Congress Passes Extender Legislation for 2014

On December 19, President Obama signed legislation extending a number of tax breaks that had expired at the end of 2013. For many individuals and businesses, these deductions and credits can provide substantial tax savings for the 2014 tax year. Below are some of the more significant provisions in the extender package.

Individuals

State and Local Sales Tax Deduction. Individuals who itemize their deductions may choose to deduct state and local sales taxes instead of state and local income taxes. This provision may help taxpayers who purchased big-ticket items, such as automobiles, in 2014, as well as taxpayers in states with a sales tax but no state income tax.

Higher Education Expenses. Eligible individuals may continue to deduct qualified tuition and related expenses of the taxpayer, his/her spouse, or dependents as an “above-the-line” deduction. The maximum deduction is either $4,000 or $2,000, depending on income.

Nontaxable IRA Transfers to Charities. Favorable tax treatment continues to be available for those taxpayers age 70½ or older who make direct transfers (of up to $100,000) from their individual retirement accounts (IRAs) to qualifying charities. If requirements are met, these contributions will be excluded from income and still count toward the taxpayer’s required minimum distributions.

Premiums for mortgage insurance deductible as qualified residence interest. Taxpayers may continue to deduct premiums paid for qualified mortgage insurance as qualified residence interest, provided that their adjusted gross income does not exceed certain levels.

Discharge of indebtedness on principal residence. Qualifying taxpayers may continue to exclude from gross income a lender’s discharge of indebtedness on the taxpayer’s principal residence.

Businesses

First-year (“bonus”) depreciation for qualified property. For qualifying property acquired and placed in service before January 1, 2015, businesses may take advantage of 50% first-year “bonus” depreciation. This rule allows businesses to deduct up to half the cost of qualifying property first placed in service in 2014. Qualifying property includes most machinery, equipment, or other tangible personal property with a recovery period of 20 years or less, certain leasehold improvement property, and most computer software.

Increased Section 179 expensing. Congress has substantially increased the amount of the allowable expense deduction for Section 179 property. Previously, businesses were allowed to expense up to $25,000 of qualifying Section 179 property placed in service for the 2014 tax year, with that limit subject to further reduction once the amount placed in service exceeded $200,000. Under the new extender legislation, these limits are restored to their previous levels of $500,000 and $2,000,000, respectively.

Research Credit. This provision generally allows businesses to take a credit equal to 20% of qualifying research expenses over a base amount.

Call us if we can provide more information about these and other provisions of the extender package.