It wouldn’t be Christmas without lights on Main Street, cookies for Santa, packages from Amazon. And what’s Christmas without year-end tax legislation? Never to disappoint, Congress passed and President Obama signed into law the Tax Increase Prevention Act (TIPA) on December 19.
For the most part TIPA is nothing new, and in fact the “extenders” as they are known in the legislation apply to tax deductions you may not have even realized had expired at the end of 2013, but now are retroactively renewed for 2014. There were about 50 of them; I’ll hit the most reader relevant ones here.
Good news for teachers. You can continue to deduct the first $250 of expenses directly on your tax return without having to clear the 2% hurdle on your miscellaneous itemized deductions. At a 25% tax rate that’s a savings of $62.50.
For taxpayers who either live in a state without an income tax, or pay little or no state income tax whether due to low income or non-taxable income (such as pension income), the alternative deduction for sales has been helpful and was renewed for 2014. For most taxpayers using this method, it provides for the deduction of either an allowance for sales tax based on income, or actual sales tax paid during the year. For the allowance method, you can add actual sales tax paid for purchase of a motor vehicle, boat, aircraft, or construction of a home or home addition (with some restrictions). For a married couple with income between $30,000 and $40,000 with no special purchases, the deduction allowance is $488. Not tremendous, but likely to yield $60 or so in tax savings for those in the 15% bracket.
The mortgage insurance premium (PMI) deduction was also extended for 2014. For someone paying $100 a month in PMI in the 25% bracket, that’s a savings of $300 for the year.
In the big savings category, it’s good to see the exemption from tax of personal residence debt forgiveness be continued, at least for 2014. Without that extension, folks who sold their home in a short sale this year would have been hit with a hefty tax bill; adding insult to injury. Let’s say a home sold in a short sale for $100,000 but you owed $140,000. Had the legislation not been signed, that $40,000 forgiven would be taxed as income. For an average taxpayer in the 15% bracket, that’s a tax bill of $6,000. It’s also quite possible the $40,000 would lift the marginal tax rate to 25%, meaning part of the income would be taxed at the higher rate and yield an even bigger bill. Readers who either took the gamble and sold short in 2014 or had no choice for the timing can breathe a sigh of relief.
Taxpayers with kids in college who are not eligible for the American Opportunity Tax Credit often can still qualify for the $4,000 tuition deduction. That’s another deduction extended in TIPA.
If your employer offers a transit benefit plan, where you can receive tax free reimbursement of qualified commuting costs (parking and mass transit), you likely noticed the monthly reimbursement limit dropped from $245 to $130 for transit in January, while the $245 parking limit went up to $250. TIPA raised that $130 for transit up to $250, retroactively. That means if you ran all of your commuting costs through payroll deduction, including the amounts that were not reimbursed, you will receive a retroactive reimbursement. Since again we do not know if this will be extended into 2015, it is smart to continue (or start) to run all costs through the program in case there is another retroactive extension in 2015.
So far we’ve looked at extensions that really are too late to plan around; they will be an extra bonus if you qualify. But there still are a few days left to take advantage of at least two provisions: the IRA charitable rollover and energy efficient savings.
For those looking to do year end giving and have IRA funds available to do it with, the IRA charitable rollover can save steps and money. This allows you to make a donation of up to $100,000 from your IRA directly to a charity. It’s only for taxpayers over age 70 ½. Making a donation this way can satisfy your required minimum distribution, and also avoids adding income on your tax return, which can have an adverse effect on the taxation of Social Security benefits and the minimum you must reach before deducting medical expenses or miscellaneous itemized deductions, not to mention taxpayers who don’t normally itemize may miss out on the charitable deduction entirely.
Did you get a Home Depot gift card for Christmas? Might want to use it for insulation or a new energy efficient door. The residential energy tax credit was also extended through 2014, for items such as windows, insulation, doors, central air, heat pumps, furnaces, and water heaters. For windows, insulation, and doors the credit is limited to 10% of the cost excluding labor (with a maximum of $200 for the portion that is windows), and just $150 for central air, heat pumps, furnaces, and water heaters. But wait- after all of that, you have a lifetime limit of $500 in credits cumulative from 2006 forward. If you claimed that much already in prior years, you’re out of luck for this year.
Now for something completely different: the TIPA legislation also created a tax benefit. The ABLE Program, or Achieving a Better Life Experience, is a long overdue benefit for families of the disabled. It allows families to save a child’s Social Security funds in an account similar to a 529 college savings account that can be used tax free for qualified expenses later, without jeopardizing benefits now. The plight of special needs families navigating the financial system is deserving of a separate article.
What does all of this mean for planning in 2015? Not a whole lot at this point, unfortunately. There is talk-again- of permanent reform and long term extensions, but pardon my cynicism; I’ll believe that when I see it.