The holiday and tax planning season is passing quickly and as usual we have some last minute changes in tax law. Congress recently passed legislation needed to extend certain tax incentives available in prior years. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act), was signed into law by President Obama on December 18, 2015. The Act extends over 50 provisions, making more than 20 of them permanent. Our year end letter is intended to notify you of some of the provisions in the Act that are of interest to individuals and businesses as well as changes in filing strategies for social security.
Individual Provisions Made Permanent
Distributions from IRAs to Charities
- Individuals age 70 ½ and older will be allowed to make tax-free distributions from IRAs (up to $100,000 per taxpayer annually) to qualified charitable organizations.
American Opportunity Credit (AOTC)
- The Act makes this higher education tax credit permanent, with a maximum of $2,500, subject to adjusted gross income phase-out amounts.
State and Local Sales Tax Deduction
- State and local general sales tax can be deducted, in lieu of claiming state and local income taxes, as an itemized deduction on Schedule A.
Teachers’ Classroom Expense Deduction
- Teachers may deduct up to $250 of qualified out of pocket classroom expenses, including professional development expenses, as an above the line deduction on form 1040. The deduction amount will be indexed for inflation beginning in 2016.
Qualified Conservation Contributions
- Contributions of capital gain real property for conservation purposes will be allowed as a deduction up to 50% of adjusted gross income.
Section 529 Plans
- The purchase of computer equipment and technology is considered a qualified expense for Section 529 Plan distribution purposes.
Individual Provisions Extended
Higher Education Deduction
- The above-the-line deduction for qualified tuition and fees for post-secondary education (subject to phase out for upper income earners) is extended through 2016.
Mortgage Insurance Premium Deduction
- The Schedule A (itemized deduction) for mortgage insurance premiums (subject to phase out for upper income earners) is extended through 2016.
Business Provisions Made Permanent
Section 179 Expensing
- The Act permanently extends the ability to immediately expense the purchase of qualified business assets up to a limit of $500,000 (subject to phase out if overall investments are greater than $2 million). Without the Act, the deduction would have been capped at $25,000 annually. The Act provides that off-the-shelf computer software, qualified leasehold improvement, qualified restaurant and qualified retail improvement property are eligible for expensing (the $250,000 cap on qualified real property expensing will be removed starting in 2016). After 2015, the expensing limit will be indexed for inflation.
Research Tax Credit
- This incentive credit for increasing research and experimentation expenses is now permanent. In addition, after 2015 the credit will be allowed for qualified small businesses (less than $50 million in gross receipts) against the Alternative Minimum Tax liability and for qualified startups against the employer FICA liability. The Act also increases the alternative simplified credit from 14% to 20%.
15 Year Depreciation of Qualified Property
- 15 year straight line depreciation for qualified leasehold improvement, restaurant property and retail improvements is now permanent
100% Exclusion for Gain on Qualified Small Business Stock
- The exclusion for gain on the sale of qualified small business stock held for more than 5 years by non-corporate taxpayers is now permanent for both regular tax and alternative minimum tax purposes.
Reduced Recognition Period for S Corporations Built-In Gains Tax
- The ten-year recognition period for built-in gains when converting from a C corporation to an S Corporation is now permanently reduced to five years.
Business Provisions Extended
- For purchases of new qualified tangible personal property, businesses may continue to claim an additional 50% first-year depreciation deduction through 2017. In years 2018 and 2019 the bonus percentage allowed is reduced to 40% and then 30%, and eliminated in 2020.
Work Opportunity Tax Credit
- Employers who hire military veterans and other qualified individuals may be eligible for this credit, which typically is equal to 40 percent of up to $6,000 (this may be higher for some veterans) in qualified first-year wages. The Act extends this provision through 2019.
Business Provisions Delayed
Affordable Care Act
- “Cadillac” plans- The Act delays for two years the ACA excise tax on high-dollar health care plans. The Act further provides that payments of the tax will also be deductible against income tax.
- Medical devices- The ACA excise tax on qualified medical devices will not apply to sales during calendar years 2016 and 2017.
Social Security Changes
A budget bill signed into law in November made significant changes to Social Security filing strategies. The bill eliminated two filing strategies commonly utilized by married couples – file and suspend and restricted application. File and suspend allows one spouse, who is at full retirement age, to apply for but suspend social security benefits thus allowing the other spouse to file for spousal benefits based on the first spouse’s earnings history. The restricted application allows a spouse, who is at full retirement age, to collect the spousal benefit only until he/she is at the maximum retirement age (generally 70). If you (or your spouse) are between the ages of 62-70 you may still be able to take advantage of these strategies if you act before April 30, 2016.
As always, we will continue to keep you up-to-date of any changes in tax law that may benefit you. Please contact us if you believe some of these changes may affect you, or if you have questions on how to properly implement them.
Happy Holidays from all of us at Howe, Riley & Howe