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OVERVIEW OF 2014 TAX INCREASE PREVENTION ACT
In the recently enacted “Tax Increase Prevention Act of 2014,” Congress has once again extended a package of expired or expiring individual, business, and energy provisions known as “extenders.” The new legislation generally extends the tax breaks retroactively, most of which expired at the end of 2013, for one year through 2014.
Here is an overview of the key tax breaks that were extended by the new law:
The following are key provisions which affect individual taxpayers are extended through 2014:
… the $250 above-the-line deduction for teachers and other school professionals for expenses paid for the classroom
… the exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income;
… the deduction for mortgage insurance premiums deductible as qualified residence interest;
… the option to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes;
… the above-the-line deduction for qualified tuition and related expenses; and
The following business credits and special rules are generally extended through 2014:
… the employer wage credit for activated military reservists;
… the work opportunity tax credit;
… three-year depreciation for racehorses;
… 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;
… 7-year recovery period for motorsports entertainment complexes;
… accelerated depreciation for business property on an Indian reservation;
… 50% bonus depreciation (extended before Jan. 1, 2016 for certain longer-lived and transportation assets);
… the increase in expensing (up to $500,000 write-off of capital expenditures subject to a gradual reduction once capital expenditures exceed $2,000,000) and an expanded definition of property eligible for expensing;
… the exclusion of 100% of gain on certain small business stock;
The following energy provisions are retroactively extended through 2014:
… the credit for non-business energy property;
… the credit for construction of energy efficient new homes;
… the energy efficient commercial buildings deduction;
This list is not all inclusive, but are the most applicable tax “extenders” to most taxpayers.
RECENT DEVELOPMENTS THAT MAY AFFECT YOUR TAX SITUATION
The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood.
Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.
No bankruptcy exemption for inherited IRAs. A unanimous Supreme Court has held that inherited IRAs do not qualify for a bankruptcy exemption, i.e., they are not protected from creditors in bankruptcy. Under the Bankruptcy Code, a debtor may exempt amounts that are both (1) “retirement funds,” and (2) exempt from income tax under one of several Internal Revenue Code provisions, including the one that provides a tax exemption for IRAs. Resolving a conflict between the Circuit Courts of Appeal, the Supreme Court has held that this exemption does not extend to inherited IRAs because funds held in them are not retirement funds. For this purpose, the term “inherited IRA” doesn’t include amounts inherited by the spouse of the decedent. This decision should be taken into account when selecting IRA beneficiaries. If a potential beneficiary is under financial distress, the IRA owner should consider naming a trust as beneficiary instead. The individual could be named as beneficiary of the trust without jeopardizing the full IRA funds if he or she personally goes bankrupt.
Purchase of underlying property didn’t prevent deduction for lease termination payment. The Court of Appeals for the Sixth Circuit has allowed a party that exercised an option to buy property that it was leasing, to deduct a portion of the amount tendered in the transaction as a lease termination payment. In so doing, it rejected the IRS’s argument that the full amount tendered had to be capitalized as part of the purchase price. The dispute centered on an obscure tax law. It states that where property is acquired subject to a lease, no basis is allocated to the leasehold interest. The IRS said that this provision precluded a deduction, but the Sixth Circuit disagreed. It held that because the lease terminated when the taxpayer acquired the property, the property was not acquired subject to a lease, and the law at issue did not apply to bar the deduction. Years earlier, the Tax Court reached the opposite result in a case with similar facts.
Employer health insurance tactic may backfire. The IRS has warned of costly consequences to an employer that doesn’t establish a health insurance plan for its employees, but reimburses them for premiums they pay for health insurance (either through a qualified health plan in the Marketplace or outside the Marketplace). According to the IRS, these arrangements, which are called employer payment plans, are considered to be group health plans subject to the market reforms of the Affordable Care Act. These reforms include the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee.
Qualified retirement plans and IRAs may permit purchases of “longevity” annuities. The IRS has issued regulations that allow purchases of deferred “longevity” annuities under various tax-favored retirement vehicles including 401(k) plans and IRAs. Under the regulations, retirees may use a limited portion of their retirement savings to purchase guaranteed income for life starting at an advanced age, such as 80 or 85, to address the risk of outliving their assets.
More enforcement of responsible person penalty likely. If an employer fails to properly pay over its payroll taxes, the IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a person who is responsible for collecting and paying over payroll taxes and who willfully fails to do so. A recent report issued by the Treasury Inspector General for Tax Administration has found the IRS has often not taken adequate and timely actions in assessing and collecting the responsible person penalty. The report also makes recommendations for improvements. The IRS has agreed to implement the recommendations making greater enforcement of the penalty more likely.
Big tax for sellers who got home back from defaulting buyer. In a recent case, a married couple sold their home at a big gain for installment payments and a balloon payment down the road. In the process, they permissibly excluded $500,000 of their gain under the special exclusion for gain on sale of a principal residence. The buyers ultimately defaulted and the sellers got the home back. The IRS said that they had to report the previously excluded $500,000 gain on the reacquisition. The dispute wound up in the Tax Court, which sided with the IRS.
More trust/estate expenses escape deduction limit. Miscellaneous itemized deductions are allowed only to the extent they exceed 2% of adjusted gross income (AGI). For this purpose, the AGI of an estate or trust is computed the same way as for an individual, subject to certain exceptions. Under one exception, costs paid or incurred in connection with the administration of an estate or trust that wouldn’t have been incurred if the property weren’t held in the estate or trust are allowed as deductions in arriving at AGI. For a number of years, the IRS provided guidance on which costs qualified for the exception including proposed regulations issued in 2011. Recently, the IRS has issued final regulations, which list more trust/estate expenses that are deductible in computing an estate or trust’s AGI than were included in the earlier guidance.
Next year’s inflation adjustments for health savings accounts. The IRS has provided the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2015 for health savings accounts (HSAs). Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers as well as other persons (e.g., family members) also may contribute on behalf of an eligible individual. Employer contributions generally are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from income. In general, a person is an “eligible individual” if he is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a high deductible plan, unless the other coverage is permitted insurance (e.g., for worker’s compensation, a specified disease or illness, or providing a fixed payment for hospitalization). For calendar year 2015, the limitation on deductions is $3,350 (up from $3,300 for 2014) for an individual with self-only coverage. It’s $6,650 (up from $6,550 for 2014) for an individual with family coverage under a HDHP. Each of these amounts is increased by $1,000 if the eligible individual is age 55 or older. For calendar year 2015, a “high deductible health plan” is a health plan with an annual deductible that is not less than $1,300 (up from $1,250 for 2014) for self-only coverage or $2,600 (up from $2,500 for 2014) for family coverage, and with respect to which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,450 (up from $6,350 for 2014) for self-only coverage or $12,900 for family coverage (up from $12,700 for 2014).
Taxpayer Bill of Rights. The IRS recently adopted a “Taxpayer Bill of Rights” to help taxpayers better understand their rights. While taxpayers already had these rights, they were scattered in various provisions of the Internal Revenue Code and were unknown to many taxpayers. They are now prominently displayed on the IRS’s web site and fall into these 10 broad categories: (1) the right to be informed; (2) the right to quality service; (3) the right to pay no more than the correct amount of tax; (4) the right to challenge the IRS’s position and be heard; (5) the right to appeal an IRS decision in an independent forum; (6) the right to finality; (7) the right to privacy; (8) the right to confidentiality; (9) the right to retain representation; and (10) the right to a fair and just tax system.
Obama administration delays part of health law’s employer mandate
By Patrick Temple-West and Peter Cooney
WASHINGTON (Reuters) – The U.S. government on Monday delayed another part of President Barack Obama’s signature health reform law, saying medium-sized businesses would not face a tax penalty until 2016 for not providing employees with health coverage.
The announcement came after the administration last July delayed until 2015 the so-called employer mandate associated with the Affordable Care Act, commonly known as Obamacare.
The additional delay will provide further fuel to Republican critics, who have argued that Obamacare is an unnecessary expansion of the federal government that will harm the economy.
Obamacare aims to extend health coverage to millions of uninsured Americans, partly by imposing penalties on individuals and businesses not seeking coverage. Most individuals face a tax penalty for not having healthcare coverage in 2014.
In final regulations released on Monday, businesses with between 50 and 99 employees that are not already offering coverage will not face a penalty until 2016.
For businesses with 100 or more employees, the final rules reduce to 70 percent the number of full-time workers to whom an employer must offer coverage in 2015. Businesses are required to offer coverage to 95 percent of their employees in 2016 and beyond.
The rules finalize draft proposals issued in December 2012 and took into consideration comments from businesses and members of Congress, the Treasury Department said.
The rules clarify that government volunteers, such as firefighters and emergency responders, are not considered full-time employees – an uncertainty that worried state and local governments.
Teachers and other education employees will not be treated as part-time for the year even though their schools are closed or their work hours are limited in the summer, the rules said.
Additional safe harbors in the rules aim to make it easier for businesses to determine whether the coverage they offer is affordable to employees.
Practice Alert—”Last minute” year-end tax-saving moves for individuals
Although there are only a few weeks left to go before the year ends, it’s not too late to implement some planning moves that can improve a client’s tax situation for 2013 and beyond. This Practice Alert reviews some actions that clients can take before Dec. 31 to improve their overall tax picture.
Make HSA contributions. Under Code Sec. 223(b)(8)(A), a calendar year taxpayer who is an eligible individual under the health savings account (HSA) rules for December 2013, is treated as having been an eligible individual for the entire year. Thus, an individual who first became eligible on, for example, Dec. 1, 2013, may then make a full year’s deductible-above-the-line contribution for 2013. If he makes that maximum contribution, he gets a deduction of $3,250 for individual coverage, and $6,450 for family coverage (those age 55 or older get an additional $1,000 catch-up amount).
Nail down losses on stock while substantially preserving one’s investment position. A taxpayer may have experienced paper losses on stock in a particular company or industry in which he wants to keep an investment. He may be able to realize his losses on the shares for tax purposes and still retain the same, or approximately the same, investment position. This can be accomplished by selling the shares and buying other shares in the same company or another company in the same industry to replace them. There are several ways this can be done. For example, an individual can sell the original holding, then buy back the same securities 31 days later.
Accelerate deductible contributions. Individuals should keep in mind that charitable contributions and medical expenses are deductible when charged to their credit card accounts (e.g., in 2013) rather than when they pay the card company (e.g., in 2014).
Solve an underpayment problem. Because of the new additional .9% Medicare tax and/or the new 3.8% surtax on unearned income, more individuals may be facing a penalty for underpayment of estimated tax than in prior years. An employed individual who is facing a penalty for underpayment of estimated tax as a result of either of these new taxes or for any other reason should consider asking his employer—if it’s not too late to do so—to increase income tax withholding before year-end. Generally, income tax withheld by an employer from an employee’s wages or salary is treated as paid in equal amounts on each of the four estimated tax installment due dates. Thus, if an employee asks his employer to withhold additional amounts for the rest of the year, the penalty can be retroactively eliminated. This is because the heavy year-end withholding will be treated as paid equally over the four installment due dates.
Outside-the-box solution. An individual can take an eligible rollover distribution from a qualified retirement plan before the end of 2013 if he is facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution at a 20% rate and will be applied toward the taxes owed for 2013. He can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2013, but the withheld tax will be applied pro rata over the full 2013 tax year to reduce previous underpayments of estimated tax.
Accelerate big ticket purchases into 2013 to get sales tax deduction. Unless Congress acts this year or next to extend it, the option for itemizers to deduct state and local sales taxes in lieu of state and local income taxes will expire at the end of 2013. As a result, individuals who are considering the purchase of a big-ticket item (e.g., a car or boat) should do so before year end if they are planning to elect on their 2013 return to claim a state and local general sales tax deduction instead of a state and local income tax deduction.
Prepay qualified higher education expenses for first quarter of 2014. Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2013. Thus, individuals should consider prepaying in 2013 eligible expenses for 2014 courses if doing so will increase their 2013 deduction for qualified higher education expenses. Generally, a 2013 deduction is allowed for qualified education expenses paid in 2013 in connection with enrollment at an institution of higher education during 2013 or for an academic period beginning in 2013 or in the first 3 months of 2014.
Lock in the potential to earn tax-free gains. There is no tax on gain from the sale of qualified small business stock (QSBS) that is: (1) purchased after Sept. 27, 2010 and before Jan. 1, 2014, and (2) held for more than five years. Additionally, there’s a temporary alternative minimum tax (AMT) break. Normally, there is an AMT preference for a portion of gain from the sale or exchange of QSBS that is excluded from gross income for regular tax purposes. However, the preference doesn’t apply to QSBS acquired after Sept. 27, 2010 and before Jan. 1, 2014. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met.
Be sure to take required minimum distributions (RMDs). Taxpayers who have reached age 70-— should be sure to take their 2013 RMD from their IRAs or 401(k) plans (or other employer-sponsored retired plans). Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Those who turned age 70-— in 2013, can delay the first required distribution to 2014. However, taxpayers who take the deferral route will have to take a double distribution in 2014—the amount required for 2013 plus the amount required for 2014.
Use IRAs to make charitable gifts. Taxpayers who have reached age 70-—, own IRAs and are thinking of making a charitable gift, should consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.
Make year-end gifts. A person can give any other person up to $14,000 for 2013 without incurring any gift tax. The annual exclusion amount increases to $28,000 per donee if the donor’s spouse consents to gift-splitting. Annual exclusion gifts take the amount of the gift and future appreciation in the value of the gift out of the donor’s estate, and shift the income tax obligation on the property’s earnings to the donee who may be in a lower tax bracket (if not subject to the kiddie tax).
A gift by check to a noncharitable donee is considered to be a completed gift for gift and estate tax purposes on the earlier of:
- The date on which the donor has so parted with dominion and control under local law as to leave in the donor no power to change its disposition, or
- The date on which the donee deposits the check (or cashes it against available funds of the donee) or presents the check for payment, if it is established that:
- The check was paid by the drawee bank when first presented to the drawee bank for payment;
- The donor was alive when the check was paid by the drawee bank;
- The donor intended to make a gift;
- Delivery of the check by the donor was unconditional; and
- The check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a reasonable time of issuance.
Thus, for example, a $14,000 gift check given to and deposited by a grandson on Dec. 31, 2013, is treated as a completed gift for 2013 even though the check doesn’t clear until 2014 (assuming the donor is still alive when the check is paid by the drawee bank).
Subject: Health Care Reform Requirement / OCTOBER 1, 2013 DEADLINE
Employers subject to the Fair Labor Standards Act are required to provide informational notices to their employees regarding the health insurance marketplaces created by the Affordable Care Act, also known as “Exchanges.”
The employer is obligated to provide to each current employee, on or before October 1, 2013, a written notice describing the individual employee’s options in the Exchanges, and to all employees hired subsequent to October 1, within 14 days of hire. This health care reform requirement applies to hospitals, schools, certain residential institutions, and government agencies, as well as any employer that is engaged in interstate commerce or an employer with at least $500,000 of business per year. In short, almost every employer must provide Exchange Notices.
The written notice must meet the following content requirements:
- Inform the employee of the existence of the Exchange, including a description of the services provided, and how the employee can contact the Exchange for assistance.
- Inform the employee that the employee may be eligible for a credit on their insurance premiums if the employer does not provide qualifying health insurance and the employee purchases a qualified health plan through the Exchange.
- Inform the employee that the employee may lose any employer contribution to an employer-sponsored health benefits plan if the employee purchases a qualified health plan through the Exchange and that the employer contribution may be fully or partially excludable from income for federal income tax purposes.
We are including two sample “Model Notices” that will satisfy your requirement as an employer. The first sample is for employers who offer health insurance coverage to their employees. The second sample is for employers who do not offer health insurance to their employees. You will need to complete Part B of the notice that applies to you and distribute to your employees by October 1, 2013. Also, please keep in mind the requirement to provide the notice to all future hires.
As always, please contact one of our offices if we can be of assistance.