HOT TOPIC: Last-Minute Legislation: 2014 Tax Extenders
After contentious congressional negotiations and the threat of a presidential veto, the Tax Increase Prevention Act of 2014 — extending 55 tax provisions through the end of 2014 — finally became law in December with less than two weeks left in the tax year. Unfortunately, the fate of these provisions for 2015 and beyond remains uncertain.
Temporary tax measures can serve useful purposes — allowing a period of evaluation, responding to natural disasters, providing economic stimulus, or meeting specific budgetary needs.1 However, Congress has often waited until the end of the year to address these provisions, as lawmakers procrastinate and wrangle over who should receive tax breaks and what the costs might be for the U.S. Treasury. The one-year retroactive extension in the legislation is projected to cost about $42 billion over 10 years, far less than an abandoned bill estimated at $400+ billion that included two-year and permanent tax extensions.2
Obviously, these end-of-year exercises make it difficult to plan. However, you still may benefit from some of the extended provisions on your 2014 taxes.
Help for Individual Taxpayers
The two largest tax breaks for individuals, each valued at about $3.1 billion, are (1) allowing homeowners whose mortgage debt was canceled or forgiven to exclude the forgiven debt from their gross income, and (2) allowing taxpayers to deduct state and local sales taxes in lieu of state and local income taxes.3 The latter is especially significant in states that do not have a state income tax.
Taxpayers can deduct mortgage insurance premiums along with residential mortgage interest, and they can make an above-the-line deduction (prior to calculating adjusted gross income) for qualified higher-education tuition and related expenses paid during the year.
Educators can deduct up to $250 for unreimbursed classroom expenses — qualifying books, supplies, and supplementary materials — they spent during the 2014 tax year.
Investors 70½ and older can make tax-free qualified charitable distributions (QCDs) of up to $100,000 directly from their IRAs in lieu of all or part of their taxable required minimum distributions (RMDs) for 2014. However, because the deadline to make QCDs and RMDs was December 31, the late passage of the bill provided a narrow window of opportunity.
Business and Energy Incentives
The three largest tax cuts in the legislation are a research credit for businesses ($7.6 billion), extension of the construction start date to receive a 10-year credit for renewable power generation ($6.4 billion), and avoidance of taxation on certain “active financing” income by U.S. companies operating overseas ($5.1 billion).4
Smaller businesses may benefit from three other extensions that are applicable to companies of all sizes: (1) the $500,000 Section 179 limit for expensing capital expenditures in the current year, (2) first-year bonus depreciation allowing companies to deduct half the cost of new capital purchases, and (3) the work opportunity tax credit for hiring candidates from veterans and other “targeted groups.” A provision focusing specifically on small companies allows investors to exclude 100% of capital gain from the sale or exchange of qualified small-business stock.
These are just a few of many extensions for businesses and alternative-energy production that run the gamut from addressing broad issues to serving narrow special-interest groups. For example, the research credit, which has been extended 17 times since 1981, reflects a widely held concern that U.S. businesses are falling behind their international counterparts.5–6 Alternative-energy credits and tax breaks for large multinational companies are more divisive but have strong defenders and require comprehensive analysis.
The fact that these issues are combined with tax breaks for racehorse owners, NASCAR track owners, and Puerto Rican rum only muddies the waters. And all the business and energy tax extensions come too late to allow for strategic planning.
An Ineffective Policy
A report by the Congressional Research Service regarding the 2013 tax extensions offered a cogent summary of the problem in avoiding long-term decisions on temporary measures: “[The] rationale for enacting temporary tax provisions is undermined if expiring provisions are regularly extended without systematic review, as is the case in practice.”7
Most of the 2014 extensions have been extended multiple times amid continuing discussion of the need for broader tax reform. Some observers are hopeful that the decision to extend these provisions only through 2014, the minimum term, may force Congress into more definitive action in 2015, but others fear that the exercise will be repeated again next year.8
One congressman who “reluctantly” voted for the tax extender bill called it “a lousy way to run a tax code.”9 Most Americans would probably agree.
As with other tax issues, be sure to consult with your tax professional before taking any specific action.