Tax benefits for individuals and small businesses that expired in 2013 could have an impact on as many as one in six taxpayers, according to a new analysis.
The analysis, by the Tax Institute of H&R Block, estimates that five of the more popular expired tax breaks benefiting individuals delivered more than $87 billion in tax benefits in 2013.
These benefits, which include the state and local sales tax deduction, mortgage insurance premium deduction, educator expenses deduction, tuition and fees deduction and the mortgage debt relief tax benefit, are part of proposed “extenders” legislation that would extend up to 55 tax breaks that expired last year. The Tax Institute identified another two benefits as particularly significant to individuals and—the nonbusiness energy property credit and the charitable IRA distribution provision.
“Unless Congress renews the expired tax breaks, taxpayers of all types and across all incomes will lose tax benefits they've used in the past,” said Kathy Pickering, executive director of the Tax Institute at H&R Block, in a statement. “Taxpayers should prepare themselves and their tax returns for the changes that are ahead and look at other tax benefits for relief.”
The affected taxpayers include residents of the seven states with no income tax—such as Florida, Texas and Washington—who itemize their state and local sales taxes. These residents have been able to deduct state and local sales tax from federal returns, similar to taxpayers who deduct their state income tax when itemizing.
Others affected include homeowners who pay mortgage insurance and who have used the mortgage insurance premium deduction, which may help taxpayers unlock itemization of their deductions, leading to greater tax savings.
In addition, the average teacher spends $356 out-of-pocket on classroom supplies and has been able to use the $250 educator expenses deduction to reclaim some of those expenses.
Finally, taxpayers who face foreclosure and receive protection through the mortgage debt relief tax benefit would lose this tax break unless it is extended. Without this provision, taxpayers may find their debt discharge results in taxable income.
Five times in the past 10 years, Congress has extended expiring tax provisions or retroactively renewed expired tax benefits anytime between November and January, the Tax Institute noted.
"No matter what Congress does or does not do, taxpayers will face changes this tax season," said Pickering. "These tax breaks expired more than 10 months ago, so either taxpayers will face the loss of these tax benefits or face late changes by Congress."
Taxpayers should prepare for the possibility that Congress does not renew all of the expired tax benefits, the Tax Institute noted. Taxpayers should familiarize themselves with the expired tax breaks they have used in the past. Then they should identify alternative benefits, if any, they may use in their place. While some taxpayers may be eligible to claim alternative credits, they are not identical substitutes and have unique qualifications and restrictions.
Other Key Facts
The expiration of the state and local sales tax deduction will affect one in every 14 taxpayers. More than 10 million tax returns used this deduction in 2013 to the tune of $17.5 billion.
More than 4.5 million tax returns used the mortgage insurance premium deduction in 2013 for $6.2 billion in tax benefits.
The educator expenses deduction for teachers totaled more than $996 million on almost 4 million returns in 2013.
On more than 2 million tax returns, students used the tuition and fees benefit to deduct $4.5 billion for 2013.
The mortgage debt relief tax benefit affected a little more than 500,000 tax returns, but delivered more than $58 billion in relief in 2013.
Taxpayers, using two residential energy credits—one of which is expiring—claimed almost $1.5 billion in energy-efficient improvements in 2013. Taxpayers who increased their home's heating and/or cooling efficiency can no longer claim the nonbusiness energy tax credit.
The charitable distribution provision allowed taxpayers to rollover IRA distributions tax-free to charitable organizations. IRA distributions were reported on 14.2 million tax returns in 2013; these taxpayers will no longer have an option to save on taxes by making qualified charitable distributions from their IRAs.
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