Every year around this time, people are scurrying to finish last minute details surrounding their holiday
celebrations. Most tax accountants are doing the same, all while keeping an ear tuned into Capitol Hill.
Why, you ask? In recent years this is the time that Congress decides which, if any, of the tax provisions it will be extending for yet another tax year. These provisions are not a permanent part of the tax code and therefore, each year Congress must decide if they are worthy of being extended. As if taxes alone are not confusing enough, this bill has usually passed right before the end of the calendar year but applies retroactively to the beginning of year. There are a few of these tax provisions which may be familiar to you and some that will come as a surprise. We will take a closer look at a few of the most popular tax extenders in an attempt to simplify their purpose and impact on your individual or business tax returns.
One such tax extender is the deduction allowed for state and local general sales taxes. The extension of this item allows the individual taxpayer, who itemizes, to deduct state and local sales tax paid throughout the tax year. This is especially beneficial for those of us who live in a state where there is no state income tax. For many Tennessee residents, this has been a significant tax saving law.
Another tax provision that is usually part of the annual extender bill allows those taxpayers aged 70 ½ or older to donate up to $100,000, directly from their IRA, to a charity without claiming the IRA distribution as income. This means the taxpayer fulfills the requirements for the IRA withdrawal without having their adjusted gross income increase and potential being phased out of personal exemptions and cutbacks itemized deductions. The charitable donation is not allowed as an itemized deduction, in this instance, since you are given the full benefit through the exclusion from income.
These next two tax provisions, extended in the past, are quite popular with business owners of every kind. The bonus depreciation and Section 179 extenders are two separate items allowing businesses to increase the amount of expenses they are able to deduct when fixed assets are acquired. Bonus depreciation allows a business to deduct 50% of the cost on each new asset purchased within the tax year, in addition to the amount of regular depreciation calculated on that same asset. The Section 179 deduction allows small business owners to deduct the full cost of certain assets purchased during the tax year, up to a certain limit, which was $500,000 in 2014. If this extender is not passed, the maximum Section 179 deduction will be limited to $25,000.
Below is a list of a few more of the tax provisions that are usually part of the extender bill:
- Educators allowed to deduct up to $250 spent on materials for their classroom
- A deduction of up to $4,000 of tuition and fees paid for higher education
- Deduction of mortgage insurance premiums as if it were additional mortgage interest
- Certain exclusions for the discharge of qualified principal residence mortgage debt
- Businesses allowed to use a 15 year depreciation life for qualified leasehold improvements, qualified restaurant improvements, and qualified retail improvements
- Certain renewable energy production and energy efficiency credits for businesses
- A reduction in the recognition period for built-in gains tax for S corporations
- For S corporations making charitable contributions of property, allowing for an adjustment to the basis for their stock
So as the year 2015 comes to a close, we will be watching the action in Washington to see which items we can anticipate being part of the tax rules imposed for all of us in this tax year. If a tax extender bill is passed for the 2015 tax year, we will let you know the significant changes and surprises so that you can best prepare for your annual tax meeting with your tax professional.
If you have any questions regarding any of the tax provisions detailed above, please don’t hesitate to contact us.