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Tax News

CONGRESS MAKES PERMANENT MANY “TEMPORARY” TAX PROVISIONS AND ENHANCES SEVERAL MORE – POSTED JANUARY 2016

The “Protecting Americans from Tax Hikes Act of 2015" (PATH Act), signed by President Obama on December 18, 2015, makes 22 temporary provisions permanent, including the following: (1) state sales tax deduction; (2) American Opportunity Tax credit; (3) the reduced earnings threshold ($3,000) for the additional child tax credit; (4) the EITC rate of 45 percent for taxpayers with three or more qualifying children and the higher EITC phase-out thresholds for married couples filing joint returns ($5,520 for 2015, adjusted for inflation after 2015); (5) $250 above-the-line deduction for educators, which is adjusted for inflation after 2015; (6) tax-free retirement plan distributions made to qualified charitable organizations; (7) increased percentage limits and extended carryforward period for qualified conservation contributions; (8) the Section 179 immediate expense deduction of $500,000; (9) the modified research tax credit; (10) 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant buildings; and, (11) 100% gain exclusion on certain small business stock. Four other provisions have been extended through 2019, which include bonus depreciation. The bonus percentages are 50% for 2015-2017, 40% for 2018, and 30% for 2019. For taxpayers who claim bonus depreciation on passenger vehicles, the $8,000 increase in the limitation on the depreciation deductions has been extended for 2015-2017, and is reduced to $6,400 in 2018 and $4,800 in 2019. Thirty other provisions, generally more narrow in scope, have been extended through 2016. Two of these extensions affecting a larger number of taxpayers are (1) mortgage insurance premiums treated as qualified residence interest, and (2) above-the-line deduction for tuition and fees. There are a number of other tax provisions involving family tax relief, real estate investment trusts, and tax administration. Note: The PATH Act is a welcome relief to tax planners who have had to wait until the end of the year to find out whether provisions affecting their clients would be extended. Making incentive provisions such as bonus deprecation permanent may be more effective. For example, how effective can the bonus depreciation provision be in stimulating the current economy if the taxpayer does not know whether it will apply to the current year until the last two weeks of the year? The PATH Act also should be welcomed by the IRS, which previously was unable to finalize tax forms for the upcoming tax season until Congress decided whether to extend many temporary provisions.

Click here for a copy of the complete technical explanation of the PATH Act by the Joint Committee on Taxation.

Key 2015 Dollar Amounts and Limitations – Posted November, 2015

Below, we have posted a table of key 2015 amounts and limitations. These include the standard deduction, exemption deductions, and the AGI or Modified AGI (MAGI) amounts where certain tax deductions and tax credits begin to be phased out or are eliminated. The latter includes phaseout amounts reducing: (1) exemption deductions; (2) itemized deductions; (3) child tax credit; (4) education tax credits, (5) IRA deductions; and, (6) several more. Please see below for the complete table. If some of your clients are affected by one or more of these phaseout limitations, they may be able to increase their 2015 tax deductions or tax credits by either deferring income to 2016 or accelerating 2016 above-the-line deductions to 2015 (the phaseouts are based on AGI rather than taxable income, so accelerating itemized deductions does not affect the AGI limitations). For example, assume a married couple with two dependent children expect their 2015 MAGI to be about $120,000. If the phaseout limitations did not apply, the taxpayers could claim a $1,000 child credit for their 15-year old and a $2,000 lifetime learning tax credit for their other child, who is attending graduate school. Note that for both of these credits, the beginning MAGI phaseout is $110,000 so these credits will be reduced if their actual MAGI is $120,000. The acceleration of above-the-line deductions or the deferral of income will increase both of these tax credits. For example, assume that in their AGI estimation is an expected $5,000 long-term capital gain from a stock sale they are planning to make in December, 2015. If they delay this sale until January, 2016, this action will result in (1) increasing their child credit by $250 ($50 for every $1,000 AGI reduction until their MAGI is $110,000 or less), and (2) increasing their lifetime learning tax credit by $500 ($100 for every $1,000 AGI reduction until their MAGI is $110,000 or less). In addition, they will delay $750 ($5,000 x 15%) of capital gains tax until 2016. Other ways that taxpayers may reduce their 2015 MAGI are (1) accelerate Schedule C or Schedule E expenses; (2) realize capital losses up to the $3,000 limitation; and, (3) where feasible, delay year-end bonuses until January 2016. Note: Deferring income to the next year or accelerating deductions to the current year is likely to have a negative impact on next year’s tax liability. So, the tax costs and benefits of both years need to be estimated to determine the optimal tax strategy.

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CONGRESS CHANGES DUE DATES OF PARTNERSHIP AND C CORPORATION INCOME TAX RETURNS – Posted September, 2015

On July 31, 2015, President Obama signed the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015" (Public Law 114-41). The major thrust of this law is to provide an extension of Federal-aid highway programs and to provide resource flexibility to the Department of Veterans Affairs for health care services. Section 2006 of this law will have a major impact on tax preparers as the due dates of tax returns for C Corporations and partnerships have flipped for taxable years beginning after December 31, 2015. In general, partnerships (and S Corporations as under current law) will be due on the 15th day of the third month after year-end while C Corporation income tax returns will be due on the 15th day of the fourth month after year-end. So for the 2017 filing season, the filing due date for 2016 calendar-year S Corporations and partnerships will be March 15, 2017, while 2016 calendar-year C Corporations will be due on April 17, 2017 (April 15 is on a Saturday in 2017). A six-month extension will be available for partnerships and S Corporations. After 2015, tax returns for calendar-year S Corporations and partnerships for which extensions have been filed will be due on September 15, which is the same as under current law. For calendar-year C Corporations, only a five-month extension will be allowed until 2026 where a six-month extension will be allowed. Note: There is a special rule for C corporations with a taxable year ending on June 30. In this case, the law does not apply until taxable years beginning after December 31, 2025. Note: These new due dates are generally ones that the AICPA and state CPA societies have been advocating for several years to create a more logical flow of information and help taxpayers and tax professionals in filing timely and accurate tax returns.

SUPREME COURT RULES THAT THE PREMIUM ASSISTANCE TAX CREDIT APPLIES TO ALL EXCHANGES – Posted June, 2015

As a consequence of the Affordable Care Act, the Section 36B refundable tax credit is available to taxpayers covered by a qualified health plan that the taxpayer enrolls in through an Exchange. The taxpayer must be covered by a qualified health plan enrolled in through an Exchange established by the State. For states that chose not to establish an Exchange, Federal Exchanges may be set up. The Supreme Court has ruled that the term “established by the State” applies to Exchanges established by both individual states and the Secretary of Health and Human Services. The Supreme Court reasoned that Congress must have intended the premium assistance credit to be available in all states, not just in states where the exchanges were established by individual states. Most of the opinion is dedicated to a review of the three major reforms of the Affordable Care Act. The first reform is that each health insurance issuer must accept every individual that apples for coverage and that higher premiums cannot be charged on the basis of a person’s health. The second reform is the health insurance mandate – all individuals are required to maintain health insurance coverage or to make a payment to the IRS. The purpose of this reform was to broaden the health insurance risk pool to include healthy individuals, which hopefully would lead to lower premium costs. The individual mandate does not apply to individuals who have to spend more than eight percent of their income on health insurance. The third reform is the premium assistance tax credit for individuals with household incomes between 100 percent and 400 percent of the federal poverty line. Without the tax credits, the cost of buying insurance would exceed eight percent of income for a large number of individuals, which would exempt them from the coverage requirement. Together these three reforms were intended to minimize adverse selection (the significant reduction in the percentage of individuals who purchase insurance), broaden the risk pool, and lower insurance premiums. The court noted that for 2014, 87 percent of people who bought insurance on a Federal Exchange did so with tax credits and virtually all of those people would become exempt under the individual mandate reform if the credits were not available to Federal Exchanges (their costs would be more than eight percent of their income). If this were the case, not all of the reforms would be satisfied. The Supreme Court reasoned that this could not have been the intent of Congress. It therefore ruled that the tax credits apply to all exchanges, not just exchanges established by individual states. Note: A dissenting opinion stated the following: “Words no longer have meaning if an Exchange that is not established by a State is ‘established by the State.’ It is hard to come up with a clearer way to limit tax credits to state Exchanges than to use the words ‘established by the State.’ And it is hard to come up with a reason to include the words ‘by the State’ other than the purpose of limiting credits to state Exchanges.” CLICK HERE to read the opinion.

TAX COURT DENIES CHARITABLE DEDUCTION FOR SLIGHTLY ALTERED CONSERVATION EASEMENT – Posted April, 2015

In Balsam Mountain Investments, LLC [3/12/2015], a partnership (Balsam) granted a perpetual conservation easement on a 22-acre land parcel to a nonprofit corporation. The conservation purpose was to preserve the parcel as natural habitat and open space. Balsam claimed a qualified conservation charitable contribution deduction for the donated easement. Balsam was restricted in perpetuity from developing or altering the parcel. The land’s exact boundaries were described in a plat attached to the agreement. However, the agreement permitted Balsam to make minor boundary changes to the land, provided specified requirements were met. Examples of some of the requirements are described below. First, the calculated 22-acre total could not be reduced after the boundary was altered. Second, the aggregate land removed by the boundary line alterations must be 5% or less of the total land area in the original agreement.Third, no boundary line adjustments could be made after five years from the date of the original easement. Fourth, all new boundaries were subject to prior donee review. The IRS disallowed the deduction, asserting that the easement donated was not a Section 170(h)(2)C) “qualified real property interest.” The basis of the IRS argument was that the easement agreement permitted the donor to change the property that was the subject of the easement. The fact that the property could be changed precluded its being a “qualified real property interest” because the donation was not an interest in an identifiable, specific piece of real property. The Tax Court agreed with the IRS, and denied the deduction to Balsam. IRS: On 3/19/2015, the IRS updated its page on conservation easements. The IRS points out that there are abuses of the charitable deduction for qualified conservation contributions. Abuses include taxpayers claiming inappropriately large deductions, or claiming deductions where they are not entitled to a deduction. The IRS also states that the donee charity may allow property owners to modify the original easement or to develop the donated land in a manner inconsistent with the easement’s restrictions, actions that preclude the deduction.  [CLICK HERE] to read the original case.

TWO RECENT TAX COURT DECISIONS DETERMINE ALIMONY DEDUCTION – Posted March, 2015

In Becker [1/13/15], a couple’s divorce was finalized on August 29, 2011. The husband owed $8,205 for alimony and $8,307 for child support for 2011. He paid $9,688 for alimony and child support. The Tax Court focused on the alimony criteria in Section 71, noting that amounts paid for child support are not alimony. Per Section 71(c), if the payment is less than the amount specified in the instrument, child support is satisfied first. The court ruled that the first $8,307 of the payments was nondeductible child support, and the next $1,381 balance was deductible alimony.  [CLICK HERE] for the complete Becker case.

In Hampers [2/18/15], as part of a divorce decree a New Hampshire taxpayer was required to pay his former spouse’s present and future attorney’s fees that she incurred with respect to their divorce. He claimed a deduction for “future attorney’s fees” that he paid in 2009, 2010, and 2011. The Tax Court considered if the future attorney’s fees met the Section 71 alimony deduction requirements. The court considered the four specific Code requirements for alimony: (1) cash payment received by spouse under divorce or separation instrument; (2) instrument does not designate payment as not allowable as a deduction and / or not includible in gross income; (3) spouses legally separated under decree of divorce or separate maintenance are not members of same household when payment is made; and, (4) no liability to make any payment after payee spouse dies. The issue was if the taxpayer could be liable to make a payment of future attorney’s fees pursuant to the decree after his former spouse died. The court stated that if the payor is liable for even one payment after the payee’s death, none of the related payments required before death qualify as alimony. It stated that if the divorce instrument is silent regarding a postdeath obligation, requirement four still may be met if the payments terminate upon the payee’s death by operation of state law. If state law is ambiguous, the court makes its own determination based on the language of the document. The document was silent, so the court considered state law. It noted that a New Hampshire Supreme Court (NHSC) decision had stated a general rule that there is no reason to render a divorce decree once the marital relationship has already been ended by death. The court observed that the NHSC had stated that the general rule could be subject to limitations and exceptions. It cited other New Hampshire law that provides that jurisdiction in divorce proceedings is a continuing one with respect to all subsequent proceedings which arise out of the original cause of action. The court stated that it could be possible for liability for litigation fees to arise after the death of the payee spouse if she were to die after future attorney’s fees were incurred but before a proceeding to determine their reasonableness had taken place. Also, there could be a post-death action for collection of accrued arrears. The court concluded New Hampshire law does not plainly show that the taxpayer’s liability for future attorney’s fees for his former spouse payee would terminate upon her death. The court then reviewed the divorce instrument itself. It ruled that under New Hampshire law the taxpayer could be liable for future attorney’s fees after his payee spouse died, and that he was not entitled to an alimony paid deduction for the 2009 - 2011 payments of future attorney’s fees. Planning Pointer: Payors of alimony under a divorce decree should make sure that the divorce decree clearly states that the alimony payments cease upon the death of the former spouse. [CLICK HERE] for the complete Hampers case.

IRS PROVIDES EXTENSIVE RESOURCES TO FACILITATE ACA COMPLIANCE – Posted February, 2015

The IRS has issued some items to facilitate compliance with the Affordable Care Act (ACA) for 2014. In IRS News Release IR-2015-3 [1/16/15], the IRS notes that many taxpayers simply will need to check a box (Form 1040, page 2, line 61) on their tax return to verify they have health insurance coverage. ACA information is at irs.gov/aca. A taxpayer and each family member must have qualifying health insurance coverage for each month of 2014, qualify for an exemption, or make an individual shared responsibility payment with their 2014 federal income tax return. There is a chart at irs.gov/aca to use to determine if insurance counts as qualifying coverage. Taxpayers eligible for an exemption complete Form 8965, “Health Coverage Exemptions,” and attach it to their return. Taxpayers without qualifying coverage or an exemption for each month of 2014 must make the individual shared responsibility payment with their return (put in the amount on line 61 of Form 1040). Taxpayers who bought coverage through the Health Insurance Marketplace should receive Form 1095-A, “Health Insurance Marketplace Statement,” from the Marketplace by early February 2015. If the taxpayer does not receive Form 1095-A, the taxpayer should contact the Marketplace. Taxpayers who received advance payments of the premium tax credit must reconcile the advance payments with the amount of premium tax credit to which they are entitled on their 2014 return. Taxpayers use Form 8962, “Premium Tax Credit (PTC),” to reconcile the credit to which they are entitled with advance payments. The IRS also published Publication 5187, “Health Care Law: What’s New for Individuals & Families,” which contains 21 pages of explanation about the ACA. [Click here] for a copy of Publication 5187. In Notice 2015-9 [1/26/15], the IRS provides limited penalty relief for taxpayers who have a balance due on their 2014 income tax return due to receiving more advance PTC payments than the PTC to which they are entitled. Some taxpayers with a balance due on their return attributable to an advance payment excess may not be able to pay the excess when it is due, generally April 15. In certain cases, the IRS will provide relief from the Section 6651(a)(2) failure to pay penalty, and the Section 6654(a) underpayment of estimated tax penalty if certain conditions are met. There is no relief from the failure to file penalty, or the shared responsibility payment. Also, the Section 6601 interest provision for amounts of tax not paid by the due date still applies, even if taxpayers qualify for penalty relief under the notice.

CONGRESS PASSES “EXTENDERS BILL” IN LATE 2014

On December 19, 2014, President Obama signed “The Tax Increase Prevention Act of 2014” (Public Law # 113-295). The major thrust of the law focused on extending certain provisions which expired at the end of 2013. Unfortunately, the law only extended affected provisions for one year. The short extension makes tax planning in 2015 problematic for those taxpayers who use these provisions. That is, if these provisions are to apply in 2015, Congress will have to pass another bill to extend them through 2015. Some of the more common extended provisions affecting individual income taxpayers include the following: (1) the $250 above-the line deduction for elementary and secondary school teachers who incur expenses for books, supplies, equipment and other classroom expenses; (2) income exclusion for home mortgage debt which is discharged in 2014; (3) the treatment of mortgage insurance premiums as qualified residence interest expense; (4) the deduction for state and local sales taxes; (5) the above-the-line deduction for higher education expenses; and, (6) tax-free treatment for IRA distributions to qualified charitable organizations. With respect to businesses, both the research tax credit and work opportunity tax credit were extended through 2014. Other business or investment provisions which were extended include: (1) the 100% exclusion of gain on certain small business stock; (2) the reduction of the period that the built-in gains tax applies to S Corporations from from ten years to five years; and (3) the enhanced deduction for donations of food inventory. Most of the depreciation and expensing provisions were also extended. For example, the 50% bonus depreciation provision and the $8,000 year 1 addition to the auto and truck depreciation limitations apply in 2014. So do the 15-year writeoff provisions for qualified leasehold and retail improvements as well as qualified restaurant property. Note: A separate part of this law added a new provision to assist families to save private funds for support of individuals with disabilities. The so-called ABLE (achieving a better life experience) account provisions will be discussed in the 2015 Spring issue of The Elite Quarterly. Click here for the complete text of “The Tax Increase Prevention Act of 2014.”

 

Year End Tax Planning Strategies – Posted October, 2014

Near the end of the year, it is always good idea to examine whether accelerating or deferring income or deductions to the next taxable year can lower a client’s total tax over the two-year period. With the ever-increasing number of deductions and tax credits that are subject to income phaseouts, tax planning is more complicated than ever. First, let’s consider the basic standard deduction and analyze whether it may be better for some taxpayers to accelerate or postpone some deductions by paying them in December 2014 or January 2015. For example, assume that Vanessa, a single taxpayer, generally incurs around $6,000 of itemized deductions each year. Since the standard deductions in 2014 and 2015 for single taxpayers are $6,200 and $6,300, respectively, the taxpayer will claim the standard deductions in 2014 and 2015 rather than itemize her deductions. But wait! What if it were possible to alter the timing of some of the deductions. Assume that her $6,000 of itemized deductions included in part (1) $1,000 of charitable deductions to her church which she contributes every year, (2) $1,200 of real estate taxes on her home which was paid on January 11, 2014, and (3) $3,600 of mortgage interest on her home. Assume that she just received next year’s real estate tax bill of $1,300 that is due by January 15, 2015, and the interest portion of the mortgage payment due on January 1, 2015, is $300. By accelerating her 2015 charitable deductions to 2014 and by paying her January real estate tax bill and January mortgage payment in December 2014, she can itemize her deductions in 2014 and claim the standard deduction in 2015. This strategy will result in 2014 itemized deductions of $8,600 ($6,000 + $1,000 + $1,300 + $300) rather than a standard deduction of $6,200 for a net reduction in taxable income of $2,400 ($8,600 - $6,200). In 2015, her itemized deductions will be considerably less so she will take the 2015 standard deduction of $6,300. So by accelerating some of her itemized deductions normally incurred in the odd-numbered years to the even-numbered years, her total tax deductions over the two taxable years have increased. On our website, we have posted a table of key 2014 amounts and limitations. These include the standard deduction, exemption deductions, and the AGI or Modified AGI (MAGI) amounts where certain tax deductions and tax credits begin to be phased out or are eliminated. The latter includes phaseout amounts reducing: (1) exemption deductions; (2) itemized deductions; (3) child tax credits; (4) American Opportunity tax credits, (5) IRA deductions; and, (6) several more. Please CLICK HERE  for the complete table. If some of your clients are affected by one or more of these phaseout limitations, they may be able to increase their 2014 tax deductions or tax credits by either deferring income to 2015 or accelerating 2015 above-the line deductions to 2014 (the phaseouts are based on AGI rather than taxable income so accelerating itemized deductions does not affect the AGI limitations). For example, assume a single taxpayer estimates that her 2014 AGI is expected to be $80,100. She has one child who qualifies for a child tax credit. The phaseout of the child tax credit for a single taxpayer begins at an AGI of $75,000. Assume that she has a stock that if sold would result in a capital loss of $2,400. This action will result in two tax savings if she realizes the capital loss in 2014 – (1) increasing her child credit (by $150 since less of the credit is phased out), and (2) increasing her tax deductions (by $2,400). Note: Deferring income to the next year or accelerating deductions to the current year is likely to have a negative impact on next year’s tax liability. So, as in the first example above where itemized deductions were accelerated from 2015 to 2014, the tax costs and benefits of both years need to be estimated to determine the optimal tax strategy.

AICPA v IRS [Posted August, 2014]

On July 15, 2014, the American Institute of CPAs filed a complaint with the D.C. District Court against the IRS and seeks to enjoin the IRS from implementing its Annual Filing Season Program (AFSP).  Last month, the IRS initiated this program to encourage unenrolled tax preparers to complete continuing education on an annual basis.  If they meet the program’s requirements, they will receive an AFSP Record of Completion and be placed in the IRS’s Directory of Federal Tax Return Preparers.  The AICPA claims that the AFSP is an end run around the Loving decision which invalidated a nearly identical program.   [CLICK HERE] to read more or to obtain a copy of the full complaint.