In what has become an annual ritual, Congress recently passed a last minute bill to extend tax laws that expired at the end of 2014. The good news is that some of these extenders are now permanent, which will eliminate the need to extend them in future years. Other provisions were extended just through 2016 and others were extended through 2019.
The Protecting American from Tax Hikes (PATH) Act of 2015 was signed into law on December 18. Here is a summary of the most popular provisions that were extended or made permanent.
Extenders that are now permanent include:
Tax free distributions from IRAs to charities: The PATH Act permanently extends the provisions allowing tax-free distributions by individuals age 70½ or older directly from their IRAs to qualified charities. The annual limit is $100,000 per taxpayer.
American Opportunity Tax Credit: The PATH Act makes permanent an enhanced AOTC, with a maximum deduction of $2,500 and phaseout thresholds of $80,000 for single filers and $160,000 for joint filers.
Deduction for state and local sales taxes: Taxpayers may elect to deduct state and local sales taxes in lieu of deducting state and local income taxes. This optional deduction, which is especially valuable to residents of states without a state income tax and purchasers of certain big-ticket items, is now permanent.
Child Tax Credit: The enhanced child credit, which allows for a refundable portion with a reduced income threshold, is made permanent. This provision was scheduled to expire after 2017.
Earned Income Credit: The PATH Act makes permanent certain enhancements in the EITC for lower-income taxpayers. Previously, the enhancements were only available though 2017.
Deductions for teacher’s expenses: The deduction for up to $250 of out-of-pocket eligible educator expenses is now permanent. It will be indexed for inflation beginning with 2016 tax returns. You claim this deduction “above the line,” meaning it’s available even if you don’t itemize. If you do itemize, you can also generally claim qualified expenses above $250 as a deduction subject to a 2% of adjusted gross income limit.
Section 529 plans: The PATH Act permanently extends the rule allowing computers and related equipment to be treated as qualified expenses.
Section 179 expensing: The PATH ACT permanently restores the maximum expensing deduction of $500,000 for qualified business property with a phaseout threshold of $2 million. (It was scheduled to drop to $25,000 with a $200,000 phaseout threshold.) It will be indexed for inflation for 2016 and thereafter.
The following provisions were extended through 2016
Tuition and fees deduction: If you or a family member is an eligible student, you may be able to claim a tuition and fees above-the-line deduction for qualified higher education expenses for 2015 and 2016. For 2015 tax returns, the maximum deduction is $4,000 when your adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers). The maximum deduction is $2,000 when your AGI is less than $80,000 ($160,000 for joint filers).
Residential energy credit: The latest version of the residential energy credit, which provides a lifetime credit of up to $500 for 10% of qualified expenses, is extended through 2016.
Mortgage debt exclusion: The tax exclusion for mortgage forgiveness on up to $2 million of debt on a principal residence is extended, with certain modifications through 2016.
Deductibility of mortgage insurance premiums: This provision allows taxpayers to deduct mortgage insurance premiums subject to a phaseout beginning at $100,000 of AGI. The deduction is extended through 2016.
50% bonus depreciation (extended through 2019): Although 50% bonus depreciation for qualified business property is retroactively extended to 2015, it will be reduced to 40% for 2018 and then 30% for 2019. Bonus depreciation will completely expire after 2019 unless it is extended again.
These are just a few of the tax extenders included in the 231 page PATH Act passed last week. For a more detailed list of the tax provisions that were extended please see “SECTION-BY-SECTION SUMMARY OF THE PROPOSED PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015”
Kristine McKinley is a fee only financial planner in Kansas City, Missouri. Kristine provides retirement planning, tax preparation and planning, investment reviews and comprehensive financial planning on a fee-only, as needed basis. To schedule your complimentary introduction meeting, please contact Kristine at kristine@beacon-advisor.com.