by
Senior Wealth Planner

In this Wealth Planning Update:

  • Many of the most favorable “extenders” provisions for high net worth individuals and family businesses were made permanent
  • Tax-free distributions from individual retirement accounts (IRAs) for charitable purposes made permanent
  • It is important to understand how these changes may impact your situation

On Friday, December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (PATH) and spending bills (Consolidated Appropriations Act, 2016) to fund the government for its 2016 fiscal year. The tax provisions include language extending or making permanent numerous expired business and household tax breaks. Below is a summary of the tax provisions contained in the overall legislation that may be of interest to individual tax payers.

Incentives for Charitable Giving

Extension and modification of special rule for contributions of capital gain real property made for conservation purposes: The Act permanently extends the charitable deduction for contributions of real property for conservation purposes and the enhanced deduction and increased carryforward period for certain individual and corporate farmers and ranchers for qualified conservation contributions. Effective for taxable years beginning after December 31, 2014.

Extension of tax-free distributions from individual retirement plans for charitable purposes: The Act permanently extends the ability of individuals at least 70 ½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs). The exclusion cannot exceed $100,000 per taxpayer in any tax year. Effective for distributions made in taxable years beginning after December 31, 2014.

Extension of basis adjustment to stock of S-corporations making charitable contributions of property: The Act permanently extends the provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions exceed such shareholder's adjusted basis in the S corporation. Effective for contributions made in taxable years beginning after December 31, 2014.

Incentives for Growth, Jobs, Investment, and Innovation

Extension and modification of increased expensing limitations and treatment of certain real property as section 179 property: The Act makes permanent the higher small business expensing limitation and phase-out amounts ($500,000 and $2 million). Without this change, the amounts would have been $25,000 and $200,000, respectively, for tax years beginning after 2014. These amounts are indexed for inflation beginning in 2016.  Generally effective for taxable years beginning after December 31, 2014.

Extension of exclusion of 100 percent of gain on certain small business stock: The Act permanently extends the exclusion of 100 percent of the gain on certain small business stock for non-corporate taxpayers to stock acquired after September 27, 2010, and held for more than five years. This provision also extends the rule that eliminates such gain as an AMT preference item. Effective for stock acquired after December 31, 2014.

Extension of reduction in S-corporation recognition period for built-in gains tax: The Act permanently reduces the “built-in gain” recognition period to five years for taxable years beginning in 2015 and thereafter. Pre-existing installment sales continue to be governed by the holding periods for the years of sale. Effective for taxable years beginning after December 31, 2014.

Tax Relief for Families and Individuals

Enhanced child tax credit made permanent: The Act permanently extends the threshold for determining the portion of the child tax credit that is refundable at $3,000. The dollar amount will not be indexed for inflation. Effective for taxable years beginning after the date of enactment (December 18, 2015).

Enhanced American Opportunity Tax credit made permanent: The Act makes the American Opportunity Tax credit permanent (increased dollar amounts and phase-outs over the Hope Scholarship credit). Effective for taxable years beginning after the date of enactment (December 18, 2015).

Enhanced earned income tax credit made permanent: The Act makes permanent the increased credit percentage for families with three or more qualifying children and the reduction in the marriage penalty for the credit. The phase-out amounts of the credit for taxpayers filing jointly increases by $5,000 (indexed for inflation). Effective for taxable years beginning after December 31, 2015.

Extension and modification of deduction for certain expenses of elementary and secondary school teachers: The Act makes permanent the $250 above-the-line tax deduction for eligible expenses of elementary and secondary school teachers. The Act indexes the deduction to inflation beginning in 2016. Generally effective for tax years beginning after 2014.

Extension of parity for exclusion from income for employer-provided mass transit and parking benefits: The Act permanently extends the monthly maximum exclusion amount for transit passes and van pool benefits so that these transportation benefits match the exclusion for qualified parking benefits ($250 for 2015, $255 for 2016). This provision is effective for months after December 31, 2014.

Extension of deduction of state and local general sales taxes: The Act permanently extends the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes. Effective for taxable years beginning after December 31, 2014.

Extensions Through 2016

Tax Relief for Families and Individuals: Extension and modification of exclusion from gross income of discharge of qualified principal residence indebtedness. The Act extends through 2016 the exclusion from gross income of a discharge of qualified principal residence indebtedness. Effective for discharges of indebtedness after December 31, 2014.

Extension of mortgage insurance premiums treated as qualified residence interest: The Act extends through 2016 the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction, subject to the existing phase-out rules. Effective for amounts paid or accrued after December 31, 2014.

Extension of above-the-line deduction for qualified tuition and related expenses: The Act extends through 2016 the above-the-line tax deduction for qualified education expenses. Effective for taxable years beginning after December 31, 2014.

Please contact your relationship manager or wealth planning specialist to discuss how these changes may impact your situation.