With the April 15 personal income tax filing deadline just a few months away, I wanted to talk about a few tax changes for 2017 and remind you of a few tax breaks that you should use to reduce your tax burden. It’s a good list, so let’s get started with new or improved tax breaks for 2017.
Gift Tax Exclusion for ABLE Accounts
Many of you have probably not heard of this, but an ABLE account—which is short for Achieving a Better Life Experience— offers tax-advantaged opportunities for disabled people and their families. It helps them save and pay for expenses related to disability. Although ABLE account legislation was passed in 2014, these specialized accounts only became available for us to generally use in 2016.
So, here’s what’s allowed: Anyone, including a family member or friend of a disabled person, can contribute up to $14,000 to an ABLE account without having to pay a gift tax. And earnings and distributions are tax-free when they are used to pay for qualified disability expenses such as:
- Prevention and wellness
- Employment training and support
- Assistive technology
- and Personal support services
These accounts offer state and federal tax advantages. In addition, the first $100,000 in an ABLE account does not count as income or assets when disabled individuals try to qualify for public assistance programs. Although only nine states currently have ABLE programs, you can either open an account or contribute to one in a state other than your own. So, if you know someone with a disability, talk to them about this new ABLE account; it’s a good initiative and a great way to financially support those in need, such as say our disabled veterans or near and dear ones.
Higher Tax Thresholds
You’ll be happy to know that the IRS raised its tax thresholds for 2016, therefore, you’ll likely pay a lower percentage of your wages toward taxes if you earned more last year than you did in 2015.
For example, if you were a married couple, filing jointly, your joint income of more than $74,900 would have placed you in the 25 percent bracket in 2015. For 2016 though, you’ll have to make more than $75,300 to be in the 25% bracket. I know that’s a difference of just $400, but, heck, every dollar matters. So be sure to check those tax tables at the back and see what tax bracket you fall in for 2016.
Increased Earned Income Credit
Remember Earned Income Credit—it’s something that came up a lot in the Presidential debates in 2016. Here’s the deal: If you have low or moderate income, you might qualify for a federal Earned Income Credit. The income-based credit is for everyone if you qualify. The maximum credit for 2016 is $6,269 for filers with three or more qualifying children. The amount reflects a $27 increase from 2015’s figure of $6,242.
If you qualify, definitely take advantage by filling out Schedule EIC and attaching it to your tax return if you have a qualifying child and meet the income requirement.
Okay, now here’s a reminder of the tax breaks that every first-time home buyer should know:
Home Mortgage Interest Deduction
As most of you know, mortgage interest deduction is one of the biggest home tax breaks. It covers interest paid on loans of up to $1 million, or $500,000 if you’re married but filing a separate return. And this deduction can be especially beneficial for borrowers with new loans because interest charges on mortgages are typically steeper in the early years of the mortgage’s term. In other words, of your fixed monthly mortgage amount, a greater portion is allocated to interest in the early years and less to paying back the borrowed principal. So if you recently bought a home, make sure you take this deduction while you can because there’s also been some talk of phasing this out.
To take this deduction, you must use Schedule A of your tax return. Claiming the mortgage interest deduction can save you tax dollars if your itemized deductions are greater than your standard deduction. And don’t worry, you don’t have to figure this out. Your loan provider should send you a Form 1098 which shows the amount of interest you paid the previous year.
Mortgage Interest Credit
The federal government’s mortgage interest credit provides another opportunity for first-time homebuyers to claim a tax break for the mortgage interest they paid. Unlike the mortgage interest deduction, which reduces your taxable income, this mortgage interest credit directly counts against your tax bill, lowering what you owe. It’s a little-known but a pretty cool program. Depending on the purchase price of your home, you could get back 20 to 30 percent of the interest you pay every year as a straight tax credit. You’ll have to fill out IRS Form 8396 to get this.
For example, if you owe the IRS $1,000 in taxes and, say, completing Form 8396 shows that you’re eligible for an $800 credit, then you can apply the credit and only owe $200 in taxes. So definitely look into this.
Tax-Free IRA Withdrawals
As folks think of buying a home, one of their major concerns is having enough money for the down payment and closing costs. Many of you may not know this, but the IRS says you can pull funds from your IRA to help.
So, first-time homebuyers who break into their IRAs to come up with the down payment do not have to pay the 10-percent penalty normally applied to withdrawals taken before the age of 59½. By the way, the first-time buyer status also covers those who may have bought in the past but have not owned a home in two years. Thank you, Washington DC!
The IRS lets you withdraw up to $10,000 from your IRA without penalty to buy a home, but, remember, you’ll still need to pay taxes on the money you withdraw.
Please note that your 401k plan does not qualify for this penalty waiver, it’s just your IRA.
Property Tax Deduction
Remember, you can deduct your property taxes. If you itemize deductions on Schedule A, you can deduct real estate taxes paid on your primary residence for the year you’re filing.
Home Improvement Tax Breaks
Improvements you make to a home can also qualify for a tax break. If you use a home equity or other loan secured by your home to finance improvements, the loan will qualify for the same mortgage interest deductions as your main mortgage.
I urge you to keep track of all your home improvements—big and small—because they all add to your cost basis which is the sum of the amount you paid to buy the house and the money you spent on home improvements along the way. Then, if your home sells for more than what you paid for it, you only have to pay capital gains on the portion that’s above your cost basis. Raising your cost basis helps cut down on capital gains taxes you would owe when you sell the house. Just make sure you keep your receipts for major improvements so you can prove the costs you claim.
Final Thought: There is a lot of talk right now about lowering taxes. And who doesn’t love the idea of keeping more money for yourself? Of course, few things in life are free, so expect to see some increases elsewhere. Those increases may be in the form of the elimination of certain deductions, like mortgage interest, or through an increase in the cost of basic goods due to a proposed tax on goods that are imported from other countries. We will have to wait and see how it all works out.