Before rushing out of town for the Christmas break, Congress passed and President Obama signed the creatively named PATH (Protect Americans from Tax Hikes) Act containing a grab bag of valuable tax breaks. A two-year delay in implementation of a tax on medical devices gained headlines in Minnesota, home to some of the industry’s biggest players. Congress also gave Christmas favors to owners of race horses, “motor sports entertainment complexes” and movie production companies in a bill that will reduce future tax revenue by an estimated $622 billion over 10 years, according the Joint Committee on Taxation.
But the 233-page PATH Act also contained several provisions benefiting small businesses and individuals. Here are some of the most important of those tax breaks.
Paying for college: Families with college-age students received three breaks. The American Opportunity College Credit provides $2,500 per qualifying student per year for up to four years. The credit was scheduled to revert in 2018 down to $2,000 for the first two years, but Congress made the higher level permanent. Families whose income is too high to qualify for the tax credit are still able to take a deduction of up to $4,000 for college tuition payments. While this provision expired in 2014, Congress reinstated it for 2015 and extended it to 2016. Finally, those with tax-favored 529 college savings plans used to pay tuition, room and board can now use those tax-free funds for purchase of computers and software as well.
Child tax credits: Two provisions benefit low and moderate income families with children. Tax filers are able to claim a $1,000 credit for each dependent child under 17. If those credits are larger than your tax bill, you are eligible for a refund on a portion of the difference. Congress made this provision more generous and permanent. In addition, the enhanced Earned Income Tax Credit (EITC) available to eligible low- and moderate-income workers with three or more children was made permanent and the marriage penalty for joint EITC filers was reduced.
Housing: If you defaulted on the mortgage for your primary residence and the bank forgave the loan, you won’t have to pay taxes on the discharged debt in 2016 (or 2017 if you have an agreement on debt forgiveness completed this year). In addition, mortgage insurance premiums can be counted as part of a mortgage interest deduction though 2016 for taxpayers with adjusted gross income below $110,000.
Charitable contributions: Affluent seniors age 70 ½ and older can make up to $100,000 in charitable contributions a year from their IRA accounts, satisfying the IRS requirement for a minimum payout without triggering any taxes. This provision had been on a one year leash, with Congress renewing it annually. Now it is permanent.
Employer tax credits: Employers receive a 20 percent wage credit for employees called up to active duty military service. This provision was made permanent and extended beyond small companies to all employers. Employer tax credits for hiring certain categories of workers such as unemployed and disabled veterans, food stamp and social security disability recipients, and ex-felons were extended through 2019, and credits were made available for hiring long term (27 weeks or longer) unemployed.
Schoolteachers: The $250 deduction available to elementary and secondary schoolteachers for money they spent on classroom supplies had expired. Congress made the deduction retroactive to 2015 and permanent.
Small business investments: The limit to expensing investments in equipment and facilities was raised from $25,000 to $500,000 and the ability to accelerate depreciation on capital equipment buys as well as some renovations for retailers and restaurants were made permanent.
Tax professionals I spoke with were generally pleased with the changes. “This is a big thing for small businesses,” said Joe Rapacki Jr., an Edina-based CPA, speaking about the small business investment provisions. Rapacki said he had worried about telling clients to “go ahead and buy that truck” because there was no guarantee that Congress would act.
Stillwater-based CPA Elizabeth Bystrom praised the permanent extension of the R & D tax credit. Bystrom said the yearly extension of these tax provisions was “very frustrating” for tax payers because “we’d just have to guess” what Congress was going to do. Now she can tell clients “this is how much you can work with.”
Brad Allen is a freelance journalist and former investor relations executive for companies including Imation Corp. and Cray Research. His e-mail is email@example.com.