[UNITED STATES] In the ever-evolving landscape of tax legislation, few acts have had as significant an impact on both individuals and businesses as the Protecting Americans from Tax Hikes (PATH) Act of 2015. This comprehensive piece of legislation, signed into law on December 18, 2015, brought about sweeping changes to the U.S. tax code, affecting everything from tax credits and deductions to refund processing and fraud prevention measures.
The PATH Act, at its core, was designed to provide greater stability and certainty in the tax code while simultaneously implementing measures to protect taxpayers from fraud. As Mark Steber, Chief Tax Information Officer at Jackson Hewitt, explains, "The PATH Act was passed to give taxpayers more and greater tax benefits, but also resulted in delayed refunds and benefits for some".
This legislation made permanent several tax provisions that were previously temporary, extended others, and introduced new regulations aimed at reducing tax fraud. The act's far-reaching implications touch various aspects of tax filing for both individuals and businesses, making it crucial for taxpayers to understand its key components.
Key Provisions of the PATH Act
Permanent Extensions of Tax Credits
One of the most significant aspects of the PATH Act was its permanent extension of several important tax credits. These include:
Earned Income Tax Credit (EITC): The PATH Act made permanent the enhanced EITC for eligible low and moderate-income workers. This includes the increased credit amount for families with three or more children and the reduction of the EITC marriage penalty.
Additional Child Tax Credit (ACTC): The act permanently extended the reduced earned income threshold of $3,000 for the refundable portion of the child tax credit.
American Opportunity Tax Credit (AOTC): This credit, which provides up to $2,500 for qualified education expenses, was made permanent. The PATH Act increased the phase-out thresholds to $80,000 for single filers and $160,000 for joint filers.
Business Tax Provisions
The PATH Act also included several provisions beneficial to businesses, particularly small businesses:
Section 179 Expensing: The act permanently extended the increased $500,000 maximum expensing amount under Section 179 and the $2 million investment-based phase-out amount, both indexed for inflation.
Research Tax Credit: The research and development tax credit was permanently extended, providing a significant boost to innovative businesses.
Bonus Depreciation: The act extended 50% first-year bonus depreciation for three years, gradually phasing it down to 40% in 2018 and 30% in 2019.
Impact on Tax Refunds and Processing
One of the most noticeable impacts of the PATH Act for many taxpayers is the potential delay in tax refunds. The act requires the IRS to hold refunds for tax returns claiming the EITC or ACTC until at least February 15th each year. This delay allows the IRS additional time to verify the legitimacy of these claims and prevent fraudulent refunds from being issued.
As Lisa Greene-Lewis, a CPA and tax expert at TurboTax, notes, "The PATH Act requires the IRS to hold refunds until February 15 if you claim the Earned Income Tax Credit or the Additional Child Tax Credit. This allows the IRS more time to help prevent revenue lost due to identity theft and refund fraud related to fabricated wages and withholdings".
ITIN Changes and Renewals
The PATH Act also brought significant changes to Individual Taxpayer Identification Numbers (ITINs). Under the new regulations, ITINs that have not been used on a federal tax return at least once in the last three consecutive years will no longer be valid for use on a tax return.
This change necessitates that ITIN holders stay vigilant about their tax filing status and renew their ITINs when necessary. Failure to do so could result in delayed processing of tax returns or denial of certain tax credits.
Fraud Prevention Measures
A key objective of the PATH Act was to enhance the IRS's ability to combat tax fraud. By delaying refunds for certain credits and implementing stricter ITIN regulations, the act aims to give the IRS more time to identify and prevent fraudulent claims.
Mark Steber emphasizes this point, stating, "The PATH Act helps protect taxpayers against fraud and improper payments. It gives the IRS more time to review tax returns to help prevent revenue lost due to identity theft and refund fraud related to fabricated wages and withholdings".
Planning for PATH Act Impacts
Given the significant changes brought about by the PATH Act, it's crucial for taxpayers to adjust their tax planning strategies accordingly. Here are some key considerations:
Anticipate Potential Refund Delays: If you claim the EITC or ACTC, be prepared for your refund to be delayed until at least mid-February. Plan your finances accordingly, especially if you typically rely on an early tax refund.
Stay Current with ITIN Requirements: If you use an ITIN, ensure it remains valid by using it on a federal tax return at least once every three years. If your ITIN has expired, initiate the renewal process well before the tax filing deadline.
Leverage Business Tax Benefits: If you're a business owner, explore how you can maximize the benefits of provisions like the expanded Section 179 expensing or the permanent research tax credit.
Understand Available Credits: Familiarize yourself with the tax credits made permanent by the PATH Act, such as the EITC, ACTC, and AOTC. Ensure you're claiming all credits for which you're eligible.
Consider Professional Assistance: Given the complexity of the PATH Act and its wide-ranging impacts, it may be beneficial to consult with a tax professional who can provide personalized advice based on your specific situation.
The PATH Act represents a significant shift in U.S. tax policy, bringing both opportunities and challenges for taxpayers. While it offers enhanced tax benefits and greater certainty in many areas of the tax code, it also introduces new complexities and potential processing delays.
By understanding the key provisions of the PATH Act and how they may impact your specific tax situation, you can better navigate the tax filing process and maximize your tax benefits. Remember, tax laws are complex and constantly evolving, so staying informed and seeking professional advice when needed is crucial to ensuring you're making the most of your tax situation while remaining compliant with all regulations.
