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Tax Planning for 2014…What You Need to Know!

Possible Expiring Tax Breaks and Credits and what this means for you!

The biggest challenge taxpayers face this coming year is predicting whether lawmakers will extend expiring tax breaks and credits.  Every year, lawmakers seem to go down to the wire with key tax-extender legislations and this year will be no different.  If these provisions expire, they will create new taxes in 2014 for individuals and business owners.

Important Tax Changes for Individuals

The list of expiring tax breaks and credits is long and covers a wide range of areas.  As such, we have highlighted a few of the more popular tax breaks and credits scheduled to expire at the end of the month.

The most popular is the tax break for homeowners who have had their mortgage loans modified or forgiven will no longer be able to deduct that amount, but will now have to treat the resulting debt reduction as taxable income in 2014.

The second most popular disappearing tax break is the deduction for higher education tuition and fees.  Through the end of 2013, couples with less than $160,000 in adjusted gross income can take a deduction if they are paying for qualified higher education expenses for a dependent.  This deduction which can reach $4,000 for those with income below $130,000 will be gone starting January 1, 2014.

Another heavily affected group of taxpayers is teachers.  Starting next year teachers will no longer be able to deduct up to $250 of their spending on classroom supplies.  The National Education Association estimates teachers spend on average of $400 annually on supplies.

The ability to itemize and deduct sales tax from the federal tax return is also scheduled to expire at the end of the month; impacting people living in states without income taxes, high sales tax rates and/or those who plan on making major purchases next year.

Boomers and nonprofits will be greatly hampered when the provision that allows people aged 70 ½ to give up to $100,000 of an IRA distribution to a nonprofit tax free expires. 

Public transit commuters could see a new tax if a provision equalizing the amount they are entitled to receive tax-free from their employers to subsidize their community expenses expires.  If not extended, the amount could drop from an expected $250 per month to $130 per month.

Important Tax Changes for Businesses

The just announced budget deal makes it all but certain that Congress will allow a large number of key business tax breaks and credits to expire at the end of the month.  Without an extension, the potential losses for small and mid-sized business owners will be quite significant. 

The most substantial for small and mid-sized businesses would come from the expiration of the 50% bonus depreciation provision and the Sec. 179 tax deduction.  The bonus depreciation allows half of the cost of purchases to be deducted from current year income rather than having to be spread out over the usable lifetime of the purchase.  The Sec. 179 tax benefit allows companies to take a tax deduction for the cost of purchasing various assets in a single year instead of over several years. 

Both of these provisions have been used by and have helped small and mid-sized business owners invest and grow their business, which conceivably would have been too difficult to make in tough economic conditions and it is further plausible that many will decide to postpone 2014 purchases without these provisions in place causing growth to halt.

Another three very important expiring provisions are the Research & Development (R&D) tax credit, the Work Opportunity tax credit (WOTC) and the New Markets tax credit (NMTC); all of which have greatly added value and jobs to the US economy. 

The R&D tax credit has not only been important in spurring innovation, but also has become increasingly necessary in order to keep high paying R&D jobs in the United States.  In 2011, the physical, engineering and life sciences industries alone supported 561,000 US jobs. 

The WOTC has been an important incentive to encourage hiring of individuals from demographic and economic categories that otherwise have a more difficult time obtaining employment.  In 2012 alone, there were 900,000 veterans hired under the WOTC program.

The NMTC has provided funds to business owners for investing in new commercial facilities in designated low income areas.  It has been estimated that the NMTC is responsible for creating and/or retaining 358,800 total jobs during the past 10 years.

General Tax Planning Considerations

As of mid-December, lawmakers have not moved to push these provisions forward for extension and with the recent proposed budget deal the outcome seems likely they will indeed expire.  This however, does not mean it will not happen, as many individuals and businesses heavily rely on these provisions and they will be hot political topics for all those seeking re-election next year. 

Nevertheless, given the lack of attention the situation has received so far, it is entirely possible that these expiring provisions will in fact expire thus creating new taxes for 2014 and for the conceivable future.

Call us today to find out how these expiring provisions might affect you and your business! 

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