Key tax deductions left hanging

@CNNMoney January 9, 2012: 5:25 AM ET
A slew of tax breaks expired at the end of last year. But lawmakers may choose to renew them for 2012 - or not.

A slew of tax breaks expired at the end of last year. But lawmakers may choose to renew them for 2012 - or not.

NEW YORK (CNNMoney) -- It may be a new year, but when Congress returns from its winter break it will be all old business that lawmakers failed to finish before Christmas.

The fight over a temporary extension of the payroll tax cut and long-term federal unemployment benefits sucked up all the oxygen on Capitol Hill. And it will suck up more between now and the end of February, when the two-month extension Congress managed to pass expires.

In the meantime, lawmakers left more than 50 expiring business and individual tax breaks hanging in the balance, along with an expanded mass transit break for workers.

Officially, of course, they expired on Dec. 31. But like Lazarus, they may be risen from the dead by Congress, which could choose to extend them and make the breaks retroactive to the start of this year. That way they'll be in effect before taxpayers have to fill out their federal returns for this tax year in early 2013.

The value of keeping the so-called tax extenders on the books is debatable. Tax experts argue that many should be ditched.

But the everlasting question mark punctuating these and other tax breaks is a source of frustration for anyone who takes tax and financial planning seriously.

"Taxpayers are very unhappy because they don't know what's going to happen; they can't plan," said David Mellem, who is certified to represent taxpayers before the IRS.

Expanded mass transit break: For three years, workers whose employers subsidized their commuting costs were entitled to receive the same amount of money whether they took mass transit or drove to work and paid for parking.

The parity in the benefits, which are tax-free to workers, meant mass transit commuters got more than they had in previous years.

Congress = Uncertainty, Inc.

But now Congress has let the mass transit expansion expire. As a result, those who take mass transit may only receive up to $125 a month tax-free, whereas those who drive to work can receive $240 a month.

State and local sales tax deductions: Taxpayers are allowed to deduct their state and local income tax on their federal return. But in recent years, lawmakers gave them a choice: They either could deduct their income tax or the state and local sales taxes they paid in a given year.

The choice benefits residents of the nine states that don't actually have an income tax.

As of now, those residents won't have that choice for this tax year.

What the payroll tax cut deal will do

Mortgage insurance deduction: In addition to deducting the interest they pay on their mortgage, taxpayers whose adjusted gross income doesn't exceed $110,000 have been allowed to treat the premiums they pay for mortgage insurance as deductible interest too.

But that may not be an option for tax year 2012.

School teacher tax deduction: Many K-12 teachers pony up their own money to buy supplies and equipment for their classrooms. Unless Congress acts, they will no longer be able to deduct up to $250 a year for those expenses.

Higher education tuition deduction: For tax year 2011, taxpayers are allowed to deduct qualified tuition and related expenses paid on behalf of anyone in their household to a college or university. The deduction is available regardless of whether one chooses to itemize or not.

The deduction is worth up to $4,000 for someone whose adjusted gross income doesn't exceed $65,000 if single ($130,000 if married filing jointly). Those making between $60,000 and $80,000 ($130,000 to $160,000 if married), however, may only claim up to $2,000.

Tax year 2012 may be a different story. But look on the bright side. While the tax break hasn't been renewed, it means one less complicated deduction for taxpayers to figure out.

Larger AMT exemption amounts: To protect more than 20 million middle class households from having to pay the Alternative Minimum Tax, Congress typically passes an AMT "patch" every year.

They have yet to do so for 2012, but because most Americans don't have to file their returns until early 2013, lawmakers could pass a patch at any point this year and have it apply in time for the 2013 filing season.

The AMT was intended primarily for high-income taxpayers. But in recent years, it has threatened to engulf the less affluent because the income thresholds determining who must pay the tax were never adjusted for inflation.

The patch increases the amount of income tax filers may exempt from consideration when calculating whether they need to pay the AMT.

Without the AMT patch, tax filers would only be able to exempt $33,750 in income if single or $45,000 if married filing a jointly, according to CCH, a tax information publisher. That is considerably less than the $48,450 that single filers and $74,450 joint filers may claim on their 2011 returns. To top of page

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