For a number of years, Congress created significant uncertainty by waiting until the eleventh hour to renew or extend numerous tax provisions. In response to the frustration expressed by both individual taxpayers and the business community, Congress passed the Protecting Americans from Tax Hikes (PATH) Act last year. PATH made a number of tax provisions permanent; however, more than a few were simply extended for another year – and now that year is almost up. Below are a number of provisions set to expire at the end of this year if Congress doesn’t take action.
Mortgage insurance premiums
Taxpayers can currently deduct mortgage interest subject to certain limits. Mortgage insurance premiums are deductible until the phase out for taxpayers with Adjusted Gross Income (AGI) of more than $100,000 ($50,000 if married filing separately) and becomes completely unavailable once a taxpayer’s AGI exceeds $109,000, ($54,500 if married filing separately).
Medical expense deduction
The threshold for medical expense deductions was increased from 7.5 percent up to 10 percent of AGI in 2010 as a way to help pay for the Affordable Care Act. Older taxpayers, those 65 or older, were allowed to still deduct medical expenses at the lower 7.5 percent of AGI but only through the end of 2016.
Currently, there is a bill in the House of Representatives that would permanently roll back the increased thresholds for all taxpayers, including preventing those 65 or older from facing expiration of their exemption.
Tuition and fees deduction
The tuition and fees deduction gives taxpayers an alternative tax break to the commonly claimed American Opportunity Tax Credit or the Lifetime Learning Credit. Unlike these two credits, the tuition and fees deduction is not a credit, but a deduction used in calculating a taxpayer’s AGI. As a result, it is subject to different rules and restrictions than the related credits.
The tuition and fees deduction actually expired after 2014. The PATH act retroactively brought it back to life through 2015 and until the end of 2016; however, now that we are nearing 2017, its expiration looms large again.
While it is certainly possible that this is deduction will be extended before the year end, there are no guarantees. Taxpayers can safeguard against this potential expiration by paying tuition for the spring semester in December instead of waiting until the beginning of 2017.
Discharge of indebtedness on principal residence
Mortgage related debt forgiveness is at a low level compared to the years following the recent financial crisis. Regardless of how much of this type of activity there is, we need to remember that the IRS considers debt that is forgiven and no longer needs to be paid back as income. The qualified principal residence indebtedness exclusion allows up to $2 million of debt forgiven to be excluded from income.
You can secure this tax break if you are in negotiations for a workout with a lender on or before Dec. 31, 2016. The transaction also needs to be completed during 2017 in order to qualify.
Conclusion
As you can see, while the PATH Act secured a number of tax breaks and created increased certainty for taxpayers, there are still many items up in the air as we near year’s end. Be on the lookout for developments with these items in the news or take advantage of the strategies discussed above to secure the tax break you can. Always consult with a professional for the most up-to-date advice.