Despite their well-known tendencies to procrastinate, American taxpayers always like to have at least some sense of what they’re likely to owe on their tax returns. Unfortunately, the government doesn’t always provide those answers in a timely fashion, and this year, they’re going down to the wire in deciding the fate of seven of the favorite tax breaks that Americans want to use in order to reduce the amount they have to pay to the IRS next April.
Several popular tax provisions expired at the end of last year, making their fate for the current 2014 tax year uncertain. The measures are largely ones that require renewal every year, with lawmakers choosing to extend their availability for only a single year at a time to avoid bearing the full long-term budgetary cost of the provisions at any one time. With the midterm elections having made it hard to make forward progress on legislation to extend these provisions, it’s up to a potential lame-duck session of Congress to work on restoring the tax breaks — or affirmatively allowing them to go away once and for all. Let’s take a look at seven of the most popular provisions that will disappear without intervention from lawmakers.
1. Deduction for State and Local Sales Taxes
When enacted in 2004, the deduction for state and local sales taxes made the tax system fairer for those who live in states that don’t impose a state-level income tax. Under this provision, you can choose to deduct state and local sales taxes instead of income taxes, picking whichever one is more favorable to you. Moreover, you don’t have to keep track of every penny you pay in sales taxes, as the IRS allows you to use a chart that estimates the typical sales-tax expenditure for families with various levels of income. Failure to restore this provision will hurt taxpayers in Texas, Florida and several other states in which residents pay no or minimal income tax.
2. Teachers’ Deduction for Out-of-Pocket Expenses
Lawmakers recognize the fact that many educators facing squeezed school budgets choose to take money out of their own pocket to pay for supplies and other needs in the classroom. Accordingly, the IRS allows teachers to write off up to $250 in personal expenditures for classroom use. Even though the $25 to $100 or so in potential tax savings isn’t a huge dollar amount, the perception of treating educational professionals badly has historically put enough pressure on politicians to ensure that they renew the provision each year.
3. Exemption for IRA Distributions to Charity
Many retirees prefer to use some of the money they have in their retirement accounts to fund gifts to charity. Without this special exemption, retirees would have to take taxable withdrawals from their IRAs and make charitable gifts subject to the itemized deduction rules, which in some cases won’t have value because of the standard deduction that each taxpayer gets. Still, the perception that this deduction goes disproportionately to wealthier Americans could create political roadblocks to its extension.
4. Deductions for College Tuition and Fees
This provision allows students and parents to deduct as much as $4,000 from their income for expenses related to qualifying tuition and fees of college and advanced education. In some ways, though, the loss of this deduction wouldn’t be as devastating as it might be, because most people who qualify for this deduction also qualify for other educational tax breaks. Specifically, the American Opportunity Credit and the Lifetime Learning Credit also reduce tax liability for college or other educational expenses, with the primary difference being different threshold levels at which each tax break disappears.
5. Credit for Home Energy Improvements
The government has encouraged homeowners to take steps to make their homes more energy-efficient, including installation of insulation, windows, doors, roofs, and other items that limit loss of hot or cold air. In addition, credits have been available for heating and cooling equipment that meets guidelines for efficiency. Even if these credits are allowed to expire, other credits are still available for installing solar panels or other alternative-energy equipment through the end of 2016.
6. Deduction for Private Mortgage Insurance
Historically, those who had to pay private mortgage insurance because they paid less than 20 percent toward a down payment weren’t allowed to deduct what they paid for that insurance. That changed in 2007, but it’s uncertain whether lawmakers will choose to extend the provision or whether they’ll let it lapse because of the vast improvement in the housing market.
7. Exclusion of Income From Forgiven Mortgage Debt
During the financial crisis, millions of American homeowners were horrified to discover that even when a lender voluntarily reduced the principal outstanding on their mortgages in response to their financial distress, the IRS wanted to treat that principal reduction as income. In order to avoid hitting homeowners while they were already down, Congress passed a law that temporarily made forgiven mortgage debt exempt from taxation. With default rates down, the need for this tax break is less than it once was, but those who benefited from it will certainly miss it if it disappears.
2014 won’t be the first time that lawmakers have gone down to the wire in extending expiring tax provisions. That makes it impossible to plan in advance, and with Congress and the White House now in complete opposition politically, it’s far from certain whether provisions extending these tax breaks will become law in time for you to benefit from them.
Motley Fool contributor Dan Caplinger thinks you should use any tax break you can get as long as it’s available. You can follow him on Twitter @DanCaplinger or on Google+. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.