Congress once again waited until the final hours to provide tax clarity by passing the Protecting Americans from Tax Hikes Act of 2015 (PATH). The PATH Tax Act does considerably more than the typical tax extenders legislation seen in prior years. It makes permanent over 20 key tax provisions. Here are some of the more popular provisions.
CHARITABLE DISTRIBUTIONS FROM IRAS
The Act permanently extends the provision for individuals age 70 1/2and 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. Therefore, amounts in excess of $100,000 must be included in income, but may be taken as an itemized charitable deduction, subject to the usual adjusted gross income (AGI) annual caps for contributions.
Points to note about the IRA charitable rollover:
- Married individuals filing a joint return may jointly exclude up$200,000.
- You can use an inherited IRA to donate but you have to be at least 70 ½
- The charity receiving donated IRA funds may not be a donor advised fund, supporting organization, or most private foundations.
IRA assets are particularly favorable when donating to charity, rather than leaving to heirs, because your heirs will pay tax on the entire IRA distribution. There could also be federal and state taxes and possible inheritance tax.
STATE AND LOCAL SALES TAX DEDUCTION
The Act permits tax payers to deduct sales tax, rather than state income taxes, which is helpful for taxpayers who itemize deductions and love in a state without income tax. The Act makes the election permanent.
AMERICAN OPPORTUNITY TAX CREDIT
The 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 AGI phase-out amounts of $80,000 (single) and $160,000 (married filing jointly). The AOTC had been scheduled to expire after 2017.
CHILD TAX CREDIT
The Act makes permanent the reduced earned income threshold amount of an unindexed $3,000. This provision had been scheduled to expire after 2017.
Under the Act, the child tax credit, available up to $1000 for qualifying dependents under the age of 17, may be refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $3,000.
PERMANENT EXTENSIONS FOR BUSINESSES
The Act makes permanent many business-related provisions that had been up for renewal.
CODE SEC. 179 EXPENSING
Pre-Act, the dollar limit for Code Sec. 179 expensing for 2015 had reverted to $25,000 with an investment limit of $200,000. The Act permanently sets the Code Sec. 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (both amounts indexed for inflation beginning in 2016). Meaning, the Act also makes permanent the special Code Sec. 179 expensing for qualified real property. The Act also removes the $250,000 cap related to this category of expenditure beginning in 2016. Some businesses may want to postpone larger purchases of such property until 2016 as a result.
100-PERCENT GAIN EXCLUSION ON QUALIFIED SMALL BUSINESS STOCK
The 100-percent exclusion allowed for gain on the sale or exchange of qualified small business stock held for more than five years by non-corporate taxpayers is made permanent.
This benefit has proven a valuable method of funding certain startups. With a five-year holding period, it obviously still requires a long-term commitment. Trading such stock for other, similar stock, however, can be a useful option under which gain is allowed to be deferred.
FIVE-YEAR EXTENSIONS FOR BUSINESSES
The Act makes several business-related provisions available for five-years, under the rationale that, although they should not be made permanent, they are sufficiently valuable at this time to be relied upon for more than the usual two-year extenders period.
The Act extends bonus depreciation (additional first-year depreciation) under a phase-down schedule through 2019: at 50 percent for 2015-2017; at 40 percent in 2018; and at 30 percent in 2019. The Act also continues the election to accelerate the use of AMT credits in lieu of bonus depreciation and increases the amount of unused AMT credits that may be claimed in lieu of bonus depreciation. Additionally, the Act modifies bonus depreciation to include qualified improvement property, and permits certain trees vines and plants bearing fruits or nuts to be eligible for bonus depreciation when planted or grafted.
Certain longer-lived and transportation property may qualify for an additional one-year placed in service date. Also related, bonus depreciation is modified to be adjusted for inflation in computing the first-year depreciation for passenger autos. Therefore, unlike Code Sec. 179 expending (above), only new property is eligible for bonus depreciation.
The Act contains much more, but it’s too much to list in this blog. Always seek advice from a qualified tax professional to discuss your situation. Please contact us if we can be of assistance.
This written article is for your informational benefit only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
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