On Dec. 18, several important tax law changes were enacted and, most importantly, made permanent. For the past several years, Congress has been making last-minute changes to the tax code only to have them expire soon after. This has made it exceedingly difficult for taxpayers to stay abreast of the tax code as favorite tax deductions or credits may or may not continue into the future.
In the aptly named Protecting Americans from Tax Hikes Act of 2015, several of the laws made permanent that will have the greatest impact on taxpayers include charitable donations directly from an IRA, the American Opportunity Tax Credit for college tuition, and deductions for sales tax and educator expenses.
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Perhaps the most important change from a tax planning perspective is the extension of the ability to make charitable donations directly from an IRA for individuals over age 70.5. This is really helpful as the withdrawals from the IRA are excluded from income and the individual doesn’t have to worry whether they itemize their deductions (which is important for people who don’t owe on a mortgage or have limited itemized deductions to begin with). Since the degree to which Social Security benefits are taxed is based on total income, this exclusion can further reduce income taxes on Social Security benefits.
The American Opportunity Tax Credit for college tuition expenses has been around for a number of years but was due to expire at the end of 2017. Now it’s permanent which is great news for parents of high school students who will be able to take advantage of a credit that provides $2,500 based on tuition expenses up to $4,000 per year. While still subject to income limits, this is by far one of the best education-related tax breaks.
Two additional tax deductions that continue to expire but then get extended at the last minute (to the point where the IRS “reserves” lines on tax forms for the deductions prior to Congress making the changes official) include the sales tax and educator expense deductions. Since Wisconsin imposes a state income tax, the ability to deduct sales tax isn’t a big deal (as you can only deduct the greater of sales tax or state income tax) but to people living in states such as Florida with no state income tax, this deduction is more important. For teachers who pay for a lot of classroom supplies out of pocket, they’re also allowed an “above the line” deduction up to $250 (without having to worry whether they itemize their deductions).
Of course, the caveat with anything that Congress does is that the law can always be changed in the future. What makes these changes unique is that they don’t have automatic expiration dates like they’ve had in the past. In other words, Congress would need to proactively repeal these tax changes to remove them.
Justus Morgan is a fee-only financial planner with Financial Service Group, a registered investment advisory firm at 4812 Northwestern Ave., online at www.ToYourWealth.com