As has been the case the past few years, Congress decided to wait until late in the year to extend a series of temporary tax provisions that have fairly significant implications for individual taxpayers and businesses. However, the PATH Act (Protecting Americans from Tax Hikes Act of 2015), passed by Congress and signed into law by the President on December 18, 2015, did take a new approach. Instead of extending the same package of provisions for merely a year or two, the new law made approximately 20 of the provisions permanent and extended the remaining provisions for either two or five years.  Several of the tax provisions were also significantly changed under the PATH Act.  In this article, we will look at a number of the individual provisions that were updated with the new act as well as legislation passed earlier, while our upcoming article will explore provisions related to businesses.

 

Individual Provisions

Almost half of the 20 expiring tax provisions that were made permanent related to tax law impacting individual taxpayers. In addition, earlier legislation, such as the Affordable Care Act passed in 2010 and the 2015 Surface Transportation Act contain new tax new provisions or significant changes for individual taxpayers in 2015.

  • 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 phase out 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 phase outs 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.
  • Direct IRS Charitable distributions: The Act permanently extends the provisions for taxpayers age 70 ½ or older to make tax-free distributions directly from their IRAs to qualified charities, up to an annual limit of $100,000 per taxpayer.
  • Charitable conservation property: The charitable deduction allowed for conservation property was made permanent at a 50% of adjusted gross income (100% for farmers and ranchers) rather than 35% limit.
  • Estate reporting: Under the 2015 Surface Transportation Act, The executor of any estate required to file an estate tax return must furnish to IRS and to each person acquiring any interest in property included in the decedent’s gross a statement identifying:
    • (1) the value of each interest in that property as reported on the
      estate tax return, and
    • (2) any other information about the interest that IRS might require.
  • Educator classroom expenses: The $250 above-the-line deduction for qualified out-of-pocket expenses of teachers and other educators is made permanent and will be indexed for inflation starting in 2016.
  • State and local sales taxes: The ability to deduct state and local sales taxes in lieu of deducting state and local income taxes has been made permanent. This optional deduction is especially valuable to residents of states such as Washington that do not have a state income tax.
  • Exclusion of qualified mortgage indebtedness: The tax exclusion to include in income mortgage forgiveness on up to $2 million of debt on a principal residence is extended through 2016.
  • Mortgage insurance premiums: Extendend only through 2016, taxpayers can deduct mortgage insurance premiums subject to a phaseout beginning at $100,000 of adjusted gross income.
  • Residential energy credit: The residential energy credit, which provides a lifetime credit of up to $500 for 10% of qualified home energy efficiency improvement expenses, is extended through 2016.
  • American Opportunity Tax Credit (AOTC) and Tuition and fees deduction: The PATH Act makes permanent an enhanced AOTC that was scheduled to expire in 2017. The credit is a maximum deduction of $2,500 and phaseout thresholds of $80,000 for single filers and $160,000 for joint filers. Also, instead of taking one of the two higher education credits, parents may claim a tuition-and-fees deduction; this deduction is only extended through 2016.
  • Child tax credit and Earned income tax credit (EITC): Two provisions related to low income taxpayers that were set to expire in 2017 were made permanent. These include the enhanced child credit, which allows for a refundable portion with a reduced income threshold, and certain changes in the thresholds and rates of the EITC.
  • Individual mandate penalties: The penalty paid for not having health insurance coverage for any part of the year in 2015 is set to increase to the greater of 2% of household income or $325 per person ($162.50 per child under 18) without health care coverage.

Also, individual taxpayers should be aware of new forms they will be receiving in 2015 (though some taxpayers may have received certain forms in 2014). The Affordable Health Care Act, introduced three new tax forms relevant to individuals, employers and health insurance providers. They are forms 1095-A, 1095-B and 1095-C. These forms help determine if you either owe the new shared responsibility payment, the fee you might have to pay if you don’t have health insurance, or, for individuals who bought insurance through the health care marketplace, this information will help to determine whether you are able to receive an additional premium tax credit or have to pay part of the credit received back.

 

About Alegria & Company, P.S.

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