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Tax Extenders revived by PATH

On December 18, Congress and the President finally dealt with the tax extenders. Congress named the new act the “Protecting Americans from Tax Hikes Act of 2015” or PATH. Congress likes cute acronyms. This is an annual exercise to revive dead or almost dead tax provisions. You can read about 2014’s efforts here and here. Short term tax provisions are Congress’ and the President’s way of making the increase in the deficit look better. After all, the provisions expire so the extra cost only last so long, wink wink.

By George Redgrave, Creative Commons license, Flickr

Congress likes to pretend, for budgeting reasons, that they will not renew the tax extenders. Future deficit projections ignore the tax extender costs once they expire. Few of the extenders ever really expire.

Since most of the tax extenders have risen from the dead repeatedly, Congress is lying to taxpayers about how much they are increasing the national debt. For a change, this time Congress actually made some of the extenders permanent.

Selected tax extenders made permanent

  • Enhanced child tax credit – allowing a larger refundable credit for lower-income taxpayers.
  • American opportunity credit – increased the old Hope education credit from a maximum of $1,800 each for two years to a maximum of $2,500 each for four years.
  • Enhanced earned income tax credit increased for three or more children. Credit phases-out at a higher income.
  • Teacher deduction – had expired in 2014, now permanent. Allows elementary and secondary teachers to deduct up to $250 in eligible classroom expenses. Now include professional education costs. Wouldn’t giving the teachers enough money to cover needed classroom supplies and education be a better option?
  • Option to deduct sales taxes instead of state income taxes. This really helps taxpayers in the states without a state income tax.
  • Tax free distributions from IRAs – taxpayers 70 1/2 or older can exclude up to $100,000 distributed from their IRAs to qualified charities.
  • Modified research credit.
  • Modified employer wage credit for employees on active duty (e.g. National Guard and Reserve called up).
  • 15-year straight-line depreciation of qualified leasehold, retail improvements, and restaurant buildings and improvements. If not renewed, these assets were generally deductible over 39 years.
  • Increased Section 179 of $500,000, was to drop to $25,000.
  • Made permanent the five-year waiting period to avoid paying tax on converting to an S corporation from a C corporation. It was ten years before the temporary decrease to five.

Temporary extensions through 2019

  • Work Opportunity tax credit for hiring long-term unemployed.
  • Bonus depreciation is modified to allow 50% for 2015 to 2017, 40% for 2018 and 30% for 2019.

Temporary extensions through 2016

  • Tax-free discharge of qualified principal residence debt.
  • Allow deduction of qualified mortgage insurance premiums as interest.
  • Tuition deduction of up to $4,000.
  • Mine safety equipment deduction and mine rescue training credit. Why do we have to pay mine owners to do the right thing?
  • Allow shorter 7 year depreciation for motor sports. Really, NASCAR is in financial difficulty?
  • Non-business (residential) energy credit for qualified energy-saving expenses, limited to $500 lifetime.

Other notable changes

  • Employer must send 2016 W-2s to Social Security by January 31st. Previously, employers had until March 31st if they electronically filed. The idea is to allow IRS to verify wages and withholding earlier to prevent fraud.
  • Prohibit taxpayers who did not have a qualifying Social Security number or ITIN from amending returns once they get the appropriate ID number to claim:
    • Thee earned income tax credit.
    • The child tax credit.
    • The American opportunity tax credit.
  • Beginning for 2016, taxpayer must have a Form 1098-T to claim education costs.
  • Allowing rollovers from other employer retirement plans to SIMPLE IRAs.
  • Codified taxpayers’ bill of rights.
  • Allow IRS to say when more employers can truncate Social Security numbers on W-2s.

The Congressional Budget Office estimates the ten-year cost at about $680 billion. Source: CBO (see PDF on the linked page for data)

What do you think? Are these tax cuts and credits worth the $680 billion they add to the deficit?

Filed Under: Tax