New law extends and modifies tax breaks
The new Protecting Americans from Tax Hikes (PATH) Act—signed into law by President Obama on December 18, 2015—does more than merely extend various expired tax provisions as most other “tax extender” laws have done in the past. This new legislation also makes several key tax breaks permanent, along with certain modifications and other significant changes. Here’s an overview of the key provisions in the PATH Act for individuals and businesses.
Individual Tax Provisions
Generally, these provisions expired after 2014, but they have been retroactively reinstated and, in some cases, made permanent.
Child tax credit: Parents are entitled to a child tax credit of up to $1,000 per child, subject to a phaseout, plus an additional refundable credit equal to 15% of earned income above $3,000. The $3,000 threshold was scheduled to revert to a maximum of $10,000 after 2017. However, the new law restores the lower threshold for the refundable credit and makes it permanent.
American Opportunity Tax Credit: Under current law, parents may claim the American Opportunity Tax Credit (AOTC), formerly the Hope Scholarship credit, for up to $2,500 of qualified higher education expenses for the year. But the credit is phased out for high-income taxpayers, based on modified adjusted gross income (MAGI). Previously, the maximum credit was scheduled to drop to $1,800 in 2017, with even lower MAGI thresholds. The new law permanently retains the enhanced AOTC.
Tuition deduction: In lieu of a higher education credit, parents were previously able to deduct tuition and fees paid to a college, for a maximum deduction of $4,000. This deduction was also phased out based on MAGI. The deduction is retroactively extended from January 1, 2015, through December 31, 2016.
Conservation donations: Real estate owners who donate land for conservation purposes were previously able to offset up to 50% of adjusted gross income (AGI) per year (100% for farmers and ranchers), as opposed to the usual 30% limit, while carrying forward any excess for up to 15 years instead of the usual five years. The new law retroactively revises these tax breaks to January 1, 2015, and makes them permanent.
IRA contributions to charity: Prior to 2015, an individual age 70½ or older could directly contribute up to $100,000 from an IRA to a qualified charity without paying any tax on the distribution. This tax break for charitable donations is approved retroactive to January 1, 2015, and is now permanent.
State and local sales taxes: In the past, a taxpayer could 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 with no state income tax or low income tax rates, was revived retroactive to January 1, 2015, and is now permanent.
Mortgage tax breaks: Prior to 2015, taxpayers could benefit from a tax exclusion for mortgage loan forgiveness on debts of up to $2 million on a principal residence. Another provision permitted deductions for mortgage insurance premiums, subject to a phaseout starting at an AGI of $100,000. Both mortgage tax breaks are retroactively extended from January 1, 2015, through December 31, 2016.
Residential energy credits: Under the latest version of the residential energy credit, you could have claimed a lifetime $500 credit for 10% of qualified energy-saving expenses. The residential energy credit is retroactively extended from January 1, 2015, through December 31, 2016.
Teacher classroom supply expenses: Teachers and certain other educators could previously take an above-the-line deduction for up to $250 of their out-of-pocket classroom expenses. This deduction, which has been retroactively reinstated to January 1, 2015, and is now permanent, will be indexed for inflation in future years.
Business Tax Provisions
As with individual tax provisions, certain business provisions that expired after 2014 have been retroactively extended and, in some cases, made permanent.
Section 179 allowance: The Section 179 deduction, which had eventually reached a maximum level of $500,000 with a $2 million phaseout threshold, was scheduled to plummet to $25,000 with just a $200,000 phaseout threshold for 2015. The new law restores the higher figures and makes them permanent in addition to providing for future indexing.
Bonus depreciation: Previously, a business could claim 50% “bonus depreciation” for certain qualified assets placed in service during the year. The new law retroactively extends bonus depreciation from January 1, 2015, through December 31, 2019, as follows:
50% for 2015 through 2017
40% for 2018
30% for 2019
After 2019, bonus depreciation will generally expire unless it is extended again.
Fast depreciation write-offs: A special tax law provision had enabled taxpayers to use a faster-than-usual cost recovery period of 15 years for qualified leasehold, restaurant and retail improvements. The regular write-off period is 39 years. Under the new law, the faster write-offs are permanently available for 2015 and thereafter.
Research credits: The new law retroactively extends the credit to January 1, 2015, and makes it permanent with certain modifications. Effective January 1, 2016, a small business with $50 million or less in gross receipts may claim the credit against alternative minimum tax (AMT) liability and a start-up company may be able to use up to $250,000 of the credit annually to offset payroll taxes.
Qualified small business stock: Under prior law, investors could exclude 100% of the gain from the sale of qualified small business stock (QSBS) acquired before 2015, but the exclusion was reduced to 50% for QSBS acquired after 2014. The new law permanently reinstates the 100% exclusion for QSBS acquired on January 1, 2015, and thereafter.
Work Opportunity Tax Credit: A business could previously claim a Work Opportunity Tax Credit (WOTC) for hiring people from certain economically disadvantaged groups and military veterans. The WOTC is retroactively extended from January 1, 2015, through December 31, 2019.
Employee transportation: Currently, the tax law provides tax-free benefits for employee mass transit passes, vanpooling and parking fees. The maximum monthly benefits for mass transit passes and vanpooling (but not the monthly benefit for parking fees) had been cut almost in half, from $250 to $130. The new law equalizes these fringe benefits at $250 per month (indexed to $255 in 2016), retroactive to January 1, 2015, and makes the change permanent.
Finally, the new law includes numerous other provisions, including “moratoriums” on three health care law provisions (see “Three ACA Provisions Put on Hold” box), permanently extending a tax break for using Section 529 college savings plan funds to buy computers and codifying the Taxpayer Bill of Rights. For more information about these other items in the PATH Act and details on the provisions discussed above, contact your professional tax adviser.