Tax Deductions

Tax law changes mean inflation adjustments

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate


In addition to making some temporary tax breaks permanent, 2 measures that became law on Dec. 18, 2015, also provide for annual inflation adjustments to the tax benefits.

The Protecting Americans from Tax Hikes, or PATH, Act dealt primarily with tax extenders, those tax laws that expire and must be renewed. PATH was rolled into the Consolidated Appropriations Act, or the fiscal 2016 spending bill, which also included some tax provisions.

3 tax laws that are permanently in the Internal Revenue Code thanks to those laws now require the Internal Revenue Service to calculate the effect of inflation and annually adjust the tax breaks accordingly.

The IRS has now done that. Here are the inflation-adjusted amounts for the 2016 tax year for educators’ classroom expenses, commuting costs for workers who use public transportation as well as a popular business write-off.

No 2016 increase for teachers’ deduction

Teachers and certain other elementary and secondary school employees can deduct some of their out-of-pocket costs for classroom items. When this above-the-line deduction, meaning you don’t have to itemize to claim it, was made permanent, the long-standing $250 deduction amount was set as the base.

The expense amount also was tweaked so that it will increase as inflation dictates. That’s good news for educators. But since inflation in 2015 was low, the IRS says that there won’t be any bump up for the 2016 tax year. The deduction stays this year at $250.

Public transit benefit bump

Employers can subsidize their workers’ commuting or parking costs with pretax dollars up to an allowable monthly limit. Previously, the amount allowed for parking benefits was greater than that given employees who commuted using public transit.

As part of the tax extenders, that disparity was evened out. And as part of the December tax law changes, parity between the two transportation options was made permanent.

In addition, the amount allowed for van pool and other transit options are now pegged to inflation. In 2015 that monthly amount was $250. For 2016, it goes to $255. The increase applies to parking benefits, too.

Enhanced business expensing

One way businesses can reduce their tax bills is to write off the costs of new equipment. In many cases, this requires spreading the costs over several tax years through depreciation.

But section 179 expensing allows for some costs to be deducted in one tax year. And at the height (or depth) of the great recession that began in 2008, Congress increased the expensing amount to help economically struggling businesses continue to operate and grow their companies.

With the December extenders and spending bills, lawmakers permanently set the maximum amount of newly acquired property costs that a business can expense, or deduct, in one year at $500,000.

Once a business exceeds a certain amount of qualifying equipment purchases in a tax year, the deduction is reduced. Under the new law, that phaseout starts at $2 million in purchases

Both of those limits now were indexed for inflation.

For 2016, low inflation means that the IRS did not hike the $500,000 deduction amount. However, the $2 million phaseout threshold increases this year to $2.01 million.

Now that the new permanent tax breaks are on the books, look for these adjustments to be included in the annual announcement of other inflation-affected tax provisions that the IRS releases each fall.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.


Some tax breaks made permanent

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!


By Bankrate

It’s not quite a done deal yet, but it appears that taxpayers soon will have some finality when it comes to popular tax breaks.

The list of tax extenders, the 50-plus tax provisions that technically are renewed, or extended, every year or so could be shorter thanks to the Protecting Americans from Tax Hikes, or PATH, Act of 2015.

This tax bill, announced late Dec. 15, makes permanent a variety of individual and business tax incentives. If passed by the House and Senate and signed by President Obama, PATH will mean the end of periodic worrying about the availability of some popular tax breaks.

The full bill runs 233 pages, but here are some of the individual taxpayer highlights.

Popular tax breaks made permanent

Teachers will get to write off some of their out-of-pocket classroom expenses every year. This is an above-the-line deduction, meaning it’s available directly on 1040 and 1040A forms and doesn’t require the filer to itemize deductions. Even better, the $250 tax break now will be indexed for inflation.

State and local sales taxes will be a fixture on Schedule A as a permanent choice for taxpayers who itemize, along with the deduction for state and local income taxes. You still have to pick just one set of taxes to deduct, but folks with no or low income taxes won’t have to worry about whether they get the option.

Traditional IRA owners age 70 ½ can continue to directly donate up to $100,000 a year from those retirement accounts to their favorite charities. They won’t get a tax deduction, but the money won’t count as taxable income when contributed this way.

Commuters who take mass transit rather than drive also get permanent relief when it comes to employer fringe benefits. The amount covered for rail and bus travel will remain roughly on par with parking benefits paid to workers who drive to the office.

Family benefits now tax code fixtures

Another group of tax breaks created to help families also will now be a permanent part of the Internal Revenue Code. Most of these provisions were set to expire at the end of 2017.

The child tax credit, which previously was made a permanent part of the tax code, gets another boost. A temporary enhancement that allows more parents to claim an additional refundable child tax credit — that’s money back from Uncle Sam even if you don’t owe any taxes — now is permanent, too.

Obama’s signature education tax break, the American opportunity tax credit, also is now in the tax code for good. This tax break, which increased and replaced the Hope credit, provides a $2,500 credit, a portion of it refundable, for costs associated with 4 years of college costs.

The enhanced Earned Income Tax Credit, which provides tax assistance to low- and middle-income workers, stays put, too. The provisions that offer added help for larger families are now permanent.

One-year extension only

A few folks, however, will have to continue to play a waiting game again next year. Some extenders were renewed retroactively for the 2015 tax year, but extended only through 2016.

The above-the-line deduction for qualified college tuition and fees is good for the 2015 and 2016 tax years only. It remains capped at $4,000 for filers who meet the adjusted gross income thresholds.

Homeowners who are able to get their mortgage terms modified or who face foreclosure also get only temporary tax help. The provision that excludes forgiven home loan debt from taxation applies to qualifying deals made in 2016.

Similarly, the option to count private mortgage insurance, or PMI, premiums as tax-deductible loan interest on Schedule A also is available only through the next tax year.

Some opposition remains

While this generally is good news, the bill must be approved by Congress and then signed by the president.

There is some talk from some lawmakers in both parties about voting against PATH because of its nearly $800 billion cost.

I suspect, however, that PATH opponents will make their points about fiscal responsibility during the floor votes, and the overall bill will still clear both chambers.

The timing of the vote is still a bit up in the air. It must be coordinated with a separate funding bill to keep the federal government, including the IRS, operating through September 2016. But votes on both the tax and spending bills are expected soon.

Did your favorite tax break make it permanently into the tax code? Do you agree with PATH choices? Or do you agree that the cost is too steep?

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

Deducting transgender medical expenses

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

Bruce Jenner has a new life as Caitlyn Jenner. She revealed her new look this week on the cover of Vanity Fair magazine.

It’s the most followed male-to-female transgender case since Army Pvt. Bradley Manning, who was sentenced in July 2013 to 35 years at Fort Leavenworth for Espionage Act violations in connection with Iraq war material sent to the WikiLeaks website. A month after that conviction, Manning announced she is transgender and would be living as a woman named Chelsea.

Manning’s situation raised another issue. Would the U.S. government pay for Manning’s physical transition from man to woman? The answer, ultimately, was yes. Earlier this year, the U.S. Army finally began paying for federal inmate Manning’s hormone treatments.

Jenner, thanks to the wealth she’s accumulated as an Olympic champion and more recently as a reality television star as part of the Kardashian family, is financially able to cover her gender transition costs, from hormone therapy through the final surgeries.

But the matter of Uncle Sam’s involvement still is relevant, thanks to the Internal Revenue Code and a 2010 U.S. Tax Court decision.

Gender transition medical issues

Gender identity disorder is listed in the American Psychiatric Association’s Diagnostic and Statistical Manual of Mental Disorders. Since it is a recognized medical condition, costs for treatment — that is, transitioning from one gender to another — are allowable medical tax deductions.

This was confirmed in 2010, when the IRS lost a Tax Court case in which a taxpayer deducted transgender medical costs. The court ruled that necessary treatment for gender identity disorder qualifies as medical care under the tax code, making the costs related to that care tax deductible.

The IRS followed with its own announcement on the court ruling in late 2011.

No tax judgment, just IRS rules

While such procedures attract a lot of attention, both in support for and opposition to transgender issues, tax law isn’t judgmental. All that matters is that the costs meet tax code requirements.

As noted, the first hurdle is that the treatment be medically necessary. That’s an issue for all patients and their physicians to determine. They also must be prepared to prove any therapeutic need if the IRS questions deductions.

Once that’s done, then the patient must itemize the deductions.

Shifting medical thresholds

But there is another consideration on Schedule A. The write-offs also must meet a threshold.

For younger taxpayers, all itemized medical expenses must exceed 10 percent of the patient/taxpayer’s adjusted gross income in order to be claimed.

Jenner, however, is eligible for a bit of a break. She turned 65 last October. Filers age 65 or older are allowed to deduct qualifying medical expenses that exceed 7.5 percent of their adjusted gross income. That rule is in effect through 2016.

While Jenner is estimated to be worth $100 million, much of that amount likely is from real estate holdings, so she might have annual income low enough to make at least some of the medical costs deductible. A check of a Philadelphia specialist’s price list for male-to-female transgender surgeries came to $140,450. Hollywood doctor costs are likely to be even higher.

Of course, I suspect that Jenner has some type of health insurance that will pay for part of the costs. Only uninsured and other out-of-pocket medical costs can be counted as medical deductions.

For the rest of us, regardless of whether we have literal life-changing medical expenses like Jenner or simply run-of-the-mill medical costs, it’s always worth checking on possible help via the tax code.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.