Financial News & Research
In the waning days of last year, Congress passed the Tax Increase Protection Act of 2014 (TIPA), extending a package of tax breaks that officially expired after 2013. This new federal tax legislation, promptly signed into law, applies retroactively to January 1, 2014. But the tax reprieve was fleeting: All of the extended tax provisions expired again on December 31, and now Congress will have to decide whether to extend them for 2015 and beyond.
Nevertheless, you still can maximize the tax benefits of TIPA on your 2014 tax return. Consider these seven prominent tax breaks that were included:
1. Tuition-and-fees deduction. This is available to taxpayers who spent money on college tuition and fees in 2014, and you or your children may be able to claim it even if you don't itemize deductions. However, it is phased out at higher income levels based on modified adjusted gross income (MAGI) for the year. The deduction is either $4,000, $2,000, or zero. Note that you can't take this deduction if you claim either of two federal tax credits for higher education.
2. State sales tax. Instead of deducting state and local income taxes on your federal return, you can elect to write off state sales tax that you paid in 2014. This tax return option is especially valuable to residents of one of the seven states which have no income tax, and it also can help those whose states have relatively low income tax rates. You can deduct the amount of sales tax you actually paid or you can use an IRS calculator that factors in where you live and your income level. If you use the table you also can add in what you paid on big-ticket items such as cars and boats.
3. IRA transfers to charity. If you are age 70½ or over, you won't be taxed on amounts you transfer directly from an IRA to a qualified charity. Money you withdraw from an IRA for other purposes will be taxed as income; in this case, not being taxed on the distribution takes the place of the charitable deduction you'd get if you made a contribution from outside the IRA. In addition, any amount you transfer to a charity - up to a limit of $100,000, or $200,000 for a married couple - may count as part or all of the annual required minimum distribution (RMD) you must take from your IRAs beginning at age 70½.
4. Qualified small business stock. Investors in "qualified small business stock" (QSBS) may exclude tax on 100% of the gain from selling such stock that was acquired before January 1, 2015. Prior to TIPA, the tax exclusion was scheduled to be reduced to 50% of the gain for QSBS acquired in 2014. Barring further legislation, the exclusion will revert to the 50% limit for QSBS acquired in 2015. This tax break often is viewed as a way to attract investors to fledgling companies.
5. Mortgage tax breaks. TIPA extends a couple of tax benefits relating to home mortgages. Under one provision, you can exclude the income tax you'd otherwise have to pay on up to $2 million in mortgage debt cancellation or forgiveness. The second provision allows you to deduct mortgage insurance as interest subject to a phase-out between $100,000 and $110,000 of adjusted gross income (AGI).
6. Conservation deductions. Generally, the deductible amount of charitable contributions of property is limited to 30% of AGI on your tax return. However, you may claim a deduction for the value of up to 50% of AGI for real estate property that you donate for conservation purposes. Even better, farmers and ranchers can write off the value of land given for conservation of as much as 100% of AGI. Also, any excess deduction under this rule can be carried forward for 15 years instead of the usual five years.
7. Residential energy credits. A homeowner may claim a credit of 10% of the cost of energy-saving improvements made in 2014, subject to certain limitations. The maximum lifetime credit is $500. The residential energy credit, which covers everything from high-tech heating and cooling systems to insulation, has been extended multiple times in the past, but its future remains uncertain. In addition, the new law extends various other energy-related provisions.
Finally, in legislation that was attached to TIPA, Congress approved the Achieving a Better Life Experience (ABLE) Act. The ABLE Act authorizes states to establish tax-free accounts for disabled individuals to help pay qualified expenses - for housing, transportation, education, and medical expenses, among other costs - much as Section 529 plans are used for college payments. The new law also permits a participant in a Section 529 account to change investment direction twice a year instead of only once.