The only things certain are death and taxes the saying goes, but in recent years the state of federal income taxes has been full of uncertainty.
Although the need for tax reform is apparent, our legislators have been in the habit of putting through last minute patches to keep tax provisions valid for the current year, delaying any decision about the coming year until “later.” That may have gotten them off the hook for the moment, but each year we were left to wonder if those tax deductions and credits, now expired, would once again be renewed retroactively to the beginning of the year. That has made for tough tax planning.
What a surprise then, that Congress took more permanent action this year – and two weeks prior to the end of the year – by passing the Protecting Americans from Tax Hikes (PATH) Act of 2015. The act addressed 52 tax provisions that expired Dec. 31, 2014; most were extended beyond 2015 and some even made permanent.
Key extenders for individual taxpayers to know about:
Parents of current and future college students will be pleased to learn that the American Opportunity Tax Credit, which provides for up to a $2,500 credit for expenses of tuition, fees and books for the first four years of college, is now permanent. For those under the specified income threshold, this credit over four calendar years is a very helpful $10,000 to offset the costs of college.
Good news too, for the $4,000 tuition deduction, which had also expired at the end of last year. Even students finishing school in four years actually attend school over five calendar years. Beyond the first four, taxpayers can choose the better of the tuition deduction or the Lifetime Learning Credit for a tax break. This deduction was only extended until the end of 2016.
Teachers – your educator expense deduction has not only been made permanent, but now indexed to inflation. Get your Staples cards ready, because your maximum deduction is going up from $250 to $257 for 2016. That doesn’t mean you can only deduct $257 of expenses overall, but this tax benefit allows you to deduct up to that amount directly from your return, without the need for itemizing deductions and exceeding 2 percent of your adjusted gross income before being able to take the deduction.
For those that pay little or no state and local income tax, whether by living in a state with no income tax, or living in a state like Pennsylvania that does not tax retirement income, the provision to deduct sales tax instead is back in play. This allows you to deduct the greater of state and local income tax paid or state and local sales tax, calculated by a formula based on your income and sales tax rate or by actual sales tax paid if you track that.
For a family of three in Monroe County with an income of $50,000, that yields a standard sales tax deduction of $576, while state and local income taxes on that amount of earnings would be more than $2,000. You may also add sales tax paid for items such as cars, boats and home purchase or substantial renovation to the allowance, so hold on to those receipts if you think you might take that deduction.
Feeling charitable? Those age 70 ½ or older now permanently have the ability to give up to $100,000 directly to charity from an IRA account without being taxed. That donation also counts toward the required minimum distribution.
For those who unfortunately give up a principal residence to foreclosure or short sale, the exclusion from taxation on the “income” attributed to that cancellation of debt, although not permanent, continues through Dec. 31, 2016. This is an important protection; having to find the funds to pay tax on the debt cancelled adds insult to injury, and in most cases is near impossible.
Congress even thought ahead this year. The child tax credit is worth up to $1,000 per child (up to three children) to parents whose income falls within
the limits, and a portion is refundable for those who had earned income over $3,000 – meaning you can get back more in tax refund than you paid in taxes. However, in 2017 the minimum amount of earned income necessary to qualify for refundable credits was scheduled to rise to $10,000; the PATH Act made the over $3,000 threshold permanent.
The credit for energy efficient improvements such as adding insulation, qualifying windows and doors, and high efficiency heating and air conditioning systems was continued for 2015 and 2016 also. This credit can yield 10 percent of the cost up to a $500 lifetime limit beginning in 2005 (of which only $200 can be for windows).
Even the Affordable Care Act was included; the imposition of an excise tax on medical devices was delayed until 2018, and the tax on Cadillac employer health plans until 2020.
And file this under “we need a law for that?” The PATH Act prohibits IRS employees from using personal email accounts for official business, and even better, must be familiar with and respect the 2014 Taxpayer Bill of Rights. In case you weren’t aware, you have the right to be informed, to quality service, to pay no more than the correct amount of tax, to challenge the IRS’s position and be heard, to appeal a decision in an independent forum, to finality, to privacy, to confidentiality, to retain representation, and to have a fair and just tax system.
Looking ahead, the opening of the 2015 tax filing season is Jan. 19, 2016 (a day earlier than last year), and the tax deadline is extended to Monday, April 18, 2016. With Leap Year, we have an extra five days this year. Even so, it’s in your best interest to file as early as you can, to avoid the possibility of a fraudulent return filed under your social security number.