The Protecting Americans from Tax Hikes Act of 2015 is a long-awaited legislation which offers a slate of personal and business tax breaks that had expired at the end of 2014.
Here’s a quick summary of how the resurrected breaks can affect your 2015 federal income tax return (Form 1040).
You can save money on your 2015 filings if you’re eligible for one of the new tax breaks.
Option to deduct state and local sales taxes instead of income taxes made permanent
If you will owe little or nothing for state and local income tax for 2015 and later years, you can choose to deduct state and local general sales taxes instead of income taxes. Specifically, you can deduct predetermined sales tax amounts from IRS tables based on where you live, unless you’ve kept receipts that support a bigger number. In addition, you can deduct actual sales tax amounts for major purchases such as a motor vehicle (car, truck, SUV, van, motorcycle, off-road vehicle, motor home, or recreational vehicle), a boat, an airplane, a home (including a mobile prefabricated home), or a substantial addition to or major renovation of a home. You can also include state and local general sales taxes paid for a leased motor vehicle.
Year-end strategy: Make a major purchase or vehicle lease between now and year-end to give you a bigger sales tax deduction and cut this year’s federal income tax bill. However, if you are in the dreaded alternative minimum tax (AMT) mode, this strategy won’t do you any good because the sales tax deduction is disallowed under the AMT rules.
College tuition deduction extended through 2016
The lucrative American Opportunity and Lifetime Learning tax credits are not always available for higher-education expenses. For instance, you might not meet the eligibility rules for the American Opportunity credit, and your income might be too high to claim the Lifetime Learning credit. But don’t give up hope. There’s another important break that Congress just resurrected to cover eligible education expenses paid in 2015 and 2016. It allows you to claim a limited deduction for tuition and related fees. Depending on your income, the maximum write-off is either $4,000 or $2,000. Eligible expenses include tuition, mandatory enrollment fees, and course materials including books and supplies.
If you are unmarried with modified adjusted gross income (MAGI) of $65,000 or less, the maximum deduction equals the lesser of: (1) $4,000 or (2) 100% of eligible expenses. The same limits apply to a married joint-filing couple with MAGI of $130,000 or less.
If you are unmarried with MAGI between $65,001 and $80,000, the maximum deduction is reduced to the lesser of: (1) $2,000 or (2) 100% of eligible expenses. The same limits apply to a married joint-filing couple with MAGI between $130,001 and $160,000.
If your MAGI exceeds the $80,000 or $160,000 ceiling (whichever applies), you get no deduction. Sorry!
Year-end strategy: Consider prepaying before year-end college tuition bills that are due in early 2016 if that would result in a bigger deduction on this year’s return. Your 2015 deduction can include tuition and fees that are prepaid this year for academic periods that actually begin in the first three months of 2016.
Charitable donations from IRAs made permanent
Under this now-permanently-restored break, you can make up to $100,000 in cash donations to IRS-approved charities directly out of your IRA(s) for this year if you will be age 70 1/2 or older as of Dec. 31, 2015. Your spouse is entitled to a separate $100,000 limitation for any IRA(s) that he or she separately owns, assuming your spouse has also reached the magic age.
Direct-from-your-IRA donations are called qualified charitable distributions, or QCDs. They are tax-free and no deductions are allowed for them, so QCDs don’t directly affect your tax bill. However, they count as withdrawals for purposes of meeting the required minimum distribution (RMD) rules that apply to your traditional IRAs after age 70 1/2. You’ll have to hurry to take advantage of this break for the 2015 tax year. You only have until Dec. 31 to do so.
Year-end strategy: If you haven’t yet taken your 2015 RMD amount from your IRA(s), you can substitute tax-free QCD donations for taxable RMDs. That way, you can satisfy your 2015 RMD obligation in a tax-free manner while also satisfying your charitable impulses.
Tax-free treatment for forgiven principal residence mortgage debt extended through 2016
For federal income tax purposes, a forgiven debt generally counts as taxable cancellation of debt (COD) income. However, an important exception applies to COD income from canceled mortgage debt that was used to acquire a principal residence. Under the exception, up to $2 million of COD income from such canceled principal residence acquisition debt can be treated as a tax-free item. This super-generous break expired at the end of 2014, but the new law restores it for eligible COD transactions that occur in 2015 and 2016.
$250 deduction for K-12 educator expenses made permanent
The $250 deduction for teachers and other K-12 educators for school-related expenses paid out of their own pockets was made permanent. It now covers eligible expenses paid in 2015 and beyond.
$500 energy-efficient home improvement credit extended through 2016
In recent years, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. This break expired at the end of 2014, but the new law extends it for 2015 and 2016. However, the $500 cap on the credit is reduced by any credit that you claimed in a pre-2015 year.
Plus: The 2 most important resurrected breaks for small businesses
Generous Section 179 deduction rules made permanent
The Section 179 deduction allows the cost of qualifying new and used depreciable assets (including most software) to be fully written off in Year One. For assets placed in service in tax years beginning in 2015 and beyond, the new law maintains the maximum Section 179 deduction allowance at the generous figure of $500,000 (same as for the last few years). For post-2015 years, the $500,000 cap will be indexed for inflation.
For tax years beginning in 2015, Section 179 deductions can also be claimed for up to $250,000 of qualifying real property expenditures. For 2016 and beyond the $250,000 cap on real property expenditures is eliminated. However, deductions allowed for real property expenditures reduce the overall $500,000 Section 179 deduction cap.
50% first-year bonus depreciation extended through 2017
The new law allows 50% first-year bonus depreciation for qualifying new (not used) business assets that are placed in service in calendar years 2015-2017. This break combined with the Section 179 deduction can lead to big tax savings for small and medium-size businesses.