Another tax year usually means another last-minute deal by Congress to extend dozens of expired tax breaks affecting millions of Americans, but not this year. Contrary to prior years, Congress passed a tax package in 2015 that provides clarity for taxpayers doing their 2016 taxes. Several tax breaks provide more than just temporary relief to individuals and the middle class.
The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) includes 52 tax breaks worth $622 billion over the next decade. While Congress usually extends these tax provisions for only one year and then procrastinates until next December to temporarily extend them again, nearly two dozen of the tax breaks were made permanent and many others were extended for two or five years. It’s a rare feat of bipartisanship that will benefit taxpayers across the country this year and beyond.
Let’s take a look at the five biggest tax breaks for individuals and the middle class included in the PATH Act, based on a report from Dixon Hughes Goodman. Remember, the tax deadline is April 18, 2017.
5. Teachers’ Classroom Expense Deduction
This extension is relatively small in the overall economic picture, but it affects millions of teachers. The teachers’ classroom expense deduction allows primary and secondary education professionals (grades K-12, including school administrators and assistants) to deduct above-the-line qualified expenses. You can deduct up to $250 ($500 if married filing joint and both spouses are educators, but not more than $250 each) of any unreimbursed expenses you paid or incurred for books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials that you used in the classroom.
The PATH Act makes this extender permanent. It also modifies the deduction by indexing the $250 ceiling to inflation beginning in 2016, and allows teachers to deduct “professional development expenses.”
In order to qualify, you need to work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law. For courses in health and physical education, expenses for supplies are qualified expenses only if they are related to athletics.
4. Tuition and Fees Deduction
The tuition and fees deduction, reported on Form 8917, extends through 2016. It allows for the deduction of qualified tuition and fees for post-secondary education, such as college and graduate school. The maximum deduction is $4,000 for taxpayers with modified adjusted gross income (MAGI) not exceeding $80,000 ($160,000 for a joint return).
You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return, but since it is taken as an adjustment to income, you can claim the deduction even if you do not itemize deductions on Schedule A (form 1040). Dixon Hughes Goodman estimates this provision will cost $608 million over a period of 10 years.
Additionally, the American Opportunity Tax Credit (AOTC) is a permanent tax break under the PATH Act that may be available to you. It had been scheduled to expire after 2017. The AOTC is an enhanced version of the Hope Education Credit and offers a maximum annual credit of $2,500 per eligible student. As always, consult with the IRS and/or an accountant to better understand which tax breaks apply to your own situation.
3. Energy Credit
Your house can now become more efficient with the help of Uncle Sam. Incentives for energy conservation expired at the end of 2013, but the extension of Code Sec. 25C provides a nonbusiness tax credit to people who make qualified energy efficiency improvements to residential property. Examples of qualified property are improvements such as adding insulation, energy efficient exterior windows, and energy efficient heating and air conditioning systems.
The PATH Act extends Code Sec. 25C through 2016. Other energy-related extenders include a credit for alternative fuel refueling property, credit for two-wheel plug-in electric vehicles, second generation biofuel producer credit, biodiesel and renewable diesel incentives, credit for energy-efficient new homes, special allowance for second generation biofuel plant property, special rules for sales/dispositions to implement FERC, and excise credits for alternative fuels.
2. Mortgage Debt Forgiveness
Although a lender might be willing to forgive debt you owe when you sell your home for less than what’s left on the mortgage, the IRS typically treats this cancellation of debt as income. Under the tax extension bill, cancellation of mortgage debt on a principal residence of up to $2 million ($1 million for a married taxpayer filing separately) is excluded from income for 2016. This includes foreclosures, short sales, or loan modifications. The bill also modifies the exclusion to apply to qualified principal residence indebtedness discharged in 2017 if discharge is made under a binding written agreement entered into in 2016.
Dixon Hughes Goodman explains, “Without an extension, debt that is forgiven through a foreclosure, short sale or loan modification could be treated as taxable income if another exclusion, such as for insolvency, is not available.” The cost of the extender totals $5.14 billion over 10 years.
1. State and Local Sales Tax Deduction
If you itemize your taxes, this extension allows you to deduct state and local general sales taxes you paid in lieu of deducting state and local income taxes. However, this deduction is not only potentially beneficial to taxpayers in states without an income tax. As Dixon Hughes Goodman notes, taxpayers who made a big ticket purchase, such as a motor vehicle before year-end could benefit by weighing the deduction for state and local general sales taxes against their deduction for state and local income taxes. The IRS offers a sales tax deduction calculator to learn more.
This extender is now permanent courtesy of the PATH Act. Over the next ten years, it’s estimated to cost $42.44 billion, making it one of the most expensive extenders in the bill.
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