President Obama Friday signed a $1.1 trillion funding bill that will keep the federal government operational until Sept. 30, 2016. The bill also provides nearly $700 billion in tax breaks.
College students, parents and low-income households stand to benefit from the deal, which also includes many tax breaks for businesses.
Here’s a summary of renewed or expanded tax breaks for consumer households, some of which have been made permanent:
Child Tax Credit
The intention of the child tax credit is to help parents cover the cost of raising kids. It’s refundable, which means you can claim the credit even if you owe federal income taxes. The amount that can be refunded is equal to 15 percent of earned income above $3,000. But that $3,000 level was set to expire in 2017 and revert to $10,000, which would effectively reduce the refundable amount of the child tax credit available. Under the new tax deal, the $3,000 threshold will be made permanent.
American Opportunity Tax Credit (College Tuition)
Everyone knows that college tuition is getting more expensive. Since 2009, the Hope Scholarship Credit – a potential dollar-for-dollar reduction of your tax bill — was temporarily made even more generous to taxpayers and renamed the American Opportunity Tax Credit (AOTC). The new tax bill makes permanent the expanded AOTC, which had been set to expire in 2017. Through the AOTC, you can claim a tax credit worth up to $2,500 a year for qualified education expenses, which is limited depending on income levels.
Earned Income Tax Credit (EITC)
The goal of the EITC is to combat poverty, while providing rewards for working parents. More recently, more generous temporary provisions were added for parents with several kids and for married couples. These provisions had been set to expire in 2017, but are made permanent by the tax deal signed by Obama Friday. For married workers, these provisions include a higher income threshold at which the credit would begin a scaling down. Moreover, the maximum credit for families with
three or more children was raised to 45 percent of household earnings, up from 40 percent.
State, Local Income Taxes
Those who itemize deductions may deduct their state and local income taxes on their federal returns. A temporary provision gave filers the choice of deducting either their state and local income taxes or their state and local sales taxes. Those sales tax deductions are especially appreciated by tax filers in states that don’t impose an income tax — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Residents of Tennessee and New Hampshire are only taxed interest and dividend income, but not wages. So they can also take advantage of the deducting sales taxes. Under the new tax package, that sales tax deduction is made permanent.
The tax deal extends for 2015 and 2016 a temporary provision that lets home buyers deduct the cost of mortgage insurance premiums. These premiums are charged home buyers who may not have enough to make a 20 percent down payment. If you itemize your deductions, your mortgage insurance deduction is subject to income limitations.
Forgiven Mortgage Debt
When a home is sold for less than what is owed the bank — as in a short sale — the bank may agree to forgive the remaining debt you owe. But the IRS treats that forgiven debt as taxable income and that can be a cost burden to tax filers who have gone through foreclosure. The tax deal temporarily extends for 2015 and 2016 a provision that lets you exclude the forgiven debt for federal income tax purposes.
Tuition Tax Deduction
In addition to the American Opportunity Tax Credit, the tax package extends for 2015 and 2016 a provision that lets tax filers deduct qualified tuition and related higher education expenses. Those eligible may deduct up to $4,000 — or $2,000 if your income exceeds a certain level.