Overview of the PATH Act

The Protecting Americans from Tax Hikes (PATH) Act of 2015 introduced several significant changes to the U.S. tax code. Primarily, it aimed to prevent tax fraud and ensure the accuracy of refunds for refundable credits such as the Additional Child Tax Credit (ACTC), American Opportunity Tax Credit (AOTC), and Earned Income Tax Credit (EITC). Additionally, the PATH Act included provisions that extended or enhanced various tax benefits, impacting many taxpayers’ finances.

Anti-Fraud Measures

One of the PATH Act’s key focuses was to combat fraud associated with refundable tax credits. This legislation introduced several anti-fraud measures designed to tighten the requirements for claiming these credits and to ensure that refunds are issued accurately.

Refund Delays

Under the PATH Act, tax refunds claiming the ACTC or EITC are delayed until at least February 15 of the filing year. This delay allows the IRS to cross-check tax returns with W-2 information from employers, helping to prevent fraudulent claims. For example, if you file your return before February 15 and claim these credits, you will experience a delay in receiving your refund. The law mandates that the entire refund, not just the portion related to these credits, is held until after this date. In 2024, the IRS targeted February 27 for issuing most delayed refunds, provided the taxpayer opted for direct deposit and there were no other issues with the return.

Restrictions and Penalties

The PATH Act also imposed stricter penalties for improper claims of the ACTC, EITC, and AOTC. If the IRS finds that a credit was fraudulently claimed, taxpayers can be barred from claiming that credit for up to 10 years. If the incorrect claim was due to reckless or intentional disregard of IRS rules, the penalty period is reduced to two years. The PATH Act allows the IRS to disallow improper credits without a formal audit, requiring taxpayers to file Form 8862 to reclaim a previously disallowed credit once the penalty period has expired.

Identification Number Reporting

The PATH Act enforced stricter rules regarding taxpayer identification numbers. To claim the EITC, ACTC, or AOTC, taxpayers must include valid Social Security numbers or ITINs for themselves, their spouses, and qualifying children or students. This rule ensures that all claims are accurate and helps prevent fraudulent refunds. The identification number must be obtained by the original deadline for filing the tax return, which means late returns or amended returns without proper identification will be disallowed.

New and Extended Tax Benefits

Beyond its anti-fraud measures, the PATH Act introduced several tax benefits and made previous ones permanent. Some of the notable changes include:

• Additional Child Tax Credit (ACTC): The PATH Act made it easier for lower-income families to claim the refundable portion of the ACTC by setting the threshold at 15% of earned income over $3,000. This threshold had been previously scheduled to rise to $10,000 but was adjusted to benefit more taxpayers.
• American Opportunity Tax Credit (AOTC): The AOTC, which offers up to $2,500 in partially refundable credits for higher education, was made permanent. This credit covers the first four years of college and helps reduce the cost of education for many students and their families.
• 529 Plan Distributions: The PATH Act allowed tax-free distributions from 529 plans to cover expenses for computers, software, and Internet access, expanding the utility of these education savings accounts.
• Earned Income Tax Credit (EITC): The PATH Act permanently extended the higher credit amount for workers with three or more children and reduced the marriage penalty by making higher phase-out thresholds for joint filers permanent.
• Educator Expense Deduction: This deduction was made permanent and increased annually for inflation, allowing educators to deduct up to $300 for classroom supplies and professional development.
• Electric Vehicle Recharging Equipment Credit: The PATH Act extended this credit through 2016, with further enhancements and extensions made later.
• Mass Transit Exclusion: The PATH Act increased the exclusion from gross income for employer-provided mass transit passes and vanpool benefits, adjusted annually for inflation.
• Mortgage Debt Forgiveness: The Act extended the exclusion of up to $2 million of forgiven mortgage debt from taxable income through 2016, with later extensions.
• Qualified Charitable Distributions from IRAs: Seniors aged 70½ or older can make tax-free charitable distributions from IRAs up to $100,000 per year.
• State and Local Sales Tax Deduction: The option to deduct state and local sales taxes instead of income taxes was made permanent.
• Wrongfully Incarcerated Exclusion: The PATH Act added a provision allowing tax-free compensation for wrongful incarceration.

Conclusion

The PATH Act of 2015 has had a lasting impact on tax law, primarily through its anti-fraud measures and enhancements to various tax benefits. By delaying refunds for certain credits and tightening rules around credit claims, the PATH Act aims to prevent fraud and ensure accuracy. Additionally, the Act’s provisions for education savings, credits, and deductions continue to provide financial relief and stability for taxpayers. Understanding these changes can help you navigate the tax landscape more effectively and make the most of available benefits.