2016 federal income tax return filing deadlines for
- Tuesday, April 18, 2017
- Monday, October 16, 2017, if you file for an
automatic six-month extension by the original due date
The Tax Planning Environment in 2017
November's election left us with a Republican administration in the White House as well as Republican control of both houses of Congress. President Trump campaigned, in part, on the promise of large-scale tax reform. In fact, he listed tax reform among the top priorities for his first 100 days in office.
It remains to be seen, however, where tax legislation ultimately fits into what is shaping up to be an ambitious and contentious first year of the new administration. The situation is further complicated by the fact that Republicans in the Senate lack the needed 60 votes to overcome a Democratic filibuster. Furthermore, Republicans themselves are not in complete agreement when it comes to some of the key details around potential tax policy. So while we're likely to see changes, the specifics, scope, and timing of the provisions will likely take some time to unfold.
What tax reform could look like
In 2016, House Republicans published a tax reform "blueprint," a summary of policies that could well form the basis of new legislation in 2017 (abetterway.speaker.gov). Although the Trump campaign initially proposed tax reforms that diverged from those policies, the candidate's proposals moved closer to the House Republican plan toward the end of the election cycle.
Because it's too early to know what any new legislation will look like, it may make sense to focus on some of the general provisions common to both the policies articulated by the Trump presidential campaign and those reflected in the House Republican blueprint:
- Reducing the number of income tax brackets (potentially from seven brackets to three — 12%, 25%, and 33%)
- Increasing standard deduction amounts and limiting the use of itemized deductions
- Repealing the federal estate tax, the alternative minimum tax (AMT), and the 3.8% net investment income tax
- Lowering the business tax rate from 35% (potentially to either 15% or 20%)
Efforts to move ahead with tax reform will take place in a polarized political environment. Even when Republicans coalesce around a single plan, initial indications suggest that there's little reason to expect bipartisan cooperation in enacting lasting tax reform. Without 60 votes in the Senate, it's possible that Republicans may attempt to pass tax reform through budget reconciliation, which requires only a simple majority vote.
Medical expense deductions — Individuals claiming a deduction for qualified medical expenses on Schedule A of Form 1040 are generally able to deduct the expenses to the extent that they exceed 10% of adjusted gross income (AGI). However, individuals age 65 or older have generally been subject to a lower 7.5% AGI threshold. Starting in 2017, the 10% AGI floor will apply to all individuals, regardless of age.
ABLE accounts — Created by The Tax Increase Prevention Act of 2014, ABLE accounts are tax-advantaged vehicles designed to help individuals with disabilities and their families save and pay for disability-related expenses. These accounts first became generally available during 2016.
The following deductions, credits, and exclusions expired at the end of 2016.
Deduction for qualified higher-education expenses
— An above-the-line deduction was allowed in prior years for qualified tuition and fees (for yourself, your spouse, or a dependent) in a degree or certificate program at an accredited post-secondary educational institution. The deduction could reach up to $4,000, subject to adjusted gross income limitations.
Credit for nonbusiness energy property
— A 10% credit was available for the purchase of certain energy-efficient improvements, including qualifying insulation, roofing, windows, and doors; specific credit amounts applied for the purchase of high-efficiency equipment including furnaces and hot water systems. A $500 lifetime cap applied (no more than $200 for the purchase of windows).
Deduction for mortgage insurance premiums — Premiums paid or accrued for qualified mortgage insurance associated with the acquisition of a main or second home could be treated as deductible qualified residence interest on Schedule A of Form 1040, subject to adjusted gross income limitations.
Discharge of qualified personal residence debt — Taxpayers were able to exclude up to $2 million of forgiven home mortgage debt ($1 million if married filing separately) that was incurred to acquire, construct, or substantially improve a principal residence. Refinanced qualified principal residence debt that was discharged could also qualify for the exclusion.
Last major tax legislation
Even though more than 15 major pieces of tax legislation have been
enacted into law since 2000, the current tax planning environment has been
heavily shaped by the American Taxpayer Relief Act of 2012, which passed in January
2013, and the
Protecting Americans from Tax Hikes Act of 2015, which passed in late 2015.
legislative acts made permanent a number of
significant tax provisions (commonly referred to as "tax extenders") that had previously existed only in temporary form,
Extenders that were made permanent
These provisions are now part of the permanent tax
- There are seven federal income tax brackets for individuals: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%; dollar limitations for each bracket are adjusted annually for inflation.
- Special maximum tax rates generally apply to long-term
capital gains and qualified dividends (0%, 15%, or 20% depending on
a taxpayer's federal income tax bracket).
- Higher alternative minimum tax (AMT) exemption amounts are
in effect and adjusted for inflation; the AMT is essentially a parallel federal
income tax system with its own rates and rules, and the higher exemption
amounts and other related provisions significantly limit the reach of this tax.
- Personal and dependency exemptions phase
out at higher incomes, and itemized deductions may be limited.
- "Marriage penalty" relief is
now permanent in the form of an increased standard
deduction for married couples and an expanded 15% federal income tax bracket.
- Expanded tax credit provisions apply to the dependent
care tax credit, the adoption tax credit, and the child tax credit
- Increased limits and more generous rules apply to certain education provisions, including Coverdell Education Savings
Accounts, employer-provided education assistance, and the student loan interest
- Individuals age 70½ or older can make qualified charitable
distributions (QCDs) from their IRAs and exclude the distribution from gross
income (up to $100,000 in a year); QCDs count toward satisfying any required
minimum distributions (RMDs) that would otherwise have had to be made from the
- Individuals who itemize deductions on Schedule A of IRS
Form 1040 can elect to deduct state and local general sales taxes in lieu of
the deduction for state and local income taxes.
- The maximum amount that can be expensed by a small-business owner under IRC Section 179, rather than recovered through depreciation
deductions, is $510,000, reduced by the amount by which the cost of
qualifying property placed in service during the year exceeds $2,030,000 (2017
figures; will be adjusted for inflation in future years).
Opportunity Tax Credit||The
American Opportunity Tax Credit is a modified version of the original Hope
Credit, with a higher maximum credit amount ($2,500 per eligible student per
year), more years of education covered, and an increased income phaseout range.
A portion of the credit is also refundable.||Made
additional 50% first-year depreciation deduction is available for property
placed in service during the taxable year. (The bonus percentage is reduced to
40% in 2018 and 30% in 2019.)||Extended
through 2019 as modified|
refundable portion of the child tax credit (the "additional child tax credit")
can generally be up to 15% of earned income over $3,000.||Made
|Deduction for classroom expenses paid
by educators||If you're an educator, you can
claim up to $250 of unreimbursed, qualified classroom expenses you
paid during the year as an "above-the-line" deduction. Qualifying expenses
include the cost of books, most supplies, computer equipment, and supplementary
materials used in the classroom. Since 2016, qualifying expenses also include qualifying professional development
expenses. Teachers, instructors, counselors,
principals, and aides for kindergarten through grade 12 are
eligible, provided a minimum number of hours are worked during
the school year.
income tax credit||Credit
percentage is increased for families with three or more qualifying children, and
the income threshold phaseout range is increased for married couples filing
monthly exclusion for employer-provided transit pass and vanpool benefits is
set to the same level as the exclusion for employer-provided parking ($255
monthly for 2017).||Made
of capital gain from the sale or exchange of qualified small-business
at original issue during the tax year can be excluded from income provided
that certain requirements, including a five-year holding period, are met. ||Made