Another year has nearly passed, and it’s time to make sure your have your tax ducks in a row.
It’s important to make sure you know about the key changes made to the tax code before you make your end-of-year moves.
The slogan for this month might just be “use it or lose it.” That’s because there are several tax breaks that are set to expire as 2014 dawns. Whoever your clients are — teachers, students, small-business owners and big spenders to name a few — make sure they take advantage before it's too late.
“The days of relying on Congress to automatically renew expiring tax provisions … might finally be coming to a close as the strain on the federal budget becomes more evident with each new round of budget negotiations,” wrote William H. Byrnes and Robert Bloink on ThinkAdvisor.
(Not all tax news is bad. The IRS recently gave high-income taxpayers a break with the release of the final regulations governing the new 3.8% tax on net investment income.)
Flip though the following pages to help your clients make the most of their personal and business deductions.
1. Charity Begins at Home
The days of an easy way for seniors to make a tax-free charitable donation are ending. This provision allows those 70½ and older to make direct, nontaxable rollovers from IRAs to charities. It is way to keep income low by classifying mandatory withdrawals as donations instead of income.
2. Small Business, Big Break
Small businesses that use tax provisions to depreciate assets will see a big change in the ability to do so in 2014. This year, business owners can accelerate their depreciable assets up to $500,000 on a $2 million purchase. The maximum depreciation is set to drop to $25,000 next year. If a small business client has the taxable income to offset the deduction, it might be a good move to use the provision when paying 2013 taxes.
3. Forgiving Mortgage Debt
Say goodbye to the Mortgage Debt Forgiveness Act of 2007. Under that law, if debt owed on property was reduced through a loan reduction or a short sale, the amount forgiven was not treated as taxable income as had been the practice in the past. The law is set to expire at the end of the year. Experts say the tax is unfair because the money only existed on paper.
4. Students (and Parents) Beware
After this year, there will no longer be a deduction of up to $4,000 for qualified tuition costs. The tax break was generally available to families with less than $160,000 in income and singles making half as much or less. Payments for the spring semester must be made by the end of 2013 to qualify.
5. Maybe Teacher Will Get an Apple Instead
It wasn’t much, but teachers are losing a $250 deduction for unreimbursed classroom expenses. To be eligible, teachers must be employed in primary or secondary schools.
6. Getting Harder to Be Green
Now is the time to buy that electric vehicle; a tax credit of up to $7,500 on the cars is being dropped at the end of the year. The credit only applies to certain plug-in vehicles based on weight and battery capacity. Make sure the car you purchase qualifies.
7. It Keeps You Warm, for Now
Maybe an electric car isn’t for you. How about making your home more energy efficient? Two tax credits to help defray such costs are set to die at the end of 2013. One is a $500 credit for certain improvements made to a primary residence. Second is the Energy Efficient Home Credit, a $2,000 exemption for home builders.
8. R&D? On Your Own
Congress has repeatedly extended the tax credit for technology research and development since it was enacted in 1981. Those extensions appear to be over, and the law is set to expire at the end of the year.
9. Luxury Has Its Price
For those who pay lots of state sales tax because they buy big-ticket items like cars and luxury items, this is a nice tax break. A federal tax filer could deduct state sales taxes paid if they were higher than state income taxes. The chance to do so ends this year.
While the legislators and IRS taketh way, they also sometimes giveth, as pointed out by ThinkAdvisor's Law Professor blog writers.
The IRS recently took steps to ease the restrictions that may have previously dissuaded some of your clients from taking advantage of Health Flexible Spending Accounts.
Twitter executives at the time of the company’s IPO benefited from using a type of annuity trust to reduce their estate and gift taxes. Your clients may be able to do the same.
More Top 10 lists on ThinkAdvisor:
- Top 10 Most Ridiculous Luxury Items: 2013
- 10 Best & Worst Tax States for Retirees
- 10 Worst States for Business Taxes
- 10 Best States for Business Taxes
- 12 Worst Financial Advisors in America: 2013