PATH Act

The Protecting Americans from Tax Hikes (PATH) Act of 2015 is a significant piece of legislation that was signed into law on December 18, 2015. The act’s primary purpose is to provide individuals, families, and businesses with tax relief while making certain tax provisions permanent. Furthermore, the PATH Act aims to enhance taxpayer protections and streamline the tax compliance process. The act also includes several provisions related to the prevention of fraudulent and improper claims of refundable tax credits.

Overview of the PATH Act

The PATH Act was introduced to extend and make permanent many temporary tax provisions that were set to expire. Legislation such as this typically falls under the umbrella of “tax extenders,” which are regularly renewed but not permanently fixed within the tax code. The PATH Act makes several of these provisions permanent, providing long-term certainty to individual taxpayers and businesses.

Key Provisions of the PATH Act

1. Permanent Extensions

   Some tax provisions that were made permanent under the PATH Act include:

   • enhanced American Opportunity Tax Credit (AOTC)
   • Earned Income Tax Credit (EITC)
   • Child Tax Credit (CTC)
   • Section 179 expensing
   • Research and Development (R&D) Tax Credit

   These permanent extensions aim to help taxpayers by ensuring long-term benefits rather than temporary relief.

2. Extensions Through 2019

   Certain provisions were extended through the year 2019, including:

   • Exclusion from gross income of discharge of qualified principal residence indebtedness
   • Mortgage insurance premiums treated as qualified residence interest
   • Above-the-line deduction for qualified tuition and related expenses

   These temporary extensions provide continued taxpayer support but were not made permanent parts of the tax code.

3. Provisions to Prevent Fraud

   To curb instances of fraudulent and improper claims of refundable tax credits, the PATH Act introduced several measures, such as:

   • Delaying refunds for taxpayers claiming the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until February 15
   • Requiring a valid Social Security Number (SSN) for claims of the EITC
   • Implementing procedures to verify individual taxpayer identification numbers (ITINs)

   These provisions aim to reduce tax fraud and improve the accuracy of tax credit claims.

Impact on Individuals and Families

The PATH Act has had a notable impact on individuals and families by providing clearer guidelines and permanent benefits that aid in financial planning.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) offers financial relief to students and their families by providing a tax credit of up to $2,500 per eligible student for higher education expenses. By making this credit permanent, the PATH Act has made it easier for families to plan for and afford college education.

Earned Income Tax Credit and Child Tax Credit

The Earned Income Tax Credit (EITC) helps low to moderate-income workers and families by reducing the amount of tax owed. The Child Tax Credit (CTC) provides financial support to families with children. Both credits are partially refundable, meaning that qualifying taxpayers can receive refunds even if their tax liability is zero. The permanency of these credits under the PATH Act has offered sustained financial support to millions of American households.

Impact on Businesses

The PATH Act’s impact on businesses has been equally significant, with several permanent and extended provisions that facilitate financial planning, tax compliance, and overall growth.

Research and Development Tax Credit

The permanent extension of the Research and Development (R&D) Tax Credit encourages businesses to invest in innovation by offering credits for qualified research expenses. This permanency allows for more consistent and long-term investments in R&D.

Section 179 Expensing

Under Section 179, businesses can deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. The PATH Act made the enhanced expensing provisions permanent, enabling companies to immediately write off expenses, thus improving cash flow and incentivizing capital investments.

Fraud Prevention Measures

The PATH Act’s emphasis on fraud prevention has led to the implementation of several changes aimed at reducing improper claims and enhancing the overall integrity of the tax system.

EITC and ACTC Refund Delay

One of the key measures was the delay of refunds for taxpayers claiming the EITC or ACTC until February 15. This additional time allows the IRS to verify claims more thoroughly and reduce instances of fraud.

SSN Requirements for EITC

Requiring a valid Social Security Number (SSN) for claims of the EITC ensures that only eligible individuals receive the credit. This measure helps prevent fraudulent claims and ensures that the EITC benefits those who are legitimately entitled to it.

ITIN Renewal and Verification

The PATH Act implemented procedures for the regular renewal and verification of Individual Taxpayer Identification Numbers (ITINs). ITINs are used by individuals who are not eligible for an SSN but still need to file taxes. By improving the accuracy and validity of these numbers, the act helps to reduce fraudulent claims and improve tax compliance.

Conclusion

The PATH Act of 2015 represents a crucial piece of tax legislation that provides long-term benefits and certainty to both individual taxpayers and businesses. By making several key tax provisions permanent, the act facilitates better financial planning and stability. The act also introduces important measures to prevent tax fraud and improve compliance, thereby safeguarding the integrity of the tax system. Overall, the PATH Act has had a lasting and positive impact on the American tax landscape.