Providing some much needed certainty for both businesses and individual taxpayers, Congress passed and President Obama signed Dec. 18 the Protecting Americans from Tax Hikes Act of 2015 (PATH), 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.
Breaks in Charitable Giving
1) 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.
2) The tax deduction for charitable contributions of real property for conservation purposes was also made permanent.
Small Business Incentives
3) The Research and Development tax credit has been made permanent — and, starting in 2016, small businesses will also be entitled to use this credit to offset their alternative minimum tax liability (small businesses include those with under $50 million in annual gross receipts).
4) IRC Section 179 provisions allowing for increased expensing limits and phaseout amounts for small businesses are now permanent. Section 179 allows small businesses to accelerate the deduction for the cost of depreciable assets of up to $500,000 (on purchases of up to $2 million) into the year of purchase (on January 1, 2015, these limits were set to revert to the $25,000 and $200,000 limits that previously applied). These amounts will also be indexed for inflation annually in future years.
5) The 100% exclusion for qualified Section 1202 stock was also made permanent. Under this provision, taxpayers are entitled to exclude 100% of their gain on the sale or exchange of qualifying small business stock that is held for more than five years. The exclusion was set to revert to a 50% limitation.
6) PATH also imposes a favorable 15-year lifespan for depreciating qualified retail and restaurant establishments, including remodeling and other improvements (the previous lifespan was 39 years).
7) The new markets tax credit and the 50% bonus depreciation provisions were not made permanent, but were extended through 2019. The 50% bonus depreciation will be gradually phased out — 50% immediate expensing will be permitted from 2015-2017, but the amount will be reduced to 40% in 2018 and 30% in 2019. After 2019, the provision will be eliminated absent Congressional action.
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.
8) 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% of earned income in excess of $3,000 (the amount was scheduled to increase to $10,000 in 2018).
9) 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.
10) 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).
11) 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.
12) 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).
13) 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.
Affordable Care Act Impact
PATH also delayed two key taxes imposed under the Affordable Care Act.
14) The 2.3% tax on medical devices will be delayed until 2018, and the effective date for the “Cadillac tax” on high cost health coverage will be delayed until 2020.
While PATH does not make all tax extender provisions permanent, it goes a long way toward generating a degree of tax certainty to help clients with their planning — for 2016, and into the future.