Taxpayers are receiving a bundle of early Christmas gifts as Congress has avoided a shutdown by passing a major $680 billion tax bill that will extend and also make permanent several tax breaks. The following are the major tax provisions that have been made permanent, providing taxpayers with relief and a great level of certainty now and in the future:
Research and Development Credit (R&D)
- The new tax bill permanently extends this credit and also adds one important modification. Beginning in 2016, small businesses with less than $50 million in sales may claim the credit against alternative minimum tax liability (AMT), meaning that taxpayers will no longer be restricted from claiming the R&D credit due to an AMT limitation.
Section 179 Depreciation
- The new tax bill permanently extends Section 179 expensing of the cost of new and used qualified property in the current tax year.
- The maximum deduction allowed for 2015 remains at $500,000. Businesses with asset purchases exceeding $2 million will have a dollar-for-dollar phase out of the $500,000, completely eliminating the deduction if purchases are above $2.5 million.
- Beginning in 2016, the maximum deduction and phase out amounts will be indexed for inflation.
- An additional modification in 2016 includes the treating of air conditioning and heating units as eligible for expensing.
Built-in Gains Tax Period for S-Corporations
- The new tax bill permanently sets the period of 5 years for which an S-Corporation must hold its assets following conversion from a C Corporation to avoid the tax on built-in gains.
Child Tax Credit (CTC)
- The CTC is a $1,000 credit that can be claimed for each qualifying child of the taxpayer.
- This credit remains subject to adjusted gross income (AGI) limitations. The phase out begins when AGI exceeds $75,000 for single taxpayers and $110,000 for married filing jointly.
- If the CTC exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit, known as the additional child tax credit. The new tax bill permanently allows this refundable credit if earned income exceeds the permanent threshold of $3,000.
American Opportunity Credit (AOTC)
- The AOTC is a $2,500 credit that be claimed each year for four years of post-secondary education.
- The credit remains subject to adjusted gross income (AGI) limitations. The phase out begins when AGI exceeds $80,000 for single taxpayers and $160,000 for married filing jointly. The credit is disallowed for married filing separate taxpayers.
- A new provision disallows taxpayers from claiming the credit for 10 years if they fraudulently claim the credit.
(Just a reminder that the AOTC cannot be claimed by taxpayer who is claimed as a dependent on another person’s tax return.)
Earned Income Tax Credit (EITC)
- The EITC is a credit eligible for taxpayers with low to moderate incomes. The credit increases as the number of qualifying children increases.
- A new provision increases the amount for families with 3 or more qualifying children.
- A new provision increases the phase out range for married filing jointly taxpayers.
Educator Expenses Above-the-line Deduction
- The new bill has made permanent the $250 deduction for teachers on money they spend for books, supplies, and other materials in their classrooms.
(Beginning in 2016, the $250 will be indexed for inflation and include professional development expenses.)
Itemized Deduction of State and Local General Sales Tax
- The new bill permanently extends the option to claim sales tax as an itemized deduction in the event that the sales tax exceeds state and local income taxes paid for the tax year.
Tax-free Distributions from Individual Retirement Plans for Charitable Purposes
- The new tax bill permanently allows individuals who are at least 70 ½ years old to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs). The exclusion may not exceed $100,000.
The following are non-permanent extensions of tax provisions as a result of the new tax bill:
- Bonus Depreciation will be extended 5 years through 2019.
- The Bonus Depreciation percentage is 50% for property placed into service during 2015, 2016, and 2017. The percentage is reduced to 40% in 2018 and 30% in 2019.
- The new tax bill modifies the AMT rules to increase the amount of unused AMT credits allowed while claiming bonus depreciation.
Just a reminder that bonus depreciation is not allowed for used property.
Work Opportunity Credit
- The provision extends through 2019 the work opportunity tax credit.
- The provision also modifies the credit beginning in 2016 to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) and increases the credit with respect to such long-term unemployed individuals to 40 percent of the first $6,000 of wages.
Debt Forgiveness from Personal Residence
- The discharge of debt on a taxpayer’s personal residence is excluded from income. This provision has been extended through 2016.
The itemized deduction of mortgage interest premiums is extended through 2016.
The large majority of energy incentive credits for individuals and businesses have been extended for two years.
As for the Affordable Care Act/Obamacare, the medical device tax and the Cadillac tax is delayed for two years.
As you can see, virtually all of the major tax deductions and credits have extended, some permanent and others temporarily. In addition, many of these deductions and credits have been modified in ways that provide more tax relief to individuals and businesses.
Be prepared to take advantage of the tax breaks now and in the future. Have questions or need assistance on the application and eligibility of these tax breaks as it pertains to you? We are here to assist you with our expertise and high value services. Contact us at 216.524.8900 or our form to discuss your individual situation.