Experience is the Difference®

Red stamp letters - ExpiredMost of the talk about possible tax legislation this year has focused on either wide-sweeping tax reform or taxes that are part of the Affordable Care Act. But there are a few other potential tax developments for individuals to keep an eye on.

Back in December of 2015, Congress passed the PATH Act, which made a multitude of tax breaks permanent. However, there were a few valuable breaks for individuals that it extended only through 2016. The question now is whether Congress will extend them for 2017. 

An education break

One break the PATH Act extended through 2016 was the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction was capped at $4,000 for taxpayers whose adjusted gross income (AGI) didn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI didn’t exceed $80,000 ($160,000 for joint filers).

You couldn’t take the American Opportunity credit, its cousin the Lifetime Learning credit and the tuition deduction in the same year for the same student. If you were eligible for all three breaks, the American Opportunity credit would typically be the most valuable in terms of tax savings.  
But in some situations, the AGI reduction from the tuition deduction might prove more beneficial than taking the Lifetime Learning credit. For example, a lower AGI might help avoid having other tax breaks reduced or eliminated due to AGI-based phaseouts.  

Mortgage-related tax breaks

Under the PATH Act, through 2016 you could treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. The deduction phased out for taxpayers with AGI of $100,000 to $110,000. 

The PATH Act likewise extended through 2016 the exclusion from gross income for mortgage loan forgiveness. It also modified the exclusion to apply to mortgage forgiveness that occurs in 2017 as long as it’s granted pursuant to a written agreement entered into in 2016. So even if this break isn’t extended, you might still be able to benefit from it on your 2017 income tax return.

Act now

Please check back with us for the latest information. In the meantime, keep in mind that, if you qualify and you haven’t filed your 2016 income tax return yet, you can take advantage of these breaks on that tax return. The deadline for individual extended returns is October 16, 2017.

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If you or a member of your family is off to college this fall, you may be eligible for the American Opportunity Tax Credit. Eligible students may take this credit for the first four years of higher education. The credit can be up to $2,500 annually. Expenses that qualify for the credit include tuition, fees, and related expenses. Forty percent of the credit is refundable, meaning you may be able to get up to $1,000 of the credit as a refund even if you don't owe any taxes. 

 

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In the second part of our series on 2013 Year-End Tax Planning for individuals, we focus on extended tax benefits.

EXTENDED TAX BENEFITS

Although some tax benefits were extended through 2017, others were extended only through the 2013 tax year.   If any of the tax relief applicable to your situation is set to expire after 2013, you should try to take advantage of it in the current year.

American Opportunity Tax Credit (AOTC). The AOTC is extended to apply to tax years beginning before 2018, including the $2,500 maximum credit per eligible student, the higher income phaseout ranges of $80,000 to $90,000 for single filers ($160,000 to $180,000 for joint filers), the eligibility extension to the first four years of post-secondary education, the inclusion of text books and course materials as eligible expenses, and the 40 percent refundable credit component.

Higher education tuition deduction. The above-the-line deduction for qualified tuition and related expenses is extended through 2013. Since the deduction is an adjustment to gross income, it can be taken even if the taxpayer does not itemize deductions, and it is not subject to the two-percent-of-AGI floor or the overall limitation on itemized deductions. However, an individual who can be claimed as a dependent by another taxpayer cannot take a deduction for qualified tuition and related expenses.

Student loan interest deduction. The increased phaseout thresholds for the student loan interest deduction were made permanent, and continue to be adjusted each year for inflation. In addition, the 60-month limitation on the deduction and the restriction that makes voluntary payments of interest nondeductible are permanently repealed.

Popular extenders. Unless extended by Congress, the following popular tax benefits may not be available after 2013:

  • the $250 above-the-line annual deduction for a professional educator’s qualified unreimbursed expenses, including books, supplies, computers, and software;
  • the exclusion from gross income for discharges of qualified principal residence indebtedness;
  • the itemized deduction for mortgage insurance premiums;
  • the election to claim an itemized deduction for State and local general sales taxes in lieu of State and local income taxes;
  • the exclusion from gross income of qualified charitable distributions for individuals aged 70½ or older; and
  • the residential energy property credit (lifetime limit remains at $500, and no more than $200 of the credit amount can be attributed to exterior windows and skylights).

Every tax situation is different and requires a careful and comprehensive plan. We can assist you in aligning traditional year-end techniques with strategies for dealing with any unconventional issues that you may have. Please call our office at (302) 225-5000 or email at info@gunnip.com to schedule an appointment. 

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The U.S. Senate overwhelmingly passed legislation to prevent the so-called fiscal cliff on January 1, 2013 sending the American Taxpayer Relief Act of 2012 (HR 8, as amended by the Senate) to the House, where it was likewise approved on January 1, 2013.  The American Taxpayer Relief Act allows the Bush-era tax rates to sunset after 2012 for individuals with incomes over $400,000 and families with incomes over $450,000; permanently patches the alternative minimum tax (AMT); revives many now-expired tax extenders, including the research tax credit and the American Opportunity Tax Credit and for a maximum estate tax of 40 percent with a $5 million exclusion. The bill also delays the mandatory across-the-board spending cuts known as sequestration.  President Obama said that he will sign this legislation as soon as it reaches his desk. For detailed information, read the full American Taxpayer Relief Act of 2012 Tax Briefing.

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President Obama secured a second term in office November 6, 2012, in the end winning the Electoral College by a wide margin. The President's re-election now sets in motion what will likely be difficult negotiations between Democrats and Republicans over the fate of the Bush-era tax cuts, nearly $100 billion in automatic spending cuts, and the more than 50 expiring tax extenders, which include the alternative minimum tax (AMT) patch for tens of millions of taxpayers. The President's re-election has also significantly changed the dynamics for reaching an eventual agreement over long-term tax reform.For more information, read the full CCH Tax Briefing Special Report.

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The IRS has issued a tax scam warning connected with the American Opportunity Tax Credit.Promoters of the scheme target senior citizens, low-income individuals, and members of church congregations. The con artists say they can get a tax refund or stimulus payments based on the American Opportunity Tax Credit, even if the taxpayer was not enrolled in or paying for college.Victims of these scams can lose the upfront fees they are asked to pay to have the promoters file these claims on their behalf.The IRS also warns taxpayers to be careful of these scams because they are legally responsible for the accuracy of any tax return filed and will have to repay any refunds received in error, plus penalties and interest. They may also face criminal prosecution.In its notice about the promotion of these bogus refund claims, the IRS cautions taxpayers to beware of any of the following:•  Fictitious claims for refunds or rebates based on false statements of entitlement to tax credits.•  Unfamiliar for-profit tax services selling refund and credit schemes to the membership of local churches.•  Internet solicitations that direct individuals to toll-free numbers and then solicit social security numbers.•  Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.•  Offers of free money with no documentation required.•  Promises of refunds for "Low Income -- No Documents Tax Returns."•  Claims for the expired Economic Recovery Credit Program or for economic stimulus payments.•  Unsolicited offers to prepare a return and split the refund.•  Unfamiliar return preparation firms soliciting business from cities outside of the normal business or commuting area.

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Books with a pencil and eraser in front of a chalkboard, Back to SchoolAs schools get back in session, it is a good time to check the education tax breaks for which you might qualify.First, there's the American Opportunity Tax Credit (formerly called the Hope credit) for a percentage of qualified expenses paid during the first four years of higher education.Second, the Lifetime Learning Credit allows a deduction for a percentage of qualified expenses paid for any year the American Opportunity Credit isn't claimed, and it even applies to job-related classes.Third, you may qualify for a deduction for interest paid on student loans.Fourth, education savings accounts allow annual nondeductible contributions for children under 18, with tax-free withdrawals for qualifying education expenses. Section 529 plans for college expenses should also be investigated.As always, please contact our office to discuss if these are appropriate for you. 

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Experience is the Difference®

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