Path Act Update
An update to our Clients:
Congress recently passed new legislation, extending the extenders, an accumulation of more than 50 individual and business tax breaks. These breaks have often been referred to as extenders because this package has been temporarily extended for short periods of time. This year, the newly enacted Protecting Americans from Tax Hikes Act of 2015 has made some of the provisions permanent and extended the others for two or five years. The 2015 PATH Act includes the following key provisions:
American Opportunity Tax Credit:
The Act makes permanent the AOTC, available at an increased level of $2,500 per eligible student per year for qualified tuition and related expenses, subject to phase-out amounts of $80,000 (single) and $160,000 (MFJ).
Child Tax Credit:
For each qualifying child under 17 the taxpayer claims as a dependent, the taxpayer is allowed a $1,000 child tax credit, phased-out at thresholds of $110K for married filing joint and $75K for single filers. This credit is now made permanent.
Earned Income Tax Credit:
The 2015 PATH Act makes permanent the increase in the phase-out amount for joint filers by $5,000 and also the credit percentage of 45% for taxpayers with three or more qualifying children.
Teachers Classroom Expense Deduction:
The Act permanently extends the above-the-line deduction for eligible educators classroom expenses of $250 paid or incurred for classroom related expenses.
Mortgage Debt Exclusion:
The 2015 PATH Act extended through 2016 up to $2 million of cancellation of mortgage debt excluded from income for married filing joint and $1 million for married filing separate if the cancellation of debt is related to the taxpayer’s qualified principal residence. Generally, a discharge of indebtedness is recognized as gross income with the exception of certain cases like the one mentioned above.
Mortgage Insurance Premium Deduction:
The Act extends for two years (through 2016), treating qualified mortgage insurance in connection with acquisition indebtedness for the taxpayer’s main or second home are treated as deductible qualified residence interest, subject to AGI phase-out.
State and Local Sales Tax Deduction:
The Act makes permanent the election to claim an itemized deduction for state and local general sales taxes in lieu of deducting state and local income taxes.
Charitable Distributions from IRAs:
The Act permanently extends the provision to make tax-free distributions from IRAs to qualified charitable organizations for individuals age 70 or older, capped at $100K per taxpayer per year.
Qualified Tuition/Related Expenses Deduction:
The Act extends for two years (through 2016), the above-the-line deduction for qualified tuition and related expenses for post-secondary education. Expenses include tuition and fees of the taxpayer, taxpayer’s spouse, or any dependent for whom the taxpayer can claim a personal exemption.
Miscellaneous Individual Notes:
Taxpayers claiming the American Opportunity Tax Credit, the Lifetime Learning Credit, or the tuition and fees deduction must have a valid Form 1098-T from the educational institution. Form 1098-T should be submitted with Form 8863, which is used to claim the educational credits.
Identity Protection PINs (IP PINs) will now be required for identity theft victims. Victims of tax-related identity theft were issued a notice containing a 6 digit IP PIN. The notice was sent to taxpayers who:
1. Reported to the IRS they were a victim of identity theft
2. Have been identified by the IRS as a victim of identity theft
3. Received an IP PIN in 2015
4. Participated in the 2015 IP PIN pilot for residents of Florida, Georgia or DC.
Taxpayers who were assigned an IP PIN must use it on Form 1040, Form 2441 and Schedule EIC. The tax return will be rejected if the IP PIN is not included in any of the required fields.
Code section 179 expensing for 2015 prior to the Act had reverted to a maximum deduction of $25K with an investment limit of $200K. The Act permanently sets section 179 expensing at $500K with a $2M investment limit before phase-out.
The Act extends, for five years, bonus depreciation under a phase-down schedule through 2019:
2017: 50% bonus depreciation
2018: 40% bonus depreciation
2019: 30% bonus depreciation
Research Tax Credit:
The R&D tax credit is available to taxpayers with specified increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. Beginning in 2016, the research credit of an eligible small business can now offset both regular tax and AMT liabilities, and certain even smaller businesses can use the credit against the employer’s portion of the Social Security portion of the employer’s payroll tax liability.
Recognition Period for S-Corp Built-in Gains Tax:
The Act makes permanent the five year recognition period for built-in gain following conversion from a C to an S corporation.
Minimum Low-Income Housing Credit:
The Act permanently extends the low-income housing credit, which is claimed over a ten-year credit period after each low-income building is placed in service.
If you have any questions about how the 2015 PATH effect impacts your taxes both now and in the future, please don’t hesitate to contact our experienced team at McGill, Power, Bell & Associates, LLP.