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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  1. Take a careful look at what’s changed within the tax law since the beginning of the year  
    Opportunities and pitfalls within recent changes of tax laws impact each taxpayer’s unique situation and should not be overlooked especially during the year-end 2016.
  2. Review Data & Prior Year Returns 
    Take a look at losses or other carryovers, estimated tax installments, and items that were unusual. Conversations about next year should include review of any plans for significant purchases or dispositions, as well as any possible life changes.
  3. Investments
    Taxpayers holding investments in the form of securities, real estate, collectibles, or other assets, have an op­portunity to reduce their overall tax bill by some strategic buying and sell­ing (or like-kind exchanging). The ordinary income tax rates, the capital gain rates, the net investment income tax rate, and the alternative minimum tax (AMT), all play a role.
  4. Income Caps on Benefits
    Monitoring adjusted gross income (AGI) can provide a number of tax benefits. Some of the tax benefits that get phased out depending upon the taxpayer’s AGI level include: Itemized deductions, Personal exemptions, Medical Savings account adjustments, education credits, student loan interest deduction, and Maximum Roth IRA contributions.
  5. PATH Act Extenders
    The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), enacted immediately before the start of 2016, permanently extended many tax incentives that were previously temporary. Some were modified in the process and others were extended for up to five years.
  6. Life events
    Life events such as marriage, birth or adoption of a child, a new job or the loss of a job, and retirement, all impact year-end tax planning. Take a look into the future and consider any possible events that could trigger significant income, losses or deductions.
  7. Retirement strategies
    Take a look at a number of different provisions in anticipation of retirement. Many of these provisions have opportunities and deadlines associated with the concept of taxable year. These include contributions to employer plans, strategic use of IRAs and timing Roth IRA conversions and reconversions to maximize your retirement.
  8. Affordable Care Act compliance
    The Affordable Care Act (ACA) imposes new requirements on individu­als. Year-end planning for individuals with regards to the ACA may be valuable, particularly with health-related expenditures.
  9. Acceleration or delay
    Taxpayers using the cash method basis of accounting can defer or accelerate income using a variety of strategies such as sell appreciated assets, receive bonuses before January, sell outstanding installment contracts, redeem U.S. Savings Bonds, accelerate debt forgiveness income and avoid mandatory like-kind exchange treatment.

    A cash basis taxpayer generally deducts an expense in the year it is paid, although prepayment of an expense gener­ally will not accelerate a deduction. There are exceptions, including those made in connection with January mortgage payment in December, tuition prepayments and estimated state taxes.
  10. A New Administration
    When the new Administration moves into Washington in January 2017, it is inevitable that changes will follow. How these changes will impact upon your long-term tax situation remains to be developed. Looking toward the future, you should not lose sight of the short term tax dollars to be saved immediately through 2016 year-end strategies. 

Please feel free to call our offices if you have any questions about how year-end tax planning might help you save taxes. Our tax laws operate largely within the confines of “the taxable year.” Once 2016 is over, tax savings that are specific to 2016 may be gone forever.



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Experience is the Difference®

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