The Consolidated Appropriations Act (CAA) is a significant piece of legislation in the United States that serves multiple purposes. Primarily, it exists to ensure that government projects run smoothly. But, it also plays a crucial role in tax legislation as it makes provision for a range of benefits, commonly known as “tax extenders.” These impact both individuals and businesses.
Our CPAs look into how understanding the CAA and tax extenders, can benefit your financial planning.
Understanding Tax Extenders
Tax extenders are designed to provide specific tax benefits over a set period, typically one or two years. These can be extended periodically to provide continuity and stability to your financial position – both as an individual and a business.
Individual Tax Provisions
The following common tax provisions have been included in the CAA to help individuals minimize their overall tax liability.
- The Educator Expense Deduction. Allows teachers and eligible educators to deduct unreimbursed classroom expenses. Government implemented the deduction in 2002 and has since made it permanent.
- The Mortgage Insurance Premium Deduction. Allows homeowners to use their mortgage insurance premiums as a tax deduction. Initially implemented in 2006, it was extended to December 31, 2020, and would be relevant to individuals that need to submit back taxes for this period.
- The Exclusion for Forgiven Mortgage Debt. Allows homeowners to exclude forgiven mortgage debt. Introduced in 2007 and extended until December 31, 2025.
Business Tax Provisions
In the same way, there are several tax provisions for business that support their financial growth, while also contributing to broader economic and social goals.
- The Work Opportunity Tax Credit (WOTC). Incentivizes businesses to hire individuals from targeted groups that face significant barriers to employment. The government first implemented this credit in 1996 and has extended it to December 31, 2025.
- Empowerment Zone Tax Incentives. Benefits businesses that operate in designated economically distressed areas with high poverty and unemployment rates, for example. They introduced it in 1993 and have extended it to December 31, 2025.
- Energy Efficiency Tax Credits. Encourage businesses to invest in energy-efficient improvements for tax deductions. These started in 2005 and have extended through December 31, 2021. Which means that if your business made energy saving investments during this period, you would be eligible for the credit when filing back taxes.
Tax Planning and Compliance
The only thing better than utilizing your tax credits, is strategizing how you will go about maximizing them. But this requires both short and long-term planning.
The IRS issues detailed regulatory notices that explain how taxpayers can apply these provisions to their specific situations. They regularly release updates to tax laws and extenders.
Staying abreast of these changes will help you build a sound tax strategy. Consider the following tips as part of your long-term tax planning:
- Plan ahead. Strategize how to use credits and deductions over multiple years and include the possibility of government termination of extender benefits.
- Keep accurate records. Maintain detailed documentation for all eligible expenses and credits to ensure compliance and as evidence in the event of an audit or when submitting back taxes.
- Review and adjust. Periodically review your tax strategy and make adjustments as needed based on changes in tax laws and your financial circumstances.
- Consult professionals. Work with a CPA to ensure that you maximize benefits and stay compliant.
At Fusion, we can help you with a tax planning strategy and ensure that your accounting records are in line with the CAA and IRS reporting requirements. Contact us today.
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.