Tax Breaks in the Spending Bill: A Guide

Lawmakers are poised to make permanent or renew dozens of tax provisions as part of a major spending bill agreed to this week. One popular measure would allow older owners of individual retirement accounts to transfer assets directly from the accounts to charities. Here are some other notable tax breaks in the legislation that affect individuals and closely held businesses.

Permanent Extensions
American Opportunity tax credit: This benefit, which replaced the Hope Education Credit in 2009, is often the best education tax break for many. It was scheduled to expire after 2017 but now will be permanent. It is an offset of up to $2,500 annually for up to four years of postsecondary education, and the income threshold at which the credit phases out is as high as $160,000 for married couples filing jointly.

State and local sales-tax deduction: This provision makes permanent a break that allows taxpayers to deduct sales taxes they paid instead of state and local income taxes. Although the write-off is available to all taxpayers, it is used mainly by residents of states without an income tax, such as Washington, Florida, Texas and Nevada.

Educator-expense deduction: This popular benefit allows millions of K-12 classroom teachers, and others who are eligible, to deduct up to $250 of unreimbursed expenses for classroom supplies. The bill makes this benefit permanent, indexes it for inflation, and expands it to include professional- development expenses.

Mass-transit benefits: This provision makes permanent certain tax benefits for employer-provided transit passes and van pools, in order to provide parity with benefits for employer-provided parking.

Expansion of 529 plan benefits: Withdrawals from 529 education-savings plans can now be used for computer equipment and technology. In addition, certain tuition refunds may now be put back into 529 plans, if the transfer is made within 60 days.

ABLE act expansion: The bill allows ABLE accounts (tax-favored savings accounts for certain disabled individuals) to be established in any state, not just in the state of residence, so that taxpayers can choose the program that best fits their needs.

Research and development tax credit: The bill permanently extends this credit and expands it for small businesses. Beginning in 2016, firms with $50 million or less in gross receipts can claim the credit against their liability for the alternative-minimum tax and, in some cases, the employer’s payroll-tax (FICA) expenses.

“Section 179” depreciation: The bill permanently expands the current limits and indexes them for inflation. The expensing limit will be $500,000, and the phaseout limit will be $2 million.

In addition, air conditioning and heating units will be eligible for expensing, and the $250,000 cap on real property expensing will be eliminated, among other modifications.

Earned-income tax credit: The bill makes permanent certain expansions to this benefit for low- and moderate-income workers that were scheduled to expire after 2017.

Child tax credit: The bill makes permanent certain enhancements to the $1,000 credit per child designed to help the working poor.

Temporary Extensions
“Bonus” depreciation: The bill extends this enhanced write-off for property acquired and placed in service from 2015 through 2019. The percentage is 50% for 2015, 2016, and 2017; 40% in 2018, and 30% in 2019. Certain other modifications apply.

Tax relief for mortgage-debt forgiveness: When homeowners negotiate a reduction in the balance of a mortgage, the forgiven amount normally counts as income. The bill extends an income-tax exclusion for this income on a principal residence through 2016.

Deduction for mortgage insurance premiums: The bill extends through 2016 a provision allowing some homeowners to deduct mortgage insurance premiums along with mortgage interest.

Tuition and fees deduction: This benefit allows a deduction of up to $4,000 per year for qualified expenses for college or other post-high-school education (subject to phaseout for taxpayers with higher incomes), and the bill extends it through 2016.

For many taxpayers, the American Opportunity Credit, which can allow a dollar-for-dollar offset of taxes, is a better choice.

Credit for alternative-fuel vehicles: The bill extends through 2016 the credit for purchases of certain new “fuel cell” motor vehicles. The tax offset ranges from $4,000 to $40,000, depending on weight.


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