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Changes in Tax Deductions and Credits

Overview

It's tax filing season.  And again this year, we had some tax laws extended by Congress through 2016 or 2019, but some were actually made permanent.  I'm going to discuss those tax provisions that have been extended or made permanent for individual taxpayers.

Summary of Individual Tax Provisions Made Permanent

  1. Charitable giving incentives: a) Taxpayers are now allowed to donate real property for conservation purposes; b) IRA owners over 70.5 years old may now make charitable donations directly to a qualified charity, without being taxed on the distribution amount up to $100,000 per year. 
  2. State Sales Tax: Itemized deduction for state and local sales taxes in lieu of income taxes. 
  3. Teacher’s supplies deduction: Teachers will now have a deduction option for K-12 supplies expense up to $250/year.  The deduction will be indexed to inflation starting this year.
  4. Enhanced earned income credit: Families with children under age 17 can take a $1,000 per child tax credit. Phaseout begins with adjusted gross income of $110,000 for joint filings or $75,000 for single filers.
  5. The Enhanced American Opportunity tax credit:  This tax credit of up to $2,500 is for each qualified student for whom you pay qualified educational expesnse for four years of post-secondary education. The phase-outs still remain at $80,000 single and $160,000 married, filing jointly of income limits. 
  6. Enhanced Child tax credit: The current law allows $1,000 credit per qualifying child with an additional refundable credit equal to 15% of the taxpayers’ earned income in excess of $3,000.  This credit was set to expire beginning in 2017.
  7. Due to fraud, another permanent provision included in the new law enforces that earned income credits or child tax credits cannot be filed for in amended returns, claiming those credits for any year that the taxpayer did not have a valid social security number or ITIN.

Summary of Individual Tax Provisions Extended through 2019

  1. The new markets credit: An individual or corporate tax credit for making qualified equity investments in qualified community development entities.
  2. Bonus Depreciation: 50% immediate expensing is good through 2017, but it drops to 40% in 2018, and only 30% in 2019, before expiring altogether.

Summary of Individual Tax Provisions Extended through 2016:

  1. Tuition deduction of $4,000 will continue for tuition costs of higher education, as an above-the-line deduction.
  2. A $500 credit on the purchase of non-business energy-efficient items.
  3. On commercial property related to heating, cooling and lighting improvements, the section 179D expensing option remains intact.
  4. Probably the most beneficial is the exclusion of COD income on a principal residence, where a taxpayer is forced to sell the home in foreclosure or short sale, and does not repay the lender.  This previous exclusion of income up to $2 million has been extended for this cancellation of indebtedness. 

In addition, there were approximately 50 other  provisions extended for just two years, in addition to all the extenders mentioned above. However, probably the most controversial extender/delay is Obamacare. This extended provision actually pauses the 2.3% excise tax on medical devices in the years 2016 and 2017. It also delayed the Cadillac tax on employer-sponsored insurance plans until 2020 from 2018.

Other tax deductions or credits that were extended, but not made permanent include:

  1. The deduction for private mortgage insurance, used when a home buyer does not have all of the required down payment, was extended for the 2015 tax year but not made permanent. PMI is generally not reported on your 1098 mortgage tax form, so you must find out from your mortgage company how much of your monthly escrowed payment is PMI to deduct it.
  2. An above-the-line deduction for tuition and fees for students in higher education was extended for two years.
  3. In a boon to homeowners who want solar or wind power, Congress passed a five-year extension of the investment tax credit for solar and wind power projects.  The move extended a 30 percent tax credit of the value of solar projects, including solar panels and water heaters, extended through 2019 and then declining until 2022, when it will be eliminated.
  4. The 30 percent wind tax credit will continue through 2019, then diminish each year, before disappearing in 2020.

So while many of the tax extenders are not new or just more of the same, the permanent changes provide some solid, known tax provisions we can all bank on going forward. 

Taxpayers will have an extra weekend to prepare taxes, which won’t be due until April 18 this year because of Emancipation Day in Washington, D.C. on April 15.

Bowman Law Firm, Tax Attorney, CPA

Huntsville, Alabama