How the PATH Act May Impact Your 2016 Tax Planning

As April quickly approaches, many Americans have reluctantly turned their attention to filing their annual income taxes.  Hopefully, this task does not include any unpleasant surprises as to the amount of your tax bill or refund, but if so, it would be advisable to figure out why that was the case and do some tax planning for 2016.  Obviously, the amount of tax withholdings from your paycheck or other income has a big impact on the bill at tax time, but tax credits, deductions, and other tax planning strategies might also affect that number.  In December 2015, Congress passed the Protecting Americans from Tax Hikes (PATH) Act, which included a number of provisions regarding this second category, so, to assist with 2016 tax planning, here is a brief overview of the provisions most likely to impact our clients.

The PATH Act converted several temporary tax credits and deductions into permanent fixtures in the federal tax code.  These include:

• American Opportunity tax credit: up to $2,500 credit for secondary education expenses
• Itemized deduction for sales tax or use tax: used instead of deducting state or local income tax, especially beneficial for individuals in states with no income tax
• Exclusion of employer-provided mass transit and parking benefits from gross income: up to $255 per month, now indexed for inflation
• Deduction for classroom expenses: up to $250 deduction for elementary and secondary school teachers, now indexed for inflation and expanded to include professional development expenses

In addition, the PATH Act made permanent the ability of those over age 70 ½ to make tax-free charitable distributions from your IRAs (up to $100k annually), which also count toward your current-year required minimum distribution (RMD).  Such charitable contributions can be a tax efficient way to give–by avoiding income tax in the current year on the funds withdrawn and, if the gift exceeds your current-year RMD, by reducing the amount of RMDs in future years. 

The PATH Act also included an expansion of tax benefits for 529 accounts.  It expanded the definition of qualified higher education expenses to include computer equipment and related expenses, regardless of whether they are required by the school for enrollment, and for 529 ABLE accounts, it removed the residency requirement for establishing an account.  Accounts may now be set up in any state, not just the beneficiary’s state of residence.

In addition to these permanent changes to the tax code, the PATH Act delayed by two years the Cadillac tax on overly generous employer health plans and the medical device excise tax that were scheduled to come into force this year.  It also extended the $4,000 above-the-line deduction for qualified higher education tuition and fees through 2016.  The act contained numerous other provisions, including changes to Child Tax Credit and Earned Income Tax Credit that will likely benefit low income families and changes to the depreciation of capital investments that will benefit small businesses. 

If you have questions about tax planning or strategizing for the upcoming year, please feel free to contact us.  The tax code can be a very confusing maze to try to wander through, but we are happy to help you find your way to the other side.