Keeping year-end tax planning interesting right up until the end, Congress acted in late December to pass The Protecting Americans from Tax Hikes (PATH) Act of 2015. This bill addresses a variety of popular but temporary tax provisions, commonly referred to as “tax extenders,” that expired at the end of 2014, and makes many of them permanent. Having permanent tax incentives takes the uncertainty out of tax planning and allows taxpayers to make important financial tax decisions confidently.
For individuals, the incentives in the PATH bill include:
- American Opportunity Tax Credit – (a modified version of the original Hope Credit) and the credit rules – including maximum credit amount, number of years of education covered, income phase-out ranges, and refundability provisions – are made permanent.
- Child tax credit – The lower $3,000 earned income threshold for determining the refundable portion of the tax credit is made permanent. If the credit exceeds tax liability, an amount equal to 15% of earned income over $3,000 may be refunded.
- Credit for nonbusiness energy property – This credit is extended for two additional years (through 2016); lifetime cap of $500 remains.
- Deduction for classroom expenses paid by educators – The $250 above-the-line deduction is made permanent–the rules that applied in 2014 are retroactively extended for 2015; starting in 2016, the limit will be indexed for inflation, and qualifying professional development expenses will be considered eligible expenses for purposes of the deduction.
- Deduction for qualified higher-education expenses – The above-the-line deduction, worth up to $4,000, is reinstated for 2015 and extended through 2016.
- Deduction for state and local general sales taxes – Individuals who itemize deductions on Schedule A of IRS Form 1040 can elect to deduct state and local general sales taxes in lieu of the deduction for state and local income taxes. This is now permanent.
- Discharge of qualified personal residence debt – The exclusion from gross income of the discharge of debt associated with a qualified principal residence is reinstated for 2015 and extended through 2016.
- Earned income tax credit – The increased credit percentage for families with three or more qualifying children and the increased threshold phase-out range for married couples filing joint returns are made permanent.
- Employer-provided mass transit benefits – The monthly exclusion for employer-provided transit pass and vanpool benefits will be permanently set to the same level as the exclusion for employer-provided parking (applies retroactively to 2015, increasing the exclusion from $130 to $250 monthly).
- Mortgage insurance premiums – The provision allowing premiums paid for qualified mortgage insurance to be treated as deductible qualified residence interest on Schedule A of IRS Form 1040 (subject to phase-out based on income) is extended for two additional years, through 2016.
- Qualified charitable distributions (QCDs) – The provision allowing individuals age 70 1/2 or older to make qualified charitable distributions (QCDs) from their IRAs, and exclude the distribution from gross income (up to $100,000 in a year), is made permanent.
- Qualified conservation contributions of capital gain real property – Special rules for qualified conservation contributions of capital gain real property are made permanent; new rules for qualified contributions by certain Alaska Native Corporations are added for years after 2015.
The PATH provisions affecting businesses include:
- Bonus depreciation – Additional 50% bonus depreciation is reinstated for 2015 and extended through 2019; the bonus percentage is reduced to 40% in 2018 and 30% in 2019 for most property types.
- Exclusion of gain on qualified small business stock – The 100% exclusion of capital gain from sale or exchange of qualified small business stock held for more than five years is made permanent; it applies to alternative minimum tax as well as regular income tax.
- IRC Section 179 expensing – Increased dollar amounts ($500,000/$2,000,000) associated with Section 179 expensing are made permanent and indexed for inflation after 2015; $250,000 limit on qualified real property eliminated after 2015.
- Research credit – The research tax credit is made permanent, with new provisions effective in tax years beginning after 2015 that will provide additional benefits to some small businesses.
- Work Opportunity Tax Credit – This tax credit is extended through 2019 and expanded (after 2015) to apply to employers who hire qualified long-term unemployment recipients.
Congress made additional changes in the final quarter via the Consolidated Appropriations Act, which contains multiple other tax provisions, including:
- The Act delays imposition of the excise tax on high-cost employer-sponsored health coverage (the so-called “Cadillac tax”) for two years. The tax, originally scheduled to take effect after 2017, will now be effective for tax years beginning after December 31, 2019.
- The Act eliminates the requirement that ABLE accounts (tax-favored savings vehicles intended to benefit disabled individuals) be established only in the ABLE account owner’s state of residence.
- Rules relating to 529 plans are modified for tax years after 2014, including expansion of the definition of qualified expenses to include the purchase of a computer, peripheral equipment, computer software, and Internet access if used primarily by the beneficiary while enrolled at an eligible education institution.
- The Act permits funds to be rolled over to a SIMPLE IRA from employer-sponsored retirement plans and traditional IRAs once a participant has participated in the SIMPLE IRA for a two-year period (effective for rollover contributions made after December 18, 2015).
Changes in Social Security
Social Security was also impacted in three significant ways at the end of 2015. “File and suspend” and “restricted application for spousal benefits” strategies are being eliminated. These strategies were mechanisms used to boost retirement income for married couples. Lastly, beneficiaries learned there would not be annual cost of living adjustment (COLA) for 2016. 2014 and 2015 adjustments were low at 1.5% and 1.7% in 2014 and 2015, respectively.
The popular “file and suspend” strategy is being eliminated after April 29, 2016. Under this strategy, a higher-earning spouse can file for social security at full-retirement age (FRA) and delay receipt of benefits until age 70 to earn delayed retirement credits (DRCs). When the higher earning spouse files and suspends, his/her spouse can collect the spousal benefit on the higher amount. The ability for the lower-earning spouse to collect on the higher-earning spouse’s benefit is being eliminated.
In order to employ this strategy before April 29, 2016, you must be age 66 by April 30, 2016 to allow your eligible spouse or dependent child to file for benefits while also increasing your future benefits.
The restricted application strategy enabled a married individual who had reached full retirement age to file a “restricted application” for spousal benefits after the other spouse had filed for retired worker benefits. This allowed the individual to collect spousal benefits while delaying filing for his or her own benefit, in order to accrue delayed retirement credits. Under the new rules, an individual born in 1954 or later who files a benefit application will be deemed to have filed for both worker and spousal benefits, and will receive whichever benefit is higher. He or she will no longer be able to file only for spousal benefits.
To utilize the restricted application strategy and claim only spousal benefits at age 66, you must be at least age 62 by December 31, 2015. When you file, your spouse must have already claimed social security or filed and suspended benefits before April 29, 2015.
If a couple has already deployed these planning techniques, they are unaffected by change as it is not retroactive.
If all of these tax changes, extensions and new provisions are making your head spin, contact me at email@example.com or 609-689-9700. As a full-service accounting and financial firm, our advisors can help guide you or your business through complex tax planning.