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Tax Law Changes Help Most Folks... Including Retirees

J Terwilliger 2014
James P. Terwilliger, PhD, CFP®
Senior Vice President, Senior Planning Advisor
[email protected]
(585) 419-0670 x50630

On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) and the omnibus fiscal year 2016 budget bill. This legislation addressed many individual and business tax 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. I use the term “permanent” somewhat tongue-in-cheek. As we all know when it comes to tax laws, nothing is really permanent.

Below is a summary of some of the more-popular personal tax provisions impacted by the legislation.

Qualified Charitable Distributions

IRAs are tax-efficient goldmines when it comes to charitable giving. For nine years, 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.

Congress had been erratic in allowing QCDs, first in four consecutive 2-year periods, then most recently in 2014. They are now allowed on an ongoing basis.

There are several advantages to giving in this manner. Perhaps the greatest is that required minimum distributions (RMDs) may be used to fund these transfers. For folks who do not need their RMDs for household cash flow, such transfers allow both RMD and charitable interests to be satisfied simultaneously.

Since a QCD is not taxable, gifts made in this manner cannot also be listed as itemized deductions. No double dipping. But, there are a number of advantages to minimizing Adjusted Gross Income (AGI), which a QCD does quite nicely. An example is the multi-tiered schedule for Medicare Part B premiums which increase dramatically at higher AGIs.

Note that QCDs are not allowed for gifts to donor-advised funds. Also, such transfers do not apply to employer retirement plans such as 401(k)s.

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 retirees who pay no NYS income tax. For example, Social Security benefits and government and NYS teachers’ pensions are tax-free in New York. The same is true for the first $20,000 per taxpayer for IRA distributions and non-government employer pensions combined.

For folks who do not track their annual sales tax history, the IRS provides a simple table to estimate total sales tax based on AGI. For big-ticket purchases, such as an auto, the IRS allows taxpayers to add sales tax for such purchases to the table amount.

Conservation Easements

Landowners who donate a conservation easement on real property can claim a federal income tax deduction equal to the difference in appraised property value before and after the easement. This provision was both enhanced and made permanent.

Enhancements include raising the maximum deduction in any one year from 30% to 50% of AGI (100% for farmers) and increasing the number of years over which a donor can take deductions from 6 to 16 years. The latter benefits low-income taxpayers who may be land-rich but cash-poor.

Other Permanent Provisions Include:

  • Additional Child Tax Credit – maintains a portion of the credit that is refundable (allows for refund even if the total tax is zero). Limited by 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 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 Provisions Include:

  • Mortgage insurance premiums deduction – extended through 2016.
  • College tuition and fees deduction – “above-the-line” deduction extended through 2016.
  • Mortgage debt exclusion – exclusion from income for forgiveness of mortgage debt on principal residence extended through 2016.

There is something here for just about everyone who pays federal income taxes. To learn more about how these changes affect you, talk with your tax preparer and financial planner.

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].

This material is provided for general information purposes only. Investments and insurance products are not FDIC insured, not bank deposits, not obligations of, or guaranteed by Canandaigua National Bank & Trust or any of its affiliates. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please consult your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.

Tax information presented is not to be considered as tax advice and cannot be used for the purpose of avoiding tax penalties. Canandaigua National Bank & Trust does not provide tax, legal, or accounting advice. Please consult your personal tax advisor, attorney, or accountant for advice on these matters.