Monday, December 28, 2015

Ways the New PATH Tax Law Helps You

Once again in 2015, Congress waited until just a few days before year end to pass a law to extend the life of many popular and helpful deductions in the tax code.  The difference this time is they made many of these items permanent, and in some cases also improved them.

Here are the key ways this will help you:


The Child Tax Credit now has no expiration date.  Up to $1,000 per child under age 17 for taxpayers with adjusted gross income of $75,000 (single head of household), $110,000 (married filing jointly), $55,000 (married filing separately).  In many cases this is even a refundable credit, meaning it can be paid to you even when you have zero tax liability.

This credit is in addition to the deduction you can claim for dependents (and which is not limited to children under age 17).

Earned Income Credit is no longer scheduled to decrease after 2017.   It will continue to be available for taxpayers with investment income less than $3,301 and adjusted gross income less than $53,267 (married filing jointly) or $47,747 (single head of household) and three or more children.  It is also available for taxpayers with less than three children (even no children) at lower income levels.

Like most tax provisions, there are additional rules and procedures.  You can find many of them at www.irs.gov/eitc.

Educator Expenses Deduction now has no expiration date and has been improved.  Educators who work 900+ hours yearly as teachers, instructors, counselors, or principal and aides in grade levels kindergarten though 12 in schools recognized by your state (generally not home schools) can deduct up to $250 per educator in unreimbursed expenses for books, supplies, computer equipment software, and other items used in the classroom.

In my experience, most educators have much more than $250 in unreimbursed expenses.  These additional expenses (and also their union dues) can be deducted to the extent they exceed 2% of adjusted gross income and if the educator itemizes deductions.  Because of these limitations, it is very nice that at least part of these expenses can be deducted no matter what.

The improvements:  After 2015 this deduction will be indexed for inflation and professional development expenses will be added to the list of expenses that qualify for the deduction.

The itemized deduction for state/local sales taxes no longer has an expiration date.  This helps both taxpayers in states that don't have a state income tax and taxpayers who paid sales tax on a nonbusiness purchase of an auto, truck, boat, airplane, home, or substantial improvements on a home.  Taxpayers making these purchases can add that sales tax to the amount in a table for sales taxes on general purchases -- and then choose whether to claim the resulting total sales tax or the state income tax, whichever is higher.

IRA transfers directly to a charity are now tax free without an expiration date.  This only helps taxpayers of at least age 70 1/2, but once that age is reached, it is helpful at almost all income levels.  This is because it lowers adjusted gross income and does not require the taxpayer to itemize deductions.  In many cases, it also reduces the amount of social security is taxable ... so it is totally worth the effort to call your IRA administrator to have them directly make a charitable contribution you were going to do anyway, rather than you receiving the IRA distribution and then making the donation.

Section 179 Equipment Expense Deduction is now available up to $500,000 without an expiration date.  Normally when equipment is purchased and put in to service in a business, a gradual deduction for the cost of the equipment is taken over several years.  For many years there has been a provision to allow business owners to elect to take this deduction in full in the year the equipment is put in service.  The maximum amount of this election was reduced to $25,000 on January 1, 2015, but the new PATH law increased the maximum to $500,000.  Not only is there no longer an expiration date, but the maximum will now be indexed for inflation yearly.

Post-Secondary Education Tuition and Fees Deduction was extended for 2015 and 2016.  It is available only for tuition and fees, but in some cases it can be more beneficial than claiming an education credit because it can reduce state as well as federal income tax.  It can be worth calculating both ways to see which is more beneficial to you.

The provision for no tax on forgiveness of acquisition debt on a principal residence has been extended for 2015 and 2016.  This is true for up to $2 million of such debt.  Without this provision, many people would owe thousands of dollars of tax on home mortgage debt they couldn't afford to pay, and became taxable income when it was forgiven.

The itemized deduction for premiums paid on mortgage insurance contracts issued after 2006 in connection with home acquisition debt is extended for 2015 and 2016.  This deduction begins to be phased out at adjusted gross income of $100,000 for all taxpayers except married filing separately; for them the phase out begins at $50,000 adjusted gross income.

There are many other deductions that were extended by the PATH law that will provide benefits to smaller groups of people.  You can read about them here.


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