Individual Tax Extender

employee-compensationTax Extender: Prior to the enactment of the American Taxpayer Relief Act of 2012 (“ATRA”), the potential expiration of a variety of credits and deductions caused individual taxpayers and tax return preparers to face unprecedented uncertainty for the 2012 and 2013 tax years which helped to carve the so-called “fiscal cliff.”  Additionally, many of the expiring provisions often served as a significant economic incentive or stimulus for individuals. Fortunately, ATRA has provided limited certainty for individual taxpayers and tax return preparers by extending or making permanent many of these important provisions.  A highlight of some of the most useful individual extenders is listed below.

Educational Extenders

  • Above the line deduction for qualified tuition and related expenses:  ATRA extends the above-the-line deduction for qualified education expenses until December 31, 2013. Taxpayers whose adjusted gross income is $65,000 or less can receive a credit up to $4,000 for qualified tuition expenses. Taxpayers whose adjusted gross income is $80,000 or less can receive a credit up to $2,000 for qualified tuition expenses. Taxpayers with an adjusted gross income above $80,000 are not entitled to a deduction for qualified expenses.AOTC:  ATRA extends through 2017 the American Opportunity Tax Credit.  For the first four years of post-secondary education, qualified taxpayers can receive a tax credit of 100% of the first $2,000 of qualified tuition and related expenses and 25 percent for the next $2,000 for a total maximum credit of $2,500 per eligible student.
    • Importantly, after the initial December 31, 2011 expiration of this deduction, Congress failed to enact an extender for the 2012 tax year. Therefore, ATRA also retroactively extends the deduction to cover qualified tuition and related expenses spent in 2012.
    • Limitations that existed in prior years continue to remain in full force and effect. Therefore, for example, taxpayers are unable to take a deduction in the same tax year that they or anyone else claims the American Opportunity Tax Credit (“AOTC”) or the Lifetime Learning Credit for the student.
  • Student Loan Interest Deduction: The 60 month rule for the $2500 above the line student loan interest deduction is suspended by ATRA.  The modified AGI range for phase-out of the deduction is also permanently expanded by ATRA and the restriction making voluntary payments of interest nondeductible is permanently repealed.

Extenders related to Children

  • Child Tax Credit:  Subject to phase-out provisions, ATRA permanently extends the $1,000 per child tax credit.  Also as a result of the ATRA extension, through December 31, 2017, this credit is refundable to the extent of 15% of the taxpayers’ earned income exceeding $3,000.
  • Earned Income Credit (“EIC”):  ATRA extends through December 31, 2017 the EIC for three or more qualifying children. Subject to phase-out provisions the rate is equal to 45%. Many other Bush-era EIC provisions have also been extended by ATRA.
  • Adoption credit:  Subject to phase-out provisions, the adoption credit and assistance provisions were permanently extended by ATRA.
  • Child and Dependent Care Tax Credit:  Subject to phase-out provisions, ATRA permanently extends the credit for 35% of $3,000 of eligible expenses for one qualifying child or 35% of up to $6,000 of eligible expenses for two or more qualifying children.

Mortgage Related Extenders

  • Itemized Deduction for Mortgage Insurance Premiums:  ATRA extends the provision allowing taxpayers to take an itemized deduction for payment or accrual of  mortgage insurance premiums as qualified residence interest through December 31, 2013. The mortgage insurance premiums must be taken in connection with a qualified residence and the insurance contract must be issued after January 1, 2007.
  • Relief from Mortgage Cancellation of Debt Income:  ATRA extends the provision allowing taxpayers who have qualified principal residence indebtedness cancelled or forgiven to exclude certain amounts of the forgiven debt from taxable income. The debt must be cancelled before January 1, 2014.

Miscellaneous Individual Extenders

  • Charitable Contributions from Retirement Plans:  Under ATRA, individuals age 70 ½ or older can make tax free distributions up to $100,000 from individual retirement plans to certain qualified organizations for tax years beginning before January 1, 2014.
  • Parity for Mass Transit Benefits: ATRA extends through December 31, 2013, an increase in the fringe benefit for mass transit, making it equal to the fringe benefit provided for parking. Employers, therefore, can exclude from an employee’s income a statutory amount of $175 per month that is adjusted for inflation ($240 per month in 2012) for qualified transportation fringe benefits that the employer provided through transit passes and vanpooling.
  • Deduction of state and local general sales taxes:  ATRA extends the election that allows a taxpayer to take an itemized deduction for state and local general sales tax rather than state and local income taxes. Taxpayers can make this election for tax years beginning before January 1, 2014.  This can be particularly beneficial to those taxpayers who have paid a large amount of state and local sales tax, such as when a large purchase (i.e. a car) is made.