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 on December 18.The PATH Act does considerably more than the typical tax extenders legislation that has been seen in prior years. It makes permanent more than twenty
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.
Permanent Extensions for Individual Taxpayers — Key Provisions
• Qualified Charitable Distributions (QCD’s) 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.
• Qualified Conservation Contributions. The PATH Act permanently extends a special rule which allows contributions of capital gain real property for conservation purposes to be deductible up to 50% of Adjusted Gross Income.
• American Opportunity Tax Credit. The PATH Act makes permanent the American Opportunity Tax Credit (AOTC) of 100% of the first $2,000 of qualified tuition and related expenses and 25% of the next $2,000 for a total maximum credit of $2,500 per eligible student for up to 4 years of post-secondary education, 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.
• 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.
The PATH Act of 2015, along with The American Taxpayer Relief Act of 2012, has finally created a more permanent set of tax laws that will allow taxpayers to more confidently prepare and implement longer term income and estate planning strategies.
Please contact us with any questions about how these tax law changes may impact your integrated wealth management planning in the years ahead.