On Friday, December 18, 2015, Congress passed and the President signed the “Protecting Americans from Tax Hikes Act of 2015” (PATH). Here are some of the items included in that bill that may affect your personal tax situation.
To start, some of the widely used tax credits have been made permanent and retroactive to the beginning of 2015. These include the Child Tax Credit, the American Opportunity Tax Credit, and the Earned Income Tax Credit.
The Child Tax Credit may be worth as much as $1000.00 per qualifying child, depending on income. The American Opportunity Tax Credit, designed to help offset the cost of tuition, has broadened eligibility and may be worth up to $2,500.00 per student annually. The Earned Income Tax Credit which helps lower-income individuals and families received a permanent increase to the credit percentage for three or more qualifying children.
The deduction allowed to teachers (elementary and secondary education) of $250.00 was also made permanent with an inflation adjuster built in.
For employees who receive employer-provided mass transit and parking benefits, the exclusion from income was raised to $175.00 from $100.00.
Also made permanent in PATH is the state and local tax deduction.
This legislation also impacts financial planning for seniors. The ability to make charitable contributions from an IRA without facing taxes is now permanent. This applies to taxpayers who are over age 70 ½ as they can now distribute money to a qualifying charitable organizations free of taxation. In the past, this particular provision underwent several last-minute revisions each year.
Tax Benefits for Business
The PATH Act makes the expansion of Section 179 limits permanent. Section 179 of the tax code allows businesses to immediately deduct up to $500,000 of investments. That limit was scheduled to reduce to $25,000. Additionally, bonus depreciations (allowing businesses to immediately deduct 50 percent of some investment costs, applying to a larger share of investments than Section 179) have been extended until the end of 2019. Whether or not this benefit becomes permanent at that time remains to be seen.
The Research and Experimentation credit has historically been one of the most unstable credits in the tax code; however, the PATH Act now makes it permanent. This credit allows businesses to lower their tax burdens by engaging in certain research activities.
The bill also includes a 100 percent exclusion of gains on certain small business stock (Section 1202) to encourage taxpayers to invest in small businesses. Additionally, the “built-in gains” tax period has been extended to five years for conversions of C corporations to S corporations or S corporations acquiring assets from C corporations in a tax-free transaction.
Temporary Extensions
For individual taxpayers, the PATH Act temporarily extended two popular exclusions/deductions. The Mortgage Debt Relief was extended through 2016 as was the deduction for mortgage insurance premiums. In the first case, a taxpayer can exclude from income up to $2 million of debt discharged before Jan. 1, 2017. (Note: For married taxpayers filing separately, the allowable exclusion is $1 million.) In the second instance, taxpayers may deduct the cost of mortgage insurance on a qualified primary residence.
Also extended through 2016 is the above-the-line deduction for qualified tuition and related higher-education expenses.
The PATH Act also extended certain tax provisions in place to encourage energy conservation including the alternate fuel vehicle refueling facility, fuel cell vehicle, and two-wheel electric vehicle credits.
If you are uncertain how the PATH Act benefits you, please contact us (or use our convenient online scheduler) to discuss your particular situation, so we can take full advantage of these benefits in lowering your overall tax liability.
