Tax Increase Prevention Act of 2014

Small Business Jobs Act of 2010
April 6, 2017
Tax Considerations: Terminal Illness and Death
April 6, 2017

The Tax Increase Prevention Act of 2014

In one of its final actions, the 113th Congress passed the Tax Increase Prevention Act of 2014. This legislation extends for one year a host of popular tax provisions (commonly referred to as “tax extenders”) that had expired at the end of 2013. The legislation also authorizes the creation of new ABLE accounts–tax-advantaged savings accounts for individuals with disabilities–and includes a change allowing 529 account owners to change investments up to twice each year.

Extended tax provisions–Individuals

The following provisions are extended through 2014 (i.e., unless extended by additional legislation, these provisions will not apply to tax years beginning on or after January 1, 2015).

Deduction for classroom expenses paid by educators

Up to $250 of unreimbursed annual qualified classroom expenses paid by eligible educators can be deducted as an “above-the-line” deduction. Qualifying expenses can include the cost of books, most supplies, computer equipment, and supplementary materials used in the classroom. Teachers, instructors, counselors, principals, and aides for kindergarten through grade 12 are eligible, provided they work a minimum number of hours during the school year.

Exclusion of income from the discharge of debt associated with a qualified principal residence

Generally, debt amounts that are reduced, forgiven, or eliminated as part of a mortgage restructuring or foreclosure are treated as taxable income. Under current provisions (effective since 2007), however, taxpayers have been able exclude from gross income the discharge of debt associated with a qualified principal residence. Specifically, an exclusion is provided for discharges of up to $2 million ($1 million if married filing separately) of qualified principal residence indebtedness–debt incurred in acquiring, constructing, or substantially improving a principal residence. Refinanced qualified principal residence debt that is discharged can also qualify for the exclusion.

Employer-provided mass transit benefits

Qualified transportation fringe benefits provided by an employer are excluded from gross income for federal income tax purposes. Qualified transportation fringe benefits include parking, transit passes, vanpool benefits, and qualified bicycle commuting reimbursements. Qualified transportation fringe benefits may also include a cash reimbursement (under a bona fide reimbursement arrangement) by an employer to an employee for parking, transit passes, or vanpooling. Parity in qualified transportation fringe benefits is temporarily extended by increasing the monthly exclusion for employer-provided transit pass and vanpool benefits from $130 to $250 (the same level as the exclusion for employer-provided parking).

Deduction for mortgage insurance premiums

Premiums paid or accrued for qualified mortgage insurance associated with the acquisition of a main or second home may be treated as deductible qualified residence interest on Schedule A of IRS Form 1040. The amount that would otherwise be allowed as a deduction is reduced if adjusted gross income (AGI) exceeds $100,000 ($50,000 if married filing separately) and no deduction is allowed if AGI exceeds $109,000 ($54,500 if married filing separately).

Deduction for state and local general sales tax

Individuals who itemize deductions on Schedule A of IRS Form 1040 can elect to deduct state and local general sales taxes in lieu of the deduction for state and local income taxes. The total amount of state and local sales taxes paid can be calculated by accumulating receipts showing general sales taxes paid, or by using IRS tables. If IRS tables are used to determine the deduction, in addition to the table amount, a deduction can be claimed for eligible general sales taxes paid on cars, boats, and other specified items.

Qualified conservation contributions of capital gain real property

An individual’s total deductible charitable contributions generally may not exceed 50 percent of the individual’s contribution base, which is the individual’s AGI (disregarding any net operating loss carryback). Contributions of capital gain property to public charities are generally deductible up to 30 percent of the individual’s contribution base, and contributions of capital gain property to private foundations and certain other charitable organizations are generally deductible up to 20 percent of the individual’s contribution base.

The 30 percent limitation that normally applies to the contribution of capital gain property by individuals temporarily does not apply to qualified conservation contributions. Instead, individuals may deduct the fair market value of any qualified conservation contribution, subject to the general 50 percent limitation.

The fair market value of the qualified conservation contribution may be deducted to the extent that it doesn’t exceed 50 percent of the contribution base over the amount of all other allowable charitable contributions. Excess contributions can be carried forward for up to 15 years.

A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization exclusively for conservation purposes. A qualified real property interest is defined as: (1) the entire interest of the donor other than a qualified mineral interest; (2) a remainder interest; or (3) a restriction (granted in perpetuity) on the use that may be made of the real property.

Special rules apply to farmers and ranchers.

Deduction for qualified higher education expenses

Individuals may claim an above-the-line deduction for qualified higher education expenses paid during the year. Qualified expenses include tuition and fees paid for enrollment in a degree or certificate program at an accredited post-secondary educational institution for the individual, the individual’s spouse, or a dependent. The deduction doesn’t include payments made for meals, lodging, insurance, transportation, or other living expenses. The maximum deduction is $4,000. Individuals with adjusted gross incomes (AGIs) exceeding $65,000 ($130,000 for married individuals filing jointly) can claim a maximum deduction of $2,000, and individuals with AGIs greater than $80,000 ($160,000 if married filing a joint return) can’t claim the deduction at all.

The expenses must be in connection with enrollment at an institution of higher education during the taxable year, or with an academic period beginning during the taxable year or during the first three months of the next taxable year. Special rules apply relating to how this provision coordinates with Coverdell education savings accounts, qualified tuition programs, the American Opportunity and Lifetime Learning tax credits, and education expenses paid with tax-free interest on U.S. savings bonds.

Qualified charitable distributions (QCDs)

An individual age 70½ or older can make a qualified charitable distribution (QCD) from his or her IRA, and exclude the distribution from gross income (up to $100,000 in a year). The distribution must be made directly to a qualified charity, and must be a distribution that would otherwise be taxable to the individual. QCDs count toward satisfying any required minimum distributions (RMDs) that would otherwise have to be made from the IRA, just as if the individual had received an actual distribution from the plan. Individuals are not able to claim a charitable deduction for the QCD on their federal income tax returns.

Credit for nonbusiness energy property

The credit is the sum of two amounts:

  1. A 10 percent credit is available for the purchase of qualified energy efficiency improvements to existing homes. Qualified energy efficiency improvements can include qualifying insulation materials, exterior windows, skylights, doors, and certain metal or asphalt roofs. The original use of the property must commence with the taxpayer; the improvement must be installed in or on a U.S. home owned by the taxpayer and used as his or her principal residence; and the improvement must be reasonably expected to remain in use for at least five years.
  2. Specific credit amounts for the purchase of certain energy-efficient property placed in service during the taxable year: (1) $50 for each advanced main air circulating fan, (2) $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, and (3) $300 for items including certain electric heat pumps, central air conditioners, natural gas, propane, or oil water heaters, and biomass fuel property.

The maximum (total lifetime) credit for all taxable years is $500, and no more than $200 of such credit may be attributable to expenditures on windows.

Extended tax provisions–Businesses

Research credit

A credit may be claimed for qualified research expenses. The credit is generally equal to 20 percent of the amount by which qualified research expenses exceed a base amount for the year. An optional alternative simplified research credit (with a 14 percent rate and a different base amount) can be claimed instead.

Special rules and calculations also apply for: (1) corporate cash expenses including grants and contributions paid for basic research conducted by universities and certain nonprofit scientific research organizations (“the university basic research credit”), and (2) expenditures on research undertaken by an energy research consortium (“the energy research credit”).

Work opportunity tax credit

The work opportunity tax credit is available to employers hiring individuals from one or more of nine targeted groups. The amount of the credit is generally 40 percent (25 percent for employment of 400 hours or less) of qualified wages paid by the employer. Qualified wages are wages (generally, up to $6,000) earned by a member of a targeted group during the one-year period beginning with the day the individual begins work for the employer. In the case of an individual in the long-term family assistance recipient category, the period of time is two years rather than one year.

Targeted groups eligible for the credit include: (1) families receiving Temporary Assistance for Needy Families (TANF), (2) qualified veterans, (3) qualified ex-felons, (4) designated community residents, (5) vocational rehabilitation referrals, (6) qualified summer youth employees, (7) qualified supplemental nutrition assistance program benefits recipients, (8) qualified SSI recipients, and (9) long-term family assistance recipients.

In the case of qualified summer youth employees, the maximum credit is $1,200 (40 percent of the first $3,000 of qualified first-year wages). In the case of long-term family assistance recipients, the maximum credit equals $9,000 (40 percent of the first $10,000 of qualified first-year wages, and 50 percent of the first $10,000 of qualified second-year wages).

Bonus depreciation

An additional first-year “bonus” depreciation deduction is available, equal to 50 percent of the adjusted basis of qualified property placed in service during the year. The additional first-year depreciation deduction is allowed for both regular tax and the alternative minimum tax. The basis of the property and the regular depreciation allowances in the year the property is placed in service and later years are adjusted accordingly.

A corporation otherwise eligible for additional first year depreciation may be able to elect to claim additional minimum tax credits in lieu of claiming the additional bonus deprecation.

Expanded IRC Section 179 expensing limits

Small businesses may elect under IRC Section 179 to expense the cost of qualifying property, rather than to recover such costs through depreciation deductions. The maximum amount that can be expensed for 2014 now remains at $500,000 (the same limit that applied in 2013), rather than dropping to $25,000 as it would have had the legislation not passed. The $500,000 limit is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $2,000,000.

In general, qualifying property is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. Off-the-shelf computer software placed in service in taxable years beginning before 2015 also is treated as qualifying property.

For taxable years beginning in 2010 through 2014, qualifying property can include up to $250,000 in qualified real property (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

Exclusion of gain–qualified small business stock

Individuals are generally able to exclude 50 percent of any capital gain from the sale or exchange of qualified small business stock acquired at original issue, provided that certain requirements, including a five-year holding period, are met. However, the temporary increase of the exclusion percentage to 100 percent that applied in 2013 is now extended to qualified small business stock issued and acquired in 2014. The exclusion applies for purposes of the alternative minimum tax calculation as well as for regular income tax calculation.

Other business provisions extended

  • Indian employment tax credit
  • New markets tax credit
  • Employer wage credit for employees who are active duty members of the uniformed services
  • 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  • Enhanced charitable deduction for contributions of food inventory
  • Empowerment zone tax incentives
  • Credit for energy efficient new homes

Other provisions

Qualified achieving a better life experience (ABLE) programs

For tax years beginning after December 31, 2014, states can establish and operate ABLE programs, allowing the establishment of ABLE accounts, which are intended to help pay for the qualified disability expenses of eligible individuals.

In general:

  • Accounts may be established to benefit eligible individuals. Eligible individuals are individuals severely disabled by age 26, based on marked and severe functional limitation or receipt of benefits under the SSI or Disability Insurance (DI) program.
  • Eligible individuals are limited to one ABLE account.
  • Anyone can contribute to an ABLE account.
  • Total annual contributions by all individuals to any one ABLE account are limited to the gift tax annual exclusion amount for the year ($14,000 for 2015); total aggregate contributions to an ABLE account would be subject to individual state limits imposed on 529 accounts.
  • Contributions to ABLE accounts are not deductible–they are made with after-tax dollars.
  • Income earned in an ABLE account is not subject to federal income tax in the year earned.
  • Distributions from ABLE accounts to eligible individuals for qualifying expenses are not subject to federal income tax. Qualified expenses are generally expenses related to the eligible individual’s disability, such as health, education, housing, transportation, training, assistive technology, personal support, and related services.
  • Distributions from ABLE accounts used for nonqualified expenses would be subject to federal income tax on the portion of the distribution that represents earnings, plus an additional 10 percent penalty tax on the portion of the distribution that represents earnings.

Individuals with ABLE accounts can maintain eligibility for means-tested benefit programs such as SSI and Medicaid. Specifically, $100,000 in ABLE account balances are exempt from being counted toward the SSI program’s $2,000 individual resource limit. However, any ABLE account distribution used for housing would count as income for SSI purposes. States are required to recoup certain expenses through Medicaid upon the death of the eligible individual.

Contributions to an ABLE account by a parent or grandparent of a designated beneficiary are protected in the case of bankruptcy, provided the contribution(s) is made more than 365 days prior to the bankruptcy filing.

ABLE accounts can generally only be rolled over into another ABLE account for the same individual or into an ABLE account for a sibling who is also an eligible individual. Upon the death of an eligible individual, any amounts remaining in an ABLE account (after any Medicaid reimbursement) will go to the deceased individual’s estate or to a designated beneficiary, and would be subject to federal income tax on investment earnings.

Investment direction rules for 529 plans

For tax years beginning after December 31, 2014, Section 529 qualified tuition programs may permit investment direction by an account contributor or designated beneficiary up to two times per year.