The pols did it again. Washington waited until the year was nearly over to reinstate expired tax breaks—December 18 to be precise, with the enactment of the Protecting Americans from Tax Hikes Act of 2015. Yet you have to give the lawmakers some credit. They finally made permanent many of the so-called “extenders,” a trove of temporary tax breaks with a record of temporary renewal. Others were restored beyond 2015 by the new law. (See the chart for highlights.)
The most bankable extender for many high-income clients is their ability, after age 70 and a half, to give to charity up to $100,000 annually tax-free from their individual retirement accounts. “We are glad to see this permanently extended,” says Mike Tedone, a partner at Connecticut Wealth Management LLC in Farmington, Conn. “It was a last-second fire drill at the end of 2015 for some clients to direct their required minimum distributions to charity.”
Separate from the December legislation, a November IRS rule change lets business owners immediately deduct the cost of more items instead of depreciating them over time. Previously, items costing up to $500 could be written off immediately as supplies or materials by many small businesses. The change ups that to $2,500, and although it technically applies beginning in 2016, the IRS won’t challenge its use for 2015.
But qualifying to use the higher deduction amount for 2015 equipment purchases requires a somewhat unlikely fact pattern. Namely, a business would need to have had in place at the beginning of 2015 “a written policy to expense amounts greater than $500 and no more than $2,500, even though for tax purposes the IRS would have limited it to $500 under the rules at that time,” says CPA Blake Christian, a tax partner at HCVT LLP in Park City, Utah, and Long Beach, Calif. “There probably will be some rare cases,” he says
Advisors can help clients this tax-filing season by helping their accountants. Tedone says that at his planning firm, “We reach out to clients’ CPAs at the beginning of the year to let them know we are here to help track down anything that’s missing and to answer any questions about clients’ 1099s or about cost basis.”
Advisors can also be of service by starting to look at 2016 taxes. You can tell clients that some mileage deductions will be skinnier this year—for example, 54 cents per mile for business automobile use versus 57.5 cents on 2015 tax returns. For medical mileage, the 2016 rate is 19 cents, down from 23 cents in 2015.
Be sure to prep clients who teach elementary or secondary school about some favorable changes in the recent tax bill. Starting in 2016, expenses for professional development also qualify for the $250 above-the-line deduction that was formerly restricted to classroom expenses and which is now permanent.
Professional development expenses are defined as courses related to either the curriculum in which the educator provides instruction, or to the students for which the educator provides instruction, according to Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting in Riverwoods, Ill. “There’s probably room for debate about what could qualify under that definition,” he says.
This deduction is now indexed for inflation, which is another change. But it’s not likely to budge soon from $250. It only changes in $50 increments. So it will take 20% cumulative inflation from 2015 (a $50 change divided by a $250 base) to actually increase the deduction for educators, Luscombe explains.
It’s estimated the recent tax act’s price tag will be more than $620 billion over 10 years. “It was surprising to me that a lot of provisions were made permanent without paying for them,” Luscombe says. “That had always seemed in the past to be a roadblock to making them permanent, but not so this time.”
Here’s how recent legislation affected various tax breaks.
FOR BUSINESSES
Made Permanent
• The research tax credit
• Section 179 expensing up to $500,000* for purchases of equipment and off-the-shelf computer software, with phaseout when total purchases exceed $2 million*
• 15-year depreciation for qualified restaurant property, leasehold improvements and retail improvements
Extended Through 2019
• Bonus depreciation on purchases of new property (50% of cost through 2017, 40% in 2018, 30% in 2019), or option to accelerate AMT credits instead
FOR INDIVIDUALS
Made Permanent
• Tax-free IRA distributions to charity after age 70 and a half, up to $100,000 annually
• Itemized deduction for state and local sales tax instead of income tax
• The American Opportunity Tax Credit for qualified education expenses
• The $250* above-the-line deduction for elementary and high school teachers’ classroom expenses (and professional
development expenses beginning with 2016 tax returns)
• Tax-free distributions from Section 529 plans for the purchase of a computer and related technology expenses
Extended Through 2016
• The above-the-line deduction for college (post-secondary) tuition and fees
• The residential energy property credit of up to $500
• Exclusion from income of up to $2 million of forgiven debt on a residence
*Indexed beginning in 2016. Sources: Internal Revenue Service; Wolters Kluwer Tax & Accounting.