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Arnold Sky &
Associates, Inc.
11419 Cronridge Drive, Suite 1
Owings Mills, MD 21117
410.654.0600 410.654.0606 fax
December 2014
Well another year
has flown by and Congress finally passed and the President signed on December
19, 2014 the “Tax Increase Prevention Act of 2014” (TIPA), which extends a host
of expired or expiring individual, business, and energy provisions. These
“extenders” are a varied assortment of more than 50 individual and business tax
deductions, tax credits, and other tax-saving laws which have been on the books
for years but which technically are temporary because they have a specific end
date. The new legislation generally extends these tax breaks, most of which
expired at the end of 2013, for one year through 2014. In addition, the
legislation provides for a new type of tax-advantaged savings program to help in
meeting the financial needs of disabled individuals, the “Achieving a Better
Life Experience” (ABLE) program, and also contains several other miscellaneous
provisions.
While this
long-awaited legislation generally resolves the uncertainty of whether the
extender tax breaks will be available for 2014, their fate will soon be
uncertain again as they are again set to expire at the end of that year. The
justification for making the extension for only one year was apparently to allow
each of the extenders to be individually examined and dealt with in a less
time-constrained environment and as part of a greater tax reform effort, and
perhaps made permanent or allowed to remain expired. However, whether and when
that occurs, and whether the political landscape in the coming year makes tax
reform more of a reality, remains to be seen.
INDIVIDUAL
PROVISIONS
ABOVE-THE-LINE DEDUCTION FOR EDUCATOR EXPENSES EXTENDED
Eligible
elementary and secondary school teachers may claim an above-the-line deduction
for up to $250 per year of expenses paid or incurred for books, certain
supplies, computer and other equipment, and supplementary materials used in the
classroom. Under pre-Act law, the educator expense deduction didn’t apply for
expenses paid or incurred in tax years after 2013.
New
law.
TIPA retroactively extends the educator expense deduction one year so that it
applies to expenses paid or incurred in tax years through 2014.
EXCLUSION
FOR DISCHARGED HOME MORTGAGE DEBT EXTENDED
Discharge
of indebtedness income from qualified principal residence debt, up to a $2
million limit ($1 million for married individuals filing separately) is excluded
from gross income. Under pre-Act law, this exclusion didn’t apply to any debt
discharged after December 31, 2013.
New
law.
TIPA extends this exclusion for one year so that it applies to home mortgage
debt discharged before January 1, 2015.
INCREASE
IN EXCLUDIBLE EMPLOYER-PROVIDED MASS TRANSIT AND PARKING BENEFITS EXTENDED
Under
pre-Act law, for 2014, an employee may exclude from gross income up to: (1) $250
per month for qualified parking, and (2) $130 a month for transit passes and
commuter transportation in a commuter highway vehicle (including van pools).
However, notwithstanding the applicable statutory limits on the exclusion of
qualified transportation fringes (as adjusted for inflation), for any month
beginning before January 1, 2014, a parity provision required that the monthly
dollar limitation for transit passes and transportation in a commuter highway
vehicle had to be applied as if it were the same as the dollar limitation for
that month for employer-provided parking ($245 for 2013).
New law.
TIPA extends for one year the parity provision, through 2014. Thus, for 2014, it
increases the monthly exclusion for employer-provided transit and vanpool
benefits to $250 - the same as for the exclusion for employer-provided parking
benefits.
MORTGAGE
INSURANCE PREMIUMS AS DEDUCTIBLE QUALIFIED RESIDENCE INTEREST EXTENDED
Mortgage
insurance premiums paid or accrued by a taxpayer in connection with acquisition
indebtedness with respect to the taxpayer’s qualified residence are treated as
deductible qualified residence interest, subject to a phase-out based on the
taxpayer’s adjusted gross income (AGI). The amount allowable as a deduction is
phased out ratably by 10% for each $1,000 by which the taxpayer’s adjusted gross
income exceeds $100,000 ($500 and $50,000, respectively, in the case of a
married individual filing a separate return). Thus, the deduction isn’t allowed
if the taxpayer’s AGI exceeds $110,000 ($55,000 in the case of married
individual filing a separate return).
Under
pre-Act law, this provision only applied to premiums paid or accrued before
January 1, 2014 (and not properly allocable to any period after that date).
New law. TIPA retroactively extends this provision for one year so that a
taxpayer can deduct, as qualified residence interest, mortgage insurance
premiums paid or accrued before January 1, 2015 (and not properly allocable to
any period after 2014).
STATE
AND LOCAL SALES TAX DEDUCTION EXTENDED
Taxpayers who itemize deductions may elect to deduct state and local general
sales and use taxes instead of state and local income taxes.
Under
pre-Act law, this choice was unavailable for tax years beginning after December
31, 2013.
New law. TIPA retroactively extends this provision for one year so that
itemizers can elect to deduct state and local sales and use taxes instead of
state and local income taxes for tax years beginning before January 1, 2015.
LIBERALIZED
RULES FOR QUALIFIED CONSERVATION CONTRIBUTIONS EXTENDED
A
taxpayer’s aggregate qualified conservation contributions (i.e., contributions
of appreciated real property for conservation purposes) are allowed up to the
excess of 50% of the taxpayer’s contribution base over the amount of all other
allowable charitable contributions (100% for qualified farmers and ranchers),
with a 15 year carryover of such contributions in excess of the applicable
limitation. Under pre-Act law, these rules didn’t apply to any contribution made
in a tax year beginning after December 31, 2013, and contributions made
thereafter were to be subject to the otherwise applicable 30% limit for capital
gain property (50% limit for qualified farmers and ranchers).
New law. TIPA retroactively extends for one year the 50% and 100%
limitations on qualified conservation contributions of appreciated real property
so that they apply to contributions made in tax years beginning before January
1, 2015.
ABOVE-THE-LINE
DEDUCTION FOR HIGHER EDUCATION EXPENSES EXTENDED
Eligible
individuals can deduct higher education expenses - i.e., “qualified tuition and
related expenses” of the taxpayer, his spouse, or dependents - as an adjustment
to gross income to arrive at adjusted gross income. The maximum deduction is
$4,000 for an in individual whose AGI for the tax year doesn’t exceed $65,000
($130,000 in the case of a joint return), or $2,000 for individuals who don’t
meet the above AGI limit, but whose adjusted gross income doesn’t exceed $80,000
($160,000 in the case of a joint return). No deduction is allowed for an
individual whose adjusted gross income exceeds the relevant adjusted gross
income limitations, for a married individual who does not file a joint return,
or for an individual for whom a personal exemption deduction may be claimed by
another taxpayer for the tax year.
Under
pre-Act law, this deduction wasn’t available for tax years beginning after
December 31, 2013.
New law. TIPA retroactively extends the qualified tuition deduction for one
year so that it can be claimed for tax years beginning before January 1, 2015.
NONTAXABLE IRA TRANSFERS TO ELIGIBLE CHARITIES EXTENDED
Taxpayers
who are age 70 1/2 or older can make tax-free distributions to a charity from an
Individual Retirement Account (IRA) of up to $100,000 per year. These
distributions aren’t subject to the charitable contribution percentage limits
since they are neither included in gross income nor claimed as a deduction on
the taxpayer’s return.
Under
pre-Act law, these rules didn’t apply to distributions made in tax years
beginning after December 31, 2013.
New law. TIPA retroactively extends this provision for one year so that
it’s available for charitable IRA transfers made in tax years beginning before
January 1, 2015.
ENERGY
PROVISIONS
NONBUSINESS
ENERGY PROPERTY CREDIT EXTENDED
For
qualified energy property placed in service before 2014, a taxpayer may claim a
credit up to a $500 lifetime limit (with no more than $200 from windows and
skylights) over the aggregate of the credits allowed to the taxpayer for all
earlier tax years ending after December 31, 2005. The credit equals the sum of:
(1) 10% of the amount paid or incurred by the taxpayer for qualified energy
efficiency improvements installed during the tax year, and (2) the amount of the
residential energy property expenditures paid or incurred by the taxpayer during
the tax year. The credit for residential energy property expenditures can’t
exceed: (i) $50 for an advanced main circulating fan; (ii) $150 for any
qualified natural gas, propane, or hot water boiler; and (iii) $300 for any item
of energy-efficient building property.
Under
pre-Act law, the credit wasn’t available for property placed in service after
December 31, 2013.
New law. TIPA retroactively extends the nonbusiness energy property credit
for one year, to apply to property placed in service after December 31, 2013 and
before January 1, 2015. Thus, taxpayers can claim a credit on the cost of
qualified energy efficiency improvements and residential energy property
expenditures, with a lifetime credit limit of $500 ($200 for windows and
skylights), for property placed in service through 2014.
NEW
TAX-ADVANTAGED ABLE ACCOUNTS
Under
pre-Act law, there wasn’t a tax-advantaged savings program specifically targeted
to persons with disabilities that was similar, for example, to a qualified
tuition program (QTP, or 529 plan). A QTP provides taxpayer favorable rules for
paying qualified higher education expenses. Under a QTP, a person can make
nondeductible cash contributions on behalf of a designated beneficiary to an
account established by a state. The earnings on the contributions build up
tax-free, and distributions from the QTP are excludable to the extent used to
pay qualified higher education expenses. A 10% additional tax is imposed on
distributions that are includible in gross income. But the contributor can do
either of the following without tax consequences: a) change the beneficiary to
be a member of the prior beneficiary’s family, or b) roll over amounts from one
QTP to another for the same beneficiary or for a beneficiary who is a member of
the prior beneficiary’s family.
A
“qualified disability trust” - a disability trust described in Sec.1917(c)(2)(B
)(iv) of the Social Security Act, all the beneficiaries of which are determined
to be disabled (within the meaning of Sec.1614(a)(3) of the Social Security Act)
- may be used to provide financial assistance to a disabled person (the trust
beneficiary) without disqualifying the beneficiary for certain government
benefits. Amounts distributed to a child who is a beneficiary of a qualified
disability trust are treated as earned income for purposes of the “kiddie” tax
and so aren’t taxed at parents’ tax rates.
New law. For tax years beginning after December 31, 2014, TIPA allows
states to establish tax-exempt “Achieving a Better Life Experience” (ABLE)
accounts to assist persons with disabilities in building an account to pay for
qualified disability expenses. Similar to a QTP, a tax exemption would be
allowed for an ABLE program; amounts in an ABLE account would accumulate on a
tax-exempt (or, in some cases, tax-deferred) basis.
General
rules on taxation of the ABLE program. A qualified ABLE account is generally
exempt from income tax but is subject to the tax imposed by Code Sec. 511 on the
unrelated business income of tax-exempt organizations. (Code Sec. 529A(a)) A
“qualified ABLE program” (see below) is subject to the excise tax on non-plan
tax-exempt entities that are parties to prohibited tax shelter transactions and
subsequently listed transactions. (Code Sec.4965(c)(8), as amended by Act Sec.
102(e)(3) Div B) Any person may make contributions to an ABLE account.
Summary of H.R. 647) Contributions to an ABLE account aren’t deductible for
income tax purposes.
QUALIFIED
ABLE PROGRAM DEFINED
A
qualified ABLE program is a program established and maintained by a state or
state agency or instrumentality that:
(a)
provides that non-cash contributions and contributions that exceed the annual
contribution limit won’t be accepted. (Non-cash contributions won’t violate this
rule if they are returned before the return due date). Except in the case of a
rollover contribution from another account, an ABLE program must limit the
aggregate contributions from all contributors for a tax year to the amount of
the annual Code Sec. 2503(b) gift tax exclusion for that tax year ($14,000 for
2015, adjusted annually for inflation). A 6% excise tax is imposed on excess
contributions to an ABLE account; (b) provides separate accounting for each
designated beneficiary; (c) limits the designated beneficiary’s investment
direction to no more than two times in a calendar year; (d) prohibits the use of
any interest or any portion of an interest in the program as security for a
loan; and (e) provides adequate safeguards to prevent excess aggregate
contributions.
Observation:
Contributions to a QTP, which are also required to be made in cash,
may be made by check, money order, credit card, electronic funds transfer,
payroll deductions, or automatic deductions from a bank account. Presumably, the
same rules will apply to ABLE accounts. The program must limit a designated
beneficiary to one ABLE account. If an ABLE account is established for a
designated beneficiary, no account later established for that beneficiary is
treated as an ABLE account.
WHO CAN BE A BENEFICIARY OF AN ABLE ACCOUNT
The
program must allow an ABLE account to be established only for a beneficiary who
is a resident of either the state that maintains the program (a ‘‘program
state’’) or of a contracting state that hasn’t established an ABLE program but
has entered into a contract with a program state to provide the contracting
state’s residents with access to the program state’s ABLE program.
The
designated beneficiary of an ABLE account is an eligible individual who
established the account and is its owner. An individual is an eligible
individual for a tax year if, during that tax year: the individual is entitled
to benefits based on blindness or disability under the Social Security
disability insurance program (title II of the Social Security Act) or the SSI
program (title XVI of the Social Security Act), and that blindness or disability
occurred before the date on which the individual reached age 26, or a
“disability certification” for the individual has been filed with IRS for the
tax year.
A
disability certification is one made by the eligible individual or his parent or
guardian, that certifies that:
(1) the individual has a medically determinable physical or mental impairment,
which results in marked and severe functional limitations, and that can be
expected to result in death or that has lasted or can be expected to last for a
continuous period of not less than 12 months, or is blind, within the meaning of
Sec.1614(a)(2) of the Social Security Act, and (2) that blindness or disability
occurred before the date on which the individual attained age 26.
The certification
must include a copy of the individual’s diagnosis relating to the individual’s
relevant impairment(s), signed by a licensed physician meeting the criteria of
Sec.1861(r)(1) of the Social Security Act.
Distributions from,
and other amounts coming out of, ABLE accounts. No amount of a distribution from
an ABLE account is includible in gross income if distributions from the account
don’t exceed the designated beneficiary’s “qualified disability expenses.”
Qualified disability expenses are any expenses related to the eligible
individual’s blindness or disability that are made for the benefit of an
eligible individual who is the designated beneficiary.
They include
education, housing, transportation, employment training & support, assistive
technology & personal support services, health, prevention & wellness, financial
management & administrative services, legal fees, expenses for oversight &
monitoring, funeral & burial expenses and other expenses that are approved under
IRS regulations and consistent with Code Sec. 529A’s purposes.
If the
distributions exceed the qualified disability expenses, then the amount
otherwise includible in gross income is reduced by an amount that bears the same
ratio to the distributed amount as the qualified disability expenses bear to
that amount. Distributions from a qualified ABLE program are includible in the
distributees gross income under the Code Sec. 72 annuity rules to the extent not
excluded from gross income under any other income tax provision.
A taxpayer who
receives a distribution from a qualified ABLE program that’s includible in gross
income is subject to an additional 10% tax on the includible part. An exception
to this rule applies to the distribution of certain contributions made during
the tax year on the designated beneficiary’s behalf.
A payment or
distribution from an ABLE account isn’t taxable to the extent that the amount
received is paid, no later than the 60th day after the date of the payment or
distribution, into another ABLE account for the benefit of the designated
beneficiary or an eligible individual who’s a family member of the designated
beneficiary.
A change
in the designated beneficiary of an interest in a qualified ABLE program during
a tax year isn’t treated as a taxable distribution if the new beneficiary is
both an eligible individual for the tax year and a member of the family of the
former beneficiary. Upon the death of an eligible individual, any amounts
remaining in the account (after Medicaid reimbursements) would go to the
deceased’s estate or to a designated beneficiary and would be subject to income
tax on investment earnings, but not to the 10% penalty.
EXCEPT
FOR SSI, ABLE ACCOUNTS DISREGARDED FOR FEDERAL MEANS-TESTED PROGRAMS
Federal
means-tested programs typically include income and resource limits that are
designed to target benefits to individuals with limited income and other
financial resources. These limits vary from program to program or, for
state-administered programs such as Medicaid, from state to state. For example,
the supplemental security income (SSI) program, which is federally-administered,
has a $2,000 resource limit for individuals. In most states, SSI receipt confers
Medicaid eligibility. When SSI recipients have income and resources over the
limit, their SSI benefits are suspended but they remain eligible for Medicaid.
New law. Amounts in an individual’s qualified ABLE account (including
earnings), contributions to the individual’s account, and distributions to pay
qualified disability expenses are disregarded for purposes of determining an
individual’s eligibility for, or the amount of, any assistance or benefit
authorized by any federal means-tested program. This rule overrides any other
federal law that requires those amounts to be taken into account.
However, in the case of the SSI program, distributions from an ABLE account for
housing expenses are considered income; and amounts (including earnings) in an
ABLE account in excess of $100,000 are considered a resource of the designated
beneficiary. (Act Sec. 103(a) Div B) The SSI benefits of an individual who has
excess resources because the individual’s ABLE account balance exceeds $100,000
aren’t terminated. Instead, the benefits are suspended (Act Sec. 103(b)(1) Div
B) until the individual’s balance falls below $100,000. (Committee Report) The
suspension of SSI benefits doesn’t apply for purposes of Medicaid eligibility.
Observation:
32 states and the District of Columbia provide that anyone who is
eligible for SSI benefits is also eligible for Medicaid. In those states, an
individual would remain eligible for Medicaid during any period where his ABLE
account balance exceeded $100,000 and thus his SSI benefits were suspended.
For
purposes of determining SSI eligibility, states must submit to the Commissioner
of Social Security, in the manner specified by the Commissioner, monthly
electronic statements on relevant distributions and account balances from all
ABLE accounts. This requirement is effective for tax years beginning after
December 31, 2014.
SOME
ABLE ACCOUNTS GET BANKRUPTCY EXEMPTION
Property
of a bankruptcy estate doesn’t include funds placed in an ABLE account no later
than 365 days before the filing date of the bankruptcy petition but, only if the
designated beneficiary of the account was the debtor’s child, stepchild,
grandchild, or step-grandchild for the tax year for which funds were placed in
the account. And, the exclusion is limited to $6,225 for funds placed in all
ABLE accounts having the same designated beneficiary no earlier than 720 days
nor later than 365 days before the filing date.
Other
rules limit this exemption; one such rule provides that no exemption is provided
for contributions in excess of the annual contribution limit, which, as
discussed under “Qualified ABLE program defined,” above, is equal to the annual
gift tax exclusion amount.
These
provisions apply to bankruptcy cases begun under title 11 of the U.S. Code on or
after the date of enactment (i.e., December 19, 2014).
As
always, we look forward to seeing you again this tax season. In the interim, if
you have any questions on this or any matter on which you feel we may be of
assistance, please do not hesitate to contact us immediately.
Yours truly
David S. Ostrow
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