A number of income tax provisions are slated to expire at the end of this year. Many of these tax breaks have been extended in the past, so it's possible Congress could extend them again over the next few months - but you never know.
1. Teachers' classroom expense deduction. Teachers can deduct up to $250 worth of unreimbursed classroom expenses. This is an above- the-line deduction, which means teachers can take this deduction even if they don't itemize other deductions.
Any classroom expenses in excess of the $250 can be deducted as an employee business expense, which is a miscellaneous itemized deduction subject to threshold of 2 percent of adjusted gross income. The ability to deduct these costs as an employee business expense will continue into 2014.
2. Exclusion of cancellation of indebtedness on principal residence. Normally when a taxpayer's debt is forgiven, the taxpayer realizes income from cancellation of indebtedness. However, if your principal residence is foreclosed or sold in a short sale before the end of 2013, a special relief provision of the Internal Revenue Code allows you to exclude up to $2 million of debt forgiveness income.
The special provision was in response to the myriad foreclosures that came out of the mortgage and housing market fiasco. If your home is on the verge of a foreclosure or short sale, you might want to nudge along the process before the end of the year to ensure you're eligible for this tax break.
3. Transit benefits. In 2013, employees can spend up to $245 pretax per month on transit benefits such as rail passes, which is on par with the $245 pretax they can spend on parking. The benefit had to be provided through employer payroll.
That parity is scheduled to sunset at the end of this year so that the benefit for public transportation would drop to $130 per month pretax while higher parking benefits will remain.
4. Mortgage insurance premiums. Homeowners who have less than 20 percent equity typically pay for private mortgage insurance (also known as PMI). Those premiums were deductible in 2012 and 2013, but that provision is scheduled to expire at the end of 2013.
5. IRA distributions to charity. Under this provision, those who are 70 1/2 or older can give away as much as $100,000 a year from their individual retirement accounts directly to eligible charities without having to include any of the transfer as part of their gross income. The transfer must be made directly from the IRA to the organization.
Transfers count toward that person's required minimum distribution for the year. The provision can keep income low enough for an individual to qualify for other tax breaks that might have phase-out limits.
Taxpayers can't deduct any such transfers as charitable donations on their federal income-tax returns. Even so, this provision can be a tax-efficient technique.
Since transfers aren't counted as part of adjusted gross income, this provision helps prevent the loss of itemized tax deductions, phase-out of personal exemptions or credits, additional portions of Social Security being taxable or even the imposition of the new 3.8 percent surtax on investment income.
Distributions from traditional and Roth IRAs are the only ones that qualify. Distributions from employer-sponsored retirement plans, including simple IRAs and simplified employee pensions (SEPs), aren't qualified charitable distributions; nor are distributions from Keoghs, 403(b) plans, 401(k) plans, profit sharing and other plans.
Consider doing a two-step to qualify: (1) Roll over a nonqualified pension plan into a qualified IRA. (2) The qualified IRA then makes the distributions directly to the charity.
More than 65 percent of taxpayers take the standard deduction; thus, they have no charitable deduction. However, a tax-free distribution from an IRA is the equivalent of a charitable deduction. This is an important technique for nonitemizers.
6. State and local sales tax. If you pay state or local income tax, you can deduct that amount paid to your state from your federal income if you itemize. If you live in a state such as Florida or Texas that doesn't have an income tax, you can't take advantage of that deduction.
A provision was added to the tax code that allows you to deduct state sales tax if your state doesn't have an income tax or if the amount you paid in sales tax was higher than income tax. You cannot deduct both sales and state income tax.
You can use the IRS estimate of sales tax paid based on your income and the state you live in to calculate what would be a normal sales tax deduction, and then you can add to that certain big- ticket items such as a car or boat. The option to deduct sales tax goes away at the end of 2013.
7. Electric vehicles. Consumers who buy a qualified electric plug- in vehicle might be eligible for a tax credit of up to $7,500 depending on the size of the car's battery pack. For instance, owners of the Chevy Volt and Nissan Leaf might be eligible for a $7,500 credit, while owners of the Ford Fusion Energi and C-MAX Energi are eligible for a $3,750 credit. Some lessees might be eligible for this credit as well. This credit expires at the end of 2013.
8. Remodeling your home for energy efficiency. Homeowners who remodel for energy-efficiency can take a credit of up to $500 over their lifetime. This provision has existed since 2006, so many taxpayers already have used the credit. There is a separate $500 credit available for energy-efficient appliances. If you haven't used the credit yet, there's still a month left to install new windows or buy an energy-efficient air conditioner.
(c) 2013 ProQuest Information and Learning Company; All Rights Reserved.
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