United States: Expiring Federal Tax Provisions And Recent State Tax Changes

Last Updated: September 29 2016
Article by Kelly Morris

At the end of nearly every recent year, Congress has been forced to address numerous tax "extenders" in its budget negotiations. Extenders describes a variety of temporary tax breaks which are set to expire at the end of a particular year unless Congress extends them or makes them permanent. Usually there are several dozen of these extenders set to expire, but the Protecting Americans from Tax Hikes Act of 2015 ("Path" Act), enacted late in 2015, pared the list significantly by making many extenders permanent. These permanent provisions included tax incentives such as the Research and Development Tax Credit and an increased Section 179 Expensing Election. Numerous other provisions were again extended, some for multiple years and some for just 12 months. Several of the more popular ones set to expire at the end of this year are described below, and some may require action quickly to avoid missing out on their benefits.

Several of the provisions expiring this year relate to renewable energy. Most of these incentives are credits for biofuels, energy efficient homes and buildings, and renewable power facilities and equipment. A number of these credits pertain to fuel and energy efficient vehicles, construction of energy efficient homes, and upgrades to existing residential fuel systems. Included in this list is a popular 30% credit for homeowners applied to costs of installing geothermal heat pumps or small wind turbines. Solar energy equipment also qualifies for the credit, but represents one of the few types of energy investments for which the credit does not expire this year, instead expiring five years from now.

Two of the biggest expiring provisions pertain to homeowners. The first extender exempts some homeowners from any tax on mortgage loan forgiveness. Typically, any loan forgiveness ("discharge of indebtedness") must be included as income by the person who receives the forgiveness. However, this provision allows some homeowners to exclude that mortgage loan forgiveness from income. The second extender allows homeowners to deduct mortgage insurance premiums with their mortgage interest deductions. Mortgage insurance is typically required whenever a home is purchased with less than a 20 percent down payment. Most of the existing federal and state programs for first time homebuyers and low income buyers only require down payments of 5 percent or less, and therefore this second provision would affect many homeowners.

The remaining provisions are mostly a mixed bag of incentives for a variety of economic interests, ranging from a credit for railroad track maintenance to changes in the limits for rum excise tax revenue from Puerto Rico and the Virgin Islands. Of note are the deductions for medical expenses and qualified tuition and related expenses. Through the end of 2016, individuals aged 65 and older are allowed to deduct their qualified medical expenses above 7.5 percent of adjusted gross income ("AGI"), while all other individuals are subject to a 10 percent limit. If this provision is not extended, all taxpayers, regardless of age, will be subject to the 10 percent limit. Additionally, there is currently an above-the-line deduction (deducted while computing AGI) for qualified tuition fees and related expenses. This deduction will disappear at the end of 2016 unless extended.

What Congress chooses to do with these extenders remains to be seen. No doubt some will be extended again, while others will be allowed to expire. Congress seemingly will be under less pressure to extend these than in prior years, because some of the overwhelmingly popular extenders were made permanent a year ago.

States

Individual states do not endure the same chaotic year end push to extend expiring tax provisions the way Congress does. However, the states do make changes during the year of which taxpayers should be aware. Here are a few highlights of state tax law changes in northern New England.

Maine

Maine made a few changes in 2016 to conform its corporate and personal income tax laws to the Internal Revenue Code, which included passing extensions for bonus depreciation and the Capital Investment Credit. More significant, however, is the expansion of Maine's Educational Opportunity Credit ("EOC"). The EOC provides a tax credit to taxpayers who:

  1. graduated from an accredited Maine community college, college, or university;
  2. live and work in Maine; and
  3. pay student loans for that degree.

Previously, students who earned more than 30 credit hours out of state and transferred to a Maine school before December 31, 2012, were disqualified from utilizing the credit. Under the new expanded law (for tax years beginning January 1, 2017), any student who received an associate or bachelor's degree from an accredited Maine school who lives and works in Maine is eligible for the credit. The EOC is expanding for both the 2016 and 2017 tax years.

Massachusetts

Massachusetts made numerous changes to its corporate excise and personal tax credits, as well as its personal income tax deductions. Notably, Massachusetts added a personal income tax deduction for taxpayers who purchase an interest in, or contribute to, a Massachusetts prepaid tuition or college savings program. Previously one of just nine states that did not offer a state deduction for these contributions (there is no deduction at the federal level), Massachusetts now offers a $1,000 deduction for a taxpayer filing as single, married filing separately, or head of household, and a $2,000 deduction for married taxpayers filing jointly. This is a five year provision, applying to contributions made between January 1, 2017 and December 31, 2021.

New Hampshire

In 2016, New Hampshire made three big legislative changes that make the state more business friendly. First, New Hampshire increased its Section 179 depreciation deduction from $25,000 to $100,000 for property placed in service on or after January 1, 2017. If your business is considering making a large equipment purchase before the end of the year, it may be worth considering a delay in that purchase until the new year, when this change takes effect. Second, New Hampshire made its "basis step-up tax" optional for businesses. Previously, when an interest in a business was sold or exchanged, businesses were required to recognize and pay tax on the increased basis in the acquired interest's underlying assets if the entity elected for federal income tax purposes to "step-up" the basis in the assets. Beginning in 2017, businesses are no longer required to pay the "phantom tax" if they do not elect the step-up in basis. Finally, New Hampshire created an exemption from its real estate transfer tax for certain transfers involving only a change in the form of ownership. For more detailed information on these changes, see this article from a previous BNN newsletter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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