The American Taxpayer Relief Act of 2012 extended many tax deductions and credits for tax years 2012 and 2013 but these items are scheduled to disappear for 2014 unless Congress again extends these provisions. Now is the time to begin planning for the tax implications for 2014.
Tax deductions set to expire on Dec. 31, 2013 include:
- Educator’s Expenses – IRC Sec. 62(a)(D) – Grades K–12 teachers, instructors, counselors, principals and aides can deduct up to $250 of out-of-pocket costs above the line.
- Cancellation of Debt (COD) — Mortgage Debt – IRC Sec. 108(a)(1)(E) - Individuals can exclude up to $2 million ($1 million for married filing separately) of COD income from qualified principal residence indebtedness that is canceled because of their financial condition or decline in value of the residence.
- Mortgage Insurance Premiums Deduction – IRC Sec. 163(h)(3) - Taxpayers with Adjusted Gross Income no greater than $109,000 can treat qualified mortgage insurance premiums as home mortgage interest.
- Personal Energy Property Credit – IRC Sec. 25C – A credit (subject to a $500 lifetime cap) is available for qualified energy efficiency improvements and expenditures to a taxpayer’s principal residence.
- Qualified Small Business Stock (QSBS) Gain Exclusion – IRC Sec. 1202(a)(4) – Qualified small business stocks acquired between Sept. 28, 2010, and Dec. 31, 2013, qualify for 100 percent gain exclusion (if the holding period is met). For stock acquired during that period, the following rules also apply:
- None of the 60% gain exclusion rules for QSBS issued by a QBE apply.
- No portion of the excluded gain is added back to determine alternative minimum taxable income. Gains on QSBS acquired after Dec. 31, 2013, qualify for a 50 percent gain exclusion (60 percent for QSBS issued by a qualified business entity). Also, a percentage of the excluded gain is an Alternative Minimum Tax preference item.
- State and Local Sales Taxes Deduction – IRC Sec. 164(b)(5) -Individuals can elect to deduct state and local general sales taxes instead of state and local income taxes.
- Tuition and Fees Deduction – IRC Sec. 222 – Individuals can claim an above-the-line deduction for tuition and fees for qualified higher education expenses.
- Qualified Charitable Distributions – IRC Sec. 408(d) – Taxpayers over age 70-1/2 can make tax-free transfers from an IRA directly to a charity. Any amounts so transferred count toward the individual’s required minimum distribution, but are not deductible as charitable contributions.
- Qualified Leasehold, Restaurant and Retail Improvement Property – IRC Sec. 168(e)(3)(E) – Qualified leasehold improvements, qualified restaurant property and qualified retail improvements are assigned a 15-year, straight-line recovery period. In 2014, all improvements are assigned a 39-year, straight-line recovery period.
- Section 179 — Deduction Limit – IRC Sec. 179(b), (c) and (d) – The Section 179 deduction and qualifying property limits are $500,000 and $2,000,000, respectively. In addition, off-the shelf computer software qualifies for Section 179 expensing and taxpayers can amend or irrevocably revoke a Section 179 election. After 2013, the deduction and qualifying property limits are $25,000 and $200,000, respectively. Off-the-shelf software does not qualify for Section 179 expensing and the election generally is irrevocable with IRS consent.
- Section 179—Qualified Real Property – IRC Sec. 179(f) – Taxpayers can claim the Section 179 deduction on up to $250,000 of qualified real property (qualified leasehold improvements, qualified restaurant property and qualified retail improvement property). In 2014, qualified real property will not be eligible for Section 179 expensing.
- Special (Bonus) Depreciation – IRC Sec. 168(k) – 50% special depreciation is allowed for qualified property additions placed in service in 2013. (Note: For 2013, the Section 280F limit on depreciation for passenger autos is also increased by $8,000 for qualified property and no AMT adjustment applies to property for which the special depreciation allowance is claimed). In 2014, special deprecation will only be available for long production-period property and certain aircraft.
In addition, several provisions that expired at the end of 2012 will impact taxpayer’s 2013 income tax returns. They include:
- Exemption/Itemized Deduction Phase-out – For taxpayers with AGI above the threshold amounts personal exemptions and itemized deductions are subject to being phased out. The threshold limits are the same for both exemptions and itemized deduction phase-outs. Single – $250,000, Head of Household – $275,000, Married filing Jointly and surviving spouses – $300,000, and Married Filing Separately – $150,000.
- Exemptions – reduced by 2% for every $2,500 ($1,250 MFS), or fraction thereof, exceeds the threshold amount.
- Itemized Deductions – reduce itemized deductions by lessor of (1) 3% of excess of AGI above threshold or (2) 80% of otherwise allowable itemized deductions.
This article was previously printed in a First Command publication.