The decade long practice of Congress hastily extending various tax breaks just before their year end expiration might become less common. In late December the “Protecting Americans from Tax Hikes (PATH) Act of 2015” was signed into legislation that caused some tax breaks to be extended permanently, while others were renewed for two years. Tax breaks are retroactive to the end of 2014 when they lapsed.
Among the more than 50 extender provisions approved are a number that are advantageous for individuals who are saving or paying for college, making significant charitable contributions and those seeking certain tax deductions. We’ve identified some of the significant tax extenders that may be of interest to you.
Permanent Tax Extenders
Qualified Charitable Distributions from IRAs – This provision, first available in 2006, allows an IRA owner, age 70½ or older, to directly transfer, tax-free, up to $100,000 per year to an eligible charity. The contribution may not be deducted, but the distribution is not taxed as income. (Some charities, such as donor-advised funds and supporting organizations are not eligible.) In addition, amounts transferred to a charity from an IRA can be used to satisfy the owner’s required minimum distribution (RMD.)
Qualified Charitable Contributions of Property – This provision allows deductions for contributions of real property for conservation purposes, up to 50% of a taxpayer’s contribution base. The deduction expands to up to 100% for qualified farmers and ranchers.
State and Local Sales Tax Deductions – IRS rules allows taxpayers to deduct either state sales taxes or state income taxes (most choose to deduct whichever is higher). This deduction benefits individuals who live in or are legal residents of states that do not have a state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
American Opportunity Tax Credit – A successor of the Hope Scholarship Credit for tuition and expenses, this provides a $2,500 credit for college tuition and related expenses for each eligible student. Under the tax extender, adjusted modified gross income limits were raised to $80,000 per year ($160,000 for couples filing jointly) in addition to making the provision permanent.
Two-year Tax Extenders
Exclusion of Discharged Mortgage Debt – This provision allows taxpayers to exclude up to $2 million in discharged mortgage debt on a qualified principal residence. Under normal IRS rules, mortgage debt that is cancelled, such as in a foreclosure or short sale, is considered taxable income. The exclusion has been extended for two years, through 2016. However, mortgage debt discharged in 2017 will qualify if there is a written agreement in place as of December 31, 2016.
Mortgage Insurance Deductions – This deduction is allowed for qualified mortgage insurance payments under contracts issued after 2006.
Qualified Tuition and Fees Deductions – Individuals with an annual modified adjusted gross income of up to $80,000 ($160,00 for couples filing jointly) may be allowed to deduct up to $4,000 per year from gross income for qualified tuition and fees.
529 ABLE Account Enhancement – These tax-deferred accounts for individuals with disabilities now may be established in any state. Previously, they were limited to the individual’s state of residence.
Because many of the more desirable tax breaks now are permanent, it’s possible lawmakers will let the two-year extenders expire at the end of 2016, or will renew only a few. In the meantime, investors and taxpayers can reap the benefits of the recent changes in tax provisions.