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All Contents © 2016The Kiplinger Washington Editors
In its endearing (if infuriating) way, Congress left a package of tax cuts under the tree as lawmakers beat a hasty retreat from Washington for the Christmas holiday. You might call this “regifting,” though, because the goodies are the same ones Congress let die at the end of last year. The long-awaited revival to make them retroactively apply for 2015 came on December 18. In an important twist to the habitual year-end gamesmanship, however, this time Congress actually made many of them permanent and even improved a few. Here are 12 that might put—er, leave—money in your pocket by reducing your tax bill for 2015, 2016 and beyond.
By Kevin McCormally, Chief Content Officer
, December 2015
Generally, the child credit—which is worth $1,000 for each child younger than age 17 that you claim as a dependent on your return—is nonrefundable. That means if the credit more than wipes out your tax bill for the year, the excess simply disappears. However, based on their income, some lower-income taxpayers can qualify for the “additional child credit” that makes the credit refundable. That means you’d get a check from the IRS for amounts not needed to offset your tax bill. Recent enhancements to the refundable part of the credit were due to expire at the end of 2017. But now Congress has made those improvements permanent. (The child credit phases out at higher income levels.)
SEE ALSO: The Most Overlooked Tax Breaks for New Parents
Congress often picks favorites when it comes to subsidizing the cost of getting to work. At the dawn of 2015, for example, employees could use up to $250 each month of pretax salary to pay for parking, but the pretax piggy bank for those who used mass transit was capped at $130. The law signed by President Obama on December 18 eliminates this discrepancy, retroactive for all of 2015. The eleventh-hour change won’t do much good for most commuters, though, because they already used after-tax money to pay their bills. But some bus and subway riders might catch a break. When Congress did a similar end-of-year about-face a couple of years ago, the IRS allowed employers to recast after-tax money run through a transit-pass program as pretax money. This benefited employees who opted to use more of their salary than the transit limit to buy transit passes, even though the excess was after-tax money. Check with your employer to see if there’s any way you can cash in on the retroactivity of this break for 2015. Good news: Congress made parity permanent, ending the discrimination from now on. For 2016, both parkers and mass transit users can use up to $255 of pretax money each month to get to work.
This is the key tax credit that helps families pay for college, providing up to $2,500 a year for each qualifying student for up to four years. In 2018, however, the credit was scheduled to revert to the old Hope credit, at about $2,000 a year for just the first two years of college. The new law makes permanent the American Opportunity credit’s higher value and longer term, so families sending children off to college can rest assured that they can get the break for four years. (This credit phases out at higher income levels.)
SEE ALSO: 6 Tax Breaks for College Costs
The opportunity for elementary and high school teachers to deduct up to $250 a year for money they spend for classroom supplies was revived retroactively for 2015 and made permanent. Even better, the law now says that professional-development expenses count toward the deduction. You can claim this write-off even if you don’t itemize deductions.
For several years, taxpayers have been given the choice of deducting either the state income tax or the state sales taxes they pay. The chance to deduct state sales taxes, though, expired at the end of 2014. This option has now been revived retroactively for 2015 and made permanent. This is a no-brainer for itemizers who live in states with no (or limited) income tax. (See the map above or visit the Kiplinger Tax Map to see states that don't impose their own income taxes.) In some cases, it can even pay off for folks who live in states that collect income taxes. The IRS has tables to estimate how much sales tax folks with different incomes pay in different states. To the table amounts you can add sales tax paid on big-ticket items, such as cars or boats. Whenever the sales tax write-off is bigger than the income tax deduction, go for it.
SEE ALSO: 10 Most Tax-Friendly States in the U.S.
The past several years have brought nail-biting anxiety to taxpayers older than age 70½ who wanted to make charitable contributions using part or all of the required minimum distributions from their IRAs. Congress has allowed up to $100,000 of a traditional IRA to be donated directly to charity tax-free. But the break has often been allowed to expire, only to be brought back to life retroactively at the last minute. Congress did that again this year, eventually allowing tax-free donations for 2015. And now, finally, the lawmakers have made this tax break permanent.
Generally, the tax law treats the forgiveness of debt as taxable income to the debtor. But as a wave of foreclosures followed the housing bust that began in 2006, Congress decided to cut some slack for homeowners who lost their homes. A new rule allowed up to $2 million of debt discharged by lenders in foreclosures or short sales, for example, to be excluded from income. That provision expired at the end of 2014, but it has now been revived retroactively to cover 2015 and extended for 2016, too. This break does not apply to the discharge of debt on second homes or rental property.
SEE ALSO: 15 Tax Deductions You Won't Believe Are Real
These state plans allow parents (and others) to save for college expenses in a tax-favored account. Earnings accrue tax-deferred and are tax-free when withdrawn if used to pay college expenses, such as the cost of tuition, books, and room and board. In 2009 and 2010, computers counted, too. That provision disappeared five years ago, but the new law brings it back retroactively for 2015 purchases. What’s more, it’s permanent: From now on, 529 distributions used to buy computers and pay for Internet access are tax-free. There’s no federal tax deduction for contributions to 529 plans, but most states offer tax incentives.
This break, which expired at the end of 2014, is particularly popular with families whose income is too high to claim the Lifetime Learning credit for the college expenses that don’t qualify for the American Opportunity credit. It permits the deduction of up to $4,000 of qualified college tuition paid during the year; the top deduction drops to $2,000 for taxpayers with incomes that exceed $65,000 on a single return or $130,000 on a joint return. It disappears completely for taxpayers with incomes over $80,000 and $160,000 respectively. This deduction, which you can claim whether or not you itemize, is scheduled to expire again at the end of 2016. Be sure to check whether the deduction would be worth more to you than the Lifetime Learning credit.
SEE ALSO: 9 Tax Breaks for the Middle Class
This on-again, off-again deduction is for homeowners who bought after 2006 and are required to pay private mortgage insurance. The right to deduct those premiums expired at the end of 2014 but has now been revived retroactively for 2015 and extended for 2016. You must itemize deductions to claim this write-off, which is now scheduled to expire after 2016.
For many years, Congress has sweetened tax breaks designed to encourage businesses to invest in capital equipment. Until the end of 2014, for example, the Section 179 “expensing” deduction allowed firms to write off 100% of the cost of up to $500,000 in qualifying assets in the year of the purchase, rather than gradually deducting the cost over many years. Another break, called 50% bonus depreciation, let firms write off 50% of the cost of such purchases right away, with regular depreciation deductions taking care of the rest over a set number of years. Bonus depreciation expired altogether at the end of 2014, and the expensing limit fell to $25,000. The new law revives the $500,000 expensing cap for 2015 and makes it permanent (it phases out after $2 million in assets are purchased in a single year), and the law extends bonus depreciation retroactively for 2015. The 50% bonus applies for property purchased in 2016 and 2017, too; the bonus drops to 40% in 2018 and 30% in 2019.
SEE ALSO: Most Overlooked Tax Breaks for the Self-Employed
To encourage investors to take the risk of investing in start-up businesses, the law offers a special break on the profit from the stock of qualifying small businesses. If an investor holds the stock from the time it’s issued for at least five years, a certain percentage of the profit—up to a maximum of $10 million—can be tax-free. In 2014, 100% of qualifying profit was tax-free; for 2015, that was cut in half to 50%. Now the new law restores the 100% level for stock purchased in 2015 and future years.
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