Feb
11

5 Tax Law Changes That Benefit You

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Tax Money The American Taxpayer Relief Act, or ATRA, was signed into law on January 2, 2013. Be thankful the law was passed. There were many tax provisions that expired in 2011 and 2012, and the ATRA not only extended those into the future, but made many of the extensions retroactive. Quite a few of the provisions were also made permanent.

Here are five tax “breaks” that are fairly common, and used widely. Many of you reading right now have relied on these to decrease your tax liability in the past (more than likely increasing your refund), and probably didn’t have any idea the credits had expired. But – Congress (finally!) acted, did the right thing, and gave you the tax deductions back. You’re paying less tax because of these tax law changes – and less tax is always a good thing!

1.  EDUCATION EXPENSE DEDUCTIONS

The two most popular education related tax deductions are the Tuition and Fees Deduction, (Form 8917), and the deduction for Educator Expenses. Both of these tax benefits expired in 2011. The ATRA made retroactive to 2012, and extended through 2017, both of these “above-the-line” deductions.

Above-the-line means adjustments (subtractions) to total income, in order to calculate Adjusted Gross Income. This type of deduction is usually more beneficial to you than “below-the-line” adjustments, which lead to Taxable Income.

Educator Expenses allow elementary and secondary school teachers, who work at least 900 hours a year, to take a deduction for classroom supplies they paid out of their own pocket.  Paper, pencils, software, books, paint, rulers, etc. – but the deduction is capped at $250.  (If you are married filing joint, and your spouse is also a qualifying teacher, you can each take the deduction of $250, for a total of $500).  Most of the teachers I know spend a lot more than $250 on class supplies during the school year.  Write your Congressman.  This deduction needs to be  higher!

The Tuition and Fees deduction allows you to claim a deduction of up to $4000 for qualified tuition expenses for you and/or your spouse, and/or your dependent.  This deduction comes straight off of your Total Income.  Less income means less tax.  Note:  this deduction is phased out depending on income.

2.  STATE AND LOCAL SALES TAXES

If you itemize deductions using Schedule A, this deduction may be a good one for you depending on your situation. This tax benefit gives you the option of deducting state and local sales and use taxes, instead of state and local income taxes. This deduction also expired in 2011.

The ATRA reinstated this benefit, made it retroactive to 2012, and extended it through 2013. Take note – this deduction is due to expire at the end of this year, 2013. You’ll be able to claim it on your 2012 and 2013 Form 1040, but not 2014. (Unless the tax laws change again, and this is included)

3.  MORTGAGE INSURANCE PREMIUM DEDUCTION

Mortgage insurance premiums are just that – mortgage insurance that the lender charged you, and added to your house payment, as insurance to cover him in case you defaulted on your loan. If you have an FHA loan written after December 31, 2006, you’re probably paying mortgage insurance. Many private lenders charge these fees, too.

This tax benefit allows you to deduct, as mortgage interest on Schedule A, your mortgage insurance premiums.

This tax benefit expired in 2011. It was reinstated, retroactive to 2012, and extended through 2013. Take note, this deduction expires at the end of this year. You’ll be able to claim it on your 2012 and 2013 Form 1040, but not 2014. (Unless the tax laws change again, and this is included)

4.  NON-BUSINESS ENERGY PROPERTY CREDITS

This credit has been around for quite a few years, and it’s expired and been reinstated a couple of times already. This tax law change covers Residential Energy Credits, Form 5695.

If you’ve put new windows or doors in your house, installed a new furnace, heat pump, or AC unit, replaced a water heater, added solar or skylights – and quite a few more options – you may know about this credit. It’s been a sales pitch for utility companies and heating & cooling companies for many years.

The deduction expired for good in 2011, but was reinstated retroactive to 2012, and extended through 2013 by the American Taxpayer Relief Act. This credit is usually equal to 10% of what a homeowner spends making eligible energy improvements or upgrades to his home.

Unfortunately, the credit is now capped at $500 (down from a maximum of $1500 in 2009 and 2010), and now the calculation has a little twist called a lifetime limitation.

If you have claimed the credit in the past, specifically in tax years 2006, 2007, 2009, 2010, and 2011, you are required to subtract those used credits from the $500 you’re allowed for 2012.

Let’s say in 2007 you had a qualified window installed in your bathroom, and it cost you $250. In 2012, you installed an eligible, energy efficient back door for a total cost of $500. Remember, you are allowed a maximum credit of $500. Even though you spent $500 for the door, you cannot write off the entire door purchase. You must subtract the $250 credit used in 2007 for the window from the $500 maximum credit allowed.

$500 – $250 = $250

You can deduct $250 of the $500 you spent for the door. I bet the salesman said you’d be able to “take the whole door off your taxes”, didn’t he?

This credit usually covers equipment and the cost of the labor to install. However, there are some energy saving items that qualify for the credit, but the labor to install them does not. You can find specifics about this and any other credit at the IRS website

5.  ALTERNATIVE MINIMUM TAX (AMT) PATCH IS PERMANENT

Well, hallelujah and it’s about time, Congress!

Without this tax law change, 30 million middle class Americans would have had to pay Alternative Minimum Tax on their 2012 returns – this is UP from 4 million in 2012! That’s a difference of 26 million!  26 million!

This tax was created to catch the wealthy person who was taking a lot of tax write-offs, and make them pay something because of all those write-offs. But, the way the tax loopholes are also written, the wealthy are often able to avoid paying this tax – and instead the law catches many people in the middle class and lower middle class and adds thousands to their tax bills!

Do you think you could have been one of the 26 million paying a higher tax bill based on your income, exemptions, and the type of deductions you claim? I’ve seen AMT impact people in a very negative way, and often when they were not liable.

The AMT Patch is permanent, but exemption amounts are higher than in the past, and will now be indexed to inflation.

Congress should eliminate Alternative Minimum Tax altogether – and maybe they will.  There are a few savvy Congressmen trying to repeal this tax as we speak.

 

Suppose the American Taxpayer Relief Act had not been signed into law on January 2nd.  How many of the above tax deductions would you have lost because they expired?

Would your tax bill have gone up?

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Categories : Form 1040, IRS, Taxes

Comments

  1. Very good information! Thanks for the heads up and explanation of what these changes mean in practical terms to the regular taxpayer.

  2. Wendy says:

    Thank you, Georgene! The ATRA did much more than this. These are only a few of the heavily used deductions that generate major tax savings for taxpayers. If these had not been renewed, many people would have been in for a rude awakening when they had their taxes prepared! Now – time to write about more things the American Taxpayer Recovery Act did to help taxpayers!

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