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2017 inflation changes to popular tax credits, deductions


Welcome to Part 4 of the ol' blog's series on 2017 inflation adjustments. 
You can find links to all 2017 inflation posts in the first item:
Income Tax Brackets and Rates.
Today we look at changes to some popular credits and deductions.
Note: The 2017 figures apply to 2017 returns that are due in 2018.
For comparison purposes, you'll also find 2016 amounts to be used
in filing 2016 returns due next April.


Children jumping for joy
You can jump for joy like these youngsters if you can claim some of these popular inflation-adjusted credits and deductions.

The key to paying the least tax possible is to get your taxable income amount as low as possible. Tax deductions help here.

An even better way to arrive at the smallest possible tax bill is to claim tax credits. Unlike deductions that reduce your taxable income amount, credits actually reduce what you owe dollar for dollar. In some cases, they can even get you a refund after they zero out your tax liability.

Many of these tax breaks are affected by inflation, like the standard deduction amounts and limits on itemized deductions blogged about earlier in this 2017 tax inflation numbers series.

Here are some more -- including tax code help for adopting children, a variety of ways to pay for those kids' (and others') higher education, getting to and from work and help for lower and moderate income workers -- that are affected by inflation adjustments for the 2017 tax year.

Adoption tax credit, employer assistance
Having children is expensive. It can get even more costly in some adoption instances. But there is tax help available, via a credit for adoption costs and allowable tax-free assistance from your employer.

A company can provide eligible adoptive parents in 2017 a maximum of $13,570 in tax-free assistance to go toward adoption costs, a bump up from the 2016 maximum income exclusion amount of $13,460.

In addition, parents are allowed a maximum adoption credit of $13,570 for 2017, again a $110 increase from 2016.

Both the adoption exclusion and the credit amounts will begin to phase out when individuals have modified adjusted gross incomes (MAGI*) greater than $203,540. Once the adoptive parents hit MAGI of $243,540 they cannot claim the tax-favored adoption assistance. These income levels are $1,620 higher than the 2016 phase-out range, which is, in case you don't want to do the math, is $201,920 to $241, 920.

*As shamelessly plugged earlier in this 2017 inflation series, you can check out the ol' blog's glossary for more on MAGI, as well as many other tax term definitions.

Depending on the adoption's cost, you may be able to claim both the tax credit and the exclusion. However, you can't double dip; that is, you cannot claim both a credit and exclusion for the same expenses.

And note that the tax credit is not refundable, meaning that it may reduce your tax to zero, but if the credit amount is more than your tax, you can't get any additional amount as a refund.

Lifetime Learning Credit
This nonrefundable tax credit can help you pay not only higher education costs, but also continuing education courses, say that computer class you took to help you get a promotion at work.

The Lifetime Learning Credit is worth a possible maximum of $2,000. However, that amount is reduced if you make what the IRS considers a lot of money.

For the 2017 tax year, if your MAGI is more than $56,000 or a combined $112,000 on a married couple's joint return, you'll lose part of the Lifetime Learning Credit.

For the current 2016 tax year, the income limits are $55,000 for single taxpayer and $111,000 for claims on a married jointly filed return.

Student loan interest
Since college is so expensive, most students and/or their families also take out loans to pay for the added education. The interest paid on these student loans is deductible as an above-the-line income adjustment.

In 2017, you can claim a maximum of $2,500 of your school loan's interest. That's the same as in 2016 because the deduction amount is not tied to inflation. 

But the income levels at which this amount is reduced are and they bump up a bit in 2017. They are more than $65,000 MAGI for single filers and $135,000 for couples filling out a joint Form 1040.

You can't claim the interest deduction at all if your modified income next year is more than $80,000 or in excess of $165,000 for jointly filing taxpayers.

For 2016, the allowable interest amount ($2,500) and the MAGI level at which reductions of that amount begin ($65,000 single; $135,000 married joint filers) are the same as in 2017.

However, this year the deduction is eliminated when your income is more than $80,000 if you're single and $160,000 if you're a married joint filer.

Savings Bond exclusion for higher education
The savings bond education tax exclusion permits qualified taxpayers to not count as income all or part of the interest paid when they cash in eligible Series EE and I bonds issued after 1989 as long as the bond owner pays qualified higher education expenses at an eligible institution.

In addition to meeting certain requirements, there's also an income limit for the education-related savings bond interest exclusion.

For 2017, this exclusion starts phasing out when a single filer makes more than $78,150 or is a joint return filer with MAGI of more than $117,250. You cannot claim the savings bond interest exclusion at all if your MAGI as a single filer is $93,150 or more; $147,250 or more for joint return filers.

Those MAGI levels are slightly larger than the amounts allowed in 2016. This year the exclusion begins to phase out for single taxpayers at $77,550 and at $116,300 for jointly filing taxpayers. The exclusion is completely phased out in 2016 at $92,550 or more for single filers and $146,300 or more for jointly filing taxpayers.

Educators' expenses deduction
Elementary and secondary school teachers, as well as certain other educators, no longer have to worry about whether the above-the-line deduction for their out-of-pocket expenses will be renewed. The enactment of the 2015 tax extenders bill, formally known as the Protecting Americans from Tax Hikes or PATH Act, made this income adjustment permanent.

The PATH Act also calls for the $250 allowable expenses amount to be adjusted for inflation. However, low inflation means that for 2017 the amount stays at the 2016 level of $250.

Transportation fringe benefits
Do you commute to work? Does your company help you cover the cost of getting to and from the office or parking once you're there? The PATH Act made these workplace perks permanent and, even better, equalized them. That means that parking and transit cost benefits of up to $255 for each are allowed as nontaxable fringe benefits.

They also are now indexed for inflation. But as with educators' expenses, low inflation means that the 2016 and 2017  amounts are $255.

Earned Income Tax Credit, or EITC
Finally, there's the Earned Income Tax Credit, a creation of President Lyndon B. Johnson's War on Poverty.

Under the PATH Act, parts of the EITC were permanently expanded, including increased amounts for filers with three or more kids and the easing of the penalty some married EITC couples faced.

With the 2017 inflation adjustments, to claim the EITC in 2017 your earned and adjusted gross income (AGI) each must be less than:

If filing as

Number of Qualifying Children Claimed

None

1

2

3 or more

Single,
Head of Household
or Surviving Spouse   

$15,010

$39,617

$45,007

$48,340


Married Filing Jointly

$20,600

$45,207

$50,597

$53,930

In addition, in 2017 your investment income must be $3,450 or less.

If you do qualify for the EITC in 2017, the maximum credit amounts -- which are refundable, meaning any excess could come back to you as, as the name says, a refund -- are:

  • $6,318 for taxpayers filing jointly who have 3 or more qualifying children,
  • $5,616 with two qualifying children,
  • $3,400 with one qualifying child and
  • $510 if you don't have any qualifying children.

The EITC income amounts for 2017 are slightly more than those allowed on this year's tax return claims. For 2016 taxes, you can claim the EITC if your income is less than:

If filing as

Number of Qualifying Children Claimed

None

1

2

3 or more

Single,
Head of Household
or Surviving Spouse   

$14,880

$39,296

$44,648

$47,955


Married Filing Jointly

$20,430

$44,846

$50,198

$53,505

You cannot have more than $3,400 in investment income.

And the maximum EITC amounts for the 2016 tax year are:

  • $6,269 with three or more qualifying children,
  • $5,572 with two qualifying children,
  • $3,373 with one qualifying child and
  • $506 if you don't have any qualifying children.

OK. That's enough inflation infatuation for today. I know it's a lot, but many of these tax breaks can be claimed by a lot of filers. I hope you're one of them and that they cut your tax bill this and next year.

Comments

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Kay Bell

Alan, I've clarified the reference to the $2,500 student loan interest deduction amount. It is not subject to inflation adjustment even though my original phrasing seemed to imply that. Only the income thresholds to deduct the loan interest are inflation adjusted each year. Kay

Alan Drake

Is the $2,500 Student Loan interest deduction adjusted for inflation ?

And since a $2,500 to $3,000 increase is a large 20% jump, are we likely to see such an inflation adjustment in the next few years ?

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