& The American Opportunity Tax Credit

Whiner boy Shkreli claims he was targeted by authorities over hikes in drug prices, according to an interview with the Wall Street Journal. Arrogance can kick your butt, especially when you don’t have the good sense to pay off the right people. Even then, you eventually have your day, as Madoff discovered.

The big news of course, is that the FOMC raised interest rates. The committee raised the fed funds rate by 0.25%. The message they are sending will likely have a bigger impact than the increase itself. Fed Chair Janet Yellen said the increase was justified on the basis of the strength of the U.S. economy.

Last week, the House Ways and Means Committee and the Senate Finance Committee announced key legislation, referred to as the PATH Act of 2015 (H.R. 2029). PATH is an acronym for Protecting Americans from Tax Hikes. The name has a nice touch to it, especially as we head into an election year.

In its final form, H.R. 2029 retroactively reinstates and extends a wide range of individual and small business tax planning provisions which had previously expired at the end of 2014. Unlike prior versions of the tax extenders legislation, the PATH Act will temporarily reinstate some provisions, but permanently extend others.

Qualified Charitable Distributions, or QCD’s, are now a permanent part of the tax and charitable landscape. QCD’s are the feature which allow those over age 70 to make RMD distributions directly to charity, without said distribution hitting the 1040. In many cases, this is a positive, as so many parts of the 1040, and the resulting taxes due, are tied to AGI.

The limits are that the taxpayer must be at least 70.5 years old, and can give no more than $100,000, in a given year, directly from the IRA to charity. While the taxpayer doesn’t get the charitable deduction, neither do they have to take the distribution as taxable income, as noted above.

From a tax planning standpoint, it is often better to donate appreciated securities than to make QCD gifts. If you have charitable intent, and want to reduce your tax bill, and have appreciated securities, yet aren’t sure which charity to give to at the moment, you may want to establish a donor-advised fund. All the major Wall St firms, as well as Schwab and Fidelity, have donor-advised funds. In addition, there are the independent entities, such as NCF, WaterStone, Community Foundation for Northeast Georgia,, and the Community Foundation for Greater Atlanta For those of you outside of Georgia, NCF and WaterStone have a national presence, and your local community probably has a community foundation.

Taxpayers may claim either state income taxes paid, or state sales taxes paid, whichever is greater, on their federal return. Typically, state income taxes is the larger number, so state sales taxes are usually taken only by those tax payers in states without an income tax, such as Florida, Texas, Nevada, South Dakota, Alaska, Washington, and Wyoming. PATH made the state sales tax deduction permanent.

The American Opportunity Tax Credit has been made permanent, has been expanded to $2500 annually, and allows for up to four years of post-secondary education. The AGI phaseout is up to $160,000 for married couples.

The child tax credit is $1000 annually, for each qualifying child in the household. Qualifying child is one who is under age 17 who lives with the taxpayer, is claimed as a dependent on the taxpayer’s return, and does not provide more than half of his/her own support. This child tax credit phases out as AGI exceeds $110,000 for married couples.

Typically, the cancellation of indebtedness is treated as taxable income. The Mortgage Debt Relief Act of 2007 changed these rules to stipulate that up to $2 million of mortgage debt could be cancelled without triggering taxable income. PATH extends these benefits through 2017.

The favorable Section 179 expensing limits, including the $500,000 maximum deduction amount, and the $2 million threshold for phasing out the deduction, are retroactively reinstated for 2015, and are made permanent. In addition, the new rules index the $500,000 deduction, and the $2 million phase-out threshold for inflation, beginning in 2016.

The 50% bonus depreciation rules are reinstated for 2015 and extended at current levels through 2017. In 2018, the bonus depreciation rules will continue as a 40% bonus depreciation, and in 2019, it drops to 30%, when it then ends.

The Work Opportunity Tax Credit is extended through 2019 for businesses who hire within certain targeted groups. These include veterans, qualified long-term unemployed individuals, and others.

The favorable rules to exclude capital gains on qualifying small business stock, or Section 1202 Small Business Stock, are made permanent. The rules that eliminate such gain as an AMT preference item is also made permanent. This is excellent news.

Qualified conservation contributions are made permanent, memorializing the charitable gifting of real property.

The aggregation rule for 529 plans is eliminated, meaning that, for calculations to determine which distribution is return of principal versus gain, each account is now evaluated individually. For qualifying tax-free distributions, this is a moot point. For non-qualifying distributions however, which are taxed as ordinary income, plus a potential 10% tax penalty, this detail matters.

Quotes of the week:

“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” – Winston Churchill

“The wages of sin are death, but by the time taxes are taken out, it’s just sort of a tired feeling.” – Paula Poundstone

“The power to tax is the power to destroy.” – John Marshall


Randy Brunson
Randy Brunson is the founding shareholder of Centurion Advisory Group. Mr. Brunson
has invested most of his thirty five year career in the area of financial services.

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