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.
STATE AND LOCAL SALES TAX
(PERMANENT) -
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.
QUALIFIED CHARITABLE DISTRIBUTION
(PERMANENT) -
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.
RESIDENTIAL ENERGY TAX CREDIT (FOR
2016 ONLY) -
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.
TTFN
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