The days of relying on Congress to automatically renew expiring tax provisions—including those governing the tax-free IRA charitable rollover and bonus depreciation—might finally be coming to a close as the strain on the federal budget becomes more evident with each new round of budget negotiations. Unfortunately, this reality comes at a time when your clients need every tax break they can get, whether they are individual or small business clients. Individual clients may have one final chance to satisfy required minimum distribution (RMD) requirements without increasing taxable income. Small business clients, on the other hand, should be advised that the time to expand is now, as special expensing and bonus depreciation rules are also set to expire at year’s end. Regardless of your client’s situation, the list of expiring tax breaks is robust enough to grab everyone’s attention.
The Tax-Free IRA Charitable Rollover
The provision that allows taxpayers aged 70 1/2 and older to make tax-free charitable donations directly from IRA accounts is scheduled to expire at the end of 2013. For many taxpayers, this allows them to take their annual RMD from retirement accounts without the corresponding increase in taxable income.
The tax-free treatment of charitable donations from IRA accounts lets these taxpayers take an RMD of up to $100,000 per year ($200,000 per couple if each spouse has a separate IRA) without increasing their tax burden as long as the funds are transferred directly to a qualified charity (such as churches and hospitals—most private foundations and donor-advised funds are excluded).
Taking advantage of the tax-free IRA charitable rollover can prevent a taxpayer from exceeding the annual income thresholds for higher tax rates and limitations on deductions and exemptions in 2013. A tax-free rollover can also help clients avoid higher Medicare premiums and any taxes that may be imposed on Social Security payments based on income levels.
The downside of this strategy is that the donation cannot also be used as an itemized deduction if tax-free rollover treatment is elected. However, because the value of your clients’ itemized deductions will now be phased out if income exceeds the annual threshold level ($250,000 individual/$300,000 joint), electing tax-free treatment may now be more beneficial than ever, allowing your clients to reduce taxable income to enjoy the full benefit of their other itemized deductions.
Depreciation Breaks for Small Business Clients
Under IRC Section 179, small business clients are permitted to accelerate the deduction for the cost of depreciable assets of up to $500,000 (on purchases of up to $2 million) into the year of purchase, but this provision is also set to expire at the end of 2013. The special treatment generally applies to depreciable assets with a lifespan of less than 20 years. Absent Congressional action, the $500,000 figure will drop to $25,000 on January 1, 2014.
Further, the current bonus depreciation rules allow your small business clients to deduct up to 50% of the cost of certain property in the year it is placed into service (rather than spreading the deduction over a number of years). The rest of the purchase price is depreciated over the remaining life of the property. Unlike the Section 179 expensing provision, there are no dollar limits placed on bonus depreciation. However, bonus depreciation is similarly permitted only for property with a 20-year-or-less lifespan and certain computer software.
Therefore, small business clients with enough taxable income to offset the deduction in 2013 may want to consider accelerating large purchases into 2013 to take advantage of these expiring provisions.
The list of expiring provisions is much more lengthy than can be covered in a single article—the deduction for mortgage insurance premiums, the exclusion for forgiven mortgage debt, and the deduction for qualified tuition expenses are also set to expire at the end of 2013. Since these provisions may be more valuable than ever in reducing clients’ 2013 tax bills, it is important to examine the entire list of expiring provisions to make the most of them before they are gone.
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