2013 will mark the end of several major tax deductions, exclusions and credits that both personal and business filers have enjoyed for years. The Obama Administration has eliminated these breaks in an effort to increase revenue, a move that will pinch many taxpayers when they file their 2014 returns, particularly those in the middle and upper classes. Taxpayers, therefore, need to take advantage of these breaks this year while they are still available.
Here’s a list of the major deductions and credits that are disappearing:
- Educational expense deduction for teachers – The $250 ($500 for those who are married filing jointly (MFJ)) that educators who work in eligible primary or secondary institutions could take for unreimbursed expenses will be disallowed in 2014. This affects everyone who is eligible for these deductions, because it is an above-the-line deduction, which means that filers do not have to itemize in order to report them. Any expenses in excess of the $250/$500 limit, however, can be taken on Schedule A if the taxpayer itemizes, but this deduction is subject to the 2% floor on miscellaneous deductions.
- Mortgage cancelation exclusion – Created in the wake of the 2008 Subprime Meltdown, this exclusion allows homeowners who had any portion of their mortgage debt forgiven to escape having to report the amount forgiven as income, which is typically required for any other type of debt cancelation. Homeowners who had short sales or foreclosures in 2013 can exclude up to $2 million of mortgage debt that is forgiven. (Some are hopeful that this exclusion may yet be renewed for next year). The debt must have been incurred after Jan. 1, 2007, and not after Dec. 31, 2012, and be secured by the taxpayer's principal residence.
- State and local sales taxes – For the past few years, taxpayers who itemized their deductions have had the option of choosing either income or sales taxes that were paid to states as a deduction. Filers will no longer have this choice in 2014 and will only be able to deduct state income tax paid.
- Private mortgage insurance (PMI) – Homeowners who carry PMI on their mortgages will no longer be able to write off the cost of their premiums in addition to interest and taxes paid if they itemize their deductions. These premiums must have been paid or accrued before Dec. 31, 2013, and cannot be allocated to any time after that date.
- Credit for qualified electric vehicles – Taxpayers who purchased an eligible plug-in electric vehicle can receive a credit of up to $7,500 in 2013. The amount of the credit that can be taken varies according to the size of the battery pack and from one make and model to another. Those who lease one of these vehicles may also be eligible for this credit.
- Charitable IRA distributions – IRA holders who take mandatory minimum distributions and wish to make charitable contributions can still escape taxation on up to $100,000 of their IRA distributions by using them for this purpose in 2013. This is an excellent deduction that few taxpayers take.
- Deduction for transit expenses – Employees who pay for commuter expenses such as bus and train fare can take a $245 pretax deduction for these costs in 2013, but this will fall to $130 in 2014. The parking deduction of $245 will remain the same.
- Credit for energy-efficient home remodeling – Homeowners who make eligible remodeling changes to their homes that increase its energy efficiency - such as new insulation, door and window replacement and other upgrades that cut utility bills - can take a credit of up to $500 for expenses incurred. This credit is expiring in 2013 and it is not slated to be renewed.
- Donation of conservation property – Taxpayers who donate real capital gain property or easements on their property to qualified conservationist organizations will not be able to deduct the value of the donation after 2013. This year they can take a deduction of up to 50% of their charitable contribution base.
- Bonus depreciation – This deduction, through which businesses can take an additional deduction of up to 50% of depreciation on qualified business property and equipment, is set to expire in 2013.
- Enhanced Section 179 Expensing – Businesses that place more than $2.5 million worth of eligible property into use will face new dollar limitations on their expensing in 2014. The $500,000 limit on Section 179 expensing is set to expire at December 31, 2013, and set to decrease to only $25,000 in 2014.
- Work opportunity tax credit – Businesses will no longer be able to take a credit for hiring employees who belong to certain groups such as veterans or those receiving certain forms of government aid such as supplemental Social Security. The credit is for 40% of allowable wages paid up to varying dollar thresholds according to the type of employee hired. This credit is 25% if the employee has worked less than 400 hours.
- Research tax credit – Businesses will no longer be able to take a credit for business-related research expenses or fees paid to universities or other qualified research institutions for this purpose. The credit only applies to an increase in these costs that is above the average amount paid for research each year.
- Miscellaneous business incentives – There are many other tax credits for businesses that are expiring in 2013. The Indian Employment credit, the New Markets credit, the incentives for empowerment zones and several other deductions and credits will not be available in 2014 and beyond.
- Miscellaneous energy-related tax credits – A host of lesser-known tax credits for individuals are also expiring, including credits for property that is used to refuel alternative fuel vehicles, credits for biodiesel and renewable fuels, and credits for manufacturing energy-efficient homes and appliances. Credits relating to biofuel production and ethanol are also disappearing.
- Qualified tuition and related expenses - This above-the-line deduction is for qualified educational expenses paid during the tax year. The maximum deduction is $4,000, and is subject to phase-outs. This provision will expire on December 31, 2013.
Take Action Now
Taxpayers who may be eligible for any of the incentives listed above should not wait until the last minute to incur their expenses or perform the necessary qualifying transactions. According to Paul McNeil, MBA, EA, and owner of Ferguson Tax & Accounting in Lawson, Missouri: “The holidays always make it harder for customers to concentrate on their tax situation. Like everyone else, they are concerned with getting their shopping done and visiting their loved ones. But many of these deductions are likely not going to come back any time soon. It is unlikely that Congress will take any further action on a tax bill in 2013 that will enact any new provisions or changes. According to one expert, this will not occur until late 2014, at which time, of course, Congress could make retroactive changes that could affect 2013.”
IRA owners need to take their distributions as soon as possible, and homeowners who might qualify for debt forgiveness need to start the short sale or foreclosure processes now. Those who are eligible for credits based upon expenditures need to make their purchases immediately. Perhaps any big ticket items that have sufficient sales tax should be purchased before the end of 2013, assuming that this will be more than state and local taxes paid and that itemization is possible. Small businesses that are planning on purchasing equipment that currently qualifies for the $500,000 limit would also be wise to accelerate their purchase schedule to take advantage of the higher limit while it is available.
The news isn't all bad for filers; the Affordable Care Act has also created two new tax credits that will become available in 2014: the Premium Assistance Tax Credit and the Small Employer Health Insurance Credit, both of which help taxpayers to pay for their health insurance premiums under Obamacare. For more information about tax incentives that are expiring and how you can minimize your own tax bill, visit the IRS website or consult your tax or financial advisor.