Congress has a lot in common with my four year old niece. She likes to play card games that she invents, and, of course, she gets to set the rules after each hand is dealt. So guess who usually wins? Likewise, Congress has a bad habit of playing political games with the federal budget and setting tax law retroactively. The so-called “tax extenders” are a group of temporary tax provisions that are typically reinstated every year, but they have yet to be extended for 2015.
Unfortunately, this delay comes as no surprise to most tax professionals. Last year, tax extenders were not reinstated until December 19, 2014, leaving taxpayers only twelve days to make decisions about over fifty different tax provisions. As a result, CPAs and tax attorneys were left in limbo for most of the year and forced to make recommendations based on professional predictions about which extenders would be reinstated. This year has been no different.
The ten year cost estimate for this year’s batch of extenders is estimated to be between $85-97 billion, which is only a fraction of our annual budget but it’s still a considerable amount of money. Congressional budgeting rules mandate that legislators consider this ten year cost when making permanent changes to the tax law, so instead of carrying the political shame of such a high price tag, lawmakers prefer to renew these provisions on a year-by-year basis to make the costs seem much less. So there are many extenders that we assume throughout the year will be renewed, but we don’t actually know until Congress decides to act.
These tax provisions vary in size and benefit a range of taxpayers, so if you have never heard of tax extenders, you are probably thinking that theses tax rules only affect the extremely wealthy or multi-national corporations. But that is not the case. You probably do not care about the “Subpart F Exemption for Active Financing Income,” a tax break even more complicated that its title indicates: it’s an exception to an exception to an exception for multinational banks. But here are several extenders that very well could affect your 2015 tax return.
Educator Expense Deduction: If you are a teacher and spend up to $250 on supplies for your classroom, you can use this deduction. It’s a “Page 1” deduction, meaning that you don’t have to itemize in order to claim it, so it is generally a direct reduction in your taxable income.
Sales Tax Deduction: One of the biggest itemized deductions is state income taxes. However, if you are retired or live in a state with no income tax, then you are fortunate enough to be somewhat limited in the amount of that deduction. But this extender allows you to use state sales tax in lieu of state income tax, which increases your overall itemized deductions. And you do not have to keep track every sales receipt; the IRS allows you to use an estimate of your annual sales tax expense based on your adjusted gross income.
Private Mortgage Insurance (PMI) Deduction: PMI is a policy paid for by the borrower that reimburses the lender in the event of a mortgage default. It is required when borrowers do not make a significant down payment (generally 20%) on their home; however, it can be cancelled when the loan-to-value ratio drops to 80%. But while you are paying PMI premiums, this tax provision allow you to use them as an itemized deduction, much like mortgage interest payments. In fact, PMI payments generally appear on the annual Form 1098 from your lender, along with mortgage interest and property taxes.
IRA Charitable Rollover: When you turn 70 ½, you must take required minimum distributions from your IRA, although Roth IRAs are exempt from this rule. So even if you don’t currently need the money, you are still required to make a withdrawal, which creates taxable income. However, under this provision, those who are 70 ½ or older can choose instead to make a direct charitable contribution from their IRA up to $100k. The rollover amount is not counted toward charitable contributions eligible for itemized deductions, but the amount is also excluded from gross income. And since many tax calculations are based on adjusted gross income, excluding an IRA charitable rollover could increase deductions, decrease taxable income, and lower your overall tax liability.
Bonus Depreciation & Section 179 Expense: If you are a small business owner in a capital intensive industry, then you are well aware of these provisions. Generally, equipment and other assets are depreciated over a number of years, spreading out the expense over an extended period of time. However, bonus depreciation allows for a 50% current year deduction for the purchase of new assets, and Section 179 can allow current year expensing of the entire asset cost. These provisions were initiated to spur capital investment during the Great Recession, but small business owners have come to rely on them heavily to reduce their current year taxable income.
Principal Residence Debt Forgiveness Exclusion: Generally, cancellation of debt produces taxable income. But at the onset of the housing market crash, when millions of Americans were defaulting on their mortgages, Congress passed the Mortgage Debt Relief Act of 2007, which excluded from taxable income cancellation of debt on a primary residence. This act lives on as a tax extender that excludes up to $2 million on married filing jointly returns of cancellation of debt income for qualified principal residence indebtedness.
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.