In a welcome end-of-year surprise, the Protecting Americans from Tax Hikes (PATH) Act, signed into law on December 18, 2015, made many popular tax breaks permanent and retroactively extended others.
Most of these provisions had expired at the end of 2014, and — as has become typical of tax extensions — congressional action came too late for meaningful current-year planning, though you may still benefit on your 2015 taxes. More important, the provisions that were made permanent will help individual taxpayers and small businesses plan for future years.
The PATH Act is complex, but these are some of the most significant provisions for individuals and small businesses.
Tax Breaks for Individuals
These provisions are now permanent parts of the federal tax code.
Sales tax deduction — Taxpayers who itemize deductions on Schedule A of IRS Form 1040 can elect to deduct state and local general sales taxes in lieu of state and local income taxes. This is especially important for those who live in states without an income tax or for those who make large purchases during the year.
American Opportunity Tax Credit — A tax credit of up to $2,500 of qualified higher-education expenses (partially refundable, depending on income) is available for each of a student’s first four years of college, subject to income phaseout limits.
Classroom expense deduction — Teachers can deduct up to $250 in classroom expenses “above the line” (on Form 1040 before adjusted gross income) in 2015. Beginning in 2016, the amount is indexed for inflation and might include qualifying professional development expenses.
Qualified charitable distributions (QCDs) — Individuals 70½ and older can make tax-free QCDs from their IRAs (up to $100,000 in a year). The QCD counts toward the required minimum distribution.
Employer-provided mass-transit benefits — Employer pre-tax reimbursement is set at the same level as parking reimbursement and retroactively increased from $130 to $250 monthly for 2015 ($255 for 2016).
Child tax credit — The $3,000 income threshold for calculating the refundable credit is now permanent.
Earned income tax credit — Both the credit for families with three or more children and the higher income phaseout range for couples filing jointly have been increased.
The following tax provisions were extended through 2016.
Qualified higher-education expenses — Up to $4,000 can be deducted above the line on Form 1040, subject to income phaseouts (not available for a student claiming the American Opportunity Tax Credit or the Lifetime Learning Credit).
Mortgage debt — The discharge of up to $2 million in debt associated with a qualified principal residence can be excluded from gross income. This allows “underwater” homeowners to execute a “short sale” without being taxed on the forgiven debt.
Mortgage insurance premiums — Premiums paid for qualified mortgage insurance can be deducted as qualified residence interest on Form 1040, subject to income phaseouts.
Energy credit — A credit for 10% of certain energy-efficient home improvements remains available, up to a lifetime cap of $500.
Section 529 Plan Changes
The law includes more flexible distribution rules for Section 529 savings plans and adds computers and tech equipment to the list of qualified higher-education expenses.
Tax Breaks for Small Businesses
The following tax provisions were made permanent.
Section 179 expensing — Up to $500,000 in qualifying equipment can be expensed, with phaseout at $2 million in total purchases (indexed for inflation after 2015). Computer software and qualified real property may also be expensed, with the $250,000 limit on real property eliminated after 2015.
Research credit — The tax credit for qualified research and development expenses, which dates back to 1981, is finally permanent. Beginning in 2016, new provisions provide additional benefits for some small businesses.
Exclusion of gain on qualified small-business stock — Capital gains from the sale or exchange of qualified small-business stock held for more than five years can be excluded from income; this applies to the alternative minimum tax and to the regular income tax.
The following tax provisions were extended as indicated.
Bonus depreciation — Companies can deduct 50% of the cost of new capital purchases through 2017; the deduction falls to 40% in 2018 and 30% in 2019 for most property types. Bonus depreciation is typically applied after Section 179 expensing.
Work Opportunity Tax Credit — The credit for hiring veterans and candidates from other “targeted groups” is extended through 2019 and expanded (beginning in 2016) to employers that hire qualified long-term unemployment recipients.
Further tax legislation seems unlikely until a new administration and Congress take office in 2017. Taxpayers may have to wait some time to learn about the fate of provisions set to expire after 2016. However, after years of fiscal gridlock, the PATH Act shows that politicians can find common ground regarding taxes.
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.