Tax extenders -- temporary tax provisions that are reinstated on a regular basis -- have been a recurring part of the tax scene for years, but Congress’ habit of passing them extremely late in the year tends to eliminate their intended effect for tax planning (e.g., last year’s reinstatement of Section 179 increased expensing limits gave little time for purchasers of new equipment to be sure that the deduction would in fact be in place).
Much of the current group up for debate expired at the end of 2013, and were reinstated for 2014 on Dec. 19, 2014. The Senate Finance Committee in July passed a bill that would extend many of these provisions for two years, until the end of 2016, but as of yet there’s been no sign of further movement.
While the extenders run the gamut from insignificant to highly significant, a number of them are so important that it is inconceivable that they won’t get passed, sooner or later. Here are some of the ones affecting people and businesses in important ways.
1. Increased dollar limit for Section 179 expensing. This proposed extender would allow taxpayers to elect to deduct up to $500,000 of the cost of qualifying property, with a phase-out beginning at $2,000,000.
2. Bonus depreciation of 50 percent for property acquired and placed into service in 2015. The additional first-year depreciation deduction is allowed for both the regular tax and the Alternative Minimum Tax, but is not allowed in computing earnings and profits. The basis of the property and the depreciation allowances in the year of purchase and later years are adjusted to reflect the additional first-year depreciation deduction.
3. Shorter S corp recognition period for built-in-gains. For purposes of determining the net recognized built-in gain, the recognition period is five years rather than the otherwise applicable 10-year period.
4. 100 percent gain exclusion on the disposition of qualified small-business stock. The proposed extender extends the 100 percent exclusion, and the exception from minimum tax preference treatment.
5. Extension of the Research Credit. For general research expenditures, a taxpayer may claim a research credit equal to 20 percent of the amount by which the taxpayer’s qualified research expenses for a taxable year exceed their base amount for that year. Thus, the research credit is generally available for incremental increases in qualified research. An alternative simplified credit, with a 14 percent rate and a different base amount, may be claimed in lieu of this credit.
6. Above-the-line deduction for up to $250 of educator expenses. This covers books, classroom supplies, and computer equipment for eligible elementary and secondary school teachers. In general, unreimbursed employee business expenses are deductible only as an itemized deduction and only to the extent that the individual’s total miscellaneous deductions exceed two percent of adjusted gross income.
7. Above-the-line deduction for eligible individuals for higher education expenses. The maximum deduction of $4,000 for higher education expenses, including tuition and fees, is for eligible individuals whose adjusted gross income for the taxable year does not exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for other individuals whose adjusted gross income does not exceed $80,000 ($160,000 in the case of a joint return).
8. Election to deduct state and local general sales tax as an itemized deduction. This is instead of state and local income taxes, and is important for taxpayers in states with little or no state income tax.
9. Itemized deduction for mortgage insurance premiums paid or accrued in connection with the acquisition of a qualified residence. Certain premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness on a qualified residence of the taxpayer are treated as interest that is qualified residence interest, and thus deductible.
10. Qualified principal residence indebtedness exclusion for debt discharge of income. An exclusion from gross income is provided for any discharge of indebtedness income by a discharge of qualified principal residence indebtedness, up to $2 million for married filing jointly and $1 million for married filing single.
11. Tax-free charitable donation up to $100,000 from an IRA for taxpayers 70-½ or older. Distributions that are excluded from gross income by reason of this provision are not taken into account in determining the deduction for charitable contributions under Section 170.
12. Monthly exclusion for employer-provided transit/vanpool benefits up to $250. This provision provides parity with employer-provided parking.
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