As 2015 was winding down, Congress and the President came to an agreement on a tax bill benefiting individuals and business owners alike: the Protecting Americans from Tax Hikes Act of 2015 (known as the PATH Act).
This legislation makes permanent several key tax incentives and tax breaks that individuals and businesses have come to rely upon over the last several years. It also extends several other tax incentives for between 2 and 5 years. A summary of several items follows; as always, you may contact us for questions on this or any tax-related matter.
Tax Incentives for Individuals
Charitable giving from IRA’s: The new legislation permanently enables taxpayers who are 70 ½ or older to make contributions up to $100,000 from their IRA directly to charitable organizations. This is valuable in that such contributions go towards satisfying the taxpayer’s required minimum distribution from their IRA, while at the same time excluding the contribution amount from taxable income.
American Opportunity credit: This education-related credit has been made permanent as part of the PATH Act. This allows eligible taxpayers to take an annual credit of up to $2,500 for tuition-related expenses for the first four years of college. This is particularly valuable to many taxpayers, as a portion of this credit may be refundable – meaning, if a taxpayer has no tax liability but still qualifies for this credit, they may also qualify to have a portion of the credit refunded to them.
State and local sales tax deduction: The PATH Act makes permanent an itemized deduction for state and local sales taxes for taxpayers that would otherwise have minimal (or no) state & local income tax deduction. While the sales tax deduction mainly benefits taxpayers who live in states without income taxes, it may benefit any taxpayer who makes a large purchase on which sales taxes are paid (e.g. the purchase of cars, boats, RV’s and the like). An evaluation should be made when preparing the taxpayer’s return as to which deduction – sales tax or state / local income tax – is most beneficial.
Educator expense deductions: This provision, now made permanent, allows elementary and secondary school teachers to deduct up to $250 per year for expenses paid on a variety of classroom-related supplies. Furthermore, the PATH Act allows for this amount to be increased annually via indexing for inflation beginning in 2016.
Tuition and fees deduction: This popular tax break, now extended through tax year 2016, allows qualifying taxpayers a deduction of up to $4,000 for AGI (that is, “above-the-line”) for qualified tuition and related higher education expenses. Qualification for the deduction depends on the taxpayer’s adjusted gross income, with a complete phase-out for taxpayers whose AGI exceeds $80,000 ($160,000 for joint returns).
Energy tax credit: The PATH Act extends through 2016 a tax credit relating to the purchase of “residential energy property” including high-efficiency A/C units, insulation, energy-efficient exterior windows and doors, and high-efficiency water heaters, among other items. The credit is equal to 10% of the cost of such property, up to a lifetime limit of $500.
Mortgage-related items: The exclusion from gross income for mortgage loan forgiveness has been extended through 2016. Additionally, the PATH Act extends the treatment of qualified mortgage insurance premiums (PMI) as interest with respect to the mortgage interest deduction through 2016. The deductibility of PMI is phased out entirely for taxpayers with AGI over $110,000.
Tax Incentives for Businesses
Section 179 deduction: Perhaps the single most important (and most-utilized) item in the PATH Act for business owners is the now-permanent higher expensing limits provided for under Sec. 179. Business owners can now acquire assets with confidence, knowing they will be allowed up to $500,000 of expense for such purchases. This dollar limit may also be increased in subsequent years, as the amount is tied to inflation beginning in 2016.
Bonus depreciation: Business owners may depreciate the cost of new property on an accelerated basis. For property placed in service during tax years 2015 through 2017, the bonus percentage is 50% for the 1st year the property is in service. This percentage falls to 40% in 2018 and 30% in 2019, after which the provision is set to expire.
Accelerated depreciation of qualified real property: The PATH Act permanently extends the 15-year straight-line cost recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail-improvement property. Without this legislation, such improvements would otherwise have been depreciated over the standard 39 years. Given a much shorter recovery period of 15 years, this is a valuable tax incentive for restaurant and retail store owners in particular.