Federal lawmakers will simplify tax planning for many by making certain tax breaks permanent — including one for charitably inclined older investors.
Many tax breaks expire after a year or so, requiring an act of Congress to briefly extend them again. That has made tax strategizing difficult, because people don’t know if Congress will let an expired deduction or credit lapse for good or revive it at the last minute.
As part of the omnibus spending bill that the U.S. House passed, lawmakers will permanently add some elapsed deductions and credits to the tax code.
One of them is a tax break for older investors that had expired at the end of 2014. Once again, investors age 70½ or older will be allowed to directly contribute — tax-free — up to $100,000 from a traditional IRA to a qualified charity annually.
This distribution can count toward the taxpayer’s required minimum distributions that must be made annually after age 70½. And this money isn’t counted as income on a tax return, as other distributions would be. (This tax break works with a traditional IRA. A Roth IRA doesn’t require minimum distributions, and distributions in retirement generally are tax-free, anyway.)
The big advantage to donating to charities this way is that it keeps your adjusted gross income lower, says Mark Luscombe, principal federal tax analyst at Wolters Kluwer, a provider of tax information. And a lower AGI can help you qualify for tax breaks that are phased out as AGI rises, or it can reduce the amount of your Social Security benefits subject to tax, he says.
Among other tax breaks to be made permanent:
- A deduction for elementary and high school teachers who buy classroom supplies using their own money. The deduction, now worth up to $250 spent on supplies, will be adjusted for inflation going forward.
- A deduction for state and local sales tax paid during the year that taxpayers can take instead of deducting state and local income taxes on federal returns. This benefits taxpayers in states that don’t have a regular income tax, such as Texas and Florida. It can also be worthwhile for those living in states with a high sales tax or for those who made a large purchase, say, a boat, and paid a hefty sales tax on it.
- A higher education tax credit worth up to $2,500 of the cost of tuition, fees and course materials. This American Opportunity tax credit was set to expire at the end of 2017. A full or partial credit is available to individuals with income under $90,000 and to married joint filers with income below $180,000. “Of the education tax breaks, [the American Opportunity tax credit] is likely to be the most generous one that’s available,” Luscombe says. A credit is better than a deduction because it reduces your tax liability dollar for dollar. Plus, the American Opportunity credit is partially refundable, meaning if you don’t owe any taxes, you could get part of the credit as a tax refund. But he points out that starting with 2016 tax returns, families will have to provide the employer tax identification number of the school that the student is attending.
- A deduction for up to $4,000 paid in college tuition. A full or partial deduction is available to singles with income up to $80,000 and to joint filers with income not exceeding $160,000. You can’t take both the American Opportunity credit and the deduction for the same student, Luscombe says.
Also, Congress will make it possible for families to shop around when investing in a new savings account for those with disabilities. Achieving a Better Life Experience (ABLE) accounts, currently being set up by many states, are similar to 529 college savings plans. Families can invest money in the accounts, and withdrawals are tax-free if used for qualified expenses. Better yet, this account will not jeopardize the beneficiary’s federal benefits.
Initially, Congress required beneficiaries to participate in their home state’s ABLE account. The omnibus legislation gets rid of that provision, so beneficiaries and their families will be free to look at plans in other states for the one that best suits them.
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