As of December 31, 2013, the U.S. Congress allowed over 50 tax credits, deductions and other tax breaks to expire, eliminating benefits for everyone, from teachers and students to homeowners and businesses. While this will not impact your 2013 taxes, you might be in for some sticker shock when tax planning for 2014.
Although Congress has, in the past, acted to extend similar provisions, it would be difficult to predict its course of action, especially in a mid-term election year. Senate Finance Committee Chairman Ron Wyden said he hopes to strike a deal to renew the expired tax credits and deductions; however, it still needs to go through the House and be acted upon before November. Keep your fingers crossed, hope for the best, but plan for the worst.
Some of the commonly-used tax breaks that expired include:
- Tuition and fees: Students or their parents will no longer be able to take a maximum $4,000 deduction for tuition and required fees to attend an institution of higher education. Although the above-the-line tuition and fees deduction expired, other education-related tax breaks still available for 2014 include an above-the-line deduction for student loan interest as well as the American Opportunity and lifetime learning credits.
- Teachers’ expenses: Elementary and secondary school teachers can no longer claim a $250 above-the-line deduction for unreimbursed classroom school supplies paid out of pocket such as notebooks, pens and paper. Such expenses, however, may still be claimed as a miscellaneous itemized deduction.
- State and local sales tax: In deducting state and local taxes as an itemized deduction, taxpayers were given the option of claiming either sales taxes or income taxes. Although the income tax deduction remains intact, those who particularly benefitted from being able to deduct sales tax include taxpayers who reside in states with no income tax like Florida or Texas, retirees who pay little or no state income tax, and those who made a significant purchase such as a vehicle.
- Mortgage debt forgiveness: In general, forgiveness of debt results in taxable income. During the housing crisis, however, Congress passed legislation that allowed homeowners who lost their homes or who owed more on the home than its value, to exclude up to $2 million in mortgage forgiveness from taxable income.
There is one important exception that extends beyond 2013. In cases of insolvency (defined as a condition whereby a taxpayer’s total debt exceeds his or her total assets), the mortgage forgiveness would not be considered taxable income.
Unfortunately, for those who are solvent but still owe more on their mortgages than their homes are worth, securing a loan modification from their bank or executing a short sale of their home, could cost thousands of dollars more in taxes than if the modification were completed before 2014.
- Mortgage insurance premiums: Congress allowed the deduction for home mortgage insurance premiums to expire at the end of 2013. Typically, lenders require mortgage insurance if more than 80% of a home’s value is financed. Previously, homeowners could claim an itemized deduction for mortgage insurance premiums as mortgage interest.
- Energy-efficiency: Over the past three years, taxpayers could receive a cumulative lifetime maximum tax credit of $500 ($1,500 for 2009 and 2010) for making energy-efficient home improvements such as the installation of new windows, doors, roofs, insulation and more efficient heating, cooling and hot water systems. This credit was no longer available after 2013.
Nevertheless, tax credits for the following remain intact:
- Geothermal heat pumps
- Small residential wind turbines
- Solar energy systems
- Residential fuel cell and micro turbine system
- Electric Vehicles (EV): Although taxpayers can still take advantage of a $7,500 tax credit for electric car purchases, Congress allowed the following to expire on December 31, 2013:
- A $1,000 tax credit for homeowner alternative vehicle refueling, including the purchase of a 240-volt Level 2 EV charging station
- A $2,500 tax credit that could be used to offset up to 10 percent of the purchase price of a two or three-wheeled EV
- A business tax credit of up to 30% of the cost of an EV charger up to $30,000
- Commuter costs: In 2013, employer-provided transit benefits were excludable from employees’ taxable wages up to $245 a month. This includes those who take buses and trains to commute to work. The exclusion applies whether an employer provided the transit benefits out of its own funds or through a salary reduction arrangement. Beginning in 2014, the monthly exclusion has been reduced to $130. A similar exclusion that exists for qualified parking benefits has increased to $250 for 2014 ($245 in 2013).
- Donations through your IRA: Retirees older than 70 1/2 have traditionally been able to make non-taxable charitable donations of up to $100,000 directly from their IRA accounts. The benefit of this Qualified Charitable Distribution was that although it counted towards the taxpayer’s minimum distribution, it was excluded from income. Excluding it from income had the potential benefit of lowering the amount of taxable social security benefits as well as lowering the thresholds of itemized deductions such as medical and miscellaneous expenses.
The expiration of this tax break in 2014 will require seniors to first receive the distribution and then make the donation. This will trigger taxable income thereby, nullifying the benefits described above.