Six Tax Breaks That May Go Away
With the buzz in Washington about potential tax reform, little attention is being paid to dozens of tax provisions that quietly expired at the end of 2016
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Strategy: Don’t count on extensions for this group. Due to the current focus on tax reform, it’s unlikely that this year’s Congress will get around to renewing these provisions anytime soon. In fact, you might be waving goodbye to several tax breaks forever.
Here’s the whole story: Traditionally, a number of tax provisions expire at the end of the year, only to be reinstated for another limited time period, sometimes retroactively. However, at the end of 2015, Congress enacted the Protecting Americans from Tax Hikes (PATH) Act. Unlike previous “extender” laws, the PATH Act permanently preserved many tax breaks that had a short shelf life in the past, including the deduction for state sales taxes and the research credit.
What about the others? Many of the “left- overs” are technical in nature, but some may be critical to taxpayers, including these six items.
1. Tuition deduction: As an alternative to claiming a higher education tax credit, you can deduct tuition and related fees paid to a college during the year. The deduction—which is either $2,000 or $4,000, depending on your modified adjusted gross income (MAGI)—isn’t available to upper-income parents.
Tip: If you paid tuition for the spring 2017 semester in late 2016, the payment is potentially deductible on your 2016 return.
2. Mortgage debt forgiveness: Generally, you must pay tax to the extent your obligation to repay a debt is forgiven. This is so-called cancellation of debt (COD) income. Under an exception that expired at the end of 2016, you could have up to $2 million of federal-income- tax-free COD income due to forgiveness of mortgage debt on a principal residence.
Tip: The $2 million tax exclusion was extended by the PATH Act, but only through 2016.
3. Mortgage insurance: You can potentially deduct mortgage insurance premiums paid last year as home mortgage interest on your 2016 tax return. The insurance must be in connection with home acquisition debt under a contract issued after 2006. This tax break was also temporarily extended by the PATH Act.
Tip: The deduction is phased starting at an adjusted gross income (AGI) of $100,000. No deduction is allowed if your AGI exceeds $109,000.
4. Residential energy credit: The “regular” residential energy credit is generally equal to 10% of the cost of qualified energy-saving improvements installed in a principal residence. The list of qualified expenses ranges from central air conditioning to insulation. But there’s a lifetime credit limit of $500 and dollar limits on certain specific expenses (e.g., $150 for furnaces). For example, if you’ve previously claimed $300 in credits in the past, the maximum credit on your 2016 return is $200.
Tip: The credit can’t be claimed for improvements to a second home.
5. Residential energy-efficient property credit: This alternative credit is available for certain renewable energy source improvements. It is equal to 30% of the cost of qualified costs for a new home or a primary residence.
Tip: To qualify for the credit, you must be the homeowner. It’s off-limits for tenants.
6. Motor vehicle tax credits: Finally, you can claim a credit for purchasing a new full-cell motor vehicle or qualified plug-in vehicle. You must be the vehicle’s original owner. In other words, lessees and used car buyers aren’t eligible.
Tip: Credit amounts are based on the make and model of the vehicle.
Small Business Tax Strategies March 2017