4 Tax Breaks Recently Made Permanent

Congress recently passed the Protecting Americans from Tax Hikes (PATH) Act of 2015, which makes several previous temporary tax breaks permanent.  These tax breaks have provided valuable benefits to taxpayers and have caused planning headaches every year as people waited to find out if they would be extended or lapse.  Fortunately, those planning headaches will subside as these tax breaks are now permanent.

1. Qualified Charitable Distributions – The qualified charitable distribution rule allows a taxpayer who is over age 70.5 to donate their required minimum distribution (RMD) directly to charity and avoid having to claim the distribution as income.  The taxpayer does not get a tax deduction for the donation because they weren’t forced to include the distribution as taxable income. In most cases, the ability to avoid claiming the RMD as income provides a larger tax benefit than the alternative, which is including the RMD as taxable income and then writing off the donation as a deduction.  This is especially advantageous for taxpayers who use the standard deduction on their tax return.

2.  State and Local Sales Tax Deduction – Most states have an income tax and taxpayers who itemize their deductions on their Federal tax return can deduct the state income taxes they pay.  What about states that don’t charge an income tax like Florida or Texas? The state and local sales tax deduction allows a taxpayer to deduct whichever is higher; state income taxes or state sales taxes.  This is very beneficial if your state doesn’t charge an income tax. 

3. American Opportunity Tax Credit – This tax break allows taxpayers to receive a credit of up to $2,500/year for up to four years for college tuition and expenses.  It replaced the Hope Scholarship Credit and has provided greater tax relief to more people. The American Opportunity Tax Credit was scheduled to lapse at the end of 2017 but has been made permanent to the relief of parents with children in college or approaching college.

4.  Enhanced Child Tax Credit – The child tax credit provides a $1,000 credit for every qualified child in a taxpayer’s household as long as their income is below $110,000 for a married couple ($75,000 for an individual). For those with low incomes, the credit was refundable in the amount of 15% of their earned income over the threshold, which was set at $3,000 until 2017.  The PATH Act makes the $3,000 threshold permanent.

Steven Elwell, CFP®, December 24, 2015

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