A provision to make tax-free donations to charity from an IRA, tax deductions for certain college expenses, and dozens of other tax breaks known as “tax extenders” could be renewed if Congress acts before the end of the current session.
In the next few weeks, Congress must decide whether to restore some or all of the more than 50 tax provisions that expired at the end of 2013. In past years, Congress has typically voted to extend these provisions for another year, sometimes at the eleventh hour. If the tax extenders expire, taxpayers may want to reconsider end-of-the-year tax strategies.
While many of the provisions apply to businesses or are related to energy items, several affect individual investors. Some of the more popular tax deductions include:
Deduction for state and local taxes. Taxpayers who itemize deductions have the option of deducting sales taxes instead of state and local income taxes. This provision particularly benefits residents of states without state income taxes such as Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.*
Deduction for higher education expenses. Taxpayers can claim up to $4,000 for post-secondary education expenses such as tuition or fees, not including personal or living expenses such as room and board. The deduction is phased out for individuals with more than $80,000 in modified adjusted gross income (MAGI) or for couples with higher than $160,000 MAGI.
Tax-free IRA distributions to a qualified charity. IRA owners over the age of 70½ can direct up to $100,000 from an IRA to a qualified charity tax free. The distribution may include the required minimum distribution (RMD). IRA owners cannot also claim a deduction on their tax return for the donation. Investors interested in this provision may want to delay taking RMDs until later in December to determine if Congress extends this item.
Congress may act sooner rather than later
In an October letter to the Senate Finance Committee, the Internal Revenue Service cautioned that Congress needs to decide on extending the tax provisions by the end of November, or there may be “delays or disruptions” to the 2015 tax filing season.
*New Hampshire and Tennessee have no income taxes, but do apply other taxes on certain investment income such as dividends and capital gains.