Congress closed out 2015 by passing the Protecting Americans from Tax Hikes (PATH) Act of 2015. The law addressed the 56 or so tax breaks that expired or expiring. Unlike past years, Congress didn’t simply extend them for a year or two. Instead, some were made permanent and others were extended for more than a year. Those that expired at the end of 2014 were reinstated retroactively so that they apply for 2015.
Most of the tax breaks apply to larger businesses and specialized industries, but there are some that are important to individuals and small business.
Of most importance to retirees is that the exclusion for charitable contributions from IRAs by those ages 70½ and older is made permanent. It is reinstated retroactively for 2015, so anyone who took a chance that Congress would reinstate the tax break by making an IRA charitable contribution during 2015 will receive the tax benefits.
Going forward, we can include the IRA charitable contribution exclusion in our tax planning, because the provision no longer expires. If you’re charitably inclined and over age 70½, there’s no reason not to make gifts using the IRA instead of writing checks.
Normally when a charitable contribution is made directly from an IRA, it is treated as a distribution to the owner followed by a contribution to the charity. The owner must include the distribution in gross income. This income might be fully or partially offset by a deduction for the charitable contribution, if the IRA owner itemizes expenses on Schedule A of Form 1040.
Under the IRA exclusion, the IRA owner can direct that money or property be transferred directly from the IRA to a charity. Then, the amount is not included in the owner’s gross income. The owner also is not entitled to a deduction for the contribution.
An important advantage for many IRA owners is that the charitable contribution can satisfy all or part of the required minimum distribution requirements for the year. The contributions can exceed your RMD. A taxpayer can use the exclusion for no more than $100,000 of contribution in one tax year. IRA contributions above that amount are treated the traditional way.
Remember that the contribution has to be made directly from the IRA to the charity. If the owner takes a distribution and contributes money to a charity, the exclusion doesn’t apply. Also, contributions to donor-advised funds, private foundations, and supporting organizations aren’t eligible for the exclusion.
Another provision made permanent is the option to deduct state and local general sales taxes instead of income taxes. This is a benefit to residents of states without income taxes, such as Florida, Texas, and Arizona. Now, this provision doesn’t expire. Remember, you can deduct either sales taxes or state and local income taxes, not both. When you choose to deduct sales taxes, you can deduct either the actual amount you paid or an estimate taken from a table the IRS provides in the tax form instructions.
Also made permanent is the deduction from gross income of some expenses of primary and secondary school teachers. The $250 annual limit now is indexed for inflation, and professional development expenses are added to the eligible expenses.
Mortgage insurance premiums can continue to be deductible as qualified residence interest through 2016. The deduction is phased out when adjusted gross income exceeds $100,000.
For those of you still employed, the exclusions from gross income of employer-paid parking and mass transit benefits will be the same permanently. Until a few years ago, the maximum monthly parking exclusion exceeded the mass transit exclusion.
The rules for section 529 college savings accounts were modified. Expenses for computer equipment and technology are included in the list of expenses that qualify for tax-free distributions.
A new provision in the law now permits a tax-free rollover from any employer-sponsored retirement plan into a SIMPLE IRA, provided the SIMPLE IRA existed for at least two years before the rollover contribution. This benefits employees who move to a smaller business or who set up their own businesses.
For small business owners, the election to expense up to $500,000 of new business assets is made permanent. The amount that can be expensed is reduced as the value of assets put in service during the year exceeds $2 million. The limits will be indexed for inflation beginning in 2016. Also, the 50% bonus depreciation for new assets is extended through 2017. The bonus depreciation declines to 40% in 2018 and to 30% in 2019. It is scheduled to expire after 2019.
Many energy tax credits were extended. These include the 10% credit for purchases of nonbusiness energy efficient property (such as home appliances and some improvements), with the maximum credit set at $500. The credit for purchases of battery-powered (fuel cell) vehicles also was extended. The many business energy credits also were extended.
Dozens of other benefits also were made permanent or extended in the law. I’ve discussed the ones that most interest my readers.