Congress gave Americans a special gift this holiday season by passing the Protecting Americans from Tax Hikes Act of 2015, also known as the PATH act. This is a pretty significant piece of legislation, not only because it keeps some valuable tax breaks alive, but because it finally makes some tax breaks permanent, after coming close to expiration several times. Here's a rundown of the tax breaks that are now permanent, and a few that are sticking around for at least a couple more years.
Permanent tax breaks
With the PATH act, several popular tax breaks became permanent. Here are some of these now-permanent items, and what they mean to taxpayers.
- The American Opportunity Tax Credit: The most valuable of the education tax breaks for those who qualify, this is worth up to $2,500 per eligible student. To qualify, students must be in the first four years of college, must be in a degree or credential program, and must be enrolled at least half time.
- Educator expenses: Teachers in elementary or secondary schools who work at least 900 hours during the school year qualify for an above-the-line deduction (meaning that it doesn't matter if they itemize deductions) for up to $250 worth of unreimbursed costs for classroom supplies or equipment.
- State and local sales tax deduction: Taxpayers have the option to choose between deducting state and local income taxes or state and local sales taxes. Generally, income taxes are the greater of the two, but in states that don't have an income tax such as Florida or Nevada, this is a valuable deduction. You don't even need to save your receipts to document the sales tax you paid -- the IRS has an estimator you can use.
- IRA charitable transfers: If you choose to donate up to $100,000 as a direct distribution from your IRA to a qualified charity, it can be excluded from your income. You need to be over 70-1/2 years old to take advantage of this, and it can be a great way to put your required minimum distributions to work if you don't need the money.
- Expanded 529 benefits: The PATH act gives 529 plan savers a permanent ability to purchase computer equipment and other technology items with the funds in their account. It also allows for re-contribution of withdrawals that were refunded by the school.
- Employer-provided mass transit: If your employer pays for your mass transit pass, or parking costs, it will not count toward your income as long as the amount is less than $250 per month.
- Enhanced child tax credit and earned income tax credit (EITC): Families with dependent children under the age of 17 may qualify for a tax credit of up to $1,000 per child, which begins to phase out for married couples who earn more than $110,000. The act also makes permanent the EITC's provision that allows families with more than two children to receive a credit of up to $6,242.
Extended tax breaks
The PATH act didn't make all of the tax breaks it addressed permanent. There were a few that were simply extended through the 2016 tax year. So, while the future of these is somewhat uncertain, taxpayers can breathe easy -- at least until the time comes to file their 2017 tax return.
- Mortgage debt exclusion: If you had mortgage debt forgiven as a result of a foreclosure, short sale, or loan modification, it won't count toward your taxable income. This benefit applies to forgiven debt of up to $2 million, so it can be an extremely valuable tax break to those who need it.
- Mortgage insurance: If you put less than 20% down when you bought your home, chances are that you pay mortgage insurance to your lender, at least until you pay down some of your loan balance. This deduction allows mortgage insurance premiums to be treated like mortgage interest for tax purposes. The deduction begins to phase out for taxpayers with adjusted gross income over $100,000, and disappears entirely for AGI above $109,000.
- Tuition & fees deduction: This deduction allows taxpayers to deduct higher education expenses, such as tuition, fees, books, and supplies. Unlike the American Opportunity Credit, there is no requirement to be in the first four years of college or in a degree program -- in fact, you can take just one course for personal enrichment and qualify for this deduction.
Permanent (for now)
The word "permanent" should be taken with a grain of salt when used to describe anything related to taxation in America. There's really no way of knowing what the U.S. tax code will look like in a few years from now -- after all, some of the 2016 presidential candidates want to completely toss out the current tax code in its entirety.
However, these tax breaks are either extended or permanent in the sense that you don't need to worry whether or not you'll be able to take advantage of them on the 2015 tax return you're about to file, or the 2016 return you'll file in early 2017.