September 26, 2013

It happens every year. There’s a list of tax breaks that could expire in January, which will unless Congress — at the last moment — acts to breathe life back into them. Some are renewed annually, though the threat of extinction is real. Others will go by the wayside.

Here is a partial list of deductions and credits available now, which could be swept away.

1. Educator expense. Currently teachers for grades K-12, as well as instructors, counselors, principals, and aides can each deduct up to $250 of out-of-pocket expenses, above the line. “Above the line,” means this is an adjustment to your taxable income. Expiration date, 12/31/13.

2. Debt cancellation. Individuals have been able to deduct up to $2 million in cancellation of debt (COD) income (for married separate filers, $1 million). This is for debt related to the purchase of a principal residence which is cancelled due to the taxpayer’s financial condition or the decline in value of the residence. Generally this debt is considered income to the taxpayer. Thanks to this COD provision, taxpayers have been spared an additional tax hit. This is scheduled to expire this year.

3. Mortgage insurance premiums. For taxpayers who have adjusted gross incomes not exceeding $109,000, qualified mortgage insurance premiums are deductible as mortgage interest, but only through 2013.

4. Energy improvement credits. This credit is for taxpayers who spend money (subject to a $500 lifetime cap) for qualified energy efficiency improvements, expiring this year.

5. General state/local sales tax is deductible for individuals in 2013, instead of state and local income tax. Barring Congressional action, the credit expires this year.

6. Tuition and fees. This is an above-the-line deduction for qualified higher education expenses, only through 2013.

7. IRAs for those age 70 ½ and up. Until 2014, these taxpayers can make tax-free transfers from an IRA directly to a charity. The transfers count toward the required minimum distribution, but are not counted as charitable contributions.

8. Section 179 depreciation and qualifying property limits for 2013, are limited to $500,000 and $2,000,000 respectively. However in 2014 they are slated to fall back to $25,000 and $200,000 and will then exclude off-the-shelf software, which is deductible in 2013.

9. Leasehold improvements, qualified restaurant property, and qualified retail improvements have a 15 year straight-line recovery period in 2013, but for expenditures in 2014, they will have a 39 year straight-line recovery period.

With one quarter left in the year, contact your tax adviser to learn what you have to do to qualify for these tax breaks while they exist. Be sure to ask about others you may qualify for as well. Congress has a way of waiting till the last minute to pass some of the key provisions (like Section 179 depreciation). That delay keeps taxpayers – especially business owners—holding their collective breath. Some of these tax breaks will be renewed and some may disappear. However, with the government looking under every rock for new revenue, it’s more important than ever to take advantage of legitimate tax-saving strategies while you can.

Photo: artisrams