At MEDOWS CPA, PLLC the certified public accountants at our CPA NYC firm are dedicated to delivering up-to-date guidance on key tax legislation. Just before recessing for the holidays, the House and Senate passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). President Obama signed the Act and a Fiscal Year 2016 omnibus on December 18. The PATH Act does considerably more than the typical tax extenders legislation seen in prior years. It makes permanent over 20 key tax provisions, including many affecting individual taxpayers. It also extends and enhances other provisions.
Taxpayers, both individuals and businesses, had criticized some of the prior extenders as too short-lived to rely on them for any sort of meaningful strategic planning. The new law is anticipated to help both those taxpayers and the economy in general. A summary is provided below. If you have specific questions about the PATH Act contact our office to speak with a New York City Certified Public Accountant.
Permanent Extensions for Individuals
The PATH Act makes several key individual tax extenders permanent. A NYC CPA in our tax and accounting firm can offer you further guidance on these new tax provisions.
State and Local Sales Tax Deduction. The election to claim an itemized deduction for state and local general sales taxes, in lieu of deducting state and local income taxes expired after December 31, 2014. The PATH Act makes the election permanent. In addition to this provision being particularly valuable to taxpayers in states without an income tax, some taxpayers who make a big ticket purchase, such as a motor vehicle, before year-end could benefit by weighing the deduction for state and local general sales taxes against their deduction for state and local income taxes.
American Opportunity Tax Credit. The PATH Act makes permanent the American Opportunity Tax Credit (AOTC), an enhanced version of the Hope education credit. The AOTC has been available at an increased level of $2,500, with adjusted gross income (AGI) phase-out amounts of $80,000 (single) and $160,000 (married filing jointly). The AOTC had been scheduled to expire after 2017.
In addition to making this education benefit permanent, the PATH Act and related new laws include compliance rules intended to prevent fraudulent claims. Educational institutions are required to only report amounts paid for education, not the amounts billed. An individual must possess a valid Form 1098-T to claim the AOTC.
Code Sec. 529 Plans. Under the PATH Act, the purchase of computer equipment and technology with a distribution from a Code Sec. 529 plan is permanently considered a qualified expense. The Act also removes certain distribution aggregation requirements and allows taxpayers the option to redeposit 529 funds without penalty in certain circumstances when tuition is refunded. The change for computer equipment and technology applies to tax years beginning after December 31, 2014.
Child Tax Credit. The PATH Act makes permanent the reduced earned income threshold amount to qualify for the child tax credit. This provision had been scheduled to expire after 2017. Under the PATH Act, the child tax credit, available up to $1,000 for qualifying dependents under age 17, may be refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $3,000.
Earned Income Credit. The PATH Act makes permanent the increase ($5,000) in phaseout amount for joint filers, scheduled to expire after 2017. The Act also makes permanent the increased 45 percent credit percentage for taxpayers with three or more qualifying children. Under prior law, both enhancements had been available only through 2017.
Teachers’ Classroom Expense Deduction. The PATH Act permanently extends the above-the-line deduction for elementary and secondary–school teachers’ classroom expenses. It also modifies the deduction by indexing the $250 ceiling amount to inflation beginning in 2016. Additionally, the PATH Act includes “professional development expenses” within the scope of the deduction. Professional development expenses under the PATH Act include courses related to the curriculum in which the educator provides instruction. The modification for professional development courses applies to tax years beginning after December 31, 2015.
Transit Benefits Parity. The PATH Act permanently extends parity among transit benefits. These include van pool benefits, transit passes and qualified parking. Therefore, for tax years beginning in 2016, the inflation-adjusted monthly exclusion amount for transit passes and van pool benefits will be $255 (up from $250 in 2015), in line with the inflation-adjusted amount for qualified parking.
Charitable Distributions from IRAs. The PATH Act permanently extends the provision for individuals age 70 1/2 and older to be allowed to make tax-free distributions from individual retirement accounts (IRAs) to a qualified charitable organization. The treatment continues to be capped at a maximum of $100,000 per taxpayer each year. Amounts in excess of $100,000 must be included in income but may be taken as an itemized charitable deduction, subject to the usual AGI annual caps for contributions. The PATH Act also includes a provision on the deductibility of charitable contributions to agricultural research organizations.
Qualified Conservation Contributions. A special rule allows contributions of capital gain real property for conservation purposes, with the contribution to be taken against 50 percent of the contribution base. Under the PATH Act, this special rule is permanently extended. It is also modified for Alaska Native Corporations.
Extensions for Individuals
The PATH Act renews several extenders related to individuals. Unfortunately, because of their retroactive application to the start of 2015, two-year provisions will be up for renewal again at the end of 2016. Our certified public accountants in Manhattan can help you understand how these tax laws will apply to you.
Qualified Tuition/Related-Expenses Deduction. The PATH Act extends through 2016 the above-the-line deduction for qualified tuition and fees for post-secondary education.
Mortgage Debt Exclusion. The PATH Act excludes from income the cancellation of mortgage debt on a principal residence of up to $2 million ($1 million for a married taxpayer filing a separate return) through 2016. The PATH Act also modifies the exclusion to apply to qualified principal residence indebtedness discharged in 2017 if discharge is made under a binding written agreement entered into in 2016. Without an extension, debt that is forgiven through a foreclosure, short sale or loan modification could be treated as taxable income if another exclusion, such as for insolvency, is not available.
Mortgage Insurance Premium Deduction. This measure treats mortgage insurance premiums as deductible interest that is qualified residence interest subject to adjusted gross income phaseout. The PATH Act extends this special treatment through 2016.
Code Sec. 25C Credit. The PATH Act extends through 2016 the Code Sec. 25C residential energy property credit. Qualified Code Sec. 25C property includes adding insulation, energy efficient exterior windows and energy efficient heating and air conditioning systems The PATH Act allows a credit of up to 10 percent of qualifying expenses, capped at $500.
ABLE Accounts. The PATH Act removes the prior law requirement that ABLE accounts may be established only in the state of residence of the ABLE account owner.
The PATH Act does much more than deal with extensions, permanent or otherwise. Please call our office to talk to a NYC CPA if you would like to discuss how the latest tax law affects you.