Editors' note: This article is a supplement for the 2016 Church & Clergy Tax Guide produced by Church Law & Tax. When updates occur before printing the guide near the end of the calendar year, we include such updates in the guide itself. When they come just before 2016 (as they did this year), we publish them on the website for free. Below are the updates meant to supplement the numerous changes already reflected in the 2016 Church & Clergy Tax Guide.
Effect on churches and church staff
In the closing days of 2015, Congress passed a massive spending bill (the "Consolidated Appropriations Act of 2016") to fund the federal government through the end of fiscal year 2016, and a tax bill (the "Protecting Americans from Tax Hikes Act of 2015," or "PATH Act") that, among other things, extended several expiring tax provisions. The two bills amount to some 2,500 pages of text. This article addresses those provisions in each Act that pertain to taxes, and have direct relevance to churches and church staff.
Key point. The congressional Joint Committee on Taxation estimates that the tax provisions will cost $622 billion over the next ten years.
The PATH Act makes over 20 tax relief provisions permanent, including the following:
1. Child tax credit
An individual may claim a tax credit of $1,000 for each qualifying child under the age of 17. The aggregate amount of child credits that may be claimed is phased out for individuals with income over certain threshold amounts. Specifically, the child tax credit amount is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over $75,000 for single individuals or heads of households, $110,000 for married individuals filing joint returns, and $55,000 for married individuals filing separate returns. Modified AGI includes certain otherwise excludable income.
To the extent the child tax credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (the "additional child tax credit") equal to 15 percent of earned income in excess of a threshold dollar amount. This threshold dollar amount is indexed for inflation. Congress previously set the threshold at $3,000 for taxable years 2009 to 2017.
The PATH Act makes permanent the earned income threshold of $3,000.
2. American opportunity tax credit
The American Opportunity Tax Credit is available for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Under this tax credit, taxpayers receive a tax credit based on 100 percent of the first $2,000 of tuition and related expenses (including course materials) paid during the taxable year and 25 percent of the next $2,000 of tuition and related expenses paid during the taxable year. Forty percent of the credit is refundable. This tax credit is subject to a phaseout for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly).