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Last week, the House Ways and Means committee came to an agreement for key legislation to renew the so-called “Tax Extenders,” a series of tax provisions that have lapsed and been reinstated (i.e., “extended”) repeatedly over the past decade. The new legislation, entitled the Protecting Americans from Tax Hikes Act of 2015 (PATH), will once again retroactively reinstate for 2015 the tax extenders that were renewed for and then expired at the end of 2014.

Unlike past tax extenders legislation, though, this time many of the provisions are permanently renewed. From the popular qualified charitable distribution rules (QCD) for making charitable contributions from an IRA for those over age 70½, to the American Opportunity Tax Credit for college, and the deduction for state and local sales taxes, this will be the last time that these key tax planning provisions remain in an end-of-year limbo.

However, not all tax extenders provisions were made permanent; a few, such as the 50% bonus depreciation for businesses and the work opportunity tax credit, are only extended a few years. The legislation also includes a few new tweaks, from a slight expansion of how qualified distributions from section 529 plans can be used, to the elimination of the in-state-plan requirement for the coming new 529-ABLE plans for disabled beneficiaries.

Although the PATH legislation has not quite passed yet—it still needs to be added to the Omnibus Appropriations legislation that sets the government’s budget through September 30 of 2016—the tax extenders are expected to pass in their agreed-upon form in a matter of days, once the remainder of the rulemaking process is completed.

And notably, the final version of the Omnibus legislation will not include any changes to the Department of Labor’s fiduciary proposal, which remains intact and on track for the department to issue its final year in the coming months.


Key Tax Extenders Under H.R. 2029

In its final form, H.R. 2029—also known as the Protecting Americans from Tax Hikes (PATH) Act of 2015—retroactively reinstates and extends a wide range of individual and small business tax planning provisions that had previously expired at the end of 2014. An early projection from the Committee for a Responsible Federal Budget, based on prior scoring from the Joint Committee on Taxation, estimates the financial impact of the legislation at approximately $650B over the next 10 years (plus another $130B of interest on that debt).

Notably, unlike prior versions of the Tax Extenders legislation, the PATH Act will temporarily reinstate some provisions but permanently extend others. A list of the key provisions and changes is noted below.

Qualified Charitable Distributions (QCD) directly from IRAs to charities made permanent

Since 2006, taxpayers who are over age 70 ½ have been permitted to make a “Qualified Charitable Distribution” of up to $100,000 directly from an IRA to a charity. The contribution to the charity is not claimed as a tax deduction, but the distribution from the IRA is not taxed in income in the first place either, making it a perfect pre-tax charitable contribution. And the QCD counts towards the taxpayer’s Required Minimum Distribution (RMD) obligations, which would apply given that he/she must already be over the age of 70 ½. The QCD rules had lapsed at the end of 2014.

The new PATH tax extenders legislation makes the Qualified Charitable Distribution (QCD) rules permanent, at their existing levels and thresholds (still capped at $100,000 per taxpayer, and still must be over age 70 ½ at the time of the distribution).

For those who completed a QCD earlier this year in anticipation that the rules would be reinstated, this outcome ensures that they will receive favorable treatment. Any taxpayers who have already taken their Required Minimum Distribution for 2015, though, will not be able to undo their RMD to complete a QCD at this time, as it is not permitted to do an IRA rollover of an RMD to put it back in the IRA, and simply taking the proceeds of an RMD and contributing it to a charity does not qualify as a QCD (the distribution must have been done directly from the IRA to a charity); instead, the taxpayer will simply receive a normal charitable deduction that will hopefully at least mostly offset the tax impact of the RMD.

Notably, though, from a tax perspective it is still better to donate appreciated securities instead of doing a QCD for charitable giving in most cases; those who still want to donate appreciated securities this late in the year may wish to establish a donor-advised fund to facilitate the process given limited time.

State and local sales tax deduction made permanent

Each year, taxpayers may claim an itemized deduction for either the payment of state income taxes in the calendar year, or the payment of state sales taxes instead. The state sales tax deduction can be determined by adding up the actual state sales taxes paid (and validated by receipts), or the IRS provides a sales tax deduction calculator that produces an estimate that can be claimed as sales taxes paid based on the taxpayer’s income and zip code.

Generally, taxpayers will claim whichever amount is higher—state income taxes paid or state sales taxes paid (based on receipts or the IRS estimate methodology)—to produce the largest deduction on Schedule A.

Notably, given that sales taxes apply only to goods that are purchased while state income taxes apply to all income in the year, the state income tax deduction is typically higher in any states that have an income tax, and the state sales tax deduction is usually only claimed by those who live in states without an income tax (i.e., Florida, Texas, Nevada, South Dakota, Alaska, Washington, and Wyoming).

The new PATH tax extenders legislation makes the state and local sales tax deduction permanent. This change will primarily benefit those who itemize their deductions, and live in one of the aforementioned seven states that have no income tax (though individuals with low income and high expenses in other states, including retirees liquidating investment accounts in retirement, may still find the state sales tax deduction appealing).

[For more detail about these and other changes, read my full analysis here.]

While this may be the last substantial tax legislation until after the next election and inauguration, the stage is still set for potentially significant tax reform legislation coming in 2017.

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