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What's in the New Tax Law for You

These new and improved write-offs may shrink your tax bills

By Richard Eisenberg

When Congress passes legislation stuffed with all kinds of unrelated things, Washington insiders call this a “cats and dogs” or “Christmas tree” bill. Funny thing is, the new tax law — passed to help keep the government operating — actually has a provision to save stray cats and dogs and sailed through just before Christmas.

It also has a smorgasbord of new and improved write-offs that could help you save on taxes next year and beyond. Equally important: the victory for investors due to what didn’t get into the legislation and a provision that might keep your out-of-pocket health costs from skyrocketing.

The details below, with a tip of the hat to financial planner Michael Kitces, director of research at Pinnacle Advisory group in Columbia, Md. who just wrote an excellent summary with far more information than I’m including here.

1 New Tax Break

A new way for self-employed people and other small business owners to roll over retirement plan money They’ll now be allowed to roll over into a SIMPLE IRA any money from a former 401(k) plan or another employer-sponsored plan if the plan has existed for at least two years.

3 Improved Tax Breaks

Bigger write-offs for 529 college saving plans Parents can now use money they put into tax-sheltered 529 plans to pay for their kids’ computers in college.

A $2,400 tax credit for hiring the long-term unemployed Starting in 2016, employers will be able to claim this tax credit for hiring people who have been unemployed for 27 weeks or more. This could be especially helpful for some older, unemployed people; the average duration of unemployment for people 55 and older is now about 41 weeks, according to Sara Rix, an analyst who formerly worked at the AARP Public Policy Institute. (This tax credit provision is a modification of the current Work Opportunity Tax Credit.)

A better tax break for parents of disabled children In October, I wrote about the tax-favored ABLE accounts that’ll be available starting in 2016 for parents of children who became disabled before age 26. The new legislation says parents will be able to choose among ABLE accounts offered by any state (similar to the way they can with 529 college plans), not just the state the child lives in.

This means that parents will now have the flexibility to go with ABLE accounts with the lowest fees, best investment choices and most appropriate account limits.

2 Tax Breaks Extended for Just This Year

The ability to deduct mortgage insurance premiums as interest These are premiums typically charged to borrowers making down payments of less than 20 percent. The write-off can only be claimed for primary residences (including, sometimes, reverse mortgages, says Kitces), not second homes. This deduction isn’t available to filers with incomes over $110,000.

The tax deduction of up to $4,000 for college tuition and fees That deduction is less – $2,000 – for individuals with incomes under $65,000 and couples with incomes under $130,000.


3 Tax Breaks That Were Made Permanent

The American Opportunity Tax Credit for college expenses (formerly known as the Hope Scholarship Credit) was due to expire at the end of 2017; maximum credit: $2,500 a year. What hasn’t changed is that the credit is unavailable to individuals with adjusted gross income over $80,000 and married couples with incomes of $160,000 or more.

The state and local tax deduction  It’s the one that lets you claim either an itemized deduction for the state income taxes you paid during the year or the state sales taxes you paid.

The child care tax credit  The $1,000 credit is here to stay (well, until Congress decides otherwise), but didn’t get indexed for inflation as House Democratic Leader Nancy Pelosi wished. The credit will continue to begin phasing out for singles with incomes of $75,000 and married couples with incomes starting at $110,000.

What Was Postponed

The “Cadillac tax” on employer-sponsored health insurance plans  Congress delayed until 2020 the Obamacare tax some employers were due to start paying in 2018. The moniker came about because the 40 percent tax will be assessed on total employer health insurance premiums in excess of $10,200 for single coverage and $27,500 for family coverage. The Kaiser Family Foundation has estimated the Cadillac tax could have affected 26 percent of employers in its first year and more over time.

One hopeful upshot: a slowdown in the unpleasant trend toward higher deductibles and out-of-pocket health costs for employees, making health costs painful for many. The Commonwealth Fund, a nonpartisan health research group, says steep out-of-pocket costs mean that 23 percent of insured people between age 19 and 64 are now underinsured, double the percentage in 2003.

What Was Left Out

The Department of Labor’s “fiduciary ruledidn’t get watered down. Wall Street lobbyists were pushing Congress to prevent or delay the Obama administration’s upcoming proposed rule that would require brokers to put their clients’ interests before their own. But InvestmentNews reports that a bipartisan group of legislators just introduced a separate bill to replace the rule.

I'll be watching.

Photograph of Richard Eisenberg
Richard Eisenberg is the former Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and former Managing Editor for the site. He is the author of "How to Avoid a Mid-Life Financial Crisis" and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Read More
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