Protecting Americans from Tax Hikes Act of 2015

Highlights of key provisions impacting individuals

Fork in road surrounded by trees, Reston, Virginia, USA
••• © Peter Gridley / Getty Images

Current status: Passed by Congress and signed by the President. Enacted as Public Law Number 114-113 on December 18, 2015.

Full text: H.R. 2029 on Congress.gov.

Estimated budget effects: Reduces federal tax revenues by $621.951 billion over the ten-year period from 2016 through 2025 (Joint Committee on Taxation, JCX-143-15, pdf).

Technical explanation: Joint Committee on Taxation, JCX-144-15, pdf.

Quick Summaries of Individual Income Tax Provisions

Employee Benefits

Heath care benefits for government employees (Effective: 12/18/15 and going forward): Health and accident plans for government employees can use voluntary employees' beneficiary associations as a type of medical trust paying tax-exempt reimbursements for medical care in addition to trusts authorized by state legislatures or trusts that have received tax-exempt rulings from the IRS. Effective for reimbursements after December 18, 2015.

Mass transit and parking benefits (Effective: 2015 and going forward): For tax year 2015 and going forward, the maximum tax-free benefit for mass transit, carpooling and parking benefits is capped at $175 per month. Previously, there was a disparity: with $100 maximum per month for mass transit benefits and carpooling and a higher $175 maximum per month for parking benefits.

Income Exclusions

Cancellation of debt income for principal residences (Effective: Through 2016): Extended through 2016 with modifications.

Under this provision, taxpayers can exclude from their income for federal tax purposes up to $2 million of acquisition debt on their primary residence that is forgiven or discharged by their lender (such as through a foreclosure proceeding). The modification: taxpayers can still exclude the debt forgiveness after 2016 as long as the taxpayer and the lender entered a binding written agreement to cancel the debt no later than December 31, 2016.

Exclusion for amounts received under the work colleges program (Effective: 2016): Starting tax year 2016, students may exclude from their gross income payments received from a comprehensive student work-learning-service program operated by a work college. The work-learning-service program must be required to qualify for the tax-exempt treatment.

Exclusion from gross income of certain amounts received by wrongly incarcerated individuals (Effective: All tax years): New section 139F provides that money received because a person was wrongfully imprisoned for a crime he didn't commit is excluded from income tax. To qualify, a person must have been convicted of a criminal offense under federal or state law, the person served all or part of their prison sentence, and was pardoned, granted clemency or amnesty because the person was innocent, or the judgment is reversed or vacated after a new trial. The exclusion is effective beginning tax year 2016 and is retroactive for all previous tax years. PATH includes a special waiver of the normal 3-year statute of limitations on tax refunds that allow impacted individuals to file amended returns and claims for refunds of overpaid tax if the claim for refund is filed before December 18, 2016.

Exclusion of 100% gain on certain small business stock (Effective: 2015 and going forward): Permanently extended for tax years 2015 and forward. Capital gains on qualified small business stock in a C corporation are fully excluded from federal income tax if the investor holds the stock for more than five years.

Qualified zone academy bonds (Effective: Through 2016): extended for tax years 2015 and 2016. Up to $400 million in qualified zone academy bonds are authorized to be issued for each year.

Deductions

Educator expenses deduction (Effective: 2015; changes starting 2016): PATH makes three changes to the above-the-line deduction for educator expenses. First, it permanently extends this deduction. The deduction had expired at the end of the 2014. The education expense deduction is available for tax years 2015 and going forward.

Second, starting in tax year 2016, the $250 limit on this deduction will be indexed for inflation. Also starting in 2016, educators can deduct professional development courses in addition to classroom supplies.

Tuition and fees deduction (Effective: Through 2016): extended for tax years 2015 and 2016.

Mortgage insurance premiums deduction (Effective: Through 2016): extended for tax years 2015 and 2016. Under this provision, individuals can include the cost of mortgage insurance premiums as part of their mortgage interest deduction.

Sales tax deduction (Effective: 2015 and going forward): this itemized deduction has expired at the end of 2014. PATH reinstates the sales tax deduction for the tax year 2015 and makes the deduction permanent. Itemizers choose between the higher of the state and local income taxes or their state and local sales taxes.

Special Rule for Charitable Contributions of Capital Gain Real Property Made for Conservation Purposes (Effective: 2015 and going forward): This special rule had expired at the end of 2014, and PATH now makes this rule permanent. It is effective for tax year 2015 and going forward. Under this special rule, taxpayer are allowed to take a deduction for charity (at fair market value, up to 50% of their adjusted gross income) for donating all or a portion of real property to a qualified charity for conservation purposes. The excess value of the donation, over the 50% of adjusted gross income limit, is carried forward up to 15 years. Absent this special rule, conservation donations would have been limited to 30% of adjusted gross income with a 5-year carryover period.

Tax Credits

American opportunity tax credit (Permanent with changes): Originally a temporary replacement to the Hope credit, the American opportunity credit was scheduled to expire at the end of 2017. PATH removes this expiration date, making the American opportunity credit a permanent feature in the tax code. No other changes were made: how the American opportunity credit is calculated and who qualifies remain the same.

Employer Identification Number required for American Opportunity Tax Credit (Effective: Starting 2016): Individuals must include the employer identification number of the educational institution they attended (which is reported on Form 1098-T) when claiming the American Opportunity tax credit. This change is effective for tax year 2016 and going forward.

Child tax credit (Permanent with changes): There are two methods for calculating the refundable portion of the child tax credit. One method measures a person's earned income over $3,000 and multiplies this by 15 percent. This $3,000 threshold was originally a temporary change for the years 2009 through 2017 from a threshold amount of $10,000. PATH makes permanent the $3,000 threshold, and this threshold amount is not indexed for inflation.

Earned income tax credit (Permanent with changes): PATH makes two changes to the earned income credit. First, it makes permanent the higher Earned Income Credit for families with three or more dependents. (That provision was scheduled to expire at the end of 2017.) Second, it makes permanent the higher phase-out threshold for married couples filing jointly.

Prevention of retroactive claims of Earned Income Credit, Child Tax Credit, and American Opportunity Tax Credit (Effective: 12/18/15 and going forward): Effective for tax returns filed after December 18, 2015. Individuals may not claim the EITC, CTC, or AOTC for any person (whether themselves or a dependent) who has an SSN, ITIN, or ATIN issued after the due date for filing the return.

Non-business energy property tax credit (Effective: Through 2016): extended for tax years 2015 and 2016. For the tax year 2016, windows, skylights, and doors will need to meet Energy Star 6.0 standards to qualify for the credit.

Alternative fuel vehicle refueling property tax credit (Through 2016): extended for tax years 2015 and 2016.

Electric motorcycle tax credit (Through 2016): extended for tax years 2015 and 2016. This tax credit had expired at the end of 2013, and is not renewed for tax year 2014. The extension only applies to electric motorcycles. The tax credit for three-wheeled electric vehicles is not being renewed.

Credit for fuel cell vehicles (Through 2016): extended for tax years 2015 and 2016.

Tax-Preferred Savings Accounts

Charitable IRA Distributions (Permanent): Permanently extended. This provision had expired at the end of 2014. PATH revives the qualified charitable distribution for 2015 and going forward.  Under this incentive, people can donate to charity directly from their traditional individual retirement account (IRA) or Roth IRA. Qualified charitable distributions are excluded from gross income, meaning individuals don't include the value of the amount donated as part of their income. By the same token, the qualified charitable distribution is not reported as part of a person's itemized deductions. Qualified charitable distributions do count towards meeting the required minimum distributions for the year.

Early retirement distributions for nuclear materials couriers, United States Capitol Police, Supreme Court Police, and diplomatic security special agents (Effective: 2016): these types of employees may take distributions from their governmental defined benefit or defined contribution retirement plans without being subject to the 10% early distribution surtax if the employee separates from service after age 50. This is an exception to the general rule in which individuals can draw from their group retirement plan after reaching age 55 and separating from service. Effective starting tax year 2016.

Elimination of residency requirement for qualified ABLE programs (Effective: 2015): Two changes, effective for tax year 2015 and going forward. (1) PATH eliminates the requirement that ABLE accounts have to be set up in the same state where the account owner is a resident. (2) PATH allows for rollovers from section 529 college savings plans without penalty, up to the annual limit on ABLE contributions. Excess rollovers are included in the gross income of the person making the distribution.

Rollover of certain airline payment amounts (Effective: 2014): Certain types of distributions from defined benefit plans paid to airline employees may be rolled over without tax consequences to a traditional IRA. Retroactive to 2014.

Rollovers permitted from other retirement plans into SIMPLE retirement accounts (Effective: 12/18/15 and going forward): After the ending the two-year period following the date an employee first participated in a SIMPLE IRA, employees may roll over funds from other group retirements plans (such as 401(k) plans) and traditional IRAs into their SIMPLE IRA. Effective for rollovers after December 18, 2015.

Section 529 college savings plans (Effective: 2016): 3 changes. (1) QHEE for computer equipment, peripherals, software, Internet access and related services only if the equipment, software or services are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible education institution. (2) Repeals the rules providing that accounts must be aggregated for purposes of calculating the amount of a distribution that is included in a taxpayer's income. Earnings are now computed on a distribution-by-distribution basis rather than on an aggregate basis. (3) New rule: if a designated beneficiary receives a refund of any higher education expenses, any distribution that was used to pay the refunded expenses shall not be subject to tax if the beneficiary recontributes the refunded amount to the 529 plan within 60 days of receiving the refund. Effective for tax years 2015 and going forward.

IRS Procedure

Prevention of extension of tax collection period for members of the Armed Forces who are hospitalized as a result of combat zone injuries (Effective: All tax years): Normally the IRS has ten years to collect taxes from the date of assessment. This 10-year period can be extended. In particular, this 10-year period is extended for the period of time a person is on active military duty in a designated combat zone plus 180 days following the end of their active duty. This new provision clarifies that if a person is hospitalized as a result of injuries sustained in a combat zone, any period of continuous hospitalization beyond the period of active duty plus 180 days does not further extend the 10-year statute of limitations on collections. This provision is effective retroactively and going forward.

New procedures for issuing Individual Taxpayer Identification Numbers (Effective 12/18/15 and going forward): effective starting December 18, 2015.

Penalties for Individual Taxpayers

Penalties due to improper refundable credits (Effective: 12/18/2015 and going forward) : the IRS may now include the excess of refundable credits over the amount of tax shown on the return when calculating the accuracy-related penalty and the fraud penalty. The IRS may also impose a 20% erroneous claims penalty on the earned income credit. This change is effective both going forward and retroactively. It is effective for tax returns filed after December 18, 2015 and for returns filed on or before this date if the statute of limitations period for assessment has not expired. The change to the erroneous claims penalty is effective for claims filed after the date of enactment.

Restrictions on taxpayers who improperly claimed credits in prior year (Effective: Starting 2016): If an individual claims the Child Tax Credit, the IRS later denies the credit, and the taxpayer's claim for the credit was determined to be due to fraud, then the individual may not claim the Child Tax Credit for the next ten years.  However, if the taxpayer's claim was determined to be due to reckless or intentional disregard of the rules, then the individual may not claim the Child Tax Credit for the next two years. The same restriction is placed on claims involving the American Opportunity Tax Credit: 10 years for fraud and 2 years for reckless or intentional disregard of the rules.

Penalties for Tax Professionals

Due diligence for Child Tax Credit and American Opportunity Tax Credit returns (Effective: Starting 2016): In an effort to reduce improper claims, PATH requires tax professionals to meet due diligence requirements when preparing tax returns on which the client is claiming the child tax credit or the American Opportunity tax credit. The requirements – and penalties – are similar to the due diligence for the earned income tax credit. This is effective beginning tax year 2016.

Penalty for paid preparers who engage in willful or reckless conduct (Effective: 12/18/2015 and going forward): This penalty is increased to the greater of $5,000 or 75% of the income derived (or to be derived) by the preparer with respect to tax returns or claims for refund on which the preparer has understating tax due to willful or reckless conduct. The higher penalty is effective starting December 18, 2015. The penalty was the greater of $1,000 or 50% of the income derived (or to be derived) by the preparer with respect to the tax return. The understatement must be due to an unreasonable position, which is any position that a preparer does not reasonably believe is more likely than not to be sustained on its merits unless that position is disclosed on the return or there is substantial authority for the position. For positions that meet the definition of a tax shelter or listed transaction or reportable transaction, the preparer must have a reasonable belief that the position would more likely than not be sustained on its merits.

Quick Summaries of Business Tax Provisions

Information Reporting for Businesses

Deadlines for filing Form W-2 and Form 1099-MISC (Effective: Starting 2017): Forms W-2 and Form 1099-MISC must be filed by January 31st following the end of the calendar year. This is the same deadline for furnishing these statements to employees and payees. Businesses are no longer eligible for the extended filing due date (February 28th for paper filers and March 31st for electronic filers). This new deadline takes effect for calendar year 2016.

Additionally, PATH instructs the IRS not to pay any credit or refund related to the Earned Income Tax Credit or to the additional Child Tax Credit prior to February 15th. Presumably, this gives the SSA and the IRS enough time to process all the incoming W-2 and 1099-MISC forms and match them to individual tax returns to verify eligibility for the EITC and ACTC. This February 15th start date for issuing refunds related to the EITC and CTC takes effect starting with tax year 2016 returns filed in calendar year 2017.

Safe harbor for de minimis errors on information returns (Effective: Starting 2017): Starting calendar year 2017, businesses may rely on a safe harbor rule to avoid the penalty for failure to file a correct information return or the penalty for failure to furnish a correct payee statement. The safe harbor rule: "the information return or payee statement is otherwise correctly filed but includes a de minimis error of the amount required to be reported on such return or statement. In general, a de minimis error of an amount on the information return or statement need not be corrected if the error for any single amount does not exceed $100. A lower threshold of $25 is established for errors with respect to the reporting of an amount of withholding or backup withholding" (JCX-144-15, page 124).

Only tuition actually paid is reported on Form 1098-T (Effective: Starting 2016): Effective for calendar year 2016 and going forward, educational institutions are required to report only the aggregate amount of qualified tuition and related expenses that the person actually paid during the calendar year. Previously, educational institutions could report either amounts actually paid or amounts billed during the year.

Business Income

Eight-year recognition period for gains from the sale of qualifying electric transmission property (Effective: Through 2016): extended for tax years 2015 and 2016.

Reduction in S-corporation recognition period for built-in gains tax: Permanently changes from 10 years to 5 years the recognition period during which an S-corporation, regulated investment company or real estate investment trust may be subject to corporate tax on gains on property it held if it formerly was a C-corporation or received the property from a C-corporation.

Unrelated business taxable income of tax-exempt organizations: PATH permanently extends a special rule regarding rental income, royalties, annuities and interest income received from subsidiaries that have at least 50% controlled by the tax-exempt organization. Under this special rule, rents and other payments of income received from controlled subsidiaries that exceed the arm's length rules may be subject to tax as unrelated business income and may be subject to a 20% penalty. This provision had expired at the end of 2014, and is reinstated for the years 2015 and forward.

Business Deductions and Depreciation

3-year depreciation for race horses (Effective: Through 2016): extended for tax years 2015 and 2016.

7-year depreciation for motorsports entertainment complexes (Effective: Through 2016): extended for tax years 2015 and 2016.

15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements: Permanently extended and available for tax year 2015 and forward.

Accelerated depreciation recovery periods for business property on Indian reservations (Effective: Through 2016): extended for tax years 2015 and 2016. For the tax year 2016, taxpayers can elect out of this accelerated depreciation schedule on a class-by-class basis.

Basis adjustment to stock of S corporations making charitable contributions of property: Permanently extended. When a subchapter S corporation donates cash or property to charity, the value of the donation flows to the shareholder's 1040. The shareholder takes the charitable donation as an itemized deduction and reduces his or her basis in the stock of the S corporation. The amount by which the S corporation stock basis is reduced is the shareholder's pro rata share of the adjusted basis of the donated property. (This rule regarding basis adjustment had expired at the end of 2014, and is restored for tax year 2015 and forward.)

Bonus depreciation: Extended through 2019 with modifications. Taxpayers can take 50% of the adjusted basis of equipment and property as additional depreciation on top of the regular depreciation. PATH extends bonus depreciation through 2019 with the following modifications. The bonus depreciation amount is 50% of adjusted basis for tax years 2015, 2016, and 2017; 40% for tax year 2018; and 30% for tax year 2019. An additional $8,000 of bonus depreciation is allowed on cars for tax years 2015, 2016, and 2017; an additional $6,400 for 2018; and an additional $4,800 for 2019. PATH also extends to 2019 the election to accelerate AMT credits in lieu of bonus depreciation.

Bonus depreciation for the second generation biofuel plant property (Effective: Through 2016): extended for tax years 2015 and 2016.

Charitable Contributions of Food Inventory: Permanently extended. This deduction is available for tax years 2015 and forward. PATH also makes three changes to the special rules for donating food inventory to charities. First, business taxpayers can now take a deduction up to 15% of the business's taxable income (it was 10% for tax years 2014 and earlier). Second, taxpayers may elect, under certain circumstances, to treat the basis of their food inventory as equal to 25% of the fair market value of the item. Third, PATH introduces presumptions that can be used when assigning the value of the donated food items.

Domestic production activities deduction for Puerto Rico (Effective: Through 2016): extended for tax years 2015 and 2016.

Election to deduct energy-efficient commercial building property (Effective: Through 2016): extended for tax years 2015 and 2016.

Election to expense film and television productions and live theatrical productions (Effective: Through 2016): extended for tax years 2015 and 2016. For tax year 2016, live theatrical productions also qualify for this special rule.

Election to expense mine safety equipment (Effective: Through 2016): extended for tax years 2015 and 2016.

Empowerment zone tax incentives (Effective: Through 2016): extended for tax years 2015 and 2016.

Section 179: Expensing limits for 2015 and future years now set at a maximum limit of $500,000 per year, and this limit is reduced if the cost of qualifying property placed in service during the year exceeds $2 million. The $500,000 limit and $2 million phase-out are indexed for inflation starting in tax year 2016. PATH also makes permanent four special rules regarding the Section 179 deduction.

(1) Qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements are eligible for Section 179 treatment, with a special maximum limit of $250,000.

(2) Off-the-shelf computer software is eligible for Section 179 treatment.

(3) Air conditioning and heating units are eligible for Section 179 treatment starting with tax year 2016.

(4) Taxpayers may revoke a previously made Section 179 election without the consent of the Internal Revenue Service.

Business Tax Credits

American Samoa economic development credit (Effective: Through 2016): extended for tax years 2015 and 2016.

Biodiesel and renewable diesel incentives (Effective: Through 2016): extended for tax years 2015 and 2016.

Credit for energy-efficient new homes (Effective: Through 2016): extended for tax years 2015 and 2016.

Credit for facilities producing energy from renewable resources (Effective: Through 2016): extended for tax years 2015 and 2016, except for wind facilities (which expired in 2014 and is not being renewed).

Credit for the production of Indian coal facilities (Effective: Through 2016): extended for tax years 2015 and 2016.

Employer wage credit for employees who are active duty members of the uniformed services (Effective: Through 2016): Permanently extended with changes. Businesses are permitted an income tax credit equal to 20% of differential pay. Differential pay is the difference between an employee's wages that the employer would have paid had the employee remained working and the amount of pay the employee received from the military when called up to active duty. This tax credit is available to all employers of any size starting in 2016. For years 2015 and earlier, the credit is limited to small businesses.

Indian employment tax credit (Effective: Through 2016): Extended for tax years 2015 and 2016.

Mine rescue team training tax credit (Effective: Through 2016): extended for tax years 2015 and 2016.

New markets tax credit (Effective: Through 2016): Extended through 2019, permitting up to $3.5 billion in qualified investments each year. The carryover period for unused credits is extended by five years to 2024.

Railroad track maintenance tax credit (Effective: Through 2016): extended for tax years 2015 and 2016.

Research and development tax credit: Permanently extended with changes. Eligible small businesses can use the research credit to offset both their regular tax and alternative minimum tax beginning with tax year 2016. Also beginning in 2016, small businesses can elect to claim some of their research credit against their employer Social Security tax liability.

Second generation biofuel producer tax credit (Effective: Through 2016): extended for tax years 2015 and 2016.

Work opportunity tax credit: Extended through 2019 with modifications. Starting in the tax year 2016, the work opportunity tax credit is available for employers who hire people who have been unemployed for 27 weeks or more.

Excise Taxes

Medical device excise tax (Effective for calendar years 2016 and 2017): suspended for calendar years 2016 and 2017.

International Provisions

Subpart F exception for active financing income: Permanently exempts income derived from the active conduct of banking, financing, securities dealing, and insurance businesses from being included in the taxable income of a controlled foreign corporation.

Look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules: Extended through 2019.