Tax Talk 2015 FAQ
Tax Talk

Year-End Tax Strategies Still Available While Congress Puts Taxpayers in Limbo

By Teresa McUsic

It’s déjà vu all over again for the state sales tax deduction.

Once again the deduction, used by almost one in five Texans, is up in the air, along with more than 50 business and individual tax breaks that expired last year. Legislation passed the House this week to reinstate the deductions and now waits for a look from the Senate.

Without a renewal by Congress that would extend retroactively to this year, taxpayers won’t be able to use those breaks on this year’s taxes.

 Other popular tax deductions for higher education tuition and fees, private mortgage insurance payments, teacher supplies and wind power are dead, unless Congress votes to bring them back and the president signs on.

“To use church language, we are in limbo,” said Walt Hatter, a Fort Worth CPA.

Reinstated in 2004 under legislation by former Sen. Kay Bailey Hutchison, R-Texas, the sales tax deduction was never permanent and was continually extended for one or two years along with the other deductions and with a “patch” to the Alternative Minimum Tax that affected some 30 million taxpayers. Hatter said.

But last year, Congress finally fixed the Alternative Minimum Tax issues 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 tax issues.

The sales tax deduction has been popular with many Texans, however. Around 2.3 million in the state claimed the deduction for an average deduction of $1,906 deduction, according to a study by the Pew Charitable Trusts. Nationally, about 11 million filers claimed a total of $16 billion in state and local sales tax deductions that year, the study said.

While we wait, there are still several ways to save on taxes before year-end, and also a few changes taxpayers should be aware are coming. So stop your holiday daydreaming and spend a few minutes reviewing your upcoming taxes.

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 retirement plan contributions must be made by December 31, along with contributions to 403(b) plan for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, or the Thrift Savings Plan for federal employees, said Clay Sanford, IRS spokesman in Dallas. The 401(k) contribution limit is $17,500, or up to $23,000 for people age 50 or older.

Those contributing to an IRA have until April 15, 2015, to be counted on this year’s taxes. Those limits are $5,500 or $6,500 if you are age 50 or older.

Another tax-advantaged plan contribution that should be made by April 15 is to a Health Savings Account (HSA).

Only eight percent of Americans have an HSA, but 50 percent say they are somewhat or very likely to use an HSA to cut their taxes, according to an report. To have an HSA, taxpayers must also 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 that will for the first time include a rollover of $500 into 2015. If your company adopts the rule, this ends the “use it or lose it” element to the account, making it more attractive to employees. This year, you can now contribute up to $2,500 to an FSA, an amount set by the Affordable Care Act.

Another ACA tax rules to remember starting this year: Those without insurance coverage will be taxed for the first time. The tax penalty is the higher of $95 per person or 1 percent of taxable income. Although the mandate started January 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 very 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 a tax-free loan that you could be using to pay down debt or save for retirement (and reducie your taxes.)

There’s still time to adjust your withholding for 2014 by making changes to the W-4 you have 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
Contributing to charitable causes before the end of the year is a tax-reduction strategy for taxpayers who itemize deductions. Remember to get a receipt for every contribution you make, 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 this 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, an individual 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). This helps reduce the amount of your estate and reduce 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 home office deduction rule. Under the new rule, you can deduct $5 per square foot for a home office, with a maximum deduction of $1,500 per year. The new rule is simple and easy to apply.

The spring semester's bill isn't due until January, but it might be worthwhile to pay it before year's end. By doing so, you can claim the American Opportunity Tax Credit on this year's tax return.

The American Opportunity credit is in effect through 2017 and is worth up to $2,500. Up to 40 percent of the new credit is refundable, which means you could get as much as $1,000 back as a tax refund even if you don't owe any taxes.

Tuition, fees and course materials for four years of undergraduate studies are eligible expenses under the American Opportunity credit. This 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.

Favorite Tax Deductions in Texas
  Percent of all filers Amount deducted
Sales taxv 19.7 percent $1,906
Real estate taxes  20.5 percent $5,376
Mortgage interest 18.1 percent $8,393     
Charitable 19 percent $7,315
Source: The Pew Charitable Trusts

Teresa McUsic’s column appears Saturdays in the Fort Worth Star-Telegram. She can be reached at.

 American Institute of Certified Public Accountants Texas State Board of Public Accountancy