26 Nov November 26, 2014

Tax planning 2014: If and When Congress Decides to Act

Alison Simons 0 Tax Tips

Update:  In summary, everything that was in limbo has passed (once it has the President’s signature).   On December 16, Congress passed a tax extender package, known as the “Tax Increase Prevention Act of 2014,” which extends over 50 currently expired provisions through 2014, and the “Achieving a Better Life Experience (ABLE) Act of 2014” which establishes a new type of tax-advantaged savings program for individuals with disabilities and makes a number of other non-extender tax changes.

The bill will be sent to the President for his signature. It is expected that these tax provisions will be quickly signed into law.

Update:  On December 13, Congress passed H.R.83, the “Consolidated and Further Appropriations Act, 2015,” which includes a number of pension reform provisions.

Update:  The Senate is scheduled to consider on December 15 the House-passed tax package, which would extend through 2014 over fifty currently expired “extender” provisions and establish a new type of tax-advantaged savings program for individuals with disabilities.

Update:  On December 3rd, the House of Representatives passed a one-year extender to many of the tax relief provisions set to expire at the end of 2013.  It now goes to the Senate, where it can be accepted or changed, and eventually needs the President’s signature.  We will keep you updated here.

Year-end tax planning is especially challenging this year because Congress has yet to act on a host of tax breaks that expired at the end of 2013. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of 2014 (and, possibly, not until 2015). These breaks include, for individuals:

  • the option to deduct state and local sales and use taxes instead of state and local income taxes
  • the above-the-line-deduction for qualified higher education expenses
  • tax-free IRA distributions for charitable purposes by those age 70-1/2 or older
  • the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.

For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include:

  • 50% bonus first year depreciation for most new machinery, equipment and software (bonus depreciation)
  • the $500,000 annual expensing limitation (Section 179)
  • the research tax credit
  • the 15-year write-off for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

Higher-income-earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

The surtax is 3.8% of the lesser of: (1) net investment income (NII) or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The additional Medicare tax may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax. For example, an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year. He would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be overwithheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s income won’t be high enough to actually cause the tax to be owed.

In the the next installment in our tax planning 2014 series we cover 15 year-end tax planning moves for individuals.  If you feel you have an immediate need or a question pertaining to your situation specifically, please contact Randy Smith, shareholder, Samet & Company.

The third article in Samet’s 2014 tax planning series is now available as well.  We cover the top ten tax planning strategies for business and business owners.