At the end of every year, it seems as though Congress rushes to pass some sort of legislation aimed at extending tax breaks or some other benefit. In many cases, these extensions are designed to retroactively implement a tax break that has already expired.
This year is no different.
However, as Congress wrestles with issues related to taxation, there are some tax extenders that might be made permanent. The House Ways and Means Committee has included some popular tax breaks in it’s HR 2029, Protecting Americans from Tax Hikes (PATH):
Qualified Charitable Distributions Rule
One of the biggest changes included in the PATH bill is the move to make the tax break associated with distributions from your IRA to charities permanent. This is a tax benefit that has been in effect since 2006 for those over the age of 70 ½, and who are required to make minimum distributions from their IRAs.
Until now, this tax break has needed to be renewed (and it expired at the end of 2014). If PATH makes it through Congress, this tax break will be permanent. This tax break allows for you to distribute up to $100,000 from your IRA directly to a charity and not be taxed as income. While you won’t be able to claim it as a deduction, but it does count toward your RMD. This means you can meet your RMD requirement without some of the money being counted as income and taxed.
American Opportunity Tax Credit Changes
As part of the American Recovery and Reinvestment Act of 2009, the American Opportunity Tax Credit replaced the Hope Scholarship Credit and increased the possible credit amount, along with raising phaseouts for AGI. In 2017, the credit was supposed to revert back to the Hope Scholarship Credit.
The PATH legislation changes, that, however, and makes the American Opportunity Tax Credit permanent. This results in a credit of up to $2,500 per year for up to four years of post-secondary education. Additionally, the phaseouts start at $160,000 AGI for married filing jointly, and $80,000 for those filing singly.
If you are helping your children pay for college in coming years, this credit can be a great help, since a credit is a dollar-for-dollar reduction in your tax bill.
On top of that, the above-the-line deduction for qualified tuition and fees has been extended through 2016. It’s not a permanent change, but it’s a useful extension if you are helping pay for your child’s college. You can’t claim this deduction if you take the American Opportunity Tax Credit, though, so run the numbers to see what will be more beneficial in your situation.
It’s also worth noting that certain changes to 529 plans are being made permanent, including the allowance of computer equipment, software, and Internet access as qualified uses for distributions from 529 plans.
State and Local Sales Tax Deduction
One of the options offered for those who itemize their deductions has been to choose to take a deduction for the state and local sales tax paid, if they don’t deduct the amount paid for state income tax. This tax break was set to expire, but it is now expected to be permanent.
For the most part, only those who live in states where there is no state income tax choose this option. Choosing to deduct your sales tax requires that you keep receipts to document your paid sales tax, or that you use a method from the IRS that estimates your likely taxes.
However, if you are a retiree, and you don’t have a high income, but you still have expenses that result in sales tax, it might be worth it to look into this option, even if you live in a state that levies an income tax. Run the numbers to see where the greatest tax benefit would be, now that this provision is likely to be permanent.
Once again, Congress is extending the provision that excludes discharge mortgage debt from income. The rules have been reinstated (including retroactively) in recent years, and once again the rules are being extended. However, this isn’t a permanent change, with the rules being extended only through 2016. If you participated in a short sale this year, and if you are considering a short sale to unload a qualified underwater property, this change could be useful.
Another mortgage-related change is the extension of the ability to deduct mortgage insurance if it meets certain qualifications. This deduction has been extended through 2016 as well (but not made permanent).
There are other changes in the tax extenders bill that might impact you positively, including the enhanced Child Tax Credit, expensing rules for businesses under Section 179, and the 50% bonus depreciation on certain business purchases. Check with a tax professional or financial planner who can help you make the most of your situation and hopefully save you money.