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New Tax Laws

New Tax Laws

Just before recessing for the holidays, the House and Senate passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) and the 2016 budget act, which also contained numerous tax provisions. The PATH Act does considerably more than the typical tax legislation seen in prior years, making permanent over 20 key tax provisions, including the research tax credit, enhanced expensing under Code Section 179, and the American Opportunity Tax Credit. It also extends other provisions, including bonus depreciation, for five years; and revives many others for two years. In addition, many provisions have been enhanced.

 

PROVISIONS FOR INDIVIDUALS

 

The Act extends permanently many popular but heretofore temporary tax incentives for individuals. It also modifies some of them, as well as extending the rest, for either five or two years, retroactive to the start of 2015. Here are some of the provisions we believe will be applicable to most people:

 

Permanent Extensions:

 

State and Local Sales Tax Deduction

The election to claim an itemized deduction for state and local general sales taxes, in lieu of deducting state and local income taxes, expired after December 31, 2014. The Act makes the election permanent.  In addition to this provision being particularly valuable to taxpayers in states without an income tax, some taxpayers who make a big ticket purchase, such as a motor vehicle, before year-end could benefit by weighing the deduction for state and local general sales taxes against their deduction for state and local income taxes.

 

American Opportunity Tax Credit

The Act makes permanent the American Opportunity Tax Credit (AOTC), an enhanced version of the HOPE education credit. The AOTC has been available at an increased level of $2,500, with adjusted gross income (AGI) phase-out amounts of $80,000 (single) and $160,000 (married filing jointly). The AOTC had been scheduled to expire after 2017.

 

Child Tax Credit

The Act makes permanent the reduced earned income threshold amount of $3,000. This provision had been scheduled to expire after 2017.

 

Earned Income Credit

The Act makes permanent the increase ($5,000) in phaseout amount for joint filers, scheduled to expire after 2017. The Act also makes permanent the increased 45 percent credit percentage for taxpayers with three or more qualifying children. Under prior law, both enhancements had been available only through 2017.

 

Teachers’ Classroom Expense Deduction

The Act permanently extends the above-the-line deduction for elementary and secondary–school teachers’ classroom expenses. It also modifies the deduction by indexing the $250 ceiling amount to inflation beginning in 2016. Additionally, the Act includes “professional development expenses” within the scope of the deduction.

 

Charitable Distributions from IRAs

The Act permanently extends the provision for individuals age 70 1/2 and older to be allowed to make tax-free distributions from individual retirement accounts (IRAs) to a qualified charitable organization. The treatment continues to be capped at a maximum of $100,000 per taxpayer each year.

 

Two-Year Extensions:

 

Qualified Tuition/Related-Expenses Deduction

The Act extends through 2016 the above-the-line deduction for qualified tuition and fees for post-secondary education.

 

Mortgage Debt Exclusion

The Act excludes from income cancellation of mortgage debt on a principal residence of up to $2 million ($1 million for a married taxpayer filing a separate return) through 2016. The Act also modifies the exclusion to apply to qualified principal residence indebtedness discharged in 2017 if discharge is made under a binding written agreement entered into in 2016.

 

Mortgage Insurance Premium Deduction

This measure treats mortgage insurance premiums as deductible interest that is qualified residence interest subject to AGI phaseout. The Act extends this special treatment through 2016.

 

PROVISIONS FOR BUSINESSES

 

Permanent Extensions:

 

Code Sec. 179 Expensing

Pre-Act, the dollar limit for Code Sec. 179 expensing for 2015 had reverted to $25,000 with an investment limit of $200,000. The Act permanently sets the Code Sec. 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (both amounts are indexed for inflation beginning in 2016). The Act also makes permanent special expensing for qualified real property. The Act also removes the $250,000 cap related to this category of expenditure beginning in 2016. Some businesses may want to postpone larger purchases of such property until 2016 as a result.

 

Research Tax Credit

The research and development (R&D) tax credit is available to taxpayers with specified increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The Act permanently extends the credit and increases the alternative simplified credit from 14 percent to 20 percent.

 

100-Percent Gain Exclusion on Qualified Small Business Stock

The 100-percent exclusion allowed for gain on the sale or exchange of qualified small business stock held for more than five years by non-corporate taxpayers is made permanent.

 

Reduced Recognition Period For S Corporation Built-In Gains Tax

The Act makes permanent the five-year recognition period for built-in gain following conversion from a C to an S corporation.

 

Other Permanent Business Provisions

The Act also extends permanently and in some cases modifies:

  • 15-year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements
  • Employer wage credit for employees who are active duty members of the uniformed services
  • Basis adjustment in stock when an S corporation makes charitable contributions of property
  • Minimum low-income housing tax credit for non-federally subsidized buildings

 

Five-Year Extensions:

 

Bonus Depreciation

The Act extends bonus depreciation (additional first-year depreciation) under a phase-down schedule through 2019:

  • 50 percent for 2015-2017
  • 40 percent in 2018
  • 30 percent in 2019

 

Two-Year Extensions:

 

The Act extends, and in some cases modifies, through 2016:

  • Film/television expensing
  • Qualified Zone Academy Bonds
  • Three-year recovery period for certain race horses
  • Code Sec. 199 deduction for Puerto Rico
  • Cover over of rum excise taxes

 

ENERGY PROVISIONS

 

Residential Energy Property Credit

The Act extends through 2016 the residential energy property credit.

 

Production Tax Credit

The 2016 budget act extends the production tax credit (PTC) for wind energy through 2019 but subjects the credit to phase-down.

 

Solar Incentives

The 2016 budget act extends the solar investment tax credit and the credit for qualified residential solar property but subjects the credits to phase-down. Under the new law, both credits will not be available after 2021.

 

Energy-Efficient Commercial Buildings Deduction

The Act extends through 2016 the deduction for energy-efficient commercial buildings. Additionally, the Act updates the energy-efficient standards.

 

More Energy Extenders

Also extended by the Act through 2016 are:

  • Credit for alternative fuel refueling property
  • Credit for 2-wheel plug-in electric vehicles
  • Second generation biofuel producer credit
  • Biodiesel and renewable diesel incentives
  • Credit for energy-efficient new homes
  • Special allowance for second generation biofuel plant property
  • Excise credits for alternative fuels.

 

ADDITIONAL PROVISIONS

 

Here’s a sampling of some of the many other provisions which will take effect as a result of the passage of these new laws:

 

Code Section 529 Plans

Under the Act, the purchase of computer equipment and technology with a distribution from a Code Sec. 529 plan is permanently considered a qualified expense.

 

SIMPLE Plans

Under the Act, qualified individuals may generally roll over amounts from an employer-sponsored retirement plan to a SIMPLE IRA.

 

W-2s and 1099s

The Act requires that certain information returns relating to employee wage information and non-employee compensation be filed by January 31, generally the same date as the due date for employee and payee statements, and are no longer eligible for the extended filing date for electronically filed returns.

 

Some Refunds Will Be Delayed

No credit or refund for an overpayment for a tax year will be made to a taxpayer before the 15th day of the second month following the close of that tax year, if the taxpayer claimed the Earned Income Credit or Additional Child Tax Credit on the return. The Act also includes a safe harbor for small errors on information returns, payee statements and withholding.

 

Click here to download a PDF version of these new tax laws