Protecting Americans from Tax Hikes Act

As you may know, on Friday, December 18, 2015, President Obama signed into law the Consolidated Appropriations Act of 2016, which contains the Protecting Americans from Tax Hikes (PATH) Act of 2015. This act makes permanent several key tax provisions that had previously expired or were set to expire within the next two years. Each of these provisions was made retroactive to the beginning of 2015.

Qualified Charitable Distributions

The Qualified Charitable Distributions (QCD) provision permits taxpayers who are at least age 70½ to make tax-free distributions directly from an IRA or a Roth IRA to a qualified charity.

The donation is limited to $100,000 per person (married taxpayers filing jointly may exclude up to $100,000 donated from each spouse’s own IRA) and partially or fully satisfies the taxpayer’s required minimum distribution for the current tax year.

A few additional notes:

The withdrawal is a tax-free distribution; thus, the amount excluded from gross income is not tax-deductible. The benefit is available to taxpayers who do not itemize deductions and, therefore, would not otherwise be able to take a deduction. For taxpayers who do itemize, the rollover will be excluded from the calculation of their adjusted gross income (AGI).
Donations from an inherited IRA are eligible if the beneficiary is at least age 70½.
Donations from a SEP-IRA or SIMPLE IRA are not eligible.
The charitable recipient must be a 501(c)(3) charity. Nonoperating private foundations, supporting organizations, and donor-advised funds do not qualify.

These provisions will apply retroactively to QCDs made from January 1, 2015, going forward.

State and local sales tax deduction

Under PATH, taxpayers are now permitted to deduct sales tax payments instead of state and local income taxes on their federal returns. This is particularly important for individuals living in states without an income tax, such as Florida, Texas, and Washington.

Qualifying child tax credit

PATH has permanently set the refundable portion of the $1,000 per qualifying child tax credit at 15 percent of earned income in excess of $3,000.

Earned Income Tax Credit

The increased Earned Income Tax Credit for families with three or more children has been made permanent, as has the reduction in the marriage penalty.

American Opportunity Tax Credit

The American Opportunity Tax Credit, which was slated to expire in 2017, has also been made permanent. This provision allows a credit of up to $2,500 to offset the cost of postsecondary education for some taxpayers.

529 account distributions

PATH expands the definition of qualified higher education expenses (QHEE) to include computer equipment and technology, as well as related software, Internet access, and services for beneficiaries during enrollment years. In addition, refunds of tuition paid with 529 distributions are considered QHEE and can be rolled back into a 529 account within 60 days of the refund. This provision is effective for distributions or refunds made in 2015. Also, for refunds made in 2014, the provision will be effective for refunds recontributed to a 529 within 60 days of enactment.

Rollovers to SIMPLE IRAs

Taxpayers will now be permitted to roll assets from traditional and SEP-IRAs, as well as from employer-sponsored retirement plans such as a 401(k), into a SIMPLE IRA, provided that the plan has existed for at least two years. Rollovers from Roth IRAs will not be permitted. This provision will be effective for rollover contributions made after enactment.

We are continuing to monitor these changes closely and are ready to discuss your tax planning strategy with you in light of this legislation. If you have any questions or concerns about the information shared here, please feel free to call our office at 651-774-8759