Stocks will rally in the coming year, but expect some major volatility. Lots of folks disagree, but I think that the 10-year Treasury yield will not be easily tamed, and it will rise above 3.5 percent as the Fed removes some stimulus. I think 4 percent could be on the horizon. That will make stocks skittish but if the economy is improving, as we hope, the bumps will give way to year-end gains. They won't be the dazzling gains of 2013, but maybe the S&P 500 will eke out a high-single-digit move.
The Fed's efforts to assure markets it will keep short-end rates at zero for a long time actually works. The yield curve steepens, and by year-end, if everything is clicking, the market starts to look for a rate hike in 2015.
OK, this has GOT to be the year. Let's hope we see growth accelerate because if it doesn't, I fear a dip. By the end of the year, we should see some heartier gains and an economy growing at 3 percent plus.
China to the rescue?
The odds are 50-50 that China restarts its growth engine in a meaningful way and boosts the world and regional economy. The new leadership needs to show it is making economic strides, as it flexes its military muscle in the region, and that could be motivation to get the economy humming.
The U.S. oil and gas boom is in full swing, and it will continue to affect energy producers around the world. OPEC, with more barrels of its own coming on line, struggles to keep control of prices. Here's a wild thought: the U.S. actually starts to embrace its rising position of power and the political implications of being less dependent on other sources. The Keystone pipeline gets approved, and WTI crude stays in a range under $110 per barrel.
Usually, if borrowers have part of their debt written off or forgiven, they have to treat that amount as taxable income. But in the aftermath of the housing market's implosion, homeowners who defaulted on their mortgages and had their bank write off or forgive part or all of their loans weren't required to claim the forgiven amount as income. The Mortgage Forgiveness Debt Relief Act of 2007, which created this provision, has been extended before, but now, with home prices recovering somewhat, the incentive to preserve this provision is starting to fade. That makes it more likely that the mortgage-debt forgiveness provisions might not get renewed for 2014.
Federal tax law has allowed taxpayers to deduct state and local income taxes for years, but for the 57 million people who live in states that don't charge income tax, those provisions didn't provide any relief. That changed in 2004, when lawmakers allowed taxpayers to choose instead to take a similar deduction for sales taxes. The provision, which was originally slated to expire at the end of 2007, has been repeatedly extended by Congress. Over the years, it has provided $16.4 billion in deductions to affected taxpayers.
Teachers from kindergarten to high school are allowed to deduct up to $250 for money they spend buying supplies for their classrooms. This deduction's available even to those who don't itemize, making it more valuable than most deductions. According to figures from The Tax Institute at H&R Block, more than 3.6 million teachers took advantage of this provision in 2010 to deduct $915 million in expenses. This deduction has been extended regularly ever since its initially scheduled expiration in 2005, so, even though it's on the chopping block again, it's a pretty good bet that lawmakers will let the tax break survive into 2014.
Under current law, employers may allow their employees to have pre-tax money taken from their paychecks and directed to paying for parking expenses or the cost of public transportation. But for years, the maximum amounts for public-transportation expenses were only about half what car-commuters could take for parking. In 2009, lawmakers equalized those amounts. In 2013, that meant that $245 a month worth of commuting-related expenses could be paid for tax-free, whether that meant a transit pass or parking fees. But after a last-minute battle at the beginning of this year to extend the benefit retroactively to 2012, transit-riders are once again facing the expiration of the provision. In June, three lawmakers introduced the Commuter Parity Act to make the provision permanent, but the bipartisan proposal is stuck in limbo in the House Ways and Means Committee.
These provisions allow certain taxpayers to deduct between $2,000 and $4,000 of qualified educational costs. This provision was also retroactively reinstated for 2012 at the beginning of this year. The difference, though, is that other tax breaks also exist for educational expenses, including the Lifetime Learning Credit and the American Opportunity Credit. (You have to pick either the tuition and fees deduction, or one of the two education credits. You're not allowed to double-dip.) Those tax credits makes it less crucial to extend the tuition deduction, although it's still a better deal for many people: The Tax Institute at H&R Block says that 2 million taxpayers used it to write off $4.36 billion in expenses in 2010.
Since 2006, taxpayers could claim a credit on certain expenses for remodeling their homes to make them more energy efficient. Currently, the maximum lifetime credit amount is $500, but amounts were higher in the past, and more than 43.5 million taxpayers have claimed an average of more than $765 using the credit.
Congress commonly waits until late in the year to extend expiring tax provisions like these, as well as others not mentioned above, such as the exemption for charitable IRA distributions, deductions for mortgage insurance premiums, and the higher immediate write-off amounts for small-business equipment purchases.
Lawmakers often use what's known as a tax-extenders bill to pass all the extensions in a single package. Earlier this month, WOTC Coalition President Paul Suplizio said that a seemingly unrelated Medicare-payments bill was probably the first step toward a year-end tax extenders bill that would cover expiring tax breaks like these.
And, just as millions of Americans procrastinate until April 15 to file their taxes, we can expect lawmakers to wait until Dec. 31 -- or beyond -- to decide the fate of these tax breaks.