BE PREPARED: The Coming Tax-Break Smackdown

It's going to be even more painful than last year , when you file your 2014 tax forms.

First, all taxpayers this year will see a new check box on their 1040 federal tax return, where they'll be required to disclose whether they have had qualified health insurance all year, per the Affordable Care Act mandate.

If you or your dependents did not obtain minimal essential coverage, you will pay a penalty equal to 1 percent of your yearly household income, or a maximum of $95 per person, on your 2014 federal income tax return, due April 2015. That penalty increases to 2 percent of household income, or $325 per person, in 2015; and 2.5 percent of income, or $695 per person, in 2016.

Another new twist for 2014 is the uncertainty surrounding $85 billion worth of temporary tax breaks for individuals and businesses, also called extenders, that expired on Dec. 31, 2013.

In years past, Congress has reinstated those credits retroactively in the final weeks of the year, sometimes even waiting until January of the following year. And, indeed, there is a Senate bill aimed at doing just that.

But that bill is now stalled until after the November congressional elections, leaving millions of taxpayers in limbo.

Among the expired tax breaks are the commuter subsidy for riding mass transit, which fell to $130 from $245.

Gone, too, is the above-the-line deduction—meaning you need not itemize to claim it—for qualified higher-education expenses, often referred to as the tuition and fees deduction. The tax break allowed taxpayers with modified adjusted gross income of $80,000 or less ($160,000 for joint filers) to claim up to $4,000 of their own qualified tuition and related expenses, or the tuition of a spouse or dependent.

One of the most far-reaching extenders to expire, however, is the state and local general sales-tax deduction. Taxpayers who itemize have previously been permitted to subtract either their state income tax or their state sales tax in calculating their federal taxable income, but the sales-tax deduction was never made permanent.

More than 8 million taxpayers claimed the deduction for state and local general sales taxes in 2012.

Retirees should also be warned that one of the most popular ways to donate to charity—donating directly from their individual retirement accounts, thereby reducing their tax burden—will be lost if the extender bill is not approved.

Taxpayers who are 70½ or older will no longer be permitted to exclude up to $100,000 per year from gross income by donating directly from their IRAs, or count that qualified charitable distribution as their required minimum distributions.

Lastly, tax relief for homeowners who are underwater on their loan, meaning their house is worth less than they owe on their mortgage, has also disappeared.

Those still struggling in the wake of the housing crisis will no longer be able to write off up to $2 million of any portion of their mortgage debt that gets forgiven by their bank. That amount will instead be treated as taxable income.

(via CNBC)