Every year we lament how complicated year-end tax planning has become.  This year is no exception.

Washington has added to the 2014 burden in several respects.  The underlying statutory authority for a considerable number of income tax deductions and credits expired on December 31, 2013.  Congress has routinely reactivated those tax benefits retroactively, if required, to the prior expiration dates, by what is commonly referred to as "tax extenders", which tax extenders historically have found bipartisan congressional support.

Due to the extreme dysfunction in Washington, Congress has not, as of the date of this Alert, enacted the 2014 tax extenders.  However, current news reports indicate that the Congress and the Administration have agreed to a twelve (12) month extension for all of the 2014 tax extenders, retroactive to January 1, 2014.  Accordingly, taxpayers may want to evaluate whether they wish to partake of any of the related benefits, so that if the 2014 tax extenders are, in fact, enacted, that they can implement those strategies prior to year end. Remember that these benefits are extended only through December 31, 2014, and there is no assurance that they will be further extended. 

A sampling of the deductions and credits relating to the 2014 tax extenders whose fates are currently dangling in the air include the following:  

For Individuals

  • Deduction for state and local sales taxes in lieu of state and local income taxes
  • Above-the-line deduction for certain teacher's expenses
  • Above-the-line deduction for qualified tuition and certain expenses 
  • Parity for exclusion for employer-provided mass transit and parking benefits
  • Exclusion of up to $2 Million ($1 Million if married filing separately) of discharged principal residence indebtedness

For Businesses:

  • Research and experimentation credit
  • Work opportunity tax credit
  • Increase to $500,000 of §179 property deduction
  • 50% bonus depreciation
  • Special treatment of certain dividends of regulated investment companies
  • Special expensing rules for film and television production
  • Special 100% gain exclusion for qualified small business stock
  • Reduction in recognition period for S corporation built-in gains
  • 15-year straight line cost recovery for qualified leasehold property, qualified
    restaurant property, and qualified retain improvements

For Charities

  • Enhanced charitable deductions for contributions of food inventories
  • Tax free distributions for charitable purposes from IRA's of taxpayers age 70 ½ or
    older
    Special rules for contribution of capital gain real property for conservation purposes
  • Basis adjustment to stock of S corporation making charitable contributions of
    property

For Energy Concerns

  • Credit for construction of energy efficient homes
  • Deduction for energy efficient commercial building construction
  • Credit for energy efficient appliances
  • Credit for non-business energy property
  • Incentives for alternative fuel, alternative fuel mixtures, and alternative fuel vehicle
    refueling property
  • Incentives for biodiesel and renewable diesel
  • Credits for electric vehicles

Many taxpayers may have already taken actions in reliance upon the assumed extension of such incentives and benefits, and will watch anxiously as the action unfolds.  Some taxpayers may choose to increase their income tax withholdings or fourth quarter estimated tax payments to minimize underpayment penalties if the 2014 tax extenders are not passed, and then seek a refund of the excess taxes paid if the extenders are passed. 

Past Year-End Client Alerts have discussed the benefits and hazards of the strategies that are typically employed to eliminate, reduce or defer tax liabilities, which, in the income tax arena, center upon the controlling principles of deferring all taxable income into future years, and accelerating all credits and deductions into the current tax year.  Those time-honored strategies will not be repeated here, except to remind readers to: establish or continue year-end gifting programs; fund charitable contributions with appreciated securities; evaluate your alternative minimum tax status; make your minimum required withdrawals from your qualified plans and/or IRA's; harvest your investment losses, if beneficial; assure that you have sufficient adjusted income tax basis in S corporations, and partnerships in order to claim any allocated losses from those entities; and confirm that your withholdings and estimated tax payments are sufficient to eliminate any federal underpayment penalties.    

However, 2013 was the first year that taxpayers had to deal with the Medicare tax on unearned income under IRC §1411, which was enacted as part of the Affordable Care Act of 2010 (the "ACA" or "Obamacare"). As discussed in the 2013 Year End Client Alert, the applicability of the §1411 tax may turn on whether the taxpayer was actively involved in the activity in question, which status is determined, with some modification, under the Passive Activity Loss
rules under IRC §469. 

For taxpayers who have investments that may fall within the Passive Activity Losses rules, careful coordination may be required to align the strategies adopted for those purposes, and those used for the §1411 tax issues. The optimum planning objectives for one of these regimes may be inconsistent with those of the other. 

Regardless of the positions taken, concurrent and thorough documentation of the hours devoted by the taxpayer (and taxpayer's spouse, if applicable) to the activity in question may be beneficial.  Reconstruction of those records at a later date (for example, after the audit notice from the taxing authorities has issued) may reduce the accuracy and completeness of such substantiation, and will likely be deemed to be less credible in the eyes of the auditor. 

In spite of these trying circumstances, careful year-end planning may avoid surprises and yield rewards. 

Finally, we note that for calendar year 2015, the unified credit for estate and gift tax purposes will be increased to an asset value equivalent of $5.43 Million, but the annual gift tax exclusion remains at $14,000 per donor per donee.

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Mr. Rudel is a seasoned practitioner, having provided legal advice to international, national, regional and local business clients for over thirty-five years. Mr. Rudel is certified as a Tax Specialist by the State Bar Board of Specialization, and provides representation to such clients in tax (U.S. and International), general business planning, corporate law, mergers and acquisitions, and real estate matters. Read more here.

Contact Mr. Rudel at jrudel@jsslaw.com or 602.262.5951.


Disclaimer:  This Alert is for informational purposes only, and is not intended to substitute for the reader obtaining and acting upon tax advice that is specific to the circumstances of the taxpayer as obtained from the taxpayer's own professional.