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Income Tax

PATH Act: Obama Signs Tax Extenders Law

The PATH Act makes more than 20 tax breaks permanent in addition to retroactively extending a slew of others for two or more years. Here’s a roundup of the key individual, business and miscellaneous provisions in the new measure.

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President Obama signed the new tax extenders law – the “Protecting Americans from Tax Hikes” (PATH) Act of 2015 – on December 18, almost as soon as the paperwork landed on his desk. The PATH Act makes more than 20 tax breaks permanent in addition to retroactively extending a slew of others for two or more years. In some cases, these include significant modifications. Here’s a roundup of the key individual, business and miscellaneous provisions in the new measure.

Individual Tax Provisions

State and local sales taxes: Taxpayers may 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 without a state income tax and purchasers of certain big-ticket items, is now permanent.

American Opportunity Tax Credit (AOTC): The PATH Act makes permanent an enhanced AOTC, with a maximum deduction of $2,500 and phaseout thresholds of $80,000 for single filers and $160,000 for joint filers. It was scheduled to expire after 2017.

Tuition-and-fees deduction: In lieu of one of the two higher education credits, parents may claim a tuition-and-fees deduction, subject to phaseouts based on modified adjusted gross income (MAGI). The deduction is extended through 2016.

Child tax credit: The enhanced child credit, which allows for a refundable portion with a reduced income threshold, is made permanent. This provision was scheduled to expire after 2017.

Charitable distributions from IRAs: The PATH Act permanently extends the provisions allowing tax-free distributions by individuals age 70½ or older directly from their IRAs to qualified charities. The annual limit is $100,000 per taxpayer.

Charitable conservation property: Generally, gifts of property to charity are limited to 35% of adjusted gross income (AGI), but a special provision permits deductions of conservation property of up to 50% of AGI (100% for farmers and ranchers). This provision is now permanent.

Earned income tax credit (EITC): The PATH Act makes permanent certain enhancements in the EITC for lower-income taxpayers. Previously, the enhancements were only available though 2017.

Employee transportation benefits: The tax-free monthly benefit for three transportation benefits – mass transit passes, vanpooling and parking fees – is permanently equalized. The monthly benefit of $250 will be indexed for inflation for 2016 and thereafter.

Educator classroom expenses: Under the PATH Act, the $250 above-the-line deduction for qualified out-of-pocket expenses of teachers and other educators is made permanent. It will be indexed for inflation for 2016 and thereafter.

Mortgage debt exclusion: The tax exclusion for mortgage forgiveness on up to $2 million of debt on a principal residence is extended, with certain modifications through 2016.

Mortgage insurance premiums: This provision allows taxpayers to deduct mortgage insurance premiums subject to a phaseout beginning at $100,000 of AGI. The deduction is extended through 2016.

Residential energy credit: The latest version of the residential energy credit, which provides a lifetime credit of up to $500 for 10% of qualified expenses, is extended through 2016.

Business Tax Provisions

Section 179 expensing: The PATH ACT permanently restores the generous maximum expensing deduction of $500,000 for qualified business property with a phaseout threshold of $2 million. (It was scheduled to drop to $25,000 with a $200,000 phaseout threshold.) It will be indexed for inflation for 2016 and thereafter.

Bonus depreciation: Although 50% bonus depreciation for qualified business property is retroactively extended to 2015, it will be reduced to 40% for 2018 and then 30% for 2019. Bonus depreciation will completely expire after 2019 unless it is extended again.

15-year cost recovery: The tax law provision allowing taxpayers to use a straight-line cost recovery period of 15 years for qualified leasehold, restaurant and retail is permanently extended. The usual cost recovery period is 39 years.

Research and development credit: The credit for research and development expenses is made permanent with certain modifications. Notably, the alternative simplified credit is increased from 14% to 20%, while small businesses may be able to offset alternative minimum tax (AMT) liability and start-ups can offset payroll taxes, beginning in 2016.   

S corporation changes: The PATH Act makes permanent the five-year recognition period for built-in-gain (BIG) gain following a conversion to S corporation status. It also permanently extends the basis adjustment in stock when an S corporation makes charitable donations of property.

Qualified small business stock (QSBS): The 100% tax exclusion for investors in QSBS, which was scheduled to be reduced to 50% for QSBS acquired after 2014, is retroactively extended and made permanent. This tax break requires a five-year holding period.

Work Opportunity Tax Credit (WOTC): The WOTC, which is available for hiring workers from targeted economic groups and military veterans, is extended, with minor modifications, through 2019. 

New markets tax credit: The PATH Act authorizes allocation of $3.5 billion of new markets credits retroactive to 2015 and through 2019.

Miscellaneous Tax Provisions:

Affordable Care Act (ACA): The PATH Act delays for two years, from 2018 to 2020, imposition of the Cadillac tax on high-priced health insurance plans. It also places a moratorium on the ACA tax on medical devices for two years – 2016 and 2017 – and the health insurance provider fee for one year, 2017.

Section 529 plans: Funds in Section 529 college savings plans may be distributed tax-free for qualified higher education expenses. The PATH Act permanently extends the rule allowing computers and related equipment to be treated as qualified expenses.

Achieving a Better Life Experience (ABLE) Accounts: With an ABLE account, tax-free distributions may be made on behalf of a qualified disabled individual. The PATH Act permits tax-free rollovers from a 529 plan to an ABLE account if certain requirements are met.

Savings Incentive Match Plan for Employees (SIMPLE): The PATH Act generally permits tax-free rollovers from an employer-sponsored qualified plan to a SIMPLE plan.

Taxpayer Bill of Rights: Previously, the IRS had proposed a Taxpayer Bill of Rights, which is now made a permanent part of the tax code.

Real estate investment trusts (REITs): Finally, the PATH Act includes numerous provisions relating to REITs, including changes involving tax-free spinoffs.

Keep in mind that this is just the tip of the iceberg. The PATH Act is 231 pages long and its reach is far more extensive than previous tax extender laws. We will continue to focus on this significant new legislation in the coming months.