5700 Crooks Rd., Ste. 201 Troy, MI 48098 Phone: 248.649.1600 2014 Tax Newsletter Dear Client: 1785 W. Stadium Blvd., Ste. 101 Ann Arbor, MI 48103 Phone: 734.665.6688 www.smcpafirm.com Although 2014 was not the year for tax reform that some anticipated, 2014 was an important year, and helped to lay the groundwork for potential tax reform in 2015 or 2016. On November 4, Americans learned the composition of the House and Senate in the 114th Congress that will convene in January 2015. Republicans increased their majority in the House and captured a majority in the Senate. GOP leaders said that tax reform would be a priority in the new Congress but gave no specifics. President Obama said that tax reform could be an area where he and the GOP could cooperate. Included in this newsletter you will find important 2014 tax developments, as well as general tax-saving reminders and tips. We hope this information is helpful to you. For a more personalized analysis of how items in this newsletter may impact your unique situation, please do not hesitate to contact either of our offices. TAX RATES For 2013 and subsequent years, the individual income tax rate schedules reflect a continuation of the rates under the Bush-era tax cuts, except for the 39.6% for the highest bracket introduced for the 2013 tax year. The additional 0.9% Medicare surtax on earned income, and the 3.8% Medicare surtax on investment income, are still relevant for 2014. In fact, other than inflation adjustments, very little changed from 2013 to 2014. You can view the income tax rates for ordinary income, as well as the preferential rates for qualified dividends and long-term capital gains, on the second page of this newsletter. TAX EXTENDERS In the recently enacted Tax Increase Prevention Act of 2014, Congress has once again extended a package of expired or expiring individual, business, and energy provisions known as extenders. The extenders are a varied assortment of more than 50 individual and business tax deductions, tax credits, and other tax-saving laws. The new legislation generally extends the tax breaks, most of which expired at the end of 2013, for one year through 2014. INDIVIDUAL EXTENDERS OF NOTE HIGHLIGHTS Potential Tax Reform 2014 Tax Rates 2014 Tax Extenders Repair Regulations Affordable Care Act Michigan Update STATE AND LOCAL SALES TAX DEDUCTION: The option to take an itemized deduction for state and local general sales taxes in lieu of state and local income taxes. The election is potentially beneficial to taxpayers in states without an income tax. Taxpayers who make a large purchase, such as a motor vehicle, before year-end could benefit by comparing the deduction for state and local sales taxes against their deduction for state and local income taxes. 1
MORTGAGE INSURANCE PREMIUMS: This provision treats mortgage insurance premiums as qualified residence interest allowable as an itemized deduction. CANCELLATION OF DEBT: The Tax Increase Prevention Act of 2014 excludes from income cancellation of mortgage debt on a principal residence of up to $2 million through 2014. Without an extension, debt forgiven in 2014 through a foreclosure, short sale or loan modification could have been treated as taxable income. TUITION AND FEES DEDUCTION: Eligible taxpayers can deduct qualified tuition and related expenses paid on behalf of themselves, as well as their spouse and dependents. The deduction is allowed only to the extent the qualified tuition and related expenses are for enrollment at a higher education institution before 2015, except that the deduction is allowed for expenses paid before 2015 if the expenses were in connection with an academic term beginning before 2015 or during the first three months of 2015. The tuition and fees deduction may be most beneficial to taxpayers who are ineligible for education-related tax credits, because the credits typically will provide greater tax savings and a taxpayer cannot take both the deduction and education credit. TEACHERS' CLASSROOM EXPENSE DEDUCTION: Eligible primary and secondary education professionals can claim an above-the-line deduction for up to $250 for expenses paid out-of-pocket for classroom supplies, books, computers and equipment, and supplementary materials. CHARITABLE CONTRIBUTION: Individuals age 70 1/2 or older who are required to take IRA distributions may transfer up to $100,000 tax-free to charity. This provision allows retirees to avoid paying income tax on amounts withdrawn and can be used to satisfy required minimum distribution rules. This provision is extended for 2014. QUALIFIED SMALL BUSINESS (QSB) STOCK: Gains realized on the sale of QSB stock acquired after September 27, 2010 and before January 1, 2015 are eligible for an exclusion of 100% if the QSB stock has been held for at least five years. A QSB is a domestic C corporation that holds gross assets of no more than $50 million at any time and uses at least 80% of its assets in an active trade or business. The QSB stock gain exclusion has been especially valuable ever since the capital gains tax rate increased for high-income taxpayers. Single Taxable Joint Individual Tax Rates for 2014 Ordinary Capital Gains and Qualified Dividends Earned Medicare Tax Investment $0+ $0+ 10% 0% $9,075+ $18,150+ 15% $36,900+ $73,800+ 25% $89,350+ $148,850+ 28% $186,350+ $226,850+ 33% 15% $200,000+ (AGI) $250,000+ (AGI) $405,100+ $405,100+ 35% $406,750+ $457,600+ 39.6% 20% 1.45% 0.0% 2.35% 3.8% 2
BUSINESS EXTENDERS BONUS DEPRECIATION: 50% additional first-year depreciation allows businesses to recover the costs of depreciable property more quickly for qualified assets. Qualified assets must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less. Property must be new and placed in service before January 1, 2015. Taxpayers claim bonus depreciation in the tax year that a qualifying asset is placed in service, which may not necessarily be the same tax year that the asset is acquired. Only new property is eligible for bonus depreciation. SECTION 179: Enhanced Section 179 allows taxpayers to immediately deduct, rather than gradually depreciate, the cost of qualified assets. Because of the extension, a business can deduct up to $500,000 in qualified new or used assets. The deduction is subject to a dollar-for-dollar phase-out once the cost of all qualifying property placed in service during the tax year exceeds $2 million, meaning smaller businesses typically receive the greatest benefit. The expensing election can be claimed only to offset net income, not to reduce net income below zero. Absent Congressional action, the dollar limit for Code Sec. 179 expensing was $25,000 for 2014 with an investment limit of $200,000. If a business is eligible for full Section 179 expensing, it might obtain a greater benefit from the expensing election than from bonus depreciation because the expensing can enable the business to deduct 100% of an asset acquisition s cost. Moreover, Sec. 179 expensing is available for both new and used property. QUALIFIED LEASEHOLD PROPERTY: The Extenders package includes the ability to treat qualified leasehold improvement, restaurant, and retail improvement property as Section 179 eligible, as well as application of a shortened recovery period of 15 years (as opposed to 39 years). RESEARCH TAX CREDIT: The research and development tax credit may be claimed for businesses that increase their investments in research. The Tax Increase Prevention Act of 2014 extends the research tax credit through 2014. The research credit generally allows taxpayers a 20-percent credit for qualified research expenses or a 14-percent alternative simplified credit. WORK OPPORTUNITY CREDIT: The credit for hiring from certain disadvantaged groups, such as food stamp recipients, ex-felons and veterans who have been unemployed for four weeks or more has been extended through 2014. REPAIR REGULATIONS IRS issued final guidance on the following: Repair vs. Capitalization: Definition of when a repair is required to be capitalized has been updated to be more taxpayer friendly, and as such, there may be items capitalized in prior years that can be written off in the current year. Treatment of Materials and Supplies: Under the new regulations, a taxpayer may expense materials and supplies in the year paid or incurred under a de minimis rule. Disposition of MACRS Property: For assets that have been disposed of, but never written off because they were part of a larger asset, the new regulations allow a taxpayer to elect to immediately take the deduction for the disposal. Nearly every business will be affected, and will be required to file at least one application for change in accounting method Form 3115 to comply with the new regulations. 3
RETIREMENT PLANNING A number of changes have been made during 2014 affecting IRAs and other qualified plans. It is permitted to direct the taxable and non-taxable portions of a distribution from an employer sponsored plan (401(k), 403(b), 457(b)) to separate accounts. This provision does not apply to IRA's. A taxpayer is now limited to one 60-day rollover per year for all IRA accounts (rather than the previous law that allowed for one 60-day rollover per year per account). In a Supreme Court decision, inherited IRA accounts were not found to be retirement assets, and therefore not subject to creditor protection under the Bankruptcy Code. ABLE ACT The Achieving a Better Life Experience (ABLE) Act was passed along with the Tax Extenders. It offers a new savings program for people with disabilities. The ABLE Act authorizes states to establish a tax-exempt ABLE program to help people with disabilities build accounts to help pay qualified disability expenses. ABLE accounts are very similar to Section 529 savings plans. Distributions from an ABLE account (including earnings) that are used for qualified expenses (those expenses directly related to the individual's disability (e.g., health, transportation, housing)) would not be subject to tax. Anyone can make contributions to ABLE accounts, but the contributions are not tax deductible. Relatives or friends can make annual contributions to an ABLE account up to the maximum federal tax-free gift limit ($14,000 for 2015). $100,000 limit for SSI benefits, and no impact on Medicaid eligibility. AFFORDABLE CARE ACT Effective January 1, 2014, individuals were required to carry minimum essential health insurance coverage, or be required to pay a penalty known as the individual shared responsibility payment. For 2014, the penalty is the greater of $95 or 1% of household income. The penalty is pro-rated based on the number of months the individual was uninsured, and will increase in 2015 and 2016. Taxpayers that did not maintain the required health insurance coverage may qualify for an exemption from the penalty. Some of the common exemptions include: The lowest priced coverage was greater than 8% of household income Have a gap in coverage for less than 3 consecutive months Hardships, such as unpaid medical expenses Taxpayers who purchased health insurance though the Marketplace may have been eligible to receive a government subsidy in the form of a premium assistance tax credit. The amount of the tax credit is based on the taxpayer's estimate of 2014 household income, and could be applied to paying insurance premiums throughout the year. Whether or not the tax credit was received as an assistance to paying for insurance premiums, taxpayers are required to reconcile the credit on the Form 1040. If household income was either over- or under-estimated when the application for the subsidy was completed, the taxpayer will either receive the remainder of the subsidy in the form of a refundable tax credit, or will be required to re-pay the subsidy. If you If you purchased purchased health health insurance insurance through the through Marketplace, the Marketplace, a form 1095-A a form will be issued 1095-A which will be will issued show to the you details which of will the insurance, show the amount details of the of your premium, coverage, and the advance amount premium of the tax premium, credit paid. and the advance premium tax credit. 4
MICHIGAN PENSION AND RETIREMENT BENEFITS TAXATION Beginning on January 1, 2012, pension and retirement benefits became subject to Michigan income tax for many recipients. Below please find a chart to help you determine whether your retirement benefits are subject to Michigan tax on your 2014 income tax return. Born before 1946 Born 1946 to 1952 (under age 67) Born 1946 to 1952 (age 67+) Born after 1952 Private Pension Public Pension $49,027 (single) or $98,054 (joint) Michigan tax-free Exempt $20,000 (single) or $40,000 (joint) Michigan tax-free Pension subtraction replaced by income exemption Entire pension is subject to Michigan tax Social Security Exempt Exempt Exempt Exempt Exemption N/A N/A Sr. Citizen Investment Subtraction $10,767 (single) or $21,534 (joint) $20,000 (single) or $40,000 (joint) subtraction against all income Eligible after age 67 Not eligible Not eligible Not eligible MICHIGAN PERSONAL PROPERTY TAX REFORM In an attempt to make Michigan more attractive for business to grow, the State has decided to phase out its Personal Property Tax. The reform will reduce compliance, administrative, and tax costs for most businesses. If property owned by a business within a taxing jurisdiction is worth a total of $80,000 or less, then the personal property is 100% exempt. Form 5076 Affidavit needs to be filed by the assessor by February 10, 2015 to qualify for this exemption. Starting in 2016, all manufacturing personal property that was purchased in 2013 or later will no longer be subject to the PPT. In addition, all manufacturing personal property that has been in use for 10 or more years will also be exempt. Businesses claiming this manufacturing exemption will be subject to a new assessment starting in 2016: the Statewide Essential Services Assessment (SESA). CONTACT US At Schlaupitz & Madhavan, PLLC, we are dedicated to provide our clients with an unparalleled level of commitment to their tax and accounting needs. We value each and every client and will continue to provide each client with individualized attention. Please contact us at 248.649.1600 or 734.665.6688 to schedule an appointment. Sincerely, Schlaupitz & Madhavan, PLLC In accordance with U.S. Treasury regulations, this newsletter is not a formal legal opinion and may not be used by any person for the avoidance of Federal tax or penalties 5