Follow the “PATH” to tax planning
For your personal taxes
The Protecting Americans from Tax Hikes Act (PATH) that became law last December provides a clear path to midyear planning for your personal taxes. Here are seven ways you might benefit.
1. Higher education. The PATH Act made the American Opportunity Tax Credit permanent and restored the tuition deduction through 2016. But you can only claim a credit or deduction, not both. Plan ahead for next semester.
2. Sales tax. Instead of state and local income taxes, you can deduct sales taxes based on an IRS table or actual receipts. Thinking of buying a car or boat this summer? Hang on to the invoice. You can add sales tax paid on those items to the amount in the IRS table.
3. Charitable IRA transfers. Are you age 701/2 or older? If you want to make a summertime donation to your favorite charity, follow the rules and you can transfer up to $100,000 directly from your IRA to the charity with no tax consequences. The transfer counts as part of your required minimum distribution in the year you make it.
4. Qualified small business stock. As you rebalance your portfolio this summer, consider investing in the stock of certain small corporations. When you hold the stock at least five years before selling it, your gain is completely excluded from federal income tax.
5. Energy credits. Prepare for summer heat by installing energy-saving improvements in your home. You can claim a 10% energy credit, up to a lifetime limit of $500.
6. Conservation easements. Combine tax savings with your estate planning this summer by donating a conservation easement in real estate you own. The easement permanently limits uses of the land for conservation purposes. You can claim a charitable contribution deduction for the donation and benefit from special tax rules.
7. Classroom expenses. Keep the receipts when you stock up on classroom supplies during summer sales. If you’re an educator, you can deduct unreimbursed expenses of up to $250.
For your business taxes
Business tax breaks restored by last December’s PATH Act can provide benefits as you begin your midyear planning. Here are five examples.
1. Buy equipment. Under Section 179 of the tax code, for 2016 your business can claim a maximum deduction of $500,000, subject to a phase-out threshold of $2,010,000. You can also claim 50% bonus depreciation on qualified property placed in service this year.
2. Fast-track research activities. The PATH Act restored the research credit with enhancements for qualified small businesses. Starting in 2016, special offsets against alternative minimum tax and FICA tax may be available.
3. Hire target employees. The Work Opportunity Tax Credit is available when you hire workers from certain “target groups.” And don’t overlook the special summertime credit for disadvantaged youth.
4. Make building improvements. The new law permanently extends the shorter 15-year depreciation period for qualified leasehold improvements, restaurant property, and retail improvements.
5. Offer employee transportation benefits. The PATH Act creates parity for the tax exclusion for mass transit passes, van pooling, and employer-provided parking. The monthly maximum for 2016 is $255.
© MC 2016