As 2015 came to an end, many individuals, businesses and tax advisers were kept in suspense as they waited to see what tax deductions would be available for them. Over the past several years, tax planning has been tricky without the IRS announcing what the tax laws are until the last few days of the year, making them retroactive to the beginning of the year.
Fortunately, as of Dec. 18, 2015, the tax extender bill was signed into law by the President Obama. It is known as the Protecting Americans From Tax Hikes Act of 2015 (PATH Act).
With the law, some tax provisions are now permanent, while others have multi-year extensions until 2019. A summary of the most commonly known provisions follows.
Individual tax extender provisions that are now permanent:
- The child tax credit: This credit is up to $1,000 per qualifying child under age 17. This amount will phase out when taxpayers’ income exceeds certain thresholds.
- The American Opportunity credit: This allows a tax credit up to $2,500 for $4,000 or more of education expenses, part of which is refundable.
- The deduction for state and local sales taxes in lieu of state and local income taxes. This deduction is of greatest interest to Washington residents as a way to deduct our state tax. Pay special attention to sales tax paid on home remodels and vehicle purchases.
Individual tax extender provisions that were temporarily extended through 2016 (unless otherwise noted):
- The exclusion from gross income of discharges of principal residence indebtedness.
- Mortgage insurance premiums deduction.
- The non-business energy property credit: This credit is a lifetime maximum credit of $500 for installation of energy efficient items in your home, such as windows, circulating fans, water boilers and certain building property.
- Tax-free distribution from individual retirement plans for charitable purposes: Qualified charitable distributions allow individuals older than 70 1/2 to transfer up to $100,000 per year to a qualified charity tax-free.
- The deduction for qualified tuition expenses: For those not claiming a credit for education expenses and who fall within certain income guidelines, a deduction can be taken for tuition paid to higher education institutions.
- Solar energy credits: The credit for qualified solar expenditures has been extended at 30 percent through 2019 and then on a reduced scale through 2021.
Business tax extender provisions that are permanent:
- The research and development credit: A credit taken by many businesses for research and development costs incurred.
- The Section 179 limit of $500,000 for expensing equipment purchases: Section 179 allows businesses to deduct the cost of equipment up to $500,000, an amount that will be indexed for inflation in the future.
Business tax provisions that were extended:
50 percent “bonus” depreciation for qualified property through 2019: This provision allows businesses to expense up to 50 percent of new equipment and other qualified purchases in the first year, without limitation.
There are several other provisions in the new law, but these are a sample of those appealing to the largest number of taxpayers. See the table, at left, showing the expected cost of revenue over 10 years related to these tax extenders:
This tax act didn’t include any extraordinary provisions, but it will make tax planning easier for the next couple of filing seasons due to the permanent and multi-year extended provisions.
The complexity and ever changing nature of today’s tax laws is why working directly with your CPA is a smart financial move.
Cost of selected extenders over 10 years
Research Tax Credit (now permanent) $113.24 billion
State And Local Sales Tax Deduction (now permanent) $42.44 billion
Section 179 Expensing (now permanent) $77.01 billion
Refundable Child Credit (now permanent) $87.8 billion
Bonus Depreciation (5 year extension) $28.2 billion
Mortgage Debt Forgiveness (2 year extension) $5.14 billion
Tuition And Fees Deduction (2 year extension) $608 million
Aaron Dawson is a shareholder with Vancouver and Longview based CPA firm Opsahl Dawson. He can be reached at 360.737.8007.