Changes in store for taxpayers this year

THE WOODLANDS, Texas -- The Internal Revenue Service has many changes in store for U.S. taxpayers in 2014, and while one might not be on speaking terms with their personal trainer anymore, they'll want to consult with a tax professional early and often to best comprehend how the changes will affect one's financial well being.

Individual Changes

For those beloved schoolteachers who buy supplies out of their pocket, the above-the-line deduction of $250 for schoolteachers expired in 2013 and is gone.

Underwater homeowners will get one final dunk as they sell their homes. After 2013, individuals with debt forgiveness on their personal residence will have phantom income to recognize. This means that, if one does a short sale on their home or personal residence—if the bank agrees to let them sell it for less than the remaining mortgage—they will have to include the amount of mortgage debt that was forgiven as income. Yes, they will have to pay taxes on the amount of the mortgage that they no longer have to repay.

For taxpayers who itemize deductions, sales tax will no longer be deductible in 2014. This is huge in the state of Texas – and other states – that do not have a state income tax. In the past, the IRS had income tables that calculated a set amount of sales tax for different brackets of income. Alternatively, intrepid individuals could track their sales tax receipts to calculate their deductible sales tax. To this table or tracked amount, sales tax paid on large purchases – such as cars, RVs, boats or home-building materials the individual personally paid for – could be added, resulting in a significant deduction. The deduction is gone in 2014.

Parents of college-going students historically have been able to take one of two credits for college-related expenses up to a certain expense limit, and subject to certain income limits. Alternatively, they could take a deduction for college expenses from their income, up to a certain threshold. The deduction is gone, and only the credits for expenses remain. This was a popular deduction that could be taken by parents with students in fancy private schools and local community colleges alike.

"The Affordable Care Act and its myriad tax provisions has really overshadowed these, and other, tax benefits that previously had been extended, but that expired at of the close of 2013," says Elizabeth Hosea, senior tax manager for Oman, Berry and Associates. "While we remain hopeful that Congress will act to extend these expired tax provisions, only time will tell…and it is likely that we won’t see a Congressional decision on this issue until after the November elections."

Businesses

In 2014, there is no longer a tax credit for research and experimentation. Additionally, the work-opportunity tax credit is no longer available in 2014. This allowed businesses that employed certain individuals, for example workers who have been unemployed for a certain period of time, to get credit based on the wages they paid up to a certain percentage. Finally, the 15-year cost recovery for leasehold improvements that businesses have enjoyed over the past several years is gone—the IRS is going back to a 39-year depreciable life for these assets.

Despite the hopes of big business, bonus depreciation is gone. Recently, companies that made U.S. investments and purchases that helped create jobs in America were given significant tax incentives to do so. Large trade associations and industry leaders had asked Congress to extend bonus depreciation, arguing that it was vital to fueling the U.S. economy and encouraging investment in America, but the tax benefit ended in 2013.

Another big blow to the business sector is a tax change in "Section 179 Depreciation." Last year, a company could buy a big fixed asset such as a piece of machinery for a manufacturing business, or a multitude of smaller assets, and write off the entire cost of the purchase—up to $500,000—in the first year, subject to income requirements. This made it advantageous tax-wise to buy larger items or many smaller items and expense them all in one year. It was a year-end tax planning opportunity utilized by many taxpayers over the past several years. The limit on expensing in 2014 is reduced significantly to $25,000, which is expected to have a sobering effect on spending for those types of fixed assets.

"With the continual tax law changes, it is really becoming imperative that taxpayers consult early and often with their CPA trusted advisor to avoid missed opportunities for tax planning and savings,”Hosea says.

For More Information on Oman, Berry and Associates, please visit www.omanberry.com or call 832-562-2000.