All You Need to Know about the New Tax Extender Legislation

Article Highlights:

• Individual Provisions
• Business Provisions
• Energy Provisions

Congress has reached a bipartisan agreement on tax extenders, aptly named “Protecting Americans from Tax Hikes Act of 2015”. Much to everyone’s surprise, some were made permanent while others were only extended for a period of time. Congress also modified several provisions and added new ones to reduce tax fraud. Here is a look at some of the key provisions included in the legislation that pertain to individuals, small businesses, and certain energy-related provisions:

INDIVIDUAL PROVISIONS:

• Child Credit – This credit was made permanent; it provides a $1,000 credit for each dependent child who is under the age of 17 at year’s end, who lived with the taxpayer for over half of the year and who meets the relationship test. The credit phases out for higher-income taxpayers, and a portion of the credit is refundable for lower-income taxpayers. The changes also include program integrity provisions that prohibit an individual from retroactively claiming the child credit by amending a return (or filing an original return if he or she failed to file) for any prior year in which the individual for whom the credit is claimed did not have an ITIN – generally a Social Security number).

After 2015, when a taxpayer improperly claims the credit, the legislation includes a disallowance period when no credit is allowed. For fraud, the disallowance period is 10 years, and for reckless or intentional disregard of rules and regulations, the disallowance period is 2 years.

• American Opportunity Credit (AOTC) – This credit, which was due to expire after 2017, has been made permanent. This is a tax credit equal to 40% of the cost of tuition and qualifying expenses for higher education, with a maximum credit of $2,500. The credit applies to 100% of the first $2,000 and 25% of the next $2,000 of qualifying expenses. The credit offsets any tax liability, and 40% of the credit is refundable even if the taxpayer does not have any tax liability. It also phases out between $160,000 and $180,000 for married taxpayers filing jointly and between $80,000 and $90,000 for others – except for married taxpayers filing separately, who get no credit.

After 2015, when a taxpayer improperly claims the credit, the legislation includes a disallowance period when no credit is allowed. For fraud, the disallowance period is 10 years, and for reckless or intentional disregard of rules and regulations, the disallowance period is 2 years.

A provision was added that prohibits an individual from retroactively claiming the AOTC by amending a return or filing a late original return for any prior year when the individual or a student for whom the credit is claimed did not have an ITIN (generally a Social Security number).

• Earned Income Tax Credit (EITC) – The EITC is a refundable credit allowed to certain low-income workers who have W-2 wages and self-employed income. The credit is larger for taxpayers with children. The credit for taxpayers with children is based upon the number of children; those with three or more children receive the highest credit – as much as $6,269 in 2015. The higher credit for three or more children, which was a temporary provision that was set to expire after 2017, has been made permanent.

The changes also include added program integrity provisions that prohibit an individual from retroactively claiming the AOTC by amending a return (or filing an original return if the individual failed to file) for any prior year in which the individual for whom the credit is claimed did not have an ITIN (generally a Social Security number). The changes also reduced the marriage penalty by increasing the income phase-out for those filing jointly.

• Teachers’ $250 Above-the-Line Deduction – This provision, which was available from 2002 through 2014, allows teachers and other eligible educators (levels kindergarten through grade 12) to take an above-the-line deduction of up to $250 for unreimbursed expenses incurred as part of their educational work. This deduction has been made permanent and modified by adjusting the $250 for inflation in years after 2015. In addition, professional development expenses were added to the qualified expenses allowed as part of the $250 deduction.
• Transit Pass & Parking Fringe Benefit Parity – From 2010 through 2014, the monthly exclusion amount for employer-paid transit passes and qualified parking were temporarily the same. The parity of these two fringe benefits has been made permanent. Thus, for 2015 they will both be $250.
• Optional Deduction of State and Local General Sales Taxes – Since 2004, taxpayers who itemized their deductions have had the option to deduct the Larger of (1) state and local income tax paid during the year, or (2) state and local sales tax paid during the year. This provision, which had been previously extended through 2014, provides the greatest benefit to those taxpayers who reside in a state that has no income tax (which include Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming). This election has been made permanent.
• Above-the-Line Deduction for Qualified Tuition and Related Expenses – This above-the-line deduction for qualified higher education tuition and related expenses had been available from 2002 through 2014. The deduction includes adjusted gross income (AGI) limitations; it is not allowed for joint filers with an AGI of $160,000 or more ($85,000 for other filing statuses). This deduction has been retroactively extended through 2016.
• Tax-Free IRA Distributions For Charitable Purposes – This provision was temporarily added in 2004 and originally expired in 2011; it was not extended until late in the year during the years 2012, 2013 and 2014, thus limiting its application in those three years. The provision allows taxpayers age 70.5 and over to directly transfer (not rolled over) funds from their IRA accounts to a qualified charity. The distribution is not taxable, but it does count toward the individuals’ required minimum distribution (RMD) for the year. The maximum allowable transfer is $100,000 per year. No charitable deduction is allowed, as the distribution is not taxable. This provision has been made permanent; it provides four potential tax advantages:

1. The distribution is not included in income, thus lowering the taxpayer’s AGI, which in turn helps to avoid various AGI phase-outs and limitations.
2. Keeping the AGI lower also helps to minimize the amount of Social Security income that is subject to tax for some taxpayers.
3. Taxpayers using the standard deduction cannot get a charitable deduction, but they are essentially deducting the charitable deduction from their gross income when making contributions this way.
4. The transferred distribution counts towards the taxpayer’s RMD for the year.

• Discharge of Qualified Principal Residence Indebtedness – When an individual loses his or her home to foreclosure, abandonment or short sale or has a portion of his or her loan forgiven under the HAMP mortgage reduction plan, that person generally will end up with cancellation of debt (COD) income. COD income is taxable unless the taxpayer can exclude it. A taxpayer can exclude the COD income in the extent that he or she is insolvent (with debts exceeding assets immediately before the event occurs) using the insolvency exclusion.

Due to the housing market crash, in 2007, Congress added the qualified principal residence COD exclusion, which allowed taxpayers to exclude COD income to the extent that it was discharged acquisition debt. Acquisition debt is debt originally incurred to acquire a home or substantially improve it – not debt used for other purposes, which is called equity debt. However, equity debt is deemed to be discharged first, thus limiting the exclusion when both equity and acquisition debt are involved in the transaction.

The qualified principal residence COD exclusion had been previously extended but had expired at the end of 2014. This exclusion has been retroactively extended through 2016 (a two-year extension).

• Mortgage Insurance Premiums – For tax years 2007 through 2014, taxpayers could deduct (as an itemized deduction) the cost of premiums for qualified mortgage insurance on a qualified personal residence (first or second home). To be deductible, the premiums must have been related to acquisition debt incurred after Dec. 31, 2006. However, this deduction phases out for higher-income taxpayers (generally those whose AGI exceeds $100,000). This provision, which had expired after 2014, has been retroactively extended through 2016, a two-year extension.

ENERGY PROVISIONS:

• Residential Energy (Efficient) Property Credit – From 2006 through 2014, a nonrefundable credit had been available for qualified improvements to make the taxpayer’s existing primary home more energy efficient. Qualified improvements generally included insulation, storm windows and doors certain types of energy-efficient roofing materials, and energy-efficient air conditioning and hot-water systems. The credit was equal to 10% of the improvement’s cost (not including installation), with a lifetime credit of $500. The credit has been retroactively extended through 2016 (two years).
• Credit for Fuel-Cell Vehicles – Through 2014, a taxpayer could claim a credit for vehicles fueled by chemically combining oxygen with hydrogen to create electricity. Generally, the credit was $4,000 for vehicles weighing 8,500 pounds or less (and up to $40,000 for heavier vehicles, depending on their weight). An additional $1,000 to $4,000 credit was available for cars and light trucks to the extent that their fuel economy exceeded the 2002 base fuel economy set forth in the Internal Revenue Code. This credit has been retroactively extended for two years through 2016.

If you have questions related to these or other, less commonly encountered provisions of the new law (Protecting Americans from Tax Hikes Act of 2015), please give this office a call. Benefiting from these provisions for 2015 will require taking action before year’s end. Please call if you need assistance