Selected Individual Tax Provisions of the “Protecting Americans from Tax Hikes Act of 2015”

On December 16^th, the Senate Finance Committee and the House Ways and Means Committee agreed on tax legislation extending many tax provisions that had expired at the end of 2014, making some of the provisions permanent.  There does not appear to be any spending cuts associated with the $680 billion in tax cuts, so the federal deficit continues to grow!  Making some provisions permanent brings more certainty to the tax code and will help individuals with their financial and tax planning.

Selected expired provisions retroactively reinstated for 2015 and made permanent include:

1.      Tax-free distributions (not to exceed $100,000) made directly to public charities (but not a donor advised fund) from individual retirement accounts (IRA) by individuals at least age 70 ½.  The charitable IRA distribution is not included in gross income and the donation is not deducted as an itemized charitable deduction.  Tax savings come from having a lower adjusted gross income (AGI).  AGI is used frequently to increase tax expense, and having a lower AGI can lower tax.  Another important benefit is that qualified charitable distributions count in satisfying the required minimum distribution for the year.

2.      The enhanced American opportunity tax credit originally scheduled to expire at the end of 2017 is now made permanent.  An annual credit of up to $2,500 is permitted for the cost of four years of post-secondary education.  It is phased out as AGI exceeds certain indexed thresholds.

3.      The itemized deduction of State and local general sales tax is permanently reinstated.  Taxpayers can deduct the greater of sales or income taxes.  Without this provision, residents of the seven states without income tax would have no deduction.  The provision can also benefit those with low state income tax.

4.      Although not an “extender,” several improvements are made to Section 529 educational savings plans beginning in 2015.  First, qualified expenses now include computers and peripheral equipment, software, and internet access.  Second, multiple 529 plans for the same beneficiary no longer need to be aggregated to determine the taxable portion of non-qualified distributions.  Third, where a distribution was used to pay qualified higher education expenses and any amount is refunded from the educational institution (thus rendering that portion of the distribution nonqualified), the refund can be rolled back in to the 529 plan account within 60 days of receipt to avoid tax and penalty.

5.      Other permanent extensions include the enhanced child tax credit, the enhanced earned income credit, and the “above-the-line” deduction for certain expenses of elementary and secondary school teachers. 

Selected expired provisions retroactively reinstated for 2015 and extended (but not made permanent) include:

1.      The deduction of home private mortgage insurance (PMI) premiums as qualified residence interest expense is reinstated through 2016.  This deduction is ratably phased out as AGI exceeds certain thresholds.  PMI is required of home buyers having less than a 20% down payment.

2.      The “above-the-line” deduction of up to $4,000 of qualified tuition and related expenses for higher education is reinstated through 2016.  The amount of the deduction is reduced as AGI exceeds certain thresholds.  Most often the American opportunity credit will be claimed on these expenses, but there are occasions when this deduction is better.