President Obama on December 18 signed into law the $1.8 trillion Omnibus Appropriations Act, a huge tax cut and spending measure that includes extensions worth $680 billion of over 50 expiring tax provisions. 

The new tax law extends a number of important tax provisions permanently, meaning individuals and businesses will no longer have to endure the annual end-of-year drama over whether Congress would allow the cuts to expire. Other tax breaks are extended for 5 or 2 years.  

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New Tax Law: What You Need to Know (Part 1)

Tue Dec 22, 2015

President Obama on December 18 signed into law the $1.8 trillion Omnibus Appropriations Act, a huge tax cut and spending measure that includes extensions worth $680 billion of over 50 expiring tax provisions. 

The new tax law extends a number of important tax provisions permanently, meaning individuals and businesses will no longer have to endure the annual end-of-year drama over whether Congress would allow the cuts to expire. Other tax breaks are extended for 5 or 2 years.

In two year-end blog posts, I’ll cover permanent extensions (part 1) and short-term extensions (part 2).

Part 1

Based on an analysis of the new law by the congressional Joint Committee on Taxation the permanent extensions include:

  • Parity for the tax exclusion for employer-provided mass transit and parking benefits. Certain transportation fringe benefits like parking and transit passes are excluded from an employee’s gross income for tax purposes and from wages for payroll tax purposes.

As payroll professionals know, after February 2009 parity was established between parking and transit/vanpool qualified transportation fringe benefits. Starting in January 2015, however, only $130 per month could be excluded in transit and vanpool benefits while $250 could be excluded in qualified parking benefits. The 2016 monthly exclusion limit was set at $130 and $255 respectively.

Under the new law, and effective retroactively for months after December 31, 2014, the monthly limit on the exclusion for transit pass and vanpool benefits is on a par with the parking benefit exclusion, i.e., $250. For 2016 and after, therefore, the same monthly limit on the exclusion will apply to transit, vanpool and parking benefits. Employers may reimburse employees on a tax-free basis for expenses incurred in 2015 to the extent the expenses exceed $130 per month but are less than $250 a month.

  • Reduced earnings threshold for the additional child tax credit. The new tax law makes permanent a $3,000 special lower threshold for refundability that has been in effect since 2009 that allows certain taxpayers to qualify for an “additional” refundable child tax credit. The dollar-for-dollar credit against tax liability is “refundable” to the extent the child tax credit exceeds the taxpayer’s tax liability.

Had the lower refundability threshold been allowed to expire, the refundable child tax credit amount for which lower income taxpayers are eligible would have been reduced significantly. This provision is estimated to cost $88 billion over ten years.

  • Extension and modification of the research tax credit. Business taxpayers generally can claim a research tax credit of 20% of the amount by which qualified research expenses in a tax year exceed a base amount for that year. In other words, the 20% research credit is based on incremental increases in qualified research.

The “R & D” tax credit was first enacted in 1981 and has been extended on a temporary basis at least 15 times. The new tax law makes this incremental research tax credit permanent, at a cost to the federal government of $113 billion over ten years.

  • Extension of the American Opportunity tax credit. The “AOTC” allows eligible students to claim a maximum tax credit of $2,500 per year for tuition and related expenses for the first four years of post-secondary education in a degree program. The new tax law makes the AOTC for undergraduate education permanent at a cost of $80 billion.
  • Modification of the Earned Income Tax Credit. Lower income taxpayers may qualify for an earned income tax credit (EITC) based on their income, filing status, number of children and other factors. The EITC is refundable in the sense that the taxpayer receives the tax credit as a payment from the government if the amount of the credit exceeds the individual’s income tax liability.

As an example of the EITC, taxpayers with one qualifying child can receive a tax credit of 34 percent of their earnings up to $9,880, for a maximum refundable credit of $3,359, according to the Joint Committee on Taxation. Of course the maximum credit is available only for earnings up to $18,110, and then begins to phase down until $39,131. Taxpayers with two children can qualify for a credit of 40 percent for a maximum tax credit of $5,548.

The new tax law makes permanent a special provision enacted in 2012 that makes taxpayers with three or more children eligible for an EITC of 45 percent, resulting in a maximum refundable credit of $6,242. The cost of this provision is $30 billion over ten years.

  • Tax free distribution from IRAs for charitable purposes. Generally, distributions from Individual Retirement Accounts are subject to federal income taxation. However, such distributions may be excluded from taxable income if they are “qualified charitable distributions,” i.e., charitable contributions. Of course the taxpayer may not also claim a tax deduction for the charitable contribution. QCDs are distributions directly to a charity from an IRA trustee.

This special tax treatment of IRA distributions is available only to the extent the IRA owner is age 70 ½ or older and the distribution is part of an annual Required Minimum Distribution (RMD). The new tax law provision makes permanent the exclusion from gross income for qualified charitable distributions from an IRA. The cost is $9 billion over ten years.

Note: This blog is intended for educational purposes only and should not be construed as offering tax advice.