Most of us are gathering 2016 data and getting ready to prepare (or have someone else prepare) our 2016 income taxes. It is important to be mindful of federal legislation that impacts tax returns we’ll be filing soon.

In December 2015, federal legislation addressed many provisions which expired at the end of tax-year 2014. Many had come up for renewal every year or two, leading to uncertainty for taxpayers and making meaningful tax planning difficult. Retroactive to tax-year 2015, the act enhanced or made “permanent” a number of these provisions and further extended others temporarily. Below is a summary of some of the more popular personal tax provisions impacted by the legislation.

Qualified Charitable Distributions

For nine years off-and-on, Congress allowed taxpayers age 70-1/2 and older to transfer up to $100K annually directly from IRAs to charities. Such transfers, known as Qualified Charitable Distributions (QCDs), are treated as non-taxable distributions. They are now allowed on an ongoing basis. Since a QCD is not taxable, gifts made in this manner cannot also be listed as itemized deductions. Note that if you made such a distribution from an IRA in 2016, you will receive a Form 1099-R from your IRA custodian coding the distribution as “normal”. You will show the full distribution on line 15a Form 1040 but then list the taxable amount as zero on line 15b. Write/print “QCD” next to line 15 to alert the IRS as to the nature of the distribution.

State and Local Sales Tax Deduction

State and local sales taxes may be now be claimed as federal itemized deductions on an ongoing basis in lieu of state and local income taxes. This is particularly advantageous for folks who pay no NYS income tax. For folks who do not track their annual sales tax history, the IRS provides a simple table to estimate total sales tax based on income. For big-ticket purchases, such as an auto, the IRS allows taxpayers to add sales tax for such purchases to the table amount.

Other “Permanent” Provisions:

• Additional Child Tax Credit – maintains a portion of the credit that is refundable (allows for a refund even if the total tax is zero). Limited by Adjusted Gross Income (AGI).
• American Opportunity Credit covering qualified college costs – maximum credit is $2,500/student/year for first four years of college. Covers tuition costs plus materials and supplies including computers. 40% of the credit is refundable. Limited by AGI.
• Earned income credit – Refundable credit for low-income taxpayers who have earned income. Credit increases with number of dependents.
• Teachers’ deduction – Educators will continue to be able to deduct up to $250 of unreimbursed qualified out-of-pocket expenses as an “above-the-line” deduction. Includes professional development expenses. Will be indexed for inflation.

Extended through Tax-Year 2016:

• Mortgage insurance premiums deduction.
• College tuition and fees “above-the-line” deduction.
• Mortgage debt exclusion – exclusion from income for forgiveness of mortgage debt on principal residence.

There is something here for just about everyone who pays federal income taxes. Make sure you are aware of these provisions when filing your 2016 taxes.

How CNB Can Help

Please feel free to contact us with any questions you have. James Terwilliger can be reached at (585) 419-0670 ext: 50630 or via email at [email protected].