With just a couple of weeks before year end, Congress passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). The legislation deals with more than 50 tax provisions that expired December 31, 2014. Some provisions were extended, while others were made permanent. I want to discuss some of the more popular provisions.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is a credit for the first four years of higher education expenses. The AOTC has been available as a $2500 credit for taxpayers whose AGI is below the threshold amount of $80,000 single and $160,000 married. The credit had been set to expire in 2017, but was made permanent with the PATH Act.
Teachers’ Classroom Expense Deduction
Elementary and secondary school teachers are allowed a deduction of up to $250 per year for supplies and equipment paid for out of pocket by the teacher, for use in the classroom. The Act makes this deduction permanent and modifies the deduction by adjusting it for inflation beginning in 2016.
Sales Tax Deduction
This provision is near and dear to the hearts of Texans, and others who live in states without an income tax. In an effort to create parity, the option of deducting the higher of state sales tax or state income tax as an itemized deduction was added to the tax law with the American Jobs Creation Act of 2004. The PATH Act makes this option permanent.
Qualified Charitable Distributions from IRAs
Individuals age 70 ½ or over can exclude up to $100,000 from gross income for donations paid directly to a qualified charity from their IRA. This provision was set to expire 12/31/14, but the new law makes this opportunity permanent. Important to note, the amount excluded from gross income is not deductible as a charitable donation on Schedule A.
Section 179 Expensing
IRC Code Section 179 allows taxpayers to immediately expense the cost of tangible personal property in the year of acquisition, rather than depreciate it over its useful life. Prior to passage of the legislation, the maximum dollar limit had reverted back to $25,000 per year with an investment limit of $200,000. Effective with passage, the Section 179 expensing limit is set at $500,000 with a $2 million investment limit before phase out. The PATH Act made this provision permanent and provides for the annual limits to be indexed for inflation beginning in 2016.
Introduced by the Job Creation and Worker Assistance Act of 2002, bonus depreciation was initially set at 30% for property purchased after September 20, 2001. Subsequently, the amount has increased to 50%. Bonus depreciation, that is, additional first year depreciation, expired December 31, 2014. The PATH Act extends bonus depreciation with the following provisions:
- 50% for 2015-2017
- 40% in 2018 and
- 30% in 2019
Important to note, only new property is eligible for bonus depreciation. Both new and used property is eligible for Section 179 expensing.
While there are many other provisions in the new tax law, the items discussed above provide taxpayers opportunities to do some last minute tax planning prior to the close of 2015. Teachers will want to ensure they have kept adequate records to substantiate their $250 above the line deduction. Retirees with a charitable bent may want to consider directing their required minimum distribution from their IRA be directed to a qualified charity.
Perhaps the biggest impact of this legislation is to give taxpayers more certainty about the tax law. With the passage of this law, several of the more popular and beneficial tax provisions have been made permanent.