Protecting Americans from Tax Hikes Act of 2015 (PATH)
Twas the Week before Christmas and all through the House…
…. Every Representative was discussing PATH provisions, unlike a quiet mouse. There is perennial holiday ritual in Washington that “extends” a variety of tax breaks creating end of year uncertainty for all of us. On December 18th, the Protecting Americans from Tax Hikes Act of 2015 (PATH) was passed into law making many tax breaks permanent and continues the extension of others.
Highlights that affect many of us here in the valley include:
For those with charitable intentions, the act permanently extends the tax-free distribution from individual retirement plans for charitable purposes. This is a huge planning tool. As you look at how to give of your financial resources, there are many tax-efficient and creative ways to do so. Putting this piece into place permanently will provide givers who are over 70 ½ a powerful option. You can give up to $100,000 to the charitable organization of your choice out of your IRA. This can include your Required Minimum Distribution. This gives you lower taxable income instead of taking an itemized tax deduction on your schedule A. Given the current environment of the Pease limitations on itemized deductions, most tax payers will be better off. As a legacy planning tool, you don’t want to leave IRA money for your heirs – it will be taxed as ordinary income to them as distributed, and possibly exposed to estate taxes. So, make your charitable contributions out of your IRA, leaving other appreciated assets in place to be passed on with a step up in cost basis.
For small business owners, one highlight of the act is making the Section 179 deduction permanent. I like to be pro-active and plan instead of react but many small business owners don’t know until each December whether or not their business purchases would be deductible. We have a friend in the auto business that said they had their best day of the year on December 31st selling commercial vehicles! Now, Section 179 is permanent at the $500,000 level. Businesses exceeding a total of $2 million in purchases in qualifying equipment will have the deduction phase-out dollar for dollar and completely eliminated above $2.5 million. This will make capital improvements and business planning more strategic throughout the year.
The American Opportunity Tax Credit, which replaces the Hope Credit was made permanent. The credit starts phasing out at $80,000 for single filers and $160,000 for married couples. This will provide education related tax relief to many middle-income families. It also made permanent the $1,000 Child Tax Credit. Like the dependent exemption, it is now a structural component of the tax code that recognizes the high cost of raising children.
For our teachers (my husband being one of them), The Educator Expense Deduction has been made permanent. I know what teachers can spend on their classrooms and while $250.00 isn’t much of a deduction, every little bit counts!
There are many layers to this bill and as always, advantages to special interest groups got included. I am intrigued to find out how the provision to “Modify the definition of hard cider” will affect my taxes.
According to the Ways and Means Committee, this bipartisan law has been designed as a pro-growth bill. The intention is to deliver certainty, clarity and predictability to the American taxpayers by making several tax provisions that needed to be renewed each December permanent. The provisions in the bill will prevent significant, immediate tax increases. The legislation is designed to strengthen the integrity of the tax credit programs, minimizing fraud and abuse as well as reining in the IRS and protecting taxpayers. The hope is that it will help grow our economy by providing tax relief to America’s job creators, and serve as a bridge to create comprehensive tax reform. We will see how it all plays out over the long-term. You now have new opportunities to discuss with your Financial Advisor and your accountant strategies that will serve you, your business and your family in increasing your financial satisfaction and creating a healthy financial life.
Danielle Howard is a CERTIFIED FINANCIAL PLANNER ™ practitioner. Wealth By Design, LLC, her financial life planning office is located in Basalt where they take a personal interest in your financial well-being. Visit her at www.wealthbydesign4u.com. Advisory Services offered through Cambridge Investment Research Advisors, Inc., A Registered Investment Advisor. Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Cambridge and WBD are not affiliated.
