2015 Extenders and More

The Protecting Americans from Tax Hikes (PATH) Act contains many of the traditional “extenders” that Congress has been passing over the last several years.  The “extenders” are a group of taxpayer-friendly provisions of the tax code which have been allowed to expire every year or so by Congress and then (sometimes at the last minute) extended for one or two more years.

This year the PATH Act took a large step toward eventual tax reform by making several of the traditional extenders a permanent fixture in the tax code, removing their associated expiration dates.  Here’s a few of the provisions made permanent (or just extended again) by the PATH Act that impact individuals:

The American Opportunity Tax Credit is now permanent.  This credit allows up to $2,500 of tax credits for payment of college tuition and related costs.  Also, the above-the-line deduction for tuition was retroactively extended back to January 1, 2015 and now expires on December 31, 2016.

The enhancements to the child tax credit and earned income tax credit (EITC) are now both permanent.  The EITC enhancement allowing for an additional credit for taxpayers with three or more children was scheduled to expire after 2017.

Individuals can make charitable contributions directly from their IRAs.  This now permanent provision allows individuals over age 70 1/2 to have a distribution from their IRA go directly to a qualified charity.  The taxpayer does not have to report the distribution as income and receives no deduction.  What’s the benefit?  Without having to report the distribution as income, taxpayers can keep their adjusted gross income (AGI) down, impacting a variety of other tax-related calculations tied to AGI.  These distributions can also be used to cover an individual’s required minimum distribution for the year.

For individuals who have had cancellation of debt (COD) income from the short sale or foreclosure of their principal residence, the PATH Act extends a provision allowing exclusion of the COD income through 2016.  A special new provision extends the date to December 31, 2017 for written agreements entered into during 2016. Mortgage insurance premiums will continue to be treated as mortgage interest through 2016.

Below are a few of the popular provisions made permanent (or temporarily extended) that impact businesses.

Bonus depreciation (writing off 50% of the cost of new assets) was retroactively extended back to January 1, 2015.  The 50% deduction continues through 2017 and fades down to 40% in 2018 and 30% in 2019.  No bonus depreciation will be allowed after 2019 (unless Congress extends it again).

The Code Section 179 expense election has been permanently enhanced to allow businesses to write off up to $500,000 of the cost of assets acquired during the year.  A phase out of the election occurs when the taxpayer acquires more than $2 million of assets during year.  Unlike bonus depreciation, the assets eligible for Code Section 179 do not have be new.  The PATH Act also made permanent a provision that allows for certain real property to be included in the annual expensing election.

The research and development tax credit has been on the extenders list since the 1980’s and is now a permanent fixture in the tax code.  A new rule allows for a portion of the credit (up to $250,000 per year for up to five years) to be used against employment taxes rather than just income taxes.  This was an important change because many companies generating this credit do not have any income taxes at the time when they are generating the credit but they do have substantial employment tax liabilities.

Another popular tax break that was made permanent is the exclusion of 100% of the gain on the sale of qualified small business stock that is held for at least five years.  Caution – California’s provision that allowed for a similar exclusion was ruled unconstitutional so there is a federal/state difference when reporting this gain.

No new tax law would be complete without a couple of changes to Obamacare.  The PATH Act delayed the effective dates of two of the most unpopular provisions of Obamacare.  The excise tax on “Cadillac” plans has been delayed from 2018 to 2020.  This excise tax will cost an insurer 40% of the excess of an annual plan premium over a preset threshold.  For individuals the threshold is $10,200 and for families it is $27,500.  Those amounts seemed extraordinary back when the law was first enacted in 2010 but are not really unreasonable in today’s health insurance environment.  Both Democrats and Republicans in Congress want to repeal this tax but the President has threatened a veto of any law that does so.  Also delayed by the PATH Act is a 2.3% excise tax on certain medical devices.

And there’s more….

More than will easily fit in this article.  In all, the tax extenders package was 233 pages of new law impacting well over 100 different tax code sections. If you have questions on what’s new and what’s changed (or what was just extended for a year or two) ask one of the tax professionals at Seid & Company, CPAs.