Tax-saving tips up in air as Congress mulls changes

,

Year-end tax planning could be tricky over the final weeks of 2014, even without any major federal income-tax laws enacted this year.

That's part of the problem: Congress hasn't enacted anything major but still might. Several expired provisions could get revived, even after the calendar turns to 2015. Retroactive tax changes have happened before, and it's considered a reasonable possibility with a very different Senate taking office in January.

"Individuals and businesses need to be ready for late tax legislation," wrote tax researcher Wolters Kluwer CCH after midterm elections that went heavily in favor of Republicans.

If any late legislation comes through, it also could impede the Internal Revenue Service's ability to start the tax season on time. A 10-day delay last year came as a result of a government shutdown.

While CCH predicts the congressional shift might open the door to comprehensive tax reform next year or in 2016, the more immediate effect could involve any of several tax breaks that expired at the end of 2013.

Basic year-end strategies include deferring some income, such as bonuses or invoices, into the following year if you can while incurring expenses that can trigger deductions for use this year.

"I'm always a little nervous about accelerating deductions and deferring income without knowing what future tax rates will be," said David Meese, a certified public accountant in Litchfield Park, Ariz. "Having said that, it's still generally a tried-and-true method."

Individual federal tax rates are the same this year as they were in 2013, ranging from 10% to 39.6%. Dividend and capital-gain rates also are unchanged.

For investors owning stocks, mutual funds and the like in unsheltered accounts, it also makes sense to look at gains and losses realized in the current year.

On one hand, you might want to hold off on selling any more-profitable holdings until after the year ends. On the other, you might want to sell losers to harvest losses that can be used to offset capital gains in the current year.

If losses exceed gains, you generally can apply them to shelter up to $3,000 in ordinary income in a year, carrying excess amounts to future years.

As for those federal deductions that expired at the end of 2013, one provision allowed people age 70½ or older to withdraw money and donate it to charities without having to declare the withdrawals as taxable income. Most people don't use this one because they need all the money they can get for their own retirement, but some wealthy individuals have used the provision to support favored nonprofits.

Another notable provision that expired was the ability to deduct state and local sales taxes rather than state and local income taxes. This benefit was more critical for people living in states that don't have their own income tax, such as Nevada, Tennessee, Texas and Washington.

A couple of other expired provisions involved education. One allowed taxpayers to deduct some higher-education tuition and fees, while another enabled teachers to deduct up to $250 in unreimbursed classroom expenses. These breaks are gone unless Congress extends them.

One critical year-end reminder is to take any required minimum distributions that you are obligated to take from these and 401(k)-style accounts, for those investors who have reached age 70½. If you don't withdraw enough after reaching that age, you are subject to a steep 50% tax rate on the amount not taken out.

Required minimum distributions generally must be made by Dec. 31. The one exception involves your first required distribution. It can be taken as late as April 15 of the year after the year in which you turn 70½.

Yet many people delay. Fidelity Investments last year reported that two-thirds of older IRA and 401(k) investors hadn't withdrawn the required amount as of mid-November.

While not a year-end move per se, IRAs were the subject of a fairly recent tax-court ruling, affecting the number of 60-day rollovers that can be taken.

The ruling "clarified rules limiting tax-free 60-day rollovers between IRAs to one rollover in any one-year period, regardless of the number of IRAs a taxpayer may own," said investment-firm T. Rowe Price. But you still may make any number of tax-free transfers in a year if they're done from one financial firm or trustee to another.

Also somewhat up in the air are the many relatively new and complex tax changes related to the Affordable Care Act. These provisions largely affect higher-income individuals.

"The 800-pound gorilla in the room is the Affordable Care Act and the individual mandate for that," Meese said. For example, some who thought they might receive subsidies to pay health-insurance premiums could owe additional taxes.

Look for late-breaking congressional action focused on chipping away at the Affordable Care Act and its tax provisions, given that Republicans have expressed strong distaste for the legislation.

The tax drama focused around expired provisions or other items won't necessarily end New Year's Eve.

"It's definitely possible some of this could happen after Jan. 1," Meese said.