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Individuals could be affected by many expiring tax provisions

October 23, 2013

Several important tax provisions affecting individuals and businesses are slated to expire at the end of this year. While a budget conference is underway between the House and Senate, there is no way to know whether any agreement resulting from such negotiations will extend any expiring tax provisions. Because of this uncertainty, practitioners and clients, where possible, should take action now to avoid losing out on tax breaks. This Practice Alert examines expiring tax provisions relating to individuals and actions that can be taken to maximize tax breaks this year.

Expiring provisions. The following provisions are slated to expire at the end of this year:

Optional sales tax itemized deduction. Taxpayers may elect to take state and local general sales and use taxes as an itemized deduction, instead of deducting state and local income taxes. Taxpayers who make this election may either (a) deduct their actual sales and use taxes, or (b) use IRS-published tables and then add to the amount from those tables the actual amount of their sales tax for certain “big-ticket” items—motor vehicles, boats, aircraft, homes (including mobile and prefabricated homes), and home building materials. (Code Sec. 164(b)(5)) IRS has published tables based on the average consumption by taxpayers, on a state-by-state basis, of items other than motor vehicles, boats, etc, taking into account total available income, number of exemptions claimed, and the general sales tax rate in the taxpayer’s resident state. This provision does not apply for tax years beginning after 2013. (Code Sec. 164(b)(5)(I))
RIA observation: Individuals who are considering the purchase of a big ticket item may want to push the purchase into this year to achieve a higher itemized deduction for sales taxes, as explained in detail at Weekly Alert ¶  7  10/10/2013.
Above-the-line deduction for certain higher education expenses. Under Code Sec. 222, an above-the-line deduction is allowed for an individual taxpayer’s qualified tuition and related expenses. For 2013, the maximum deduction is $4,000 for taxpayers with modified AGI of not more than $65,000 ($130,000 for joint filers), and $2,000 for taxpayers with modified AGI that is equal to or more than the above amount but not more than $80,000 ($160,000 for joint filers). In general, the deduction is allowed for any tax year only to the extent the expenses are in connection with enrollment at an institution of higher education during that tax year. However, the deduction is allowed for qualified tuition and related expenses paid during a tax year if they are in connection with an academic term beginning during that tax year or during the first three months of the next tax year. (Code Sec. 222(d)(3)(B)) The deduction does not apply for tax years beginning after 2013. (Code Sec. 222(e))
RIA observation: An individual may want to prepay in 2013 tuition due for an academic term beginning in Jan., Feb. or Mar. 2014 if that would increase his 2013 tax savings from the expiring deduction.
Nonbusiness energy credit. Subject to limits (see below), a taxpayer may be able to take a credit under Code Sec. 25C equal to the sum of: (1) 10% of the amount paid or incurred for qualified energy efficiency improvements, such as insulation material, exterior windows and skylights, and exterior doors, installed during 2013; and (2) any residential energy property costs, such as electric heat pumps, central air conditioners, natural gas, propane, or oil water heaters, or qualified natural gas, propane, and oil hot water boilers, paid or incurred in 2013. The expenses must be for property originally placed in service by the taxpayer and made on or in connection with a dwelling unit located in the U.S., and owned and used by taxpayer as his principal residence at the time of installation. However, the credit is limited as follows:
  • A total combined credit limit of $500 for all tax years after 2005.
  • A combined credit limit of $200 for windows for all tax years after 2005.
  • A credit limit for residential energy property costs for 2013 of $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy efficient building property.
RIA observation: An individual who has not made full use of the credit and who is contemplating making such energy efficient improvements in the near future should do so before year-end to take advantage of the credit.
Home mortgage debt forgiveness relief. For indebtedness discharged before Jan. 1, 2014, taxpayers generally may exclude up to $2 million of mortgage debt forgiveness on their principal residence. Specifically, under Code Sec. 108(a)(1)(E), gross income doesn’t include any discharge of qualified principal residence indebtedness. Generally, this relief allows the exclusion of income realized as a result of modification of the terms of the mortgage, foreclosure on a principal residence, or where the mortgage loan is not fully satisfied (e.g., in a short sale) and a lender cancels the unsatisfied debt. The basis of the taxpayer’s principal residence is reduced by the excluded amount, but not below zero.
RIA observation: A taxpayer who is in the process of attempting to secure such relief from his lender should take all possible steps to ensure that the discharge occurs before Jan. 1 of next year.
Mortgage insurance premiums treated as deductible interest. Mortgage insurance premiums paid or accrued by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer’s qualified residence are treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer’s AGI. (Code Sec. 163(h)(3)(E)) However, this provision does not apply to premiums paid or accrued after Dec. 31, 2013 or properly allocable to any period after that date.
RIA observation: Thus, prepaying 2014 premiums this year won’t yield a deduction.
Above-the-line deduction for expenses of elementary and secondary school teachers. An eligible educator is allowed an above-the-line deduction, not in excess of $250, for otherwise allowable Code Sec. 162 trade or business expenses paid or incurred by him in connection with books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by him in the classroom. The deduction is allowed only to the extent the expenses exceed the amount excludable for the tax year under: (i) Code Sec. 135 (for redemption proceeds from U.S. savings bonds redeemed to pay for qualified higher education expenses); (ii) Code Sec. 529(c)(1) (for distributions from qualified tuition programs for the financing of qualified higher education expenses); and (iii) Code Sec. 530(d)(2) (for distributions from Coverdell ESAs for qualified education expenses. (Code Sec. 62(d)(2)) This provision does not apply for tax years beginning after 2013. (Code Sec. 62(a)(2)(D))
RIA observation: A teacher who is not over the limit and who plans to purchase items in 2014 that would qualify for the deduction if it remained in effect should consider accelerating the purchases to 2013 to gain a deduction this year.