There are dozens of temporary tax provisions that expired at the end of 2013. Most of these provisions have been part of past temporary tax extension legislation. Most recently, many temporary tax provisions were extended as part of the American Taxpayer Relief Act of 2012. Collectively, temporary tax provisions that are regularly extended by Congress rather than being allowed to expire as scheduled are often referred to as “tax extenders.”
Therefore, below is a list of just a few of the tax extenders that expired at the end of 2013. We were hopeful a vote to extend some or most of the expired tax extenders would take place in Spring 2014 and are assumptions were correct as Senate Finance Chairman Ron Wyden (D-Ore.) has started the discussion of a possible spring vote on a string of expired tax provisions.
1. Teachers’ Deduction for Certain Expenses
Primary and secondary school teachers buying school supplies out-of-pocket can take a deduction of up to $250 for unreimbursed expenses on page one of their return, meaning this deduction will be included in the calculation of their adjusted gross income.
2. State and Local Sales Taxes
Taxpayers who claim itemized deductions can choose to deduct state and local sales tax they paid, or an amount calculated using a specific formula, or any state and local income taxes paid. Thus, if a large purchase is made such as a car, a boat, appliances, etc., it may be beneficial to choose to deduct the sales tax paid in that year. Because this tax provision is expiring at the end of 2013, you may want to consider purchasing large items you were planning to purchase in 2014 now before year end to take advantage of this deduction.
3. Mortgage Insurance Premiums
Mortgage premiums insurance (PMI) are paid by homeowners with less than 20% equity in their homes. These premiums were deductible in tax years 2012 and 2013; however, this tax break is scheduled to end on December 31, 2013. Mortgage interest deductions for taxpayers who itemize are not affected.
4. Exclusion of Discharge of Principal Residence Indebtedness
Typically, forgiven debt is considered taxable income in the eyes of the IRS; however, this tax provision allows homeowners whose homes have been foreclosed on or subjected to short sale to exclude up to $2 million of cancelled mortgage debt. Also included are taxpayers seeking debt modification on their home.
5. Distributions from IRAs for Charitable Contributions
Taxpayers who are age 70 ½ or older can donate up to $100,000 in distributions from their IRA to charity. Some people do not want to take the mandatory minimum distributions (which are counted as income) upon reaching this age and instead can contribute it to charity, using it as a strategy to lower income enough to take advantage of other tax provisions with phaseout limits.
6. Mass Transit Fringe Benefits
In 2013, commuters using mass transit can exclude from income up to $245 per month on transit benefits paid by their employers such as monthly rail or subway passes, making it on par with parking benefits (also up to $245 pre-tax). This provision is set to expire at the end of the year, however and in 2014, pre-tax benefits for mass transit commuters drop to a maximum of $130 per month, while parking benefits remain the same.
7. Credit for Energy Efficient Appliances
Tax credits for energy efficiency apply to certain home appliances, as well as other home improvements that promote reduced energy consumption. Credits are available for appliances including air conditioning systems, heating systems, water heaters, biomass stoves, wind turbines and solar energy systems. Each type of home improvement must meet certain energy efficiency guidelines to qualify for a credit.
1. Credit for Construction of Energy Efficient Homes
The credit is a business tax credit available to eligible contractors for each qualified new energy efficient home constructed by the eligible contractor and acquired by a person from such eligible contractor for use as a residence during the taxable year. Use as a residence would seem to include use as a vacation home since use as a “primary” residence is not required.
2. Electric Vehicles
Buy a four-wheel electric vehicle such as a Ford Focus Electric (Model years 2012-2014), BMW i3 Sedan (Model year 2014), Fiat 500e (Model year 2013), and Nissan Leaf (Model years 2011-2013) and take a tax credit of $7,500. Other vehicles, such as a 2014 Accord Plug-In Hybrid and the Toyota Prius Plug-in Electric Drive Vehicle (Model years 2012-2014) are eligible for a lesser tax credit.
Note: The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States.
3. Small Business Stock
If you are thinking about purchasing stock of a small business it would have been better for you to consider doing that before year end and hold onto this stock for five years to benefit from being able to exclude 100% of the capital gains. If you waited until 2014, you will only be able to exclude 50% of the capital gains.
4. Additional First Year Depreciation for 50% of Qualified Property (i.e. Bonus Depreciation) The federal Economic Stimulus Act of 2008, enacted in February 2008, included a 50% first-year bonus depreciation (26 USC § 168(k)). The allowance for bonus depreciation has since been extended and modified several times since the original enactment, most recently in January 2013 by the American Taxpayer Relief Act of 2012 (H.R. 8, Sec. 331). This legislation extended the placed in service deadline for 50% first-year bonus depreciation by one year, from December 31, 2012 to December 31, 2013. Currently, in order to qualify for bonus depreciation, an asset purchased must satisfy these criteria:
- the property must have a recovery period of 20 years or less under normal federal tax depreciation rules;
- the original use of the property must commence with the taxpayer claiming the deduction;
- the property generally must have been acquired during the period from 2008 – 2013; and
- the property must have been placed in service during the period from 2008 – 2013.
5. 15 Year Recovery cost for Qualified Leasehold, Retail, and Retail Improvements This provision provides a statutory 15-year recovery period for qualified leasehold improvement property. Qualified leasehold improvement property is defined as any improvement to an interior portion of a building that is nonresidential real property provided certain requirements are met. The improvement must be made under the pursuant to a lease either by the lessee (or sublessee), or by the lessor, of that portion of the building to be occupied exclusively by the lessee (sublessee). The improvement must be placed in service more than three years after the date the building was first placed in service. Qualified leasehold improvement property does not include any improvement for which the expenditure was attributable to the enlargement of the building, any elevator or escalator, any structural component benefiting a common area, or the internal structural framework of the building. Qualified leasehold improvement property is eligible for bonus-depreciation.
6. Reduction in S Corp Recognition of Built-In Gains Tax This new provision modifies the “built-in gains” (BIG) tax for S corporations by shortening the “recognition period” for the BIG tax to seven years for sales that occur in taxable years beginning in 2009 to 2013. As a result, certain S corporations that would have been subject to the BIG tax may be able to sell their assets without being subject to the corporate-level tax in those years. This change may help streamline the acquisition of affected S corporations by not only lowering the tax cost of a transaction, but also by eliminating the valuation issues that occur with respect to goodwill and other assets that were held by such a corporation at the time that it converted from a C corporation to an S corporation.
7. Tax Credit for Research and Experimentation Expenses The R&D Tax Credit is a federal tax incentive (also available in many states) designed to promote innovation. It allows companies to receive tax credits for expenses incurred for research and development, thereby lowering their tax obligation and increasing funds for future innovation. Primarily a labor based incentive, the R&D Tax Credit applies to activities undertaken to develop new, improved and more reliable products, processes and formulas such as:
- Developing or testing new products or materials
- Developing new or enhanced formulations
- Testing new concepts
- Improving existing products
- Trial and error experimentation
- Designing tools, jigs, molds and dies
- Design and analysis of prototypes or models
- Developing or improving production or manufacturing processes
- Developing, implementing or upgrading systems/software
- Paying outside consultants/contractors to perform any of these activities
8. Exceptions under Subpart F for Active Financing Income This provision provides certain income derived in the active conduct of a banking, financing, or similar business, as a securities dealer, or in the conduct of an insurance business (known as active financing income), is excepted from treatment as Subpart F income. Without this exception, 10% or more U.S. shareholders of a controlled foreign corporation (CFC) would be subject to U.S. tax currently on such active financing income earned by the CFC, whether or not the income is distributed to shareholders.
9. Look through Treatment of Payments Between Foreign Controlled Corporations Under the Foreign Personal Holding Company Rules Certain payments of dividends, interest, rents, and royalties that would otherwise be included in foreign personal holding company income may be excepted if the payments are received from a related controlled foreign corporation and are properly attributable and allocable to income of the payor that is neither Subpart F income nor treated as effectively connected to a U.S. trade or business.
10. RIC Qualified Investment Entity Treatment Under FIRPTA Certain RIC’s that are largely invested in the stock of real property holdings companies such as REITs are treated in the same manner as REIT’s for purposes of FIRPTA. That is, certain sales of stock of such entities are not subject to FIRPTA tax or withholding. However, certain distributions by such entities of the proceeds of the sale of U.S. real property interests are subject to FIRPTA tax and withholding.