Providing some much needed certainty for both businesses and individual taxpayers, Congress passed the Protecting Americans from Tax Hikes Act of 2015 (PATH) late last week, which contains provisions that will extend several important tax breaks, both retroactively for 2015 and into the future. While it is typical of Congress to wait until late in the year to pass legislation on tax extenders, the PATH Act is unique in that it actually makes some of these provisions permanent. Others are extended for a term of years, rather than only for the 2015 tax year — giving taxpayers a much-needed degree of certainty as we move into 2016. Some of the highlights of this year’s tax extender package are outlined below.
Editor’s Note: In-depth coverage of these issues (and more) can be found in Tax Facts on Insurance & Employee Benefits, which provides a comprehensive guide to advising clients on tax and financial issues.
Tax breaks for individuals
Importantly for many lower income taxpayers, PATH makes enhancements to the child tax credit, American Opportunity tax credit and earned income tax credit permanent. In addition to the $1,000 credit per child, those claiming the child tax credit will now be entitled to a refundable credit to the extent of 15 percent of earned income in excess of $3,000 (the amount was scheduled to increase to $10,000 in 2018).
The maximum amount available under the American Opportunity tax credit, which provides a tax credit to help individuals offset college expenses, will permanently be set at $2,500. The credit was scheduled to revert back to the lower $1,800 amount in 2018.
The enhanced earned income tax credit will permanently be available to low-income families with three or more children (maintaining the increased income phase-out thresholds for married taxpayers who file joint returns).
PATH makes the option to deduct state and local sales taxes, rather than state income taxes, permanent. Taxpayers who choose to deduct sales taxes (a particularly favorable option for taxpayers living in states with no state income tax) can substantiate sales taxes paid using actual receipts, or can use an IRS calculator to generate an estimate.
The above-the-line deduction for K-12 school teachers was also made permanent, allowing teachers to deduct $250 for school supplies purchased with their own funds (the $250 amount will be indexed annually for inflation—the amount for 2016 is $257).
Additionally, the exclusion for cancellation of indebtedness (COD) income on a principal residence was extended through 2016. This provision allows taxpayers who renegotiate mortgages or are forced to sell their homes in a foreclosure sale to exclude up to $2 million (in what would otherwise be COD income) from gross income.
Breaks in charitable giving
PATH has made the provision that allows taxpayers aged 70 ½ and older to make tax-free charitable donations directly from IRA accounts permanent — ending years of uncertainty in individual tax planning. The tax-free treatment of charitable donations from IRA accounts lets these taxpayers directly transfer an RMD of up to $100,000 per year ($200,000 per couple if each spouse has a separate IRA) to a qualified charity without increasing their tax burden.
If a taxpayer has already taken 2015 RMDs, however, he or she is not entitled to retroactively allocate those funds to charity in order to take advantage of the provision.