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Also see: CPA Client Letter: 2015 Tax Extenders (PATH) for Business Taxpayers.
An In-Depth Article: Congress Permanently Extends Numerous Tax Provisions (PATH).
CPA Client Letter: 2015 Tax Extenders (PATH) for Individual Taxpayers.
(Parker Tax Publishing January 11, 2016)
Dear [client],
As a year-end holiday gift, Congress gave taxpayers the Protecting Americans from Tax Hikes Act of 2015 (PATH), which was passed by Congress and signed by the President on December 18. As part of a broad budget deal, PATH permanently extends many tax provisions that previously had been up for renewal for one or two years at a time and temporarily extends dozens of others for periods ranging from two to five years.
The following is a recap of key PATH provisions that may favorably impact your taxes this year.
State and Local General Sales Taxes Deduction
PATH permanently extends the option to claim an itemized deduction for state and local general sales taxes in lieu of an itemized deduction for state and local income taxes. Taxpayers may either deduct the actual amount of sales tax paid in the tax year, or alternatively, deduct an amount prescribed by the IRS.
Tax-Free Distributions from IRAs for Charitable Purposes
For tax years ending before January 1, 2015, individuals at least 70 1/2 years of age could exclude from gross income qualified charitable distributions from IRAs, up to a $100,000 maximum per taxpayer. PATH permanently extends this tax break.
Special Rule for Contributions Made for Conservation Purposes
PATH permanently extends the availability of the special percentage limitations for qualified conservation contributions of capital gain real property, which originally expired for contributions made after December 31, 2014.
Under this provision, the deduction for qualified conservation contributions is generally limited to 50 percent of adjusted gross income (100 percent, in the case of certain qualified farmers and ranchers), minus the deduction for all other charitable contributions. In other words, the 30-percent limitation on contributions of capital gain property by individuals does not apply to qualified conservation contributions.
Exclusion of Income from Discharge of Qualified Principal Residence Indebtedness
PATH extends through 2016 the exclusion from gross income of a discharge of qualified principal residence indebtedness. It also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged in 2017, if the discharge is pursuant to a written agreement entered into in 2016.
Mortgage Insurance Premiums Treated as Qualified Residence Interest
PATH extends through 2016 the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. This deduction phases out for taxpayers with adjusted gross income above $100,000
Exclusion of 100 Percent of Gain on Certain Small Business Stock
A noncorporate taxpayer can exclude 50 percent (60 percent for certain empowerment zone businesses) of gain from the sale of certain small business stock acquired at original issue and held for at least five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion was increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2015, the exclusion was 100 percent and the AMT preference item attributable for the sale is eliminated.
PATH extends the 100-percent exclusion and the exception from minimum tax preference treatment for two years (i.e., for stock acquired before January 1, 2014). In the case of any stock acquired after February 17, 2009, the date of acquisition for purposes of determining the percentage exclusion is the date the holding period for the stock begins.
Credit for Energy-Efficient Existing Homes
Taxpayers are allowed a 10-percent nonbusiness energy property credit for the purchase of qualified energy efficiency improvements to existing homes. Additionally, taxpayers can claim specified credits for the purchase of specific energy efficient property originally placed in service by the taxpayer during the tax year.
There is a lifetime limitation of $500 on the total amount of nonbusiness energy property credit that may be claimed. There are also dollar limitations on the amount of the credit that may be claimed for specific types of qualified energy efficiency improvements and residential energy property. This credit was to expire for any property placed in service after December 31, 2014. PATH extends the availability of the credit to property placed in service before January 1, 2017.
American Opportunity Tax Credit
The Hope Scholarship Credit is a credit of $1,800 (indexed for inflation) for various tuition and related expenses for the first two years of post-secondary education. It phases out for AGI starting at $48,000 (if single) and $96,000 (if married filing jointly). These amounts are also indexed for inflation. The American Opportunity Tax Credit (AOTC) takes those permanent provisions of the Hope Scholarship Credit and increases the credit to $2,500 for four years of post-secondary education, and increases the beginning of the phase-out amounts to $80,000 (single) and $160,000 (married filing jointly) for 2009 to 2017. PATH makes the AOTC permanent.
Above-the-Line Deduction for Qualified Tuition and Related Expenses
For years before 2015, taxpayers with modified adjusted gross income below certain thresholds could deduct up to $4,000 of qualified education expenses paid during the year for themselves, their spouses, or their dependents. The maximum deduction was $4,000 for an individual whose adjusted gross income for the tax year did not exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for other individuals whose adjusted gross income did not exceed $80,000 ($160,000 in the case of a joint return). PATH extends the availability of the deduction to tax years beginning before January 1, 2017.
Improvements to Section 529 Accounts (Qualified Tuition Programs)
PATH expands the definition of qualified higher education expenses for which tax-preferred distributions from qualified tuition programs (also known as “529 accounts”) are eligible to include computer equipment and technology. PATH modifies the 529 account rules to treat any distribution from a qualified tuition program as coming only from that account, even if the individual making the distribution operates more than one account. PATH also treats a refund of tuition paid with amounts distributed from a 529 account as a qualified expense if such amounts are re-contributed to a 529 account within 60 days.
These changes are effective for distributions made or refunds after 2014, or in the case of refunds after 2014 and before December 18, 2015, for refunds re-contributed not later than 60 days after December 18, 2015.
Child Tax Credit
The child tax credit was scheduled to be reduced from $1,000 to $500. PATH makes the $1,000 child tax credit permanent and also permanently extends certain modifications relating to the additional child tax credit, enabling more individuals to claim the credit.
Earned Income Tax Credit
For 2009 through 2017, the EITC amount had been temporarily increased for those with three (or more) children and the EITC marriage penalty had been reduced by increasing the income phase-out range by $5,000 (indexed for inflation) for those who are married and filing jointly. PATH makes these provisions permanent.
Deduction for Expenses of School Teachers
The rule that allowed elementary and secondary school teachers to deduct from gross income up to $250 of qualified expenses they paid during the year ($500 on a joint return if both spouses were eligible educators) expired for tax years beginning after 2014. PATH extends the deduction through tax years beginning before 2017. Beginning in 2016, the new law also modifies the deduction to index the $250 (or $500) cap to inflation and include professional development expenses.
Parity for Exclusion for Employer-Provided Transportation Benefits
PATH permanently extends the maximum monthly exclusion amount for transit passes and van pool benefits so that these transportation benefits match the exclusion for qualified parking benefits. These fringe benefits are excluded from an employee’s wages for payroll tax purposes and from gross income for income tax purposes.
Elimination of Residency Requirement for Qualified ABLE Programs
Effective for tax years beginning after December 31, 2014, PATH allows ABLE accounts (tax-preferred savings accounts for disabled individuals based on section 529 accounts), which currently may be located only in the state of residence of the beneficiary, to be established in any state. This will allow individuals setting up ABLE accounts to choose the state program that best fits their needs, such as with regard to investment options, fees, and account limits.
As you can see, the provisions in the Protecting Americans from Tax Hikes Act of 2015 are quite extensive. Please call me at your earliest convenience so we can discuss how these changes will impact your tax situation.
Sincerely,
[Your Name, Your Firm]
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Also see: CPA Client Letter: 2015 Tax Extenders (PATH) for Business Taxpayers.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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