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PATH Act

How the PATH Act May Affect Your Taxes | H&R Block

December 20, 2016 : Allie Freeland – Contributing Editor

Editor’s Note: You’ve probably heard about a new law Protecting Americans From Tax Hikes Act, or PATH Act. Here are some ways the PATH Act could impact you in 2016…

Do you know about a recent law passed called the Protecting Americans from Tax Hikes, or (PATH) Act? Passed in late 2015, the law contains more than 100 tax provisions, many of which go into effect this year. Most Americans are affected by the PATH Act in some capacity. The 233-page bill includes over $620 billion in tax reductions for families and businesses in America.

The new law helps provide more certainty about U.S. taxation – opening the door for more accurate and useful tax planning. Some of the important changes include: permanent extensions of many tax benefits, tax relief through credits and provisions, updated renewal requirements for Individual Taxpayer Identification Numbers (ITINs), compliance provisions, and tax incentives for individuals and small businesses.

Here Are 5 Real-Life Ways You Could Be Impacted by the PATH ACT

1 – A Refund Delay – But For a Good Reason

If you file your tax return early in the tax season, are due a refund, and claim either the EITC or the ACTC, your refund could be affected. With the PATH Act, the IRS will not release your refund before Feb. 27, 2017 if you’ve claimed one or both of these credits.

The IRS still expects to issue most refunds in 21 days or less. In fact, the IRS issues nine out of 10 refunds within 21 days. Check “Where’s My Refund?” or download the IRS2Go Mobile App and check the current status of your refund.

2 – More Coverage for College Savings Plans

Qualified tuition plans, or 529s, grows tax-free and allow taxless distributions for qualified expenses. They may also have state income tax benefits, like deductions or contribution credits. Also, anyone can contribute to them for qualified higher education expenses, which previously were limited to tuition, fees, books and room & board. The PATH Act expands “qualified higher education expenses” to include technology expenses, like computers or storage devices. Additionally, you will now have 60 days to re-contribute a tuition distribution to a 529 if a tuition payment is refunded.

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.

3 – Retirement Made Simpler With SIMPLE Plans

SIMPLE plans are retirement accounts, and can be set up as a SIMPLE IRA or a SIMPLE 401(k). It’s available to employers or self-employed taxpayers who don’t have a qualified retirement plan. (You can set up a SIMPLE plan if you have 100 or fewer employees. They must have received $5,000 or more in compensation for the prior year. If the plan is set up as an IRA, a separate SIMPLE IRA account is set up at a financial institution for each eligible employee. A SIMPLE set up as a 401(k) is considered a qualified plan. However, it’s not subject to the nondiscrimination and top-heavy rules that regular 401(k) plans have.)

Compared to other plans, IRAs have a lower administrative cost and no annual FDIC reporting requirement. This helps small employers offer matching retirement savings to their employees.

With the enactment of The PATH Act, you can now rollover funds from previous employer-sponsored retirement plans to a SIMPLE plan if the plan has existed for at least two years. This provision offers additional ways to reduce your overall adjusted gross income (AGI).

4 – Changes to ABLE, Affecting Those With a Disability

If you are certified as disabled, you and your family may have a tax-advantaged way to save and pay for the costs associated with your by opening and contributing to an ABLE account. ABLE accounts grow tax-free and funds used to pay for qualified expenses are distributed tax-free. The accounts may have state income tax benefits as well.

The PATH Act eliminates the requirement that the ABLE account be located in the beneficiary’s state of residency. This means that if you can set up an ABLE account in any state. As ABLE programs become available in more states you have the opportunity to select the plan that best meets your needs.

5 – Tax Planning 

The PATH Act now gives taxpayers more certainty about key tax breaks. Review your previous years’ tax returns to identify any of these benefits you’ve used in the past, then forecast the benefits you may be eligible to maximize tax benefits in your upcoming tax return. Because the tax landscape has changed recently, so it is more important than ever to talk with a tax professional, so with a tax professional at H&R Block now!

Gain more insight into future implications of the PATH Act in 2016 and beyond. View more information about the PATH Act here. 

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Allie Freeland – Contributing Editor

Allie Freeland – Contributing Editor

H&R Block

Allie is the Contributing Editor of the H&R Block blog, Block Talk. She has been a practicing grammar geek since 2007.

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