Russ Wiles

The Arizona Republic

In what has become a year-end tradition, Congress this month extended several income-tax provisions that had expired, providing some money-saving options heading into the return-filing season that begins Jan. 19. In fact, this year's action goes a step further and makes some of these changes permanent.

The extender changes were signed into law Dec. 18. They're one of several recent updates to personal-finance issues that gained prominence this year.

Tax rules extended

Some of the expired tax rules were revived permanently, while others got a new lease on life for two years. One provision in the permanent camp allows teachers to take an "above the line" or non-itemized deduction for unreimbursed classroom expenses, with the $250 yearly maximum indexed to inflation starting in 2016.

Another gives individual taxpayers who itemize the option of deducting state and local sales taxes instead of state and local income taxes. While this provision is especially important for people living in states like Florida and Texas that lack a state income taxes, it also can be used in other states for people making large purchases in a year. "Some taxpayers who make a big-ticket purchase, such as a motor vehicle, before year end could benefit" from this provision, said tax researcher Wolters Kluwer.

Another rule that was permanently extended could help affluent seniors and the charities they favor. It allows people 70½ and older to withdraw up to $100,000 a year from IRAs or individual retirement accounts on a tax-free basis provided they transfer the money to a charity. Otherwise, they would need to take a required minimum distribution, declare it as taxable income, then make charitable donations separately.

People still suffering from the housing downturn might appreciate a two-year extension on mortgage debt canceled by a lender. "Without an extension, debt that is forgiven through a foreclosure, short sale or loan modification could be treated as taxable income," noted Wolters Kluwer. This rule allows homeowners to avoid taxes on up to $2 million in canceled debt on a principal residence in 2015 and 2016.

In addition, homeowners who pay premiums on mortgage insurance will be able to deduct these costs for 2015 and 2016, thanks to another extension, and students pursuing post-secondary education can take above-the-line deductions on tuition and fees for two more years.

Social Security options curtailed

The headline news coming out of Social Security lately was the announcement in October that there would be no cost-of-living increase for 2016. But there were other changes, too, including the effective end to the "file and suspend" option to claim benefits for a married couple.

For couples, this provision essentially has allowed the spouse with a lower earnings record, and thus smaller retirement benefit, to claim a larger check than otherwise would be the case. The strategy involves having the higher-earning spouse file for his or her own benefits upon reaching full retirement age (generally 66 or 67), then suspending that election before receiving money.

The act of filing by the high-earning spouse allows his or her mate to start receiving spousal benefits earlier and usually for a higher amount than that person could generate from his or her own work record. The reason to suspend reflects the fact that Social Security benefits increase for people who delay claiming them. So for the higher-earning spouse who defers, his or her own benefits would grow 8% a year between full retirement age and age 70.

The strategy doesn't work in all cases, but it often makes sense for couples with a wide gap in their individual retirement benefits, said Clifton Larson Allen Wealth Advisors. At any rate, the rule change means filing and suspending generally won't be worthwhile starting around next May.

While some couples won't like it, the rule change could help improve Social Security's finances by eliminating what some view as an expensive loophole. And since it has been one of the more complicated strategies that Social Security recipients have had to figure out, simplicity could be another byproduct.

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.