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PATH Act; What It Means For Your Taxes

January 26, 2016

Call me a cynic, but I find the government hype around the December 2015 PATH act amusing. The title itself makes me laugh, “Protecting Americans From Tax Hikes”.  If I were to name it I’d call it “Congress Doing Its Job”. Essentially our taxes are full of credits and deductions that are difficult for many to remember and even understand. Government uses the calculation of our taxes to promote lower income individuals to work (Earned Income Tax Credit), provide relief for people who support children (Child Tax Credit), help those seeking higher education (Tuition credits and deductions) and so on…and so on…and so on. Now I’m not saying these are bad things, but most of the legislation that passes related to these types of deductions and credits carry an expiration date, and often times our elected leaders tend to wait until the last minute to pass further legislation to extend the deadlines. It is often in December that Congress finally does something so I know how to prepare my clients tax returns before April! Ok, rant over, but what this means is that the PATH Act passed legislation that made some tax items permanent and extended others through 2016. Below are details of some of the more popular/used provisions. For a full listing and more details, click here.

On an extremely unimportant but amusing note, Section 335 of the PATH Act modifies the definition of hard cider (yes…I mean the alcoholic beverage).

A few provisions of the PATH Act, which may actually apply to you, include:

Enhanced/Additional Child Tax Credit – There is a currently a $1,000 child tax credit per qualifying child. Parents have been entitled to an additional refundable credit equal to 15% of earned income in excess of $3,000.  This $3,000 threshold was set to expire in 2017. This act permanently sets the threshold amount at an unindexed $3,000.

American Opportunity Tax Credit – This credit is for the cost of college tuition and qualified expenses incurred during the first four years towards a degree. The maximum credit amount of $2500 per year for each student was scheduled to be reduced at the end of 2017. However, the PATH Act assures that this maximum credit amount is permanent, based on eligibility.

Good news for teachers! The existing deduction of $250, available to K-12 teachers and educators who spend that amount or more on school supplies, has been permanently extended and indexed for inflation.  Eligible expenses now, also, include professional development costs.

State and Local Sales Tax Deduction – Taxpayers may, now, permanently continue to choose between state and local sales tax or income tax to be included in their itemized deductions.

In addition to permanently extending the tax laws listed above, the PATH Act of 2015 temporarily extended other tax provisions through December 2016, like the deduction for tuition expenses and some energy incentives.

The tuition deduction is helpful because it can reduce the amount of your taxable income by up to $4,000. Typically, costs paid towards college tuition are more beneficial to the taxpayer as a tuition credit than a tuition deduction. However, the deduction is a benefit when the criteria required for a credit cannot be met.

In addition to the tuition deduction, tax credits for making your home more energy efficient were also extended through 2016. An energy credit of 10% of the total cost, up to a maximum credit of $500, is available for expenses toward things like adding insulation to your home, installing energy-efficient exterior doors or windows, or installing a high-efficiency water heater.

For businesses, the PATH Act of 2015 includes setting the Section 179 deduction at a permanent maximum of $500,000. This deduction allows businesses, including sole proprietors, to expense the entire amount of an eligible asset purchased for the business, rather than depreciating it over time.

For more details on whether the PATH Act of 2015 will have an effect on your tax return, please contact us.