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Tax Changes: Protecting Americans from Tax Hikes Act of 2015

Late last month, Congress passed (and President Obama signed) the Protecting Americans from Tax Hikes Act (“PATH Act”) of 2015. The Act makes quite a lot of changes (click the previous link to see the full list), but from a personal finance standpoint, the most important thing it did was to make permanent several tax breaks that were expiring in the near future (or already expired in some cases).

Expired Provisions Brought Back

With regard to investing, likely the most important change is that the ability to make “qualified charitable distributions” from an IRA is now permanent. (It had previously expired at the end of 2014.)

With a qualified charitable distribution, a taxpayer over age 70.5 has his/her RMD for the year distributed directly to a qualified charitable organization, and the distribution satisfies the annual RMD requirement while being excluded from gross income. The benefit is that this is an exclusion from gross income rather than an itemized deduction (which is what you would ordinarily get for a charitable donation). This is relevant because it means that:

  • This income will not be included in your adjusted gross income (which plays a role in determining many things such as how much of your Social Security benefits will be taxable and whether you qualify for numerous credits/deductions), and
  • You can take advantage of this tax break even if you use the standard deduction.

Another tax break that had expired in 2014 but which is now brought back and made permanent is the ability to elect a deduction for state and local sales taxes instead of state and local income taxes. (This is of course particularly helpful for people who live in states with no income tax.)

Finally, the increased exclusion for employer-provided mass transit benefits is now made permanent. (Prior to the passing of this Act, the monthly limitation would have reverted to a $130 limit beginning in 2015. With the passing of the Act, it will be $250 for 2015 and $255 for 2016.)

Scheduled-to-Expire Provisions Made Permanent

Another important change is that the American Opportunity Credit is also made permanent. (It was previously scheduled to expire at the end of 2017.) The American Opportunity Credit is a credit of up to $2,500 per year for paying qualified higher education expenses for yourself, your spouse, or your dependent.

Similarly, the “enhanced” version of the child tax credit (which is simply a change to the calculation of the child tax credit that increases the amount of credit many taxpayers receive) is now made permanent rather than expiring at the end of 2017.

Likewise, the “enhanced” version of the earned income credit (which increases the amount of the earned income credit for married taxpayers and taxpayers with 3 or more children) is now made permanent rather than expiring at the end of 2017.

Changes to 529 Plans

The Act also makes two important changes to 529 accounts.

First, the definition of “qualified higher education expenses” for 529 accounts has been expanded to include the cost of computers, related equipment, software, and internet access if such equipment is to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution.

Second, for 529 ABLE accounts (for disabled individuals), the residency requirement has been eliminated. Previously, a beneficiary was required to use the plan established by his/her state of residence.

Again, to be clear, these are just a few of the provisions which I am assuming are most likely to be relevant to a large number of readers. There are many provisions in the Act that I have not mentioned. If you’re interested in perusing the full list, see here.

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