On Friday, December 19, 2014, President Obama signed the Tax Increase Prevention Act of 2014 (“TIPA”). As part of TIPA, the Feds changed the tax laws for 2014 retroactive to January 1, 2014. TIPA reinstates certain tax breaks for individuals and businesses that expired on December 31, 2013.
With seven business days left in the year (three days as you read this), many of the “traditional” tax extenders are reinstated through the end of 2014. In addition, TIPA also contains a new permanent addition to the Internal Revenue Code, which allows certain qualified disabled individuals and their families to establish tax-advantaged savings accounts.
IRA Charitable Contribution. If you are over age 70½, you have until Wednesday, December 31, 2014 to make qualified charitable distributions (“QCDs”) from your IRAs. The funds must be transferred directly by your IRA trustee to an eligible charity in order to be considered a QCD and cannot exceed $100,000. There are a number of key benefits to QCDs:
The biggest benefit of a QCD is that the distribution does not have to be reported as income on your Form 1040 U.S. Individual Income Tax Return. However, since QCDs are excluded from your gross income, you also do not get the corresponding charitable contribution itemized deduction.
And because QCDs are not included in your income, they are neither subject to the general percentage limitations that apply to making charitable contributions, nor considered in determining the phase-out of any deduction, exclusion, or tax credit. And in addition, QCDs count towards your annual IRA required minimum distribution (“RMD”).
Teacher Expense Deduction. The deduction for certain expenses of elementary and secondary school teachers and administrators, which expired at the end of 2013, is now revived for 2014. If you are an “eligible educator”, which generally includes K-12 teachers, instructors, counselors, principals, or aides in any elementary or secondary school, you are allowed a deduction of up to $250 for your out-of-pocket expenses you paid in connection with certain books, supplies, equipment, software and supplementary materials used in the classroom.
Home Mortgage Forgiveness Exclusion. The exclusion for discharge of qualified principal residence indebtedness, which applied for discharges before January 1, 2014, is extended and is now continued to apply for discharges before January 1, 2015. The general rule is that if someone forgives a debt that you owe, you have taxable cancellation of debt income. This general rule is suspended for a discharge of your “qualified principal residence indebtedness”. Your debt that is discharged must have been used to acquire, construct, or substantially improve your principal residence, or to refinance your debt (but only up to the amount refinanced), and must have been secured by your residence.
Qualified Tuition Deduction. The deduction for qualified tuition and related expenses, which expired at the end of 2013, is also revived for 2014. You are allowed a deduction of up to $4,000 for “qualified tuition and related expenses” for higher education. These expenses include tuition and fees for the enrollment or attendance by you, your spouse or a qualified dependent at an eligible institution.
Sales Tax Deduction. The option to deduct state and local general sales taxes, which expired at the end of 2013, is also revived for 2014. If the sales taxes you paid in a given year are more than the state and local income taxes you paid, you can elect to take an itemized deduction for state and local general sales taxes instead of an itemized deduction for state and local income taxes.
Mortgage Insurance Premium Deduction. The treatment of mortgage insurance premiums as qualified residence interest, which expired at the end of 2013 continues for 2014. Premiums you pay or accrue during the tax year for qualified mortgage insurance in connection with certain home acquisition indebtedness for your principal residence are treated as qualified residence interest, and so are deductible.
Achieving a Better Life Experience (“ABLE”) Act of 2014. A new unexpected permanent addition to the Internal Revenue Code was included with TIPA. New Section 529A allows qualified disabled individuals and their families to create ABLE Accounts. These accounts are state sponsored tax-advantaged plans that are an alternative to traditional special needs trust planning.
Planning for special needs disabled loved ones have typically included special needs trusts (“SNTs”). Even though the assets in an SNT can be used for your disabled loved one’s benefit, the SNT assets that are not considered when your disabled loved one applies for certain governmental assistance programs which are income and/or asset based, such as Medicaid and SSI.
SNTs generally come in two flavors, self-settled SNTs and third-party SNTs. Self-settled SNTs are established with your disabled loved one’s own assets. The downside of a self-settled SNT is that when your loved one dies, anything left in the self-settled SNT is first used to reimburse the state or Feds for amounts expended on behalf of your disabled loved one through the governmental assistance programs.
On the other hand, third-party SNTs are established with assets from someone other than your disabled loved one, such as you. Because of this, after your disabled loved one’s death, the assets are protected from the state and Feds.
ABLE accounts are kind of a combination of IRAs and self-settled SNTs. Like IRAs, ABLE accounts have annual contribution and other limits, and, amounts and income in these accounts would accumulate on a tax-exempt or tax-deferred basis. Like self-settled SNTs, when your loved one dies, anything left in ABLE accounts are first used to reimburse the state or Feds for amounts spent on behalf of your disabled loved one through governmental aid.
While ABLE accounts are another estate planning option, they will likely not affect a major change in planning for your disabled loved one. The benefits of ABLE accounts are far outweighed by their relative inflexibility as compared to SNTs, especially third-party SNTs.
These are just a few of the tax provisions which have been extended or implemented and that you may be able to utilize. Please consult with a qualified tax advisor to determine if you are eligible to use these or any other tax benefits.
By: Matthew M. Wallace, CPA, JD
Published edited December 28, 2014 in The Times Herald newspaper, Port Huron, Michigan as: New act reinstates tax breaks