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Tax Developments: Individual Impacts (First Quarter of 2014)

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Minnesota

The Legislature passed two omnibus tax bills during the 2014 Session.  The second, H.F. 3167, was adopted at the end of the Session, on May 19.  The second omnibus bill included many technical changes to the property tax and sales/use tax structures, impacting primarily property tax administration, and compliance for local government and businesses.  For individuals, changes include an enhanced agricultural homestead market value credit, moving forward the requirements for re-entering into an income tax reciprocity agreement with Wisconsin, a 3% increase in the homestead credit refund based on taxes payable in 2014, a 6% increase in the renter property tax refund based on rent paid in 2013 (both for refunds being paid in 2014), and a new reading credit for up to 75% of expenses incurred for the treatment of a reading disorder.  For more detail, you can access the conference committee summary at www.house.leg.state.mn.us/hrd/bs/88/hf3167.pdf

Here is a link to the MN Dept of Revenue website (click on the lower right of the web page for tax law updates): www.revenue.state.mn.us/Pages/default.aspx

On March 21 the Minnesota Legislature passed a federal conformity bill and Governor Mark Dayton signed it (HF 1777, Session Laws Chapter 150). Some of the changes in the bill affect tax year 2013. The legislation conforms Minnesota’s individual income tax and corporate franchise tax on an ongoing basis retroactively to tax year 2013 to most federal changes enacted since April 14, 2011, with conformity delayed until tax year 2014 for the increased standard deduction for married filers. The legislation also does not conform Minnesota law to the increased income thresholds for the limitation on itemized deductions and for the phase out of personal and dependent exemptions.

If you filed a 2013 individual return prior to April 2, 2014, and the return is affected by the retroactive changes, you will receive notification by June 27 from the Minnesota Department of Revenue, and should not do anything until you are notified. One of three things will happen with the return.  The department:

  1. Will fix the return and send you a letter explaining how it was fixed.
  2. Will send you a letter requesting more information and use that information to fix the return.  You will receive a letter explaining how it was fixed.
  3. Will not be able to fix the return.  If this happens, you will receive a letter explaining the return can’t be fixed.  If this happens, you will need to file an amended return to get the benefits of the law changes that apply to you.

The gift and estate tax changes include the following:

  1. Repeal of the Minnesota gift tax retroactive to June 30, 2013.
  2. The exemption stays at $1 million for 2013, and then is phased in as follows -  $1,200,000 for estates of decedents dying in 2014; $1,400,000 for estates of decedents dying in 2015; $1,600,000 for estates of decedents dying in 2016; $1,800,000 for estates of decedents dying in 2017; and $2,000,000 for estates of decedents dying in 2018 and thereafter.
  3. Decedent’s estates will include federal adjusted taxable gifts made within three years of death.
  4. Adopted stand-alone Minnesota estate tax rates and brackets, meaning they get rid of the “bubble” marginal rates for estates just over the exemption.  For 2014, the tax rate starts at 9% for the excess over $1.200.000, and increases to a top state rate of 16% on the portion over $10.1 million.
  5. Excludes publicly- traded investments from the pass-through entity rules that tax non-residents on Minnesota real estate and tangible personal property owned by entities in which the decedent had an interest.
  6. Authorizes a QTIP marital deduction election to be made for Minnesota estate tax purposes regardless of whether the election is made for federal estate tax purposes.
  7. Provides that qualified works of art do not have a Minnesota situs under the estate tax.
  8. Clarifies that the 3-year look back for the new definition of the Minnesota taxable estate applies only to taxable gifts made after June 30, 2013.

Federal

IRA rollovers to be limited.  A law limits the number of IRA rollovers that can be made in any 1-year period to one. Recently, the Tax Court held that the limit applies not to each separate IRA an individual may own, but to all of his or her IRAs. It reached this result even though the IRS had indicated in proposed regulations and tax publications that the limit applies to each IRA. Thus, an individual with three IRAs could make three rollovers in a 1-year period under the IRS guidance but only one under the Tax Court decision. After considering the matter, the IRS has announced that it will adopt the more restrictive view of the Tax Court. However, the new rule won't apply to any rollover that involves a distribution occurring before 2015. The IRS emphasized that an IRA owner will continue to be able to transfer funds from one IRA trustee directly to another as frequently as desired. Such transfers are not rollovers and thus are not subject to the limit.

Popular expired tax breaks may be revived.  A number of popular tax breaks expired at the end of 2013. For individuals, these expired items include, among others, the deduction for state and local sales taxes, the deduction for qualified tuition and related expenses, tax-free distributions from IRAs for charitable purposes, the deduction for mortgage insurance premiums, the exclusion for discharged principal residence debt, and the provision allowing a higher exclusion for employer-provided transit benefits. Work has begun in Congress to revive these provisions and extend them through 2015.

Luxury auto depreciation limits for 2014.  Under special "luxury automobile" rules, a taxpayer's otherwise available depreciation deduction for business autos, light trucks, and minivans is subject to additional limits, which operate to extend depreciation beyond its regular period. The IRS has released the inflation-adjusted depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2014. The depreciation deduction limits for 2014 are the same as in 2013 for a passenger auto, while the limits are $100 higher for a light truck or van for the first three years and the same for years after the third year. The first-year depreciation limit is $3,160 for autos and $3,460 for light trucks or vans first placed in service in 2014. The bonus depreciation rules for additional first-year depreciation for autos, light trucks and vans, under which the regular first-year dollar limit for eligible vehicles was increased by $8,000, only applied to vehicles placed in service before Jan. 1, 2014. But there is a chance that Congress may retroactively revive bonus depreciation to the beginning of 2014 and extend it through 2015.

Maximum auto/truck values for cents-per-mile valuation.  The IRS has released the 2014 maximum fair market values for employer-provided autos, trucks and vans, the personal use of which can be valued for fringe benefit purposes at the mileage allowance rate. An employer must treat an employee's personal use of an employer-provided auto as fringe benefit income and value it using one of several methods. One of the permitted methods allows an employer to value personal use at the mileage allowance rate (56¢ per mile for 2014). However, this method may be used only if the auto's fair market value does not exceed $12,800, as adjusted for inflation. The inflation-adjusted figures for vehicles first made available to employees for personal use in 2014 are $16,000 for autos (same as for 2013) and $17,300 for trucks and vans (up from $17,000 for 2013).

 

Relief from individual mandate for certain limited health coverage.  The health care law contains an "individual mandate"-a requirement that most U.S. citizens and legal residents maintain minimum essential health insurance coverage (i.e., government-sponsored programs such as Medicare, Medicaid, Children's Health Insurance Program; eligible employer-sponsored plans; plans in the individual market; certain grandfathered group health plans; and other coverage as recognized by Health and Human Services) or be subject to a tax penalty for 2014 and later years. The IRS has provided relief from the penalty for months in 2014 in which individuals have, under Medicaid and chapter 55 of Title 10, U.S.C. (medical and dental care for members and certain former members of the uniformed services, and for their dependents), limited-benefit health coverage that is not minimum essential coverage.

Proposed regulations on the individual mandate.  The IRS has issued proposed regulations on the individual mandate to carry health insurance. The regulations include additions to the list of government-provided health plans that don't provide minimum essential coverage and a liberalization of the hardship exemption rules under which an individual who fails to carry coverage can escape the penalty.

Small estates get more time to transfer unused exclusion to surviving spouse.  The estate of a decedent who is survived by a spouse may make a portability election. It allows the surviving spouse to apply the decedent's unused exclusion amount to the surviving spouse's own transfers during life and at death. The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE, amount. In general, the election must be made within nine months of the decedent's death on the estate tax return, even if the estate is below the exclusion amount so that a return normally would not be required. Because many estates below the threshold did not file, the IRS provided a simplified method to obtain an extension of time to elect portability. This method only applies for an estate of decedent who died after Dec. 31, 2010 and on or before Dec. 31, 2013. The decedent must have been a U.S. citizen or resident on the date of death. In addition, an estate tax return must not have been required because the size of the estate was below the filing threshold. If these and other requirements are met, the IRS will grant an automatic extension to make the election on an estate tax return filed on or before Dec. 31, 2014. Taxpayers failing to qualify for this relief may request an extension of time to make the election by requesting a letter ruling.

New IRS guidance on virtual currency.  The IRS has provided guidance in the form of frequently asked questions (FAQs) on the tax treatment of virtual currency, such as Bitcoin. This guidance treats virtual currency as property for U.S. federal tax purposes. Thus, the general tax principles that apply to property transactions apply to transactions using virtual currency.

myRA.  By executive order, President Obama has directed Treasury to adopt a “starter” savings account program for employees of small businesses.  The program will be implemented later in 2014 and will look similar to the Roth IRA accounts.  Treasury has posted preliminary information about these accounts at its treasurydirect.gov website.  Some of the features will include (1) as little as $25 to open an account, (2) add to savings through regular payroll direct deposit, (3) no fees, (4) earn interest at the same variable rate as government securities used by the federal employees Thrift Savings Plan, (5) not be limited to one employer (the account will be portable), (6) contributions can be withdrawn tax-free, (7) earnings can be withdrawn tax-free after five years if the saver is 59 ½, and (8) account holders can build savings for thirty years or until the myRA reaches $15,000.