Great news for American taxpayers: many tax deductions, credits and incentives from 2013 have been extended to cover 2014! On December 19, President Obama signed the Tax Increase Prevention Act of 2014, which includes a one-year retroactive extension for many of the temporary tax provisions that had expired December 31, 2013. The Joint Committee on Taxation estimates this package will cost $41.6 billion over 10 years.
There are dozens of renewed provisions, but these three items are particularly relevant to mobility and relocating employees:
1. Exclusion of certain discharged mortgage debt from gross income
This exclusion protects homeowners from being taxed on the forgiveness of mortgage debt incurred when acquiring their homes (up to $2 million or $1 million if married and filing separately). Known as “acquisition indebtedness,” this covers debt gained during the purchase of, construction on or other substantial improvement to the principal residence of the homeowner. The exclusion also includes refinancing of such indebtedness as long as the amount of debt resulting from such refinancing does not exceed the amount of the refinanced debt.
The basis of the individual's principal residence is reduced by the amount excluded from income. Without this tax break, taxpayers are normally required to pay income taxes on forgiven debt.
This was originally enacted in the Mortgage Forgiveness Debt Relief Act of 2007 and previously extended in both 2008 and 2012.
2. The itemized deduction for the cost of mortgage insurance on a qualified personal residence
Mortgage insurance premiums can still be deducted thanks to this extension, which is a valuable deduction for those transferring employees who are purchasing homes. If the taxpayer’s Adjusted Gross Income (AGI) exceeds $100,000 ($50,000 if married and filing separately), however, the deduction is phased out 10% for each $1,000 over that $100,000 (or $50,000). That means a taxpayer whose AGI exceeds $110,000 (or $55,000 if married and filing separately) will not receive this deduction.
This has been part of tax code since 2007.
3. Itemized deduction for state and local general sales taxes
Finally, the Act extends the ability to deduct state and local sales taxes. This deduction is of particular value to transferring employees in the nine states that have no or a very limited income tax. The option to deduct state and local sales taxes instead of deducting state and local income taxes is significant for those who live in no-income tax states like Florida and Texas. Because it is available to all taxpayers as an option, though, it may also benefit other taxpayers whose sales tax bill for the year exceeds their state income tax. For example, those in low-tax jurisdictions or who have incurred large taxable expenditures that year may take advantage of this.
When filing taxes for 2014, taxpayers should make sure to take advantage of these extensions. However, Americans should keep in mind that these tax breaks are still considered temporary, as Congress elected to extend the tax breaks for only one year. They will have to decide how these deductions and credits will be treated for 2015, when they may, again, be extended temporarily for one or two years or possibly approved as permanent tax breaks. Lexicon Relocation will continue to monitor the progress and keep you updated on future tax decisions and how they may affect relocating employees.
Ernst & Young
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