Expired Tax Breaks, or Not for 2014?

Dec 2014

The end of 2014 is fast approaching, and with it is another tax filing season. With our current administration in Washington, it seems more and more common to have to wait until the very last moment to find out of tax breaks really have expired or if they will be renewed, and this year is no different.  I’ve listed some tax breaks that are currently dead, but may get a new life, and what it could mean for your tax return if they are revived:

Qualified Charitable Donation (QCD) from your IRA: If you are 70 ½ or older and have an IRA, you must take a minimum required distribution (MRD) from your IRA, which is taxable income to you. Over the past few years, if you made a charitable donation directly from your IRA ($100k maximum), you could count that towards your MRD, plus it would not be taxed. This potential tax break ended on 12/31/13. It originally was a temporary tax provision in the Pension Protection Act of 2006, and kept being temporarily extended, to the current expiration of 12/31/13. If you make a QCD this year and the law is revived, you have less taxable income. Unfortunately, there is no guarantee the law will be re-instated. If congress does not bring this provision back, you will owe taxes on your entire withdrawal from the IRA. However, you could deduct the contribution as an itemized deduction, if you itemize.

Sales Tax Deduction: Another popular provision that expired on 12/31/13 was the sales tax deduction. If you itemize, you can choose to take your state income taxes that you paid as a deduction or a sales tax deduction. For those in the workforce, the income tax deduction was usually higher, but for those who are retired with no earned income or those who live in a state with no state income tax, this sales tax break gave them additional deductions from their gross income. If this tax break is not revived, you will owe more in federal income taxes, as you will have less deductions (if all else remained the same on your tax return).

Higher Education Tuition and Fees: This deduction allowed you to take up to $4,000 in educational expenses from your Adjusted Gross Income (above-the-line deduction) prior to calculating your taxable income. If you did not qualify for the educational credits, you may be out of luck to deduct any educational expenses if this tax break is not brought back.

Homeowner’s Debt Forgiveness: The Mortgage Forgiveness Debt Relief Act of 2007 allowed debt forgiven by banks or lenders to be excluded from taxable income (up to $2 million dollars) for the purchase or improvement of your primary residence. This tax law also expired on 12/31/13. If not revived, debt forgiven will have to be reported as taxable income. Depending on the amount, this could result in a big tax hit for many taxpayers who finalized loan modifications, short sales or foreclosures in 2014.
With a new Republican-led congress set to take charge in 2015, our current Congress could drag deal-making on the above tax breaks right to the bitter end. If no deal gets done, you will owe more taxes if any of these breaks applied to you. If changes do get enacted, it could delay the start of tax season, as the IRS has to scramble to get tax forms revised.

As I write this, a temporary tax break package for 2014 was passed through the House, so let’s see what happens in the Senate. If there is any good news to be had, there is talk that some of these tax provisions could be made permanent, which would be a good thing. But I wouldn’t hold my breath on that until our new Congress takes charge next year. And who knows, if there is a changing of the guard in 2016, maybe we will see some real prosperous changes ahead!

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