $50 for an advanced main circulating fan; (ii) $150 for any qualified natural gas, propane, or hot water boiler; and (iii) $300 for any item of energy-efficient building property.
Of particular interest for the 2014 tax year is the integration of the Affordable Care Act (ACA) into the income tax return. Any penalties for not complying with the individual mandate or any credits for premiums paid must be reported on the income tax return. To that regard, we have included questions in the organizer to help us complete the necessary lines and forms of the federal income tax return. We may be contacting you with follow-up questions.
Here is the brief overview of the individual mandate. Beginning in 2014, unless your are covered by an exemption, you are required to maintain basic health insurance coverage (known as minimum essential coverage) for yourself and any of your dependents, or pay a shared responsibility payment (a penalty). The requirement to maintain coverage or pay a penalty is generally called the “individual mandate.”
The penalty is the lesser of: (i) the greater of a flat dollar amount or a percentage of your household income, or (ii) the national average premium for the lowest-level plan providing minimum essential coverage. You must make the shared responsibility payment when you file your federal income tax return. Married individuals who file a joint return for a tax year are jointly liable for any shared responsibility payment.
You can satisfy the minimum essential coverage standard (and not be subject to a penalty) if you and your dependent are enrolled in a qualified health plan offered by an Exchange, a qualified employer-sponsored plan (including a government plan), a government plan, such as Medicare, Medicaid or CHIP (Children’s Health Insurance Program), or any other health coverage plan recognized as affording minimum essential coverage. Minimum essential coverage does not include, workers compensation insurance, disability insurance, dental or vision benefits, long-term care benefits, and Medigap or MedSupp insurance.
If you are an exempt individual, such as a non-U.S. citizen, incarcerated individual, member of certain religious sects or health care sharing ministries or a member of an Indian tribe you will not be subject to the individual mandate. In addition, low income taxpayers, taxpayers for whom basic coverage is unaffordable and taxpayers who qualify under a hardship exemption are not required to maintain minimum essential coverage. Moreover, under the short coverage gap exception, any individual who doesn’t maintain minimum essential coverage for less than three consecutive months will not be subject to the penalty for failure to maintain coverage.
Certain credits and provisions for businesses that were set to expire at the end of December 31, 2013 have been extended one year.
• Research credit
• Work opportunity tax credit
• Indian employment credit
• New markets tax credit
• New energy efficient home credit
• Differential wage payment credit
• Reduction in S-corp recognition period for built-in gains tax
• Exclusion of 100% of gain on certain small business stock
• Lower shareholder basis adjustments for charitable contributions by s corporations
• Empowerment zone tax breaks
• Bonus first-year depreciation
• Extended choice to forego bonus depreciation and claim credits instead
• First-year depreciation cap for 2014 autos and trucks
• Boosted by $8,000 expensing amounts for 2014
• 15-year write-off for qualified leasehold and retail improvements and restaurant property
• Expensing election for costs of film and TV production
• Energy efficient commercial buildings deduction
Following are limitations and exclusions that apply to the 2015 tax year.
401K catch-up $6,000
IRA & Roth IRA $5,500; $1,000 (catch-up contribution if 50 and older)
Health savings account (HSA) $3,350 (self); $6,650 (family); $1,000 (catch-up if 55 and older)
Annual gift tax exclusion $14,000
Lifetime gift exclusion $5,430,000
Please note that 2014 contributions to regular and Roth IRA and HSA must be made by April 15, 2015.
Should you have any questions, please contact us.
Scott B. Price