LISTENING TO THE PRESIDENTIAL DEBATES, you'd think a sea change is coming to our tax laws. Proposals range from instituting a flat tax to adding new brackets on the upper end of the income scale. Most Republicans want the capital gains tax lowered or eliminated; Democrats would like to see it raised. Practically every candidate wants to ditch or overhaul the alternative minimum tax. But campaign talk shouldn't derail your strategy.
"Any elected official can propose a plan, but there has to be consensus as to what becomes law," says accountant Vinay Navani of Wilkin & Guttenplan P.C. "I base my planning on the laws that exist today, because that's all we know for sure."
If you haven't filed yet this year, here are some tax breaks you might want to consider. Because many have been made permanent, they may even help you plan ahead for next year and later years.
Something for (Almost) Everyone
Legislative action in 2015 extended or made permanent the following useful tax breaks:
- Permanent: Both the American Opportunity Tax Credit (for college tuition) and the earned income tax credit (for low- and middle-income taxpayers) were made permanent.
- Extended: The Mortgage Debt Relief Act was extended through 2016, helping homeowners who would otherwise pay income tax on their canceled mortgage debt.
- Permanent: Americans 70½ and older will continue to be able to transfer up to $100,000 from an individual retirement account to a charity without paying taxes.
- Permanent: Teachers can take deductions for classroom expenses up to $250.
- Permanent: A rule letting taxpayers deduct state and local sales tax rather than state income tax is here to stay. Aimed primarily at citizens in Florida and Texas who pay no state income tax, the deduction could also benefit those who made large purchases in 2015.
Married same-sex couples can now file joint returns.
Far and away the most historic change is that this tax season married same-sex couples will be able to tick the same box on both state and federal forms. "There's no way to generalize what this means for potential savings," Navani says. "You have to re-run the numbers and take into account the option to file joint returns. For most people, filing jointly is better than filing separately—and that's true for same-sex and heterosexual couples alike."
"You want to look at your 2015 returns and think, 'What could I have done better?'" — Vinay Navani CPA, Wilkin & Guttenplan P.C.
A new tax-advantaged savings vehicle entered the race. Others got a bigger tank.
Last November saw the introduction of myRAs, which are essentially introductory IRAs that are backed by the U.S. Treasury, useful for first-time savers. Contribution limits on 401(k), 403(b) and most 457 plans rose to $18,000 beginning in 2014, and the over-50 crowd can tack on an extra $6,000.
Inflation is your friend.
A number of adjustments for inflation make for larger standard deductions, personal exemptions and exclusions compared with the 2014 tax year. Tax bracket thresholds went up universally, spelling savings all the way up the ladder. Inheritors will be pleased to know that the estate tax exclusion jumped $90,000, to $5.43 million for tax year 2015.
Looking Ahead to Next Year
"You want to look at your 2015 returns and think, 'What could I have done better?'" says Navani. "If this is going to be a high income year, you may consider charitable contributions that you didn't make in 2015 but wish you had. It could also be a chance to catch up on your 401(k) contributions."
And pay attention to any changes that are announced throughout 2016. The contribution limits on health savings accounts (HSAs) for family policies rose by $100, to $6,750 this year. These accounts, which allow users to spend pre-tax dollars on a variety of health-related expenses, are worth maxing out for many families.
3 Questions to Ask Your Advisor
- Where can I find the money to increase my retirement plan contributions?
- Can I increase my charitable giving without shortchanging other priorities?
- What are the investment options for my health savings account?
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Neither Bank of America nor any of its affiliates provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.