Valuable Tax Cuts Passed at Year End
Revival of tax cuts that died and in some cases made permanent or improved were made by congress last December as they quickly beat a retreat from Washington for their Christmas holiday.
An important tax credit, helping families pay for college, previously provided up to $2,500 a year for each student who qualified for up to four years was scheduled to revert to the old credit which covered only the first two years of college in 2018 and in a smaller amount of $2,000 per year. The new American Opportunity makes permanent the four year credit at the higher amount of $2,500 per year.
Withdrawals from 529 College Savings Plans to pay for computers for students used to count as tax free in 2009 and 2010. That provision disappeared but there is a new law to bring it back permanently. (There’s no federal tax deduction for contributions to 529 plans - however most states have tax incentives)
This is a particularly popular credit for families whose income is over the threshold to qualify for the American Opportunity credit. It expired at the end of 2014, is reinstated but scheduled to expire again at the end of 2016. It allows a deduction of up to $4,000 of eligible college tuition paid during the year. The top deduction drops to $2,000 for taxpayers with incomes that exceed $65,000 on a single return or $130,000 on a joint return. For incomes over $80,000 and $160,000 respectively, this deduction is not allowed. You can claim this deduction whether you itemize or not. You might want to have your tax preparer check which deduction is better for you - American Opportunity Credit or the Lifetime Learning Credit.
Typically, forgiveness of debt is treated as taxable income to the debtor. Due to the onslaught of foreclosures over the past years, congress has cut some slack to home owners who lost their homes. The new rule allows up to $2 million of discharged debt by lenders in foreclosures or short sales to be excluded from taxable income. This exemption had expired in 2014 and in December 2015 it was reinstated retroactively for 2015 and extended for 2016 also.
The ability to deduct the insurance premiums, required for homeowners who purchased a home after 2006, is back again although scheduled to expire again after 2016.
The “expensing” deduction for business equipment in Section 179 is back and has been made permanent. This deduction allows a business to write off 100% of the cost of assets - up to qualifying assets of $500,000 in the year of purchase, rather than taking the deduction over many years.
Another break, called a 50% bonus depreciation allows businesses to write off 50% of these expenditures immediately and using regular deductions of the rest over a set amount of years. (It phases out after $2 million in assets are acquired in a single year.) The bonus depreciation is set to drop to 40% in 2018 and 30% in 2019.
This law allows for a tax break for the profits from qualifying small businesses if the investor holds the stock five consecutive years from purchase. 100% of the qualifying profit is tax free up to a maximum of $10 million.
In 2015 this was cut in half to 50% but it was restored in December 2015 permanently.
In the past if you were older than 70-½ years and wanted to make charitable contributions, using part or all of the required minimum distributions from your IRAs, up to $100,000 of that direct donation was tax free. Typically this provision was let to expire only to be retroactively be revived again each year. Congress has made this deduction a permanent one as of 2016 and retroactive for 2015.
The tax credit elementary and high school teachers were allowed to deduct - $250 per year for money they spend on supplies for the classroom and students has been revived. Additionally, it can also be used for teacher’s professional development expenses. This deduction can be taken even when not filing an itemized deductions return.
As of 2015, employees could use up to $250 per month of pretax income to pay for parking but only $130 for use of mass transit. Congress has now made the use of pretax money equal - parkers and mass transit users can now use up to $255 per month of pretax income to get to their place of work.
Typically, the child credit, worth $1,000 per child under the age of 17, is nonrefundable. In other words if the credit should erase your tax obligation for that year, the excess you didn’t use is gone. If you are in a lower tax bracket, you might qualify for the “Additional Child Credit” which would allow you to get a refund check form the IRS for amounts you don’t need to offset your tax obligation. This credit is phased out at higher income levels. This provision was due to expire in 2017, however, congress has made it permanent.
NOTE: This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
If you feel you need to talk to someone regarding how this might affect your financial plans, please call us at (415) 898-4439 or email us to schedule an appointment.