If nothing’s certain but death and taxes, count among the jillion uncertainties whether or not Congress will extend any of the 34 temporary federal tax breaks that expired on Dec. 31.
The write-offs, credits and shorter depreciation periods apply both to businesses and individuals. A number of them are energy-related; others, among a wide range, pertain to incentives to stimulate job creation in economically distressed areas.
With President Donald Trump’s plan to reform the tax code this year, the question of extending these provisions is knottier than usual, tax law expert Barbara Weltman, a tax and business attorney, told ThinkAdvisor in an interview. Look for Congress, special interest groups and lobbyists hashing it out, she said.
Some of the expired breaks apply mainly to individuals of high net worth; others are of more help to folks of modest means. A complete list, compiled by the Joint Committee on Taxation, can be found on www.jct.gov. Three breaks expired in March 2016.
In the interview, Weltman, author of “J.K. Lasser’s 1001 Deductions & Tax Breaks 2017” (Wiley), discussed what financial advisors can do now to help clients offset expired breaks; those provisions she considers most meaningful; and the battle she indeed sees brewing about the purpose of tax rules.
Here are highlights from our conversation with Weltman, who is based in Vero Beach, Florida, and specializes in helping small businesses:
THINKADVISOR: Is there more uncertainty than usual over whether tax breaks that expired in December 2016 will be extended this year?
BARBARA WELTMAN: Absolutely. When other tax breaks expired, it was just a question of whether they were going to be extended or not. Today we’re talking about [President Trump’s] total revision of the tax rules from top to bottom for both business and individuals. [Steven] Mnuchin [U.S. Treasury Secretary] says we’re going to have a tax bill by August. That seems impossibly soon, but let’s see. I’d like to see something in print that’s going to be debated.
What are the most significant breaks that have expired?
A biggie is the exclusion of up to $2 million of forgiven debt on primary residences. That’s one top-of-the-list issue. In many parts of the country, the housing market still hasn’t recovered. People who may be in short sales would be affected by [this break’s expiration]. That’s when you sell for less than what you owed; and the lender says, “OK, we’ll accept that. It’ll satisfy the debt.”
What’s another key break that expired?
The deduction for mortgage insurance – the ability to, effectively, treat mortgage insurance like an interest payment.
What about the depreciation–related breaks that expired? One is the three-year depreciation for racehorses two years old and under. Why was there a tax break for young racehorses?
Without singling out that particular break, when you see these kinds of quirky things in the law, it’s because people in Congress [may] have a pet thing in their state, or there are very strong lobbyists.
Another expiring break in the accelerated-depreciation category is a seven-year recovery period for motorsports entertainment race tracks, such as NASCAR. A third is special expensing rules for certain costs of producing movies, TV and theatrical works. Is that last one for big Hollywood productions?
No. It’s being able to write off costs more quickly but only for small amounts.
Any thoughts on which breaks will be extended in 2017?
The issue is what Congress is going to do. Last June the House Ways and Means Committee released a blueprint for tax reform. According to that, a lot of breaks aren’t going to come about, and many that we have today will fall by the wayside as a [step] to slashing tax rates, getting rid of the alternative minimum tax, and making certain other changes.
Is that blueprint the final word?
No. There are Trump proposals that are different from the blueprint. Everybody gets into the act: This usually entails special interests and lobbyists and congressional people who have interests that they may want to protect for their states.
What do you think will happen?
It’s too early to know.
Please explain the expired break for qualified zone academy bonds and allocation of bond limitation.
Tax incentives in empowerment zones — certain distressed urban and rural areas that the federal government has designated — have been around for a long time. These breaks have expired and been renewed several times. They’re tax incentives to encourage businesses to work in those areas. The concept of helping these economically distressed [zones] is certainly something that Trump has spoken to. So, I wouldn’t dismiss this being extended or being brought back in some other form.
A number of energy-related breaks expired, like an energy-efficient commercial buildings deduction; maintaining energy improvements to residences, like insulation and storm doors; a 3% credit for geothermal heat pumps property; a credit for hybrid solar lighting system property. Do you think any of these will be extended?
One of the issues is: Are taxes to raise revenue, or have the tax rules been to incentify certain activities by individuals and businesses, or are taxes meant to redistribute wealth? That’s going to be fought out.
I see that the credit for two-wheeled plug-in electric vehicles has expired.
Motorcycles is an example. There used to be a break for three-wheeled vehicles. That expired a couple of years ago and wasn’t extended.
What about the medical expense deduction for seniors?
That means people 65 and older are going to be treated just like everybody else — with a 10% of adjusted income floor for deducting their medical expenses — rather than the 7 1/2% that applied for 2016.
Then there’s the deduction for college tuition and fees that’s expired. Seems that could matter to working families.
I don’t view that as such a critical one considering that there are other education breaks, like the education credit, American opportunity credit and lifetime learning credit. With different income limits on each, you might qualify for one and not the other. But this break isn’t as critical as perhaps the one for mortgage insurance because many people want to buy a home with less than 20% down and have to take out mortgage insurance. That allowed them to take a deduction if their income is below a set limit.
What can financial advisors do now to help clients when it comes to offsetting tax breaks that have expired?
There are certain things they could suggest. Assuming that tax rates will be lower going forward, deferring compensation could benefit. If you’re in the 39.6% bracket now, but if the top rate drops to something like 25%, by deferring income, you’re automatically going to have tax savings.
You probably don’t want to be converting your IRAs to Roth IRAs at the high tax rates. See if it’s still possible to do that when the rates go down.
What about planning for the long term?
[FAs] have to take a wait-and-see approach because we can’t say with any certainty what the rules will be going forward. For example, we don’t know what the incentives will be for retirement savings. There’s talk of simplifying and just having a single plan or mandatory plans. So, you can cherry-pick certain strategies; but there’s just too much uncertainty that makes devising a whole plan challenging. In terms of making any long-term suggestions, who knows what’s going to come down the pike?
— Related on ThinkAdvisor:
- 3 Key Tax Rules Governing Typical Business Deductions
- 4 Tax-Planning Tips for a Fiscally Healthy 2017
- 4 Ways Not to Ruin Your Clients’ Taxes