Hopefully there will not be a repeat of the 16-day government shutdown following the 12 days of Christmas. The IRS has already announced to tax preparers that they likely will not be accepting tax returns prior to January 28, but maybe not until February 4 – more specific dates will be announced in December.
Each year there are legislative tax provisions that expire. Many are established in law one year at a time and therefore, require legislative action to renew or continue their provisions forward to the next year.
There are actually 57 federal tax provisions that are expiring at December 31, 2013. Of those 57 provisions there are 9 that get my attention because they are used by taxpayers I have contact with:
Deduction for certain expenses of elementary and secondary school teachers – This allows certain teachers to deduct classroom expenses of up to $250 “above the line”. Above the line means the deduction is taken directly off of gross income in arriving at adjusted gross income (AGI). This is one of the provisions that has been around for a while now, but requires annual renewal by Congress.
Discharge of indebtedness on principal residence excluded from gross income of individuals – Apparently there are still quite a number of individuals who could benefit from this since the value of their personal residence still has not returned to an amount at or above the amount of their mortgage. If the mortgage debt is discharged, this provision allows a certain amount to be excluded from income.
Premium for mortgage insurance deductible as interest that is qualified residence interest – Home buyers who are unable to provide a down payment of 20 percent or more are generally required to purchase mortgage insurance. This provision has allowed these insurance premiums to be characterized as qualified residence interest and claimed as an itemized deduction.
15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements – This is a depreciation (cost recovery) provision that has been around for several years now and as our county’s economy continues to rebound it probably still has applicability.
Additional first-year depreciation for 50 percent of basis of qualified property- For several years business entities have been allowed to deduct, in the year of purchase, 50 percent of the original cost of new equipment otherwise required to be depreciated over a life of 3 to 15 years.
Special rules for contributions of capital gain real property made for conservation purposes – This has allowed individuals to gain a charitable contribution deduction for the fair market value of property given up for conservation purposes. The current rule allows this contribution to use the 50% of AGI deduction limit whereas in 2014 it will revert back to the 30% of AGI limit. Also, currently a 15 year carryforward is allowed, whereas in 2014 it will only be 5 years.
Increase in expensing to $500,000/$2,000,000 and expansion of definition of section 179 property – Many small businesses make use of this provision to deduct, in full, in the year of acquisition, the cost of new or used equipment that would otherwise be depreciated over 3-15 years. The dollar amounts $500,000/$2,000,000 refer to the amount of deduction allowed and the total amount of qualifying property purchased in a given year.
Deduction for qualified tuition and related expenses – This provision has allowed certain individuals to deduct up to $4,000 of tuition and related expenses “above the line”. The deduction is further limited by income ranges: $4,000 maximum for income up to $65,000 ($130,000 for joint filers; $2,000 maximum for income over $65,000 up to $80,000 ($160,000 for joint filers); no deduction for income over $80,000 ($160,000 for joint filers).
Qualified charitable distribution (QCD) from an IRA – This provision allows those 70 ½ or older (required to take minimum distributions from their IRAs) to make distributions from their IRAs directly to a charity or charities of their choice up to $100,000 per year and by doing so satisfy their minimum distribution requirement. The amount so distributed is not included in gross income of the taxpayer and likewise the donation to charity is not allowed as an itemized deduction. This has been helpful to many older taxpayers since it keeps the distribution amount from unnecessarily inflating AGI when they may or may not otherwise receive a corresponding deduction for the donation (they may have used the standard deduction instead of itemizing). Above the line deductions or exclusions are preferable compared to itemized deductions which may be phased out depending on AGI.
These are some of the highlights of provisions that are set to expire at December 31, 2013. We will have to wait for Congress to take action in 2014 on these and other expiring provisions. The legislation is typically referred to as the “extenders bill”, but there has been little action so far.
The IRS recently announced the pension plan limitations for 2014. These are important to take note of and utilize because they give you the ability to defer amounts from current taxation and push the tax down the road into your retirement years. Also, another benefit of using retirement accounts as an investment vehicle is the fact that earnings will be untaxed until they are drawn out of the plan.
The 2014 amounts that are unchanged from 2013 include the wage deferral limit of $17,500, the catch-up amount for age 50 and older of $5,500, the SIMPLE deferral limit of $12,000, and the wage amount which generally defines a “highly compensated employee” of $115,000.
The 2014 amounts that have changed from what they were in 2013 include maximum defined contribution amount of $52,000 (up from $51,000), for employees 50 and older the amount is $57,500 (up from $56,500), the maximum annual compensation which may be considered when funding a pension plan is $260,000 (up from $255,000).
Also, for 2014 the social security wage base has been announced as $117,000 (up from $113,700). That means that employees earning that much or more will pay social security of $7,254; the rate is unchanged at 6.2%.
Other items of note that change annually and were recently announced by the IRS include the following:
Standard deduction: $6,200 for singles; $12,400 for joint filers; $9,100 for heads of households.
Personal exemption: $3,950, up from $3,900; however, the phase out of such begins when AGI tops $254,200 for singles and $305,050 for joint filers. The phase out is complete at AGI of $376,700 and $427,550 respectively.
Estate tax exclusion: the exclusion amount is $5,340,000 for 2014, up from $5,250,000.
Gift tax annual exclusion: no change for 2014, the amount remains at $14,000.
There is always a lot of information to keep track of as one year concludes and another starts. New rules come into play and many continuing provisions are indexed for inflation. Make sure you are on track with your 2013 tax planning and get an early start on making 2014 a good year. If you have any questions about the expiring provisions or inflation adjusted amounts as we move from 2013 to 2014 be sure to contact your CPA to get the latest information.