As 2014 begins, it is a valuable
time to look back at some of the important federal tax developments in 2013 and
their impact on the new year and beyond. Some of these developments were
anticipated; others were surprises. In nearly all cases, the developments open
tax planning opportunities.
Tax legislation. 2014 has commenced in a very
different budgetary and fiscal climate in Washington compared to the same time
last year. At the end of 2012, lawmakers were in tough negotiations over the
fiscal cliff. The result was the American Taxpayer Relief Act of 2012 (ATRA),
which finally passed Congress on January 1, 2013. The new law extended permanently
the Bush-era tax cuts for lower and moderate income taxpayers, including
reduced income tax brackets, marriage penalty relief, some education
incentives, and much more. ATRA also increased taxes on higher income
individuals by restoring the 39.6 percent tax bracket and revising other
provisions. These and other changes made by ATRA are reflected on 2013 returns
filed in 2014.
Extenders. Although ATRA resolved uncertainty
about the Bush-era tax cuts, it did not make permanent many other temporary
incentives. After 2013, a host of temporary incentives, known as tax extenders,
expired. In some cases, for example transit benefits, taxpayers feel the
effects immediately. In other cases, the impact of the expiration of these
incentives will not be felt until taxpayers file 2014 returns in 2015. That
effectively gives Congress time to extend the expired incentives, including the
state and local sales tax deduction, research tax credit, higher education
tuition deduction, and many more.
Tax reform. Action on the extenders could be
linked to tax reform. During 2013, the leaders of the House and Senate tax
writing committees undertook a nationwide campaign to drum up support for tax
reform. The lawmakers visited a number of cities and highlighted proposals to simplify
the Tax Code. Late in 2013, the Senate Finance Committee released legislative
language proposing changes in depreciation, the international tax rules and tax
administration. However, it is unclear if the Senate, or the House, will give
these proposals serious consideration in 2014. Their chief proponent, SFC Chair
Max Baucus, D-Montana, is retiring from Congress.
Affordable Care Act. The Affordable Care Act continued to
generate new rules, regulations and controversies in 2013. The Obama administration
surprised many observers with a one-year delay in the so-called employer
mandate. However, the individual mandate, which generally requires individuals
to carry minimum essential health coverage or pay a penalty unless exempt, took
effect as scheduled on January 1, 2014. Some individuals whose existing
policies were cancelled because they did not meet new standards under the
Affordable Care Act may be eligible for a hardship exemption to the penalty.
The Affordable Care Act’s Marketplaces experienced a rocky opening but as of
early 2014, the White House reported that enrollment numbers were climbing.
New Medicare taxes. The IRS released final regulations
on two new Medicare taxes imposed by the Affordable Care Act: the Net
Investment Income (NII) tax and the Additional Medicare Tax. These two taxes
generally impact higher income taxpayers (individuals with incomes over
$200,000 and married couples with incomes over $250,000) but they have some
especially complex features that complicate tax planning. The NII final
regulations are intended to shed light on the many types of income that could
be subject to the tax.
Health FSAs. The IRS announced in late 2013 a
decidedly pro-taxpayer change to a popular health care benefit. At the plan
sponsor’s option, employees participating in health flexible spending
arrangements (health FSAs) will be allowed to carry over, instead of
forfeiting, up to $500 of unused amounts remaining at year-end. Plan sponsors
now have the choice of either allowing employees a carryover of up to $500 or
giving employees a grace period of up to 2 ½ months. However, plan sponsors
cannot offer both.
Same sex marriage and domestic
partners. On June 26, 2013, the U.S. Supreme Court struck down as
unconstitutional Section 3 of the Defense of Marriage Act. The IRS announced
that same-sex couples, legally married in jurisdictions that recognize their
marriages, will be treated as married for federal tax purposes. This impacts
not only a taxpayer’s filing status. It also applies to all federal tax
provisions where marriage is a factor, including claiming personal and
dependency exemptions, taking the standard deduction, employee benefits,
contributing to an IRA and claiming the earned income tax credit or child tax
credit. The IRS also reminded domestic partners and individuals in civil unions
that they are not married for federal tax purposes.
Repair regulations. In September, the IRS issued final
regulations on the treatment of amounts paid to acquire, produce, or improve
tangible property. The complex regulations reach nearly every type of taxpayer.
Their complexity should not be a barrier to taking advantage of some of the
taxpayer-friendly provisions. For example, the final regulations include a de
minimis safe harbor, a safe harbor for small taxpayers to assist them in
applying the general rules for improvements to buildings, and more.
Foreign compliance activities. In 2014, foreign financial
institutions will have new reporting obligations under the Foreign Account Tax
Compliance Act (FATCA). FATCA, its supporters argue, will significantly boost
taxpayer compliance. Its detractors counter that the law is too complex and
sweeps in its reach taxpayers who have no intention to purposefully evade U.S.
taxation. Along with FATCA, the U.S. has been expanding its tax treaties and
information agreements with foreign jurisdictions to encourage greater
transparency. This trend is likely to continue in 2014.
Mileage rates. The optional business standard
mileage rate drops slightly for 2014 to 56 cents-per-mile (compared to 56.5
cents-per-mile for 2013). The IRS attributed the reduction to generally lower
vehicle maintenance costs, including the price of fuel. For 2014, the
depreciation component of the business standard mileage rate is 22 cents-per
mile. This represents a one-cent decrease from the depreciation component for
the 2013 business standard mileage rate. Similarly, the optional standard
mileage rate for qualified medical and moving expenses will also decrease from
24 cents-per-mile for 2013 to 23.5 cents-per-mile for 2014. However, the 14
cents-per-mile rate for charitable miles driven is set by statute and is
unchanged for 2014.
IRS operations. The IRS experienced a turbulent year
in 2013 with reports of improper oversight of some organizations, leadership
changes and a 16-day shutdown in October. In December, the Senate approved the
nomination of John Koskinen to be the new Commissioner of Internal Revenue. One
of Koskinen’s first tasks will be to oversee the smooth processing of returns
and refunds during the 2014 filing season. Koskinen will also have to
prioritize IRS activities in a challenging budgetary environment.
If you have any questions about
these or any developments in 2013 and their impact on 2014, please contact our
office at (630) 986-0540.
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