The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act)

Attorney Alyssa Graham

February 2016

2016 has started with more certainty in relation to several tax provisions than we have had in recent years. On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) was signed into law by President Obama. The PATH Act extends or makes permanent over 50 separate temporary tax provisions for both individuals and businesses that were set to expire or had already expired. For many years, these provisions have only received short term extensions, often late in the year, making tax planning with these in mind more difficult.

For individuals, among the permanent extensions are several charitable provisions. First, is the ability for people, 70 ½ and older, to make tax-free direct payouts from IRAs to public charities of up to $100,000. This charitable rollover may fulfill part or all of a person's required minimum distribution for the year. With the permanency of this tax provision, individuals can plan to make charitable gifts from their IRA with more certainty as to the tax consequences.

Second, for those looking to make a gift of property for conservation purposes increased deduction limits have been made permanent. When an individual donates to a charitable organization, there are limits on the amount of charitable deduction the individual may take in a year, which are based on the individual's adjusted gross income (AGI). The income tax deduction limit for a gift of real property is typically limited to 30% of an individual's AGI. Any excess amount can be carried forward and used in the next five years, after that, the remaining deduction is lost. There are now permanent special rules for gifts of real property made to a qualified charitable organization exclusively for approved conservation purposes. If the gift meets the requirements, the normal 30% of AGI limit is increased to 50% of AGI and the carry forward limit is extended from five years to 15 years.

One non-charitable tax credit made permanent is the American Opportunity Tax Credit. This American Opportunity Tax Credit is an increased credit that had temporarily replaced the more limited Hope Scholarship Credit in 2009 and was scheduled to lapse back at the end of 2017. The American Opportunity Tax Credit allows for a $2,500 per year credit for up to four years of post-secondary education. The credit phases out for married couples with AGI of $160,000 and for individuals with AGI of $80,000. (The Hope Scholarship Credit was limited to $1,800 a year and phased out for married couples with AGI of $96,000 and for individuals at $48,000.)

Another non-charitable tax provisions made permanent is the write-off for elementary and secondary school teachers of up to $250 of teacher classroom supplies, which was scheduled to lapse in 2015. Not only was this above-the line deduction made permanent it is also now indexed for inflation (to the nearest $50) and teachers are allowed to count professional development costs in determining the write off.

The option for those who itemize their deductions to deduct state sales taxes in lieu of income taxes was made permanent, though in New Hampshire, as we have no sales tax, this is of limited importance.

The PATH Act also addressed 529 college savings plans, easing two provisions. First, tax-free payouts for computer purchases are now allowed. Second is the waiving of taxes and penalties if, after a 529 payout is made, a student withdraws from school because of an illness or another reason and receives a refund from the school.

2016 has started with more certainty in relation to several tax provisions than we have had in recent years. On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) was signed into law by President Obama. The PATH Act extends or makes permanent over 50 separate temporary tax provisions for both individuals and businesses that were set to expire or had already expired. For many years, these provisions have only received short term extensions, often late in the year, making tax planning with these in mind more difficult.

For individuals, among the permanent extensions are several charitable provisions. First, is the ability for people, 70 ½ and older, to make tax-free direct payouts from IRAs to public charities of up to $100,000. This charitable rollover may fulfill part or all of a person's required minimum distribution for the year. With the permanency of this tax provision, individuals can plan to make charitable gifts from their IRA with more certainty as to the tax consequences.

Second, for those looking to make a gift of property for conservation purposes increased deduction limits have been made permanent. When an individual donates to a charitable organization, there are limits on the amount of charitable deduction the individual may take in a year, which are based on the individual's adjusted gross income (AGI). The income tax deduction limit for a gift of real property is typically limited to 30% of an individual's AGI. Any excess amount can be carried forward and used in the next five years, after that, the remaining deduction is lost. There are now permanent special rules for gifts of real property made to a qualified charitable organization exclusively for approved conservation purposes. If the gift meets the requirements, the normal 30% of AGI limit is increased to 50% of AGI and the carry forward limit is extended from five years to 15 years.

One non-charitable tax credit made permanent is the American Opportunity Tax Credit. This American Opportunity Tax Credit is an increased credit that had temporarily replaced the more limited Hope Scholarship Credit in 2009 and was scheduled to lapse back at the end of 2017. The American Opportunity Tax Credit allows for a $2,500 per year credit for up to four years of post-secondary education. The credit phases out for married couples with AGI of $160,000 and for individuals with AGI of $80,000. (The Hope Scholarship Credit was limited to $1,800 a year and phased out for married couples with AGI of $96,000 and for individuals at $48,000.)

Another non-charitable tax provisions made permanent is the write-off for elementary and secondary school teachers of up to $250 of teacher classroom supplies, which was scheduled to lapse in 2015. Not only was this above-the line deduction made permanent it is also now indexed for inflation (to the nearest $50) and teachers are allowed to count professional development costs in determining the write off.

The option for those who itemize their deductions to deduct state sales taxes in lieu of income taxes was made permanent, though in New Hampshire, as we have no sales tax, this is of limited importance.

The PATH Act also addressed 529 college savings plans, easing two provisions. First, tax-free payouts for computer purchases are now allowed. Second is the waiving of taxes and penalties if, after a 529 payout is made, a student withdraws from school because of an illness or another reason and receives a refund from the school.