In the coming weeks, Republicans will take control of Congress and the White House, with all fingers pointing to a major overhaul of the Internal Revenue Code. This could signal the demise of more than 30 temporary tax provisions commonly referred to as “Extenders” some of which expired with the New Year. Whether they are resurrected in any new tax reform depends on such factors as lobbyist persuasiveness and the level of Congress’ commitment to simplifying the tax code, not to mention their overall economic impact.
In December 2015, the Protecting Americans from Tax Hikes (PATH) Act of 2015 was enacted making many expiring extenders a permanent part of the tax code. All were not preserved, however, as more than thirty-five provisions, were extended only through 2016 or a few years beyond.
Four of the tax laws that expired at the end of 2016 affect millions of individual taxpayers. Three are residence related; the fourth is connected to education and was available to eligible students or their families. A brief discussion of each follows:
Mortgage insurance premium deduction
Homeowners who are required to maintain private mortgage insurance (PMI) because their down payment was less than 20 percent of their home’s purchase price may deduct these monthly premiums as mortgage interest on Schedule A. The ability to deduct PMI was first instituted in 2006 and has been extended over the past decade. As housing prices continued to rise during the last housing bubble, this deduction became increasingly popular as fewer homeowners had the ability to put down the requisite 20 percent to avoid PMI.
Mortgage debt relief exclusion
In general, the amount of debt forgiven is considered taxable income. In the wake of the last housing market crash, The Mortgage Debt Relief Act was created in 2007 to provide relief to homeowners who had their mortgage restructured or forgiven due to foreclosure or short sale. Homeowners looking to stay in their homes by working with their lenders to obtain more favorable payment terms, who faced foreclosure or who arranged for a short sale, were allowed to exclude up to $2 million of the discharged indebtedness. Since then it had been extended several times.
Credit for energy-efficient home improvements
This tax credit, available in various forms since 2005, allowed homeowners to write off a portion of the cost of certain energy-efficient improvements such as insulation, certain roofs and exterior windows and doors. The latest form of this credit had a lifetime credit cap of $500, applied to specific residential energy upgrades that must have been in place by December 31, 2016.
Tuition and fees deduction
This above-the-line deduction could be claimed without the need to itemize expenses. Eligible taxpayers could deduct up to $4,000 in higher education expenses paid for themselves, their spouse or dependents during the year. In past years, taxpayers were able to compare the tax benefit of this deduction to that of the various education credits and claim the best alternative. Unless Congress revives it in tax reform, you will only be able to claim education credits beginning in 2017.
Most would agree that the perennial use of temporary tax provisions does not support sound long term tax policy. On the contrary, a stable tax code is good for the economy, provides taxpayers with relative certainty in calculating their tax liabilities and helps people make the best decisions for the long run.
While these extenders are by no means the only tax issues on the new administration’s agenda, only time will tell if President-elect Trump and Congress will see fit to include some or all of them in any tax reform. In the meantime, keep your fingers crossed in 2017 if these provisions affect you.
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