At the end of last year, the Protecting Americans from Tax Hikes Act of 2015 was signed into law. Known as the PATH Act, it does more than just extend expired and expiring tax provisions for another year. The new law makes many temporary tax breaks permanent. This provides some stability in planning. When it comes to certain deductions and credits, taxpayers will no longer have to wait for Congress to pass a temporary tax extenders law — often at the end of the year — in order to plan tax-saving strategies.
Here’s an overview of how individuals can benefit from the latest tax package:
Eligible taxpayers can take an annual credit of up to $2,500 for various tuition and related expenses for each of the first four years of postsecondary education. The credit phases out based on modified adjusted gross income (MAGI) beginning at $80,000 for single filers and $160,000 for joint filers, indexed for inflation. The new law makes this credit permanent.
The new law extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for taxpayers whose adjusted gross income (AGI) doesn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI doesn’t exceed $80,000 ($160,000 for joint filers).
The PATH Act makes permanent the exclusion of 100% of the gain on the sale or exchange of qualified small business (QSB) stock acquired and held for more than five years. The 100% exclusion is available for QSB stock acquired after September 27, 2010.
A QSB is generally a domestic C corporation that has gross assets of no more than $50 million at any time (including when the stock is issued) and uses at least 80% of its assets in an active trade or business. The law also permanently extends the rule that eliminates QSB stock gain as a preference item for alternative minimum tax (AMT) purposes.
The PATH Act makes permanent the provision that allows taxpayers who are age 70½ or older to make direct contributions from their IRAs to qualified charitable organizations up to $100,000 per tax year. If you take advantage of this opportunity, you can’t claim a charitable or other deduction for the contributions, but the amounts aren’t considered taxable income and can be used to satisfy your required minimum distributions.
To qualify for the exclusion from income for IRA contributions for a tax year, you need to arrange a direct transfer by the IRA trustee to an eligible charity by December 31. Donor-advised funds and supporting organizations aren’t eligible recipients.
Do you commute to work via a van pool or public transportation? The law makes permanent the requirement that limits on the amounts that can be excluded from an employee’s wages for income and payroll tax purposes be the same for parking benefits and van pooling / mass transit benefits.
For 2015, the monthly limit is $250. Before the PATH Act, the 2015 monthly limit was only $130 for van pooling / mass transit benefits. (The $250 limit increases to $255 for 2016.)
Taxpayers can take an itemized deduction for state and local sales taxes, instead of for state and local income taxes. This tax break is now permanent. The deduction is especially valuable for individuals who live in states without income taxes and those who purchase major items, such as a car or boat.
The PATH Act extends through 2016 the credit for purchases of residential energy property. Examples include new high-efficiency heating and air conditioning systems, insulation, energy-efficient exterior windows and doors, high-efficiency water heaters and stoves that burn biomass fuel.
The provision allows a credit of 10% of expenditures for qualified energy improvements, up to a lifetime limit of $500.
Under the new law, you can treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through 2016. However, the deduction phases out for taxpayers with AGI of $100,000 to $110,000.
In addition, the PATH Act extends through 2016 the exclusion from gross income for mortgage loan forgiveness. It also modifies the exclusion to apply to mortgage forgiveness that occurs in 2017 as long as it’s granted pursuant to a written agreement entered into in 2016.
Qualifying elementary and secondary school teachers can claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom. Under the new law, beginning in 2016, the deduction is indexed for inflation and includes professional development expenses.
Tax Planning with More Certainty
Many of these tax breaks may seem familiar, because they’re continuations from previous years. Under the PATH Act, there are now significant tax planning opportunities for individuals. The permanent extensions of some valuable tax breaks will make it easier for taxpayers to plan ahead. Keep in mind that this article only touches on some of the new law’s provisions. There may be extensions and enhancements that can benefit you as an individual taxpayer. Contact your tax advisor to determine how you can make the most of this tax relief.