Expiring Tax Breaks for individual filers being considered...

According to the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act Committee Report the following provisions are under consideration:

1. Deduction for expenses of elementary and secondary school teachers
The bill extends for two years the $250 tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom.

2. Mortgage debt forgiveness
If you experienced mortgage debt cancellation or forgiveness on your personal residence after 2013, you may be required to pay taxes on that amount as taxable income unless the exclusion is renewed by Congress. Under this provision, up to $2 million of forgiven debt is eligible to be excluded from income ($1 million if married filing separately) through tax year 2015. This provision was created in the Mortgage Debt Relief Act of 2007 to shield taxpayers from having to pay taxes on cancelled mortgage debt stemming from mortgage loan modifications, through 01/01/2010. It was extended through 01/01/2013 by the Emergency Economic Stabilization Act of 2008; and extended through 01/01/2014 by the American Taxpayer Relief Act of 2012.

3. Deduction for mortgage interest premiums
The bill extends the ability to deduct the cost of mortgage insurance, also known as PMI on a qualified personal residence. This deduction is driven by income levels. Depending upon how much you make, the deduction may be ratably reduced and is unavailable for a taxpayer with an AGI in excess of $110,000.

4. Deduction for state and local general sales taxes
The bill extends the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes for two years. The original passage of this bill leveled the playing field for those who lived in a state that did not levy a state income tax. 

5. Above-the-line deduction for higher education expenses
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) created an above-the-line tax deduction for qualified higher education expenses. Taxpayers could enjoy the deduction rather than take the American Opportunity Credit or the Lifetime Learning Credit. The maximum deduction was $4,000 for taxpayers with AGI of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint returns).

6. Tax-free distributions from individual retirement plan for charitable purposes
The bill extends for two years the provision that permits an Individual Retirement Arrangement (“IRA”) owner who is age 70-1/2 or older generally to exclude from gross income up to $100,000 per year in distributions made directly from the IRA to certain qualified charities. This deduction is beneficial for seniors that no longer itemize deductions. It essentially allows for a charitable deduction in addition to the standard deduction. 

7. Credit for energy efficient improvements to existing homes
The bill extends for two years, through 2015, the 10% credit for purchases of energy efficient improvements to existing homes. Homeowners can claim up to $200 for energy efficient windows, up to $150 for an efficient furnace or boiler, and up to $300 for other improvements, including insulation. The total credit is capped at $500 per taxpayer. The bill also allows energy efficient roofing products to qualify.

Year- End indecision caused by expiring tax benefits

Year-end uncertainty highlights need for reform

Once again we find ourselves in an a all too common position! Many popular tax planning opportunities, such as the R&D credit and bonus depreciation, expired at the end of 2013. As of the publish date for this article, the Expiring Provisions Improvement Reform and Efficiency Act has been drafted but not yet voted on. As rumor has it, it won’t be voted on until after the November elections. This act addresses 62 business and individual provisions that have already expired.
As a tax practitioner for the past 20-plus years, the best advice I can offer to my clients and to other practitioners for 2014 year-end planning is to assume the Act will pass and plan accordingly. The Act seeks to extend the following most  commonly used provisions:
Business:

• 50% bonus depreciation
• Section 179 expense at the $500,000 level with phase-outs starting at $2 million of additions
• 15-year life for qualified leasehold improvements
• R&D credit
• 1202 stock
• Work Opportunity Tax Credit
• Renewable Energy tax credits
• New Markets Tax Credit
• Reduction in S Corporation built-in gain period

Individuals:

• Above-the-line $250 deduction for teachers
• Deducting sales tax in lieu of income tax
• Above-the-line deduction for higher education expenses
• Tax-free distributions from IRAs for charitable purposes
• PMI deductions

But the real issue is how do we plan to move forward beyond 2014? Over the last decade, the tax rules have consisted of many short-lived opportunities that, while beneficial to many taxpayers, have passed very late in the year. If you recall, the last time we went through this cycle was at the end of 2012 when we were on a crash course with the fiscal cliff, but, at the very last minute, the American Taxpayer Relief Act was passed. Even though that tax act did give us certainty as it related to the individual tax rates, AMT exemption, and gift and estate tax rates, it offered many commonly used provisions for business and individuals that were only extended for another two years.
I find it very interesting how our tax policy has evolved into two-year extensions of popular tax provisions. Then every other year we wait with baited breath to see if an extender package is passed. This cycle creates uncertainty and makes it difficult for practitioners to plan. Our current situation makes it clear that we need tax reform now, yet it begs the question: is that even possible in the current political environment?
Maybe and maybe not. The Senate does, however, set broad expectations for reform in its introduction to the provisions of the EXPIRE Act, saying that “reform efforts should eliminate temporary provisions from the tax code, boost the economy through the tax code, broaden the tax base by lowering tax rates and ensure an appropriate baseline is used.” The Act also states that “comprehensive tax reform will begin in the next Congress and conclude prior to the expiration of tax extenders.”
So, in an optimistic moment, we can start to envision what a reform package might look like. In Congress’ initial iterations, reform for C Corporations could include reducing the corporate tax rate to 25%, but eliminating benefits such as the production deduction, like-kind exchanges and LIFO inventory. Bonus depreciation could become a thing of the past, and net operating loss utilization could be altered. For individuals, tax reform could include a simplified rate structure with only 10% and 25% brackets (taking us from seven to two brackets); the elimination of AMT, as well as most deductions; and the elimination of personal exemptions in lieu of a generous standard deduction.
Regardless of the path the final reform package may take, getting there will be a long and challenging road and will take strong bi-partisan support to overhaul a tax code that hasn’t seen major reform in 30 years. However, considering the global perspective that our corporate tax rate is not competitive and the insanely complicated rules individuals must navigate to comply with their tax obligations, it is becoming clearer with each passing day that reform is not only necessary, but critical to a stable tax and business environment.

For much of this well written article, I would like to thank Tracy Monroe, CPA, MT, who is a partner with Cohen & Company.