Don't look now, but tax day is less than four weeks away! It's a time of year that most people loathe, because it means digging through a year's worth of receipts, dusting off their calculator, and most likely being poked and prodded either by tax-prepping software or a tax professional about everything you did and didn't do in the previous year.
Although taxpayers cumulatively spend 3.8 billion hours complying with federal income tax laws, tax time can actually be a boon for the average tax filer and for American businesses. The reason is that a vast majority of tax filers -- more than 80% -- will actually get money back from the government. You can almost consider tax time akin to the return of forced savings for millions of Americans; and those savings are being counted on to drive business for a number of retailers this spring.
Unfortunately, the tax code seems like it gets more complicated each and every year. According to the Taxpayer Advocate Service, there are some 3.7 million words in the U.S. tax code, or the modern equivalent of about 58 novels. Complicating matters (as if trying to understand 58 novels' worth of tax code wasn't hard enough) the tax code changes annually, with new regulations being signed into law and others failing to get renewed.
When the clock struck midnight on New Year's Eve 2013, a total of 55 tax breaks expired, taking with them a number of potential deductions for you when you file your taxes next April. Some were downright odd, but a number of these expired taxes could have a meaningfully negative impact on your return next year. It's still possible that Congress could extend some, or all, of these tax breaks, but as of now it appears that taxpayers will have to do without them in 2014.
Today, we'll take a closer look at the seven expired tax credits you're likely to miss the most in 2014.
One deduction that parents and individual filers are sorely going to miss is one that could net up to $4,000 for tuition and education-related expenses like books and supplies. Eligible tax filers received either $4,000, $2,000, or $0 based on their modified adjusted gross income, or MAGI. Individual filers whose MAGI fell below $65,000, or married couples under $130,000, received the full bonus assuming at least $4,000 in qualifying expenses. Make between $65,000 and $80,000 for individual filers and $130,000 to $160,000 for married couples, and you received $2,000. Anything beyond these MAGI levels, and your chance of a tuition and expenses deduction was phased out to zero.
A taxing loss
This one is particularly painful for me, since I live in Washington state, but beginning in 2014 there is no longer an exemption allowing an individual to deduct state, local, and use taxes on their Schedule A instead of state and local income taxes. This tax break was especially useful for residents in states that don't have an income tax ... like Washington. In total, residents in seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) will be affected, and I suspect it could have the potential to negatively alter the sale of big-ticket items in these states.
The dunce cap
In previous years, including 2013, teachers were able to deduct up to $250 in out-of-pocket expenses used to buy school and classroom supplies. Best of all, this was a deduction that teachers didn't have to itemize. Beginning in 2014 this deduction will be no more, which makes you wonder if office-supply stores like Staples (NASDAQ:SPLS), which still strongly lean on stationary sales to drive their profits, will feel a pinch.
No relief for homeowners
Perhaps the most dangerous tax break lost in 2014 is the rollback of the Mortgage Forgiveness Debt Relief Act, which was signed into law in 2007 and has been extended twice since then. Under the MFDRA, qualifying debt that under normal circumstances would count as taxable income, such as a renegotiated mortgage, a short-sale, or a foreclosure of a private residence, could be "forgiven" without counting against an individual's income. As of 2014 that exemption has gone bye-bye, and homeowners who renegotiate their mortgage, short-sell their property, or get foreclosed upon could face a potentially mammoth tax bill. I consider this to be a particularly worrisome development for a company like Nationstar Mortgage (NYSE:NSM), which services and originates home loans. A possible rise in lending rates coupled with the end of MFDRA is a potentially dangerous combo for Nationstar.
Although homeowners can still receive a credit for installing solar water heaters, solar panels, and wind turbines through 2016, they can kiss the lifetime $500 cumulative credit offered between 2007 and 2013 for the installation of qualified windows, doors, and roofs, as well as other qualified heating and air conditioning systems designed to improve energy efficiency, goodbye in 2014. The one bit of solace for homeowners here is that this credit has been extended on a number of occasions, so don't lose hope just yet.
Mass transit mayhem
Sometimes the laws Congress enacts makes you scratch your head -- and this is one them. Beginning in 2014, the average tax break that mass transit commuters can expect will drop by a whopping 47% to a maximum of $130 a month from $245 a month in 2013. Adding insult to injury for those who choose to keep their vehicles off the roads and use public transportation to get from Point A to Point B, tax benefits for parking a vehicle are actually rising $5 to a maximum of $250 per month. If you're looking at this from a financial standpoint, Avis Budget Group (NASDAQ:CAR) may wind up a beneficiary, since it purchased Zipcar last year and may see increased demand with mass transit commuter tax benefits plummeting.
Small businesses get slammed
Last, but certainly not least, small businesses are set to be creamed by a huge reduction in section 179 tax breaks. This may not seem like a big deal to you, but according to the U.S. Small Business Administration there are 23 million small business accounting for 55% of all jobs in this country. In other words, chances are more than half of you reading this work for what's classified as a small business. In 2013 and prior years, businesses were allowed to immediately deduct up to $500,000 in qualifying expenses, such as machinery, rather than amortize them out over time. This deduction only began to phase out when costs exceeded $2 million. Beginning in 2014 this deduction will drop 95% to just $25,000 and will begin to phase out at $200,000. Small businesses may be the backbone of the economy, according to President Obama, but Congress appears to be sending the wrong message by trying to break its back by removing this crucial tax benefit.
Have you taken these crucial steps to reduce your tax bill?
Tax increases that took effect at the beginning of 2013 affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "How You Can Fight Back Against Higher Taxes," the Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.