In December of 2015, Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015. This small document, numbered 233 pages in length, includes the following:
- Over 100 Separate Provisions
- $622 Billion Tax Breaks
- Permanent Research Tax Credit
- Permanent Section 179 Depreciation Deduction
- Five-Year Extension Of Bonus Depreciation
- Delay Of Excise Tax On “Cadillac” Plans
- Moratorium On Medical Device Excise Tax
So what does this document have to do with you? Well, with the passing of PATH, there’s one provision that will affect many taxpayers in a very painful way. According to this new law, the IRS cannot issue some refunds before February 15 to any taxpayer claiming the Child Tax or Earned Income Tax Credit (EITC). The rationale is that these credits are responsible for much of the tax fraud each year. The IRS is expected to suffer from $21 billion in tax fraud in 2016. That’s up from $6.5 billion in 2014.
How does this bill cause issues? For starters, the majority of the recipients of the Earned Income Tax Credit are low income and at or near the poverty level. Their IRS tax refunds are often used to provide many of the basic necessities needed by their families, therefore a refund delay will be a major inconvenience. According to an article in the Wall Street Journal, the IRS processed 29.2 million refunds by Feb 12th of 2016. This totaled $94 billion dollars.
This additional time also puts an even larger gap between the holidays, where people have been found to over extend themselves to the point they get their tax refunds and are able to become financially above water. This also means that about $94 billion dollars will be delayed back in circulation.
However, the IRS has reiterated that they don’t foresee any issues with most people still receiving their tax refunds within 21 days of it being accepted. Below is a brief outline of the PATH Act and some important provisions it entails.
Protecting Americans from Tax Hikes Act of 2015 (H.R. 2029)
The Protecting Americans from Tax Hikes Act of 2015 contains a number of extensions, some are shorter term and some are permanent. Following are the most significant extensions.
- The state and local sales tax deduction.
- Child Tax Credit
- Instead of increasing the threshold for the additional child tax credit to $10,000, The Act keeps the threshold at $3,000 permanently.
- Taxpayers are no longer allowed to claim the child tax credit for years in which a taxpayer identification number was not obtained by the due date of the tax return.
- Earned Income Credit
- EIC “marriage penalty” relief and credit increase for those with three or more children.
- Taxpayers are no longer allowed to claim EIC for years in which a social security number was not obtained by the due date of the tax return.
- The American Opportunity Tax Credit (AOTC)
- No longer allowed to claim the AOTC for years in which a taxpayer identification number was not obtained by the due date of the tax return.
- Claims for the AOTC require an EIN from the institution.
- Institutions are now required to report the amount paid for education expenses for years beginning after 2015.
- The $250 deduction for educator expenses
- Amount now adjusts for inflation.
- Includes “professional development expenses” within the scope of the deduction.
- Qualified charitable distribution (QCD) from an IRA of up to $100,000 per year.
- The 100% §1202 exclusion on qualified small business stock held for more than 5 years.
- Section 529 plans now allow expenditures for computers, peripheral equipment and software, provided they are to be used primarily by the beneficiary during years of academic study.
Note: The $500 penalty for failure to comply with EIC due diligence is now expanded to include the Child Tax Credit and American Opportunity Tax Credit.
- Cancellation of debt income exclusion on qualified principal residences (up to 2 million MFJ / up to 1 million MFS).
- Mortgage insurance premiums paid or accrued allowed as a deduction.
- The tuition and fees deduction.
- The credit for nonbusiness energy placed in service, such as windows, doors, etc.
- The residential energy efficiency credit (REEP) under §25D was modified to extend the credit solar electric or solar water property through 2021. The credit percentage is reduced each year after 2019.
Note: This provision was not in the PATH Act, but in the different part of H.R. 2029.
- The Act extends the 10% credit for purchases of electric powered 2-wheeled vehicles, such as electric motorcycles.
- The Act did not extend the credit for 3-wheeled vehicles.
- Extends parity among transit passes, van pool benefits, and qualified parking.
- 179 limit remains at $500,000.
- 2 million overall investment limit
- Expensing “off-the-shelf” software is made permanent.
- Restriction on heating and air conditioning units has been eliminated.
- The 15-year life is made permanent for the following qualifying properties:
- Qualified leasehold improvements.
- Qualified restaurant buildings.
- Qualified retail improvements.
- The 5-year recognition period for built-in-gains of an S corporation that was previously a C-corporation.
- The Credit for Increasing Research Activities (the research credit).
- Eligible small businesses can claim the credit against AMT.
- Eligible small startup companies may offset their FICA tax liability with the research credit.
- Employer wage credit for employees who are active duty members of uniformed services.
- The ability to limit the reduction in basis for charitable contributions made by an S-corporation to the property’s adjusted basis.
- Charitable deductions for contribution of food inventory.
- The due date for W-2s and W-3s and returns reporting nonemployee compensation have changed.
- The new due date is January 31 for tax years beginning after the enactment of The Act. For most taxpayers, this is tax year 2016.
- Any information returned now has a de minimis safe harbor for errors. If an information return has an error of $100 or less ($25 or less for withholding), no correction is required.
- The clarification of a race horse as three year property.
- Qualified film expensing.
- The Act contains a provision to include live theatrical performances.
- The alternative fuel vehicle refueling property credit.
- Extends bonus depreciation (additional first year deprecation) for property placed in service
- at 50% for 2015 through 2017
- at 40% for 2018
- at 30% for 2019
- Extends the first year depreciation for passenger automobiles subject to §280F limitations. The Act allows for the additional $8,000 of bonus depreciation through 2017, then $6,400 for 2018 and $4,800 for 2019.
- Work Opportunity Tax Credit.
- Includes a provision to allow a credit for qualified long-term unemployed individuals.
Taxes changes can cause even more confusion in a complicated system. If you need assistance, contact your professional tax preparer. For additional tax tips, bBe sure to follow us on Facebook and Twitter for important tax tips all year long.