In preparing for the coming tax season, I have compiled this newsletter which outlines select tax law changes for 2015 and 2016 that I believe will be relevant to my clients.
On December 18, Congress passed the Protecting Americans from Tax Hikes (PATH) Act and the President signed it. PATH retroactively extends the 50 or so temporary tax provisions that are routinely extended by Congress on a one- or two-year basis that had expired as the end of 2014. PATH makes permanent many of the individual and business extenders.
Individual provisions expiring at the end of 2014 that are extended by the PATH Act:
Deduction for teachers –PATH made permanent the elementary and secondary school teachers’ deduction for expenses paid or incurred for books, supplies, computer and other supplementary materials used in the classroom. The law now includes professional development expenses as eligible for the deduction.
Mortgage debt forgiveness exclusion – discharge of indebtedness from qualified principal residence debt, up to $2 million limit excluded from gross income is extended for 2 years. It applies to home mortgage debt discharged before January 1, 2017.
Deduct mortgage insurance premiums – this provision is extended for 2 years and taxpayers can deduct as qualified residence interest, mortgage insurance premiums paid or accrued before January 1, 2017.
Deduct state and local sales tax – the option to claim an itemized deduction for state and local sales taxes instead of state and local income taxes has been made permanent for tax years after 2014.
Deduct qualified tuition and expenses – the above-the-line deduction for qualified tuition and related expenses for higher education is extended through 2016. Eligible individuals may deduct qualified tuition and related expenses as an adjustment to gross income- the maximum deduction was $4000 for an individual who’s AGI for the tax year does not exceed $65,000 ($130,000 for married filing jointly).
Tax free distribution from IRA to charity – taxpayers who are age 70 ½ or older can make tax-free distributions to a charity from an IRA account of up to $100,000 per year. These distributions are not subject to the charitable contribution percentage limits since they are not included in gross income not claimed as a deduction on the taxpayer’s return. This has been made permanent.
Enhanced American Opportunity Credit –PATH made permanent a credit of $2,500 for four years of post-secondary education and higher phase-out limits of $80,000 (single) and $160,000 (married filing jointly).
Enhanced Earned Income Tax Credit (EITC) – PATH made permanent a refundable EITC for eligible low and moderate income workers. The amount of the credit depends on the taxpayer’s earned income and the number of qualifying children, if any, and is calculated as a percentage of the inflation adjusted earned income level.
Non –business Energy Credit- PATH extends this credit through 2016. Taxpayers could claim a credit up to a $500 lifetime limit for qualified energy property which included such items as insulation materials, exterior windows, skylight or doors, qualified natural gas, propane, or hot water boiler, and other energy-efficient building property.
Child Tax Credit – allows taxpayers to claim a $1000 tax credit for each qualifying child under age 17 that can be claimed as a dependent. The credit is refundable and subject to income phase-out. It has been made permanent.
Business provisions expiring at the end of 2014 that are extended by the PATH Act:
50% bonus depreciation – PATH has extended this through 2019. Businesses may depreciated 50% of the cost of equipment acquired and placed in service in 2015, 2016 and 2017. In 2018, the bonus depreciation is reduced to 40% and in 2019 it will be 30%.
Section 179 at $500,000 – PATH has made this limit permanent. Business may depreciate equipment purchases up to a maximum deduction of $500,000 of the first $2 million of qualifying equipment placed in service in the current year. The deduction is phased out dollar for dollar on amounts exceeding the $2 million threshold amount and eliminated above amounts exceeding $2.5 million.
Work opportunity tax credit – Extended through 2019. The WOTC allows employers who hire members of certain targeted groups to get a credit against income tax of up to 40% of first year wages up to $6,000 per employee.
Small business stock – a taxpayer may exclude all of the gain on the disposition of qualified small business stock acquired after Sept. 27, 2010 and before Jan. 1, 2015. None of the excluded gain is subject to the alternative minimum tax.
Energy Efficient Home Credit for Builders –An eligible contractor may, for homes acquired before January 1, 2017 , claim a credit of $2,000 or $1,000 (depending on the projected level of fuel consumption) for each qualified new energy efficient home constructed by the contractor and acquired by a person from the contractor for use as a residence during the tax year.
Key 2015 Facts and Figures:
Personal and dependent exemption is $4,000.
The standard deduction for married filing jointly is $12,600. For singles and married filing separately it is $6,300, and heads of household it is $9,250.
Tax brackets remain 10, 15, 25, 28, 33, 35 and 39.6%. The 39.6% top rate begins at income over $413,201 for single filers and $464,851 for married filers.
2015 Retirement plan contribution limits: 401(k) maximum annual salary deferral is $18,000 with $6,000 catch up for over 50. Maximum employer contribution is 25% of eligible employee compensation. SIMPLE IRA limits are $12,500 with $3,000 catch up for over 50. Traditional and Roth IRA limits are $5,500 with $1,000 catch up over 50.
Standard business mileage rate has increased to $.575 per mile from 2014 rate of $.56. Standard rate for medical and moving has decreased to $0.23 per mile. Standard mileage rate for charitable purposes is $0.14 per mile.
Key 2016 Facts and Figures:
The Social Security Administration announced that the wage base for computing the Social Security tax (OASDI) in 2016 will not change from 2015. The wage base in 2015 was $118,500 in 2016 there is no change.
The standard mileage rate for 2016 business mileage is $.54, charitable mileage is $.14 and medical and moving mileage is $.19.
2016 Retirement plan contribution limits: The Contribution limits remain the same as in 2015 because the increase in the cost of living index did not meet the statutory thresholds that trigger their adjustment.
North Carolina Tax Law Changes:
North Carolina’s General Assembly enacted changes to Individual, Corporate and Sales Tax.
The 2015 tax rate is a flat rate of 5.75% which is a reduction from the 2014 rate of 5.8%.
Restoration of the Medical Expense Deduction – itemizers will be able to deduct the medical and dental expenses allowed on their federal return as a NC deduction.
The Standard Deduction for 2015 is $15,000 for married filing jointly, $12,000 for heads of households and $7,500 for single and married filing separately taxpayers. These will increase in 2016 to $15,500 for married filing jointly, $12.400 for heads of households and $7,750 for single and married filing separately taxpayers.
2015 Corporate Tax Rate reduced to 5% from the 2014 rate of 6%. The rate for 2016 is schedule to be reduced to 4%.
Franchise tax rate is $1.50 per $1000 of capital stock, surplus and undivided profits; investment in tangible property in NC; or appraised valuation of tangible property – whichever is highest. The minimum franchise tax is $35. In 2017, the minimum franchise tax will increase to $200.
Sales Tax Changes:
Beginning March 1, 2016, repair, maintenance and installation services will be subject to sales tax. The new provisions are confusing and details of their application remain uncertain. The Department of Revenue should be issuing clarifying guidelines.
Please note that this newsletter provides only a brief overview of the many changes for the 2015 tax year and beyond. For this overview, I selected specific items that I expected to be relevant to my clients. Many of these tax provisions have very technical specifications. This summary is for informational purposes only, do not rely on it for tax advice as each taxpayer’s situation varies. If you have questions or concerns about how your tax situation is impacted by these changes (or others), please do not hesitate to contact me. As always, it is a pleasure to be of assistance to you. I appreciate the faith and trust you place in me as your advisor and will continue to do all I can to earn that trust.