Wednesday, January 6, 2016


Now that the “tax extenders” have been extended, many of them permanently, via the PATH ACT OF 2015, here are some of these benefits that you should keep in mind from a tax planning point of view during tax year 2016.


You can elect to deduct state and local sales tax paid instead of deducting state and local income tax paid. If you deduct state and local income tax on Schedule A you cannot also deduct state and local sales tax, and vice versa. 

For this purpose state and local income tax includes the deductible unemployment (SUI), disability (SDI), and/or family leave (FLI) contributions withheld in certain states.  If you elect to deduct sales tax you cannot also deduct state unemployment, disability, and/or family leave taxes.

You have two options for claiming a sales tax deduction – the actual amount paid for the year, per receipts, or the amount taken from the IRS-generated Optional State Sales Tax Tables, with an additional amount allowed if you also pay local sales tax, plus the tax paid on the purchase of “big-ticket” items such as a car, motorcycle, truck, van, recreational vehicle, sport utility vehicle, off-road vehicle, boat, airplane, motor home, home, and home building materials, and any sales tax paid on the lease of a motor vehicle.

The amount you can deduct if you use the IRS tables is based on your “total available income”, your state of residence, and the number of exemptions you claim. Your “total available income” includes your Adjusted Gross Income plus any nontaxable receipts, such as –

·      tax-exempt interest,

·      Veteran’s benefits,

·      nontaxable combat pay,

·      Workers’ Compensation benefits,

·      the non-taxable portion of Social Security and Railroad benefits,

·      the non-taxable portion of IRA, pension or annuity distributions (not amounts that are “rolled-over”), and

·      public assistance payments.

If a couple files separately, and both spouses elect to deduct state and local sales tax, and one spouse elects to use the sales tax tables instead of actual sales tax paid, the other spouse must also use the tables to determine the state and local sales tax deduction on his/her separate Schedule A.

You should keep track of all of the sales tax you pay during the year by saving, in a small box or a manila envelope, all purchase receipts that indicate an amount of sales tax paid.  In January of next year add up all of the sales tax amounts on these receipts and see if the total exceeds both the amount of state income tax, if any, that you can deduct and the sales tax deduction allowed from the IRS-generated Optional State Sales Tax Tables.

You may want to do a preliminary comparison as part of your year-end tax planning in November.  If you have enough in sales tax to provide a better tax benefit, or are “close to the edge”, and you were planning to purchase a new car or other big item(s) early in the New Year, considering making the purchase at the end of December to get the increased tax deduction for 2016.

When doing your comparisons keep in mind if you deduct the total amount of state income tax withheld on Schedule A for 2016 you may have to claim any refund received as taxable income on your 2017 tax return.


A Qualified Charitable Distribution (QCD) allows IRA owners age 70½ and older to directly transfer up to $100,000 from an IRA account to a qualified charity, tax-free, as part (or all) of their Required Minimum Distribution (RMD) for the year.

Any portion of an RMD that represents a QCD is not included in gross taxable income reported on Line 15(b) “Taxable amount” of “IRA distributions”) on Page 1 of Form 1040.  If your total Required Minimum Distribution from your IRA investments for the year is $50,000, and you have made a QCD of $40,000, you only report $10,000 as a taxable distribution.  If the entire $50,000 was used as a QCD you have “0” taxable income to report.

By reducing the amount of the RMD that must be included in gross income you also reduce your Adjusted Gross Income (AGI), and, by doing so, you can also potentially reduce the taxable portion of Social Security or Railroad Retirement benefits and increase the multitude of deductions and credits that are reduced or phased out as AGI rises. 

You are not allowed to claim a charitable deduction for the amount of the QCD on Schedule A – the “deduction” has already been claimed by reducing the taxable portion of your RMD. 


The credit allowed is 10% of the cost of qualifying energy-efficient purchases and improvements, up to a lifetime maximum of $500.  Some items are limited to a credit from $50 to $300.  The qualifying purchase or improvement must be for an existing home that is your principal residence.

If you claimed at least $500 in energy tax credits on your 2006 through 2015 returns, you are not eligible for a credit for 2016. If you claimed $300 in energy credits over the years, the most you can claim in 2016 is $200.

The credit is available for –

• Biomass Stoves

• Heating, Ventilating, Air Conditioning (Advanced Main Air Circulating Fan, Air Source Heat Pumps, Central Air Conditioning, Gas, Propane, or Oil Hot Water Boiler, and Natural Gas, Propane or Oil Furnace)

• Insulation

• Roofs (Metal and Asphalt)

• Water Heaters (Gas, Propane or Oil Water Heater, and Electric Heat Pump Water Heater)
• Windows and Doors

The individual limitations on the credit for specific items are -

·   $50 for an advanced main air circulating fan,
·   $150 for a qualified natural gas, propane, or oil furnace or hot water boiler, 
·   $300 for an item of energy efficient building property, and
·   $200 lifetime limit for windows.

Not every new window, door, boiler, heater, or furnace will qualify. There are very specific "energy efficiency" requirements for each of the qualifying items. You can go to the Energy Star website to find out what the specific qualifications are for individual items.  

When giving your tax pro your “stuff” next February or March do not just include a copy of the bill for one of the listed items, or a note that you spent $800 for a new hot water heater, and expect him/her to waste his/her valuable time attempting to determine if the purchase qualifies for the credit. Do the homework and determine if your purchase qualifies before contacting your tax pro.  When you purchase any of the listed items ask the person selling it for a “Manufacturer’s Certification Statement” - a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit.

My standard final word of advice – before acting on anything you have read here contact your tax professional.


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