On December 15, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 into law. Below please find a summary of some of the key tax extenders:
• Child tax credit: The child tax credit is a $1,000 credit available for each “qualifying child” (for U.S. family members under age 17 who live with the taxpayer, are claimed as dependent children, and who do not provide more than half of their own support) in the household. It phases out as modified AGI exceeds $110,000 (for married couples, $75,000 for individuals). For lower-income individuals, who do not have a $1,000 tax liability, the child tax credit becomes a refundable credit for 15% of earned income over a threshold amount. In the past, the threshold amount was $10,000, indexed for inflation. However, since 2009 the threshold amount was reduced to $3,000. The new tax extenders have permanently set this $3,000 threshold for calculating the additional refundable portion of the child tax credit.
• American Opportunity Tax Credit: The American Opportunity Tax Credit is made permanent. It allows for a credit of $2,500/year (40% refundable; 60% nonrefundable) for up to four years of post-secondary education, with Adjusted Gross Income (AGI) phase outs of $160,000 for married couples (and $80,000 for individuals).
• Qualified Charitable Distributions (QCD) From IRA to Charity: Taxpayers who are over age 70 ½ may make a “Qualified Charitable Distribution” of up to $100,000 directly from an IRA to a charity. The contribution to the charity is not claimed as a tax deduction, but the distribution from the IRA is not taxed in income either, making it a “perfect” pre-tax charitable contribution. And the QCD counts towards the taxpayer’s Required Minimum Distribution (RMD) obligations, which would apply given that he/she must already be over the age of 70 ½.
• State and Local Sales Tax Deduction: Each year, taxpayers may claim an itemized deduction for either the payment of state income taxes, or the payment of state sales tax. The state sales tax deduction is usually only claimed by those who live in states without an income tax. The new tax extenders legislation makes the state and local sales tax deduction permanent. This change will primarily benefit those who itemize their deductions, and live in one of the states that have no income tax.
• School Teacher Expense Deduction: Elementary and secondary school teachers are eligible for an above-the-line deduction for schoolteacher expenses, up to $250/year. In addition, the legislation also indexes the $250 cap for inflation beginning in 2016 and also beginning in 2016 expands the eligible schoolteacher expenses to include professional development expenses in addition to in-classroom school teacher supplies.
• Section 179 Deduction: The favorable Section 179 deduction limits, including the $500,000 maximum deduction amount and the $2,000,000 threshold is made permanent.
Extenders Set to Expire At the End of 2014 are Now Extended Through 2016:
• Exclusion of Discharged Mortgage Debt on Short Sale: The Mortgage Debt Relief Act of 2007 stipulated that up to $2,000,000 of cancelled debt associated with the mortgage of a primary residence could be discharged without tax consequences. Tax extenders legislation provides relief for anyone who had a short sale of their home in the 2015 year.
• Deductibility of Mortgage Insurance Premiums As Qualified Residence Interest: For those who pay mortgage insurance, current law permits individuals to deduct the mortgage insurance as though it was interest on mortgage debt, as long as the mortgage was taken out after 2006 and was acquisition debt for the primary residence. This mortgage insurance premiums deduction began to phase out once Adjusted Gross Income exceeded $100,000 (and was fully phased out at $110,000). Tax extenders allow the mortgage insurance premiums deduction for qualifying mortgage insurance premiums through the end of 2016, with the same AGI phase-outs in place.
• Above-The-Line Education Deduction For Qualified Tuition And Fees: For those with children in college, an alternative to claiming the American Opportunity Tax Credit or the Lifetime Learning Credit is to claim the “above-the-line education deduction” instead. This rule permits the deduction of up to $4,000 of tuition and related fees for an eligible student. This $4,000 tuition-and-fees deduction is reduced to only $2,000 for married couples with AGI in excess of $130,000 (or individuals over $65,000), and is fully eliminated once AGI exceeds $160,000 for joint filers (or $80,000 for individuals).
• 50% Bonus Depreciation: Bonus depreciation provides a deduction equal to 50% of the adjusted basis of qualifying property in the first year it is placed in service. The percentage phases down to 40% for property placed in service in 2018 and to 30% for property placed in service in 2019. Bonus depreciation will end after 2019.
Other Notable Provisions:
• Improvements To Section 529 Accounts: Under new rules, qualified higher education expenses will now include computer equipment and related expenses (including computer software and even internet access), permitting distributions for such expenditures from a Section 529 plan to still qualify for tax-free treatment. Furthermore, in situations where a 529 plan distribution is used to pay college tuition that is subsequently refunded and thus not actually used for college (which would render the distribution ineligible for tax-free treatment after the fact!), the new rules will permit such amounts to be re-contributed (i.e., “roll over”) back to the 529 account within 60 days.
• The Work Opportunity Tax Credit: This credit gives retailers a tax incentive to hire the disabled, welfare recipients and other economically challenged individuals. It has been extended through 2019.