Smart Moves to Save on Your 2014 Tax Return

This threatens to be a messy tax season, particularly for last-minute filers. Citing budget constraints, the IRS has warned taxpayers that it will probably answer only about half of the phone calls from taxpayers seeking help this year. Meanwhile, new filing requirements mandated by the Affordable Care Act could create extra work for tax preparers, making it more difficult to get help at the midnight hour. Don’t miss the following changes.

Zombie tax breaks

To the surprise of no one, Congress waited until December to revive some tax-saving provisions that expired at the end of 2013. The tax breaks that refuse to die include a deduction for state and local sales taxes that you can take instead of the write-off for state income taxes. This deduction primarily benefits residents of the nine states that have no income tax. But residents of states with low income taxes, as well as older residents of states that offer special breaks on retirement income, could also nab a bigger tax break by deducting sales taxes, says Greg Rosica, contributing author to the EY Tax Guide 2015. Go to the IRS Sales Tax Deduction Calculator to figure out how much you can deduct in sales taxes, based on your income and your state and local sales tax rates. If you bought a car, boat or airplane last year, you can add the sales tax you paid to the amount shown by the IRS calculator.

Congress also resuscitated a provision that allows some homeowners to deduct mortgage insurance premiums. Lenders typically require home buyers who put less than 20% down to buy private mortgage insurance. You’re eligible for this tax break if you took out your loan after 2006 and if your 2014 adjusted gross income was $109,000 or less.

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Finally, Congress reanimated a provision that allows taxpayers who are 70½ or older to transfer up to $100,000 directly from their individual retirement accounts to charity. The transfer counts as your required minimum distribution and isn’t included in your adjusted gross income. Reducing your AGI could help you avoid or reduce taxes on your Social Security benefits and stay below the cutoff for the Medicare high-income surcharge. If you squeezed in a direct transfer to charity during the two weeks between when Congress revived this break and New Year’s Eve (or took a chance and did it earlier, when the provision was still in limbo), you’re in luck. But if you took your RMD and donated part or all of it to charity, you’ll have to report the full RMD and then deduct your contribution.

Congress declined to make these tax breaks permanent or even extend them through 2015. The soon-to-be Republican-controlled Congress wanted the flexibility to revise the tax code this year, which could involve scrapping some tax breaks in exchange for lower tax rates, says Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting US. (Both parties remain far apart on how to accomplish that goal.)

Taxes on investment income

If the economic recovery or bull market enhanced your balance sheet last year, you may have to pay a new 3.8% surtax on your investment income. The surtax, which arrived in 2013 as part of the Affordable Care Act, affects single taxpayers with modified adjusted gross income of $200,000 or more, and married taxpayers with modified adjusted gross income of $250,000 or more.

The surtax is based on your investment income or the amount by which your modified AGI (which includes investment income) exceeds the threshold, whichever is less. If you are blindsided by the surtax this year, it’s not too early to start making your portfolio more tax-efficient for 2015. Tax-exempt interest, for example, avoids the surtax as well as the regular income tax.

Check the box on health care

The health care law’s tax requirements represent the most significant change in this year’s forms. Most taxpayers, though, will simply have to check a box on their tax returns.

If you and other members of your household had health insurance through your employer throughout 2014, check the box at line 61 on Form 1040. You can also check the box if you or other members of your household received health insurance through Medicare, Medicaid or a program such as Tricare, which covers members of the military, says Mark Ciaramitaro, vice-president of health care services at H&R Block. You may receive a Form 1095-C from your employer confirming your coverage, but that’s not required for 2014, so you don’t need one to be able to check the box.

If you bought health insurance through one of the state exchanges, you will have more work to do. By now, you should have received Form 1095-A from the exchange. This form shows your monthly premium and the amount of any subsidy you received. You can’t complete your return without this statement, so if you didn’t receive it, log on to your health care marketplace Web site and look for an electronic version.

Use this information to fill out Form 8962, which is used to determine whether your subsidy (based on the estimate you provided of your 2014 family income) was too large or too small. If you overestimated your income, you’ll receive a credit in the form of a larger tax refund or smaller tax bill. If you underestimated, the opposite will occur: The excess subsidy will eat into your refund or hike the tax due with your return.

Taxpayers who were uninsured for part or all of the year may, for the first time, have to pay a penalty. The penalty for 2014 is $95 per person or 1% of your household income above the filing threshold, whichever is higher.

The law provides a long list of exemptions from this requirement, so check them out before you pay. For example, taxpayers who went without coverage for less than three consecutive months won’t be penalized. You can find the full list of exemptions at www.healthcare.gov; type “exemption” in the search box.

Trimming the bill

Even at this late date, you can take steps to reduce your 2014 tax bill.

Contribute to a traditional IRA. You have until April 15 to make a 2014 contribution to your IRA. The IRA deduction is “above the line,” which means you can claim it even if you don’t itemize on your tax return. It will reduce your adjusted gross income on a dollar-for-dollar basis, which could also make you eligible for other tax breaks that are tied to AGI.

If you’re not enrolled in a 401(k) or some other workplace retirement plan, you can deduct an IRA contribution of up to $5,500 ($6,500 if you’re 50 or older) no matter how high your income. But if you have a company plan, the right to the IRA deduction is phased out as 2014 income rises between $60,000 and $70,000 on a single return or between $96,000 and $116,000 if you’re married and file jointly (see 7 Things You Must Know About Funding IRAs).

If your spouse is covered by a workplace-based retirement plan but you are not, you can deduct your full IRA contribution as long as your joint modified AGI doesn’t top $181,000 for 2014. You can take a partial tax deduction if your combined income is between $181,000 and $191,000.

Contribute to a SEP IRA. If you or your spouse earned self-employment income last year, you can shelter even more income with a SEP IRA. In 2014, you can contribute up to 25% of net self-employment income (business income minus half of your self-employment tax), up to a maximum of $52,000. You have until April 15 (or October 15 if you file for an extension) to set up and fund a SEP.

Fund a health savings account. You also have until April 15 to set up and fund a health savings account for 2014. To qualify, you must have had an HSA-eligible insurance policy—with a deductible of at least $1,250 for individual coverage or $2,500 for family coverage—at least since December 1. You can contribute up to $3,300 if you had single coverage or $6,550 if you had family coverage (you can contribute an additional $1,000 if you were 55 or older in 2014). Money you invest in a health savings account will reduce your AGI on a dollar-for-dollar basis.