It’s deja vu all over again for the state sales tax deduction.
The deduction, used by almost 1 in 5 Texans, is once again up in the air, along with more than 50 business and individual tax breaks that expired last year. Legislation to reinstate the deductions passed the House this week and now awaits a look from the Senate.
Without a renewal by Congress that would be retroactive, taxpayers can’t use those breaks on this year’s taxes.
Other popular deductions for college tuition and fees, private mortgage insurance, teacher supplies and wind power are dead unless Congress brings them back and the president signs on.
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“To use church language, we are in limbo,” said Walt Hatter, a Fort Worth certified public accountant.
Reinstated in 2004 under legislation by former Sen. Kay Bailey Hutchison, R-Texas, the sales tax deduction was never permanent. It has been continually extended for one or two years, along with the other deductions and a “patch” to the alternative minimum tax that affected some 30 million taxpayers, Hatter said.
But last year, Congress finally fixed the AMT permanently with a higher exemption and an index to inflation. So without the annual alarm bells for the AMT, Hatter says, Congress isn’t moving as quickly on the other matters.
The sales tax deduction has been a huge hit with Texans.
Around 2.3 million residents in the state claimed an average deduction of $1,906 in 2012, according to a study by Pew Charitable Trusts. Nationally, about 11 million filers claimed $16 billion in state and local sales tax deductions that year, the study said.
While the wait goes on, taxpayers still have several ways to save before year’s end and should know about a few changes coming their way.
So stop your holiday daydreaming and spend a few minutes reviewing your upcoming taxes.
Retirement. Contributing to a 401(k) or an IRA is good for your retirement and reduces your taxable income. Workplace retirement plans may also include a match by your company, which is like free money.
Such contributions must be made by Dec. 31, along with contributions to 403(b) plan for employees of public schools and certain tax-exempt organizations, 457 plans for state and local government employees, and the Thrift Savings Plan for federal employees, said Clay Sanford, an IRS spokesman in Dallas. The 401(k) contribution limit is $17,500, or $23,000 for people 50 and older.
With an IRA, contributions until April 15 can be counted on this year’s taxes. The limit is $5,500, or $6,500 for people 50 and older.
Health. Another contribution that should be made by April 15 is to a health savings account.
Only 8 percent of Americans have an HSA, but 50 percent say they are somewhat or very likely to use one to cut their taxes, according to an InsuranceQuotes.com report. To qualify for an HSA, taxpayers must have a high-deductible insurance plan. The HSA pays for most medical expenses before the deductible is met. Contributions to the account are tax-deductible.
The flexible spending account (FSA) has some new rules, including allowing a rollover of $500 into the next year. If your company adopts the rule, it would end the “use it or lose it” element of the account, making it more attractive. This year, you can contribute up to $2,500 to an FSA, an amount set by the Affordable Care Act.
Another ACA tax rule to remember: Those without insurance coverage will be taxed for the first time. The penalty is the higher of $95 per person or 1 percent of taxable income. Although the mandate started Jan. 1, uninsured Americans had a three-month exempt period, which means they needed just nine months of health coverage during 2014.
Tax penalties for the uninsured go up in 2015 to $326 per person, or 2 percent of taxable income.
Check your withholding. The amount of money withheld from your paycheck or sent to the IRS in quarterly payments should come close to your actual tax liability. Withhold too little and you could have a big tax bill when you file your return. Withhold too much and you’re giving the IRS what amounts to an interest-free loan that you could have used to pay down debt or save for retirement.
There’s still time to adjust your withholding for 2014 by changing the W-4 on file with your employer, or, if you make quarterly payments, by increasing or decreasing your payments between now and when the last 2014 payment is due in January.
Charitable giving. Donating to charity before the end of the year is a tax reduction strategy for those who itemize deductions. Remember to get a receipt for every contribution, not just those over $250.
Donating can include giving appreciated securities, such as stocks or bonds, to charity. The tax code allows you to use the current market value of the asset as a deduction without having to pay tax on the capital appreciation, so you get the charitable contribution deduction and avoid capital gains tax.
Not all charities accept donations of appreciated securities, however. One way to get around that is to open a donor-advised fund. The fund administrator will sell the securities for you and add the proceeds to your account, which will allow you to deduct the value of the securities and decide later where you want to donate the money.
Annual gift tax exemption. For those who want to give Christmas presents with a check, you can give up to $14,000 a year to as many people as you choose ($28,000 if you and your spouse both make gifts). That helps reduce the amount of your estate and cut or avoid federal gift and estate taxes.
This may include cash, stocks, bonds and portions of real estate. Anything above $14,000 per person per year may be subject to gift taxes.
Home office. Forget having to dig up all those credit card receipts and utility bills in January for the previous year. Instead, claim a home office expense under the simplified deduction rule. You can deduct $5 per square foot for a home office, a maximum of $1,500 a year. The new rule is easy to apply.
Education. The spring semester’s bill isn’t due until January, but it might be worthwhile to pay it before year’s end. Then you can claim the American opportunity tax credit on this year’s return.
The credit is in effect through 2017 and is worth up to $2,500. Up to 40 percent of it is refundable, which means you could get as much as $1,000 back as a tax refund even if you owe no taxes.
Tuition, fees and course materials for four years of undergraduate studies are eligible expenses. That includes education expenses made during the current tax year, as well as expenses paid toward classes that begin in the first three months of the next year.
Teresa McUsic’s column appears Saturdays. TMcUsic@SavvyConsumer.net