Expiring Tax Deductions

While many of the usual temporary tax deductions and credits were made permanent in 2012, there’s still a large number that weren’t, and that are currently slated to expire or change significantly at the end of the year.

All of the items in this section expire December 31, 2013.

Educator’s Expenses, IRC Sec. 62(a)(D)

What it is now: Grades K–12 teachers, instructors, counselors, principals and aides can deduct up to $250 of out-of-pocket costs above the line.

Cancellation of Debt — Mortgage Debt, IRC Sec. 108(a)(1)(E)

What it is now: Individuals can exclude up to $2 million ($1 million for married filing separately) of COD income from qualified principal residence indebtedness that is canceled because of their financial condition or decline in value of the residence.

Mortgage Insurance Premiums Deduction, IRC Sec. 163(h)(3)

What it is now: Taxpayers with AGI no greater than $109,000 can treat qualified mortgage insurance premiums as home mortgage interest.

Personal Energy Property Credit, IRC Sec. 25C

What it is now: A credit (subject to a $500 lifetime cap) is available for qualified energy efficiency improvements and expenditures to a taxpayer’s principal residence.

State and Local Sales Taxes Deduction, IRC Sec. 164(b)(5)

What it is now: Individuals can elect to deduct state and local general sales taxes instead of state and local income taxes.

Tuition and Fees Deduction, IRC Sec. 222

What it is now: Individuals can claim an above-the-line deduction for tuition and fees for qualified higher education expenses.

 All of the following have major changes at the end of 2013 as well.

Qualified Conservation Contributions, IRC Sec. 170(b)(1)(E)(vi), 170(b)(2)(B)(iii)

What it is now: The deduction limit for qualified conservation contributions by individuals is increased from 30% of AGI to 50% of AGI (100% of AGI for qualified farmers and ranchers) and the carry-forward period for qualified contributions in excess of the AGI limit is 15 years.

What happens in 2014: No special rules for qualified conservation contributions, so they are subject to the 30%-of-AGI limit and have a five-year carry-forward period.

Qualified Small Business Stock Gain Exclusion, IRC Sec. 1202(a)(4)

What it is now: QSBS acquired Sept. 28, 2010–Dec. 31, 2013 qualifies for 100% gain exclusion (if the holding period is met). For stock acquired during that period, the following rules also apply: 1. None of the 60% gain exclusion rules for QSBS issued by a QBE apply. 2. No portion of the excluded gain is added back to determine alternative minimum taxable income.

What happens in 2014: Gains on QSBS acquired after Dec. 31, 2013, qualify for a 50% gain exclusion [60% for QSBS issued by a qualified business entity (QBE)]. Also, a percentage of the excluded gain is an AMT preference item.

Qualified Charitable Distributions, IRC Sec. 408(d)

What it is now: Taxpayers over age 70-1/2 can make tax-free transfers from an IRA directly to a charity. Any amounts so transferred count toward the individual’s required minimum distribution, but are not deductible as charitable contributions.

What happens in 2014: Income exclusion for QCDs expires on Dec. 31, 2013

Qualified Leasehold, Restaurant and Retail Improvement Property, IRC Sec. 168(e)(3)(E)

What it is now: Qualified leasehold improvements, qualified restaurant property and qualified retail improvements are assigned a 15-year (straight-line) recovery period.

What happens in 2014: All are assigned a 39-year (straight-line) recovery period.

Section 179 — Deduction Limit, IRC Sec. 179(b), (c) and (d)

What it is now: The Section 179 deduction and qualifying property limits are $500,000 and $2,000,000, respectively. In addition, off-the shelf computer software qualifies for Section 179 expensing and taxpayers can amend or irrevocably revoke a Section 179 election.

What happens in 2014: After 2013, the deduction and qualifying property limits are $25,000 and $200,000, respectively. Off-the-shelf software does not qualify for Section 179 expensing and the election generally is irrevocable with IRS consent.

Section 179—Qualified Real Property, IRC Sec. 179(f)

What it is now: Taxpayers can claim the Section 179 deduction on up to $250,000 of qualified real property (qualified leasehold improvements, qualified restaurant property and qualified retail improvement property).

What happens in 2014: Qualified real property is not eligible for Section 179 expensing.

Special (Bonus) Depreciation, IRC Sec. 168(k)

What it is now: 50% special depreciation is allowed for qualified property additions placed in service in 2013. (Note: For 2013, the Section 280F limit on depreciation for passenger autos is also increased by $8,000 for qualified property and no AMT adjustment applies to property for which the special depreciation allowance is claimed.)

What happens in 2014: Special deprecation only available for long production-period property and certain aircraft.

 There’s more!

Among the other provisions that are expiring are:

• The Differential Wage Payment Credit

• The tax credit for new energy-efficient homes

• The tax credit for 2- and 3-wheeled plug-in electric vehicles

• The research credit for the cost of increasing research activity

• The domestic producer deduction for Puerto Rican activities

And the provisions that are changing include:

• The tax credit for alternative fuel vehicle refueling property

• The Sec. 170(e)(3) donation of food inventory deduction

• The monthly exclusion for transit passes and vanpooling

• The Sec. 374(d)(7) S corp built-in gains provision

• The Sec. 1367(a)(2) S corp shareholder basis adjustment for charitable contributions provision

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