PATH Act: Newly Permanent and Extended Tax Benefits Make More of Tax Planning
- This continues the H&R Block newsroom’s series on the Protecting Americans from Tax Hikes (PATH) Act, which made dozens of changes to the tax code. The PATH Act series covers its permanent extensions of many tax benefits, the renewal requirements for Individual Taxpayer Identification Numbers (ITINs), eligibility changes for certain tax credits, its expansion of other tax benefits, its increasing cost of making mistakes, its impact on small business and its delay of millions of refunds until February 15.
- The PATH Act tax impact resource guide provides information to help media and consumers.
It was par for the course last year when taxpayers did not know until December whether or not they would be able to claim an estimated $80 billion in expiring tax benefits. The same thing had happened the year before, when an estimated $87 billion tax benefit expiration loomed.
In all these cases, Congress extended many of the tax breaks around the time taxpayers were getting ready to file their tax returns. But in most cases, the extensions lasted only a year or two, setting up the same uncertainty to repeat itself.
But last year, something different happened. Congress passed the Protecting Americans from Tax Hikes (PATH) Act, which became law in December 2015. The PATH Act permanently extended many tax benefits, taking millions of taxpayers out of the repeating cycle of uncertainty around billions of dollars of tax benefits – and opening the door for more accurate tax planning.
“Tax planning is best done over a two-year window at least, but it can be really difficult to forecast income and other life situations that far in advance. When the tax benefits themselves are up in the air until the last minute, it makes tax planning that much more complex,” said Kathy Pickering, vice president and executive director of The Tax Institute at H&R Block. “Thanks to the PATH Act, taxpayers now have more certainty around more than a dozen tax breaks that impact parents, students, teachers and homeowners.”
Pickering advises taxpayers to review their previous year tax returns to identify any of these benefits they’ve used in the past. From there, they can try to forecast what benefits they may be eligible for this year and make any necessary changes to maximize their tax benefit.
For example, Pickering says a taxpayer who is retiring this year and has a decent amount of state and local income tax might decide to delay the purchase of an RV until next year. This taxpayer can plan to take advantage of the state and local income tax deduction this year when his income is higher and gives him the better tax benefit. And because the state and local sales tax deduction is now permanent, he knows that next year when his income is lower, he can maximize his tax benefit by making a major purchase then and deducting the sales tax instead.
Another area of important area for tax planning is education costs. The PATH Act makes the American Opportunity Credit permanent. Knowing that this important benefit is available for four years of college could mean families may want to make tuition payments earlier or later, depending on their expenses and circumstances.
“Taxpayers need to look at their own situation and understand what will give them the best result. There is no one-size-fits-all solution, but the certainty about these dozen or so tax benefits at least gives taxpayers a concrete framework to start their tax planning,” said Pickering.
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The new tax bracket and tax rate structure will impact most taxpayers. Homeowners, high-tax state residents and families face most significant changes