Good news! Congress has voted to extend a number of expired tax breaks, also called Tax Extenders, either permanently or temporarily under the Protecting Americans From Tax Hikes Act of 2015 (PATH Act, Technical Explanation). Typically, tax extenders are voted on every year or two, usually leading to a nail-biting finish at the end of the year close to the holidays. But, this year, taxpayers received a year-end holiday gift, as almost half of the tax provisions were extended permanently and the remaining provisions were extended for at least a year – saving hard working Americans and their families millions of dollars.
The tax provisions range from tax breaks for teachers and families to energy-saving tax benefits. According to Pew’s Analysis of IRS 2012 statistics, about 11 million tax filers claimed one or more tax extender benefits when filing in the past. As an example, the once expired State and Local Sales Tax Deduction, alone, saved taxpayers in some states close to $600 each.
Had some of these tax breaks for individuals and families not been permanently extended, millions of Americans were in jeopardy of losing these valuable credits by 2017, particularly since earning requirements to qualify for the Child Tax Credit were set to increase and income thresholds to qualify for Earned Income Tax Credit were set to decrease, so that higher income earners would be phased out of Earned Income Tax Credit.
In addition, Congress has passed an Omnibus Appropriations package to fund the U.S. Government. While the Appropriations packages always include budgetary funds for the Federal Government operations for their Fiscal year (which runs Oct. 1 through Sept. 30), this year the package also attached a number of pieces of policy legislation.
For clarity, when discussing the Omnibus Appropriations bill, we reference two different types of language:
- Legislative Language, which is statutory in nature, and is therefore binding and regulators must abide by it. It is usually associated with directing particular spending or limiting or prohibiting certain spending.
- Report Language, which is intended as guidance to explain and press Congressional intent, but is not legally binding on Departments and Agencies.
Here is a recap of some of the relevant provisions of both pieces of legislation:
Tax Relief for Families and Individuals
- Enhanced Child Tax Credit made permanent – If you have a dependent child under the age of 17, you may still be eligible for a tax credit of up to $1,000. The enhanced law helps families with children still qualify for the Child Tax Credit. Without permanent passage, earnings necessary to qualify for the law were set to increase in order to get partial or full credit. For example, a family earning $20,000 with two kids would have seen their Child Tax Credit cut from $2,000 to about $810.
- Enhanced earned income tax credit made permanent – If you are a low to moderate income earner, you may still be eligible for the Earned Income Tax Credit, allowing a family with three or more children to receive a credit of up to $6,242. The provision has been enhanced to continue to allow married couples with higher income to benefit, and larger families with more than two children to continue to receive a larger credit. Had this tax credit not been permanently passed, families with more than two children would see their credit decrease $700 to the level for a family with two children.
Both the Omnibus Appropriations and the Tax Extenders bill include provisions that address EITC tax administration. Sec. 207 of the Extenders bill (the PATH Act) includes Legislative Language, requiring Treasury to produce a study about IRS Form 8867 (the form known as the “Paid Preparer’s Earned Income Credit Checklist”). The study is directed to examine the appropriateness and effectiveness of the questions being asked of EITC applicants through Form 8867 today, the examination of alternative methods of applying and complying for the EITC credit, and whether EITC application methods should be applied in the same way or differently across the various methods of return preparation, depending on what is most effective. This report is due back to Congress in one year. The study provision seeks a balanced analysis of the EITC application process as it is designed in regulation today.
In addition to the Tax Extenders/PATH Act statutory provision, some Report Language about EITC was adopted as a part of the Omnibus Appropriations bill. This Report Language encourages the IRS to convene a summit-like process (similar to the Security Summit) to collaboratively develop strategies to reduce improper payments in the EITC program. By law, improper payments include underpayments and overpayments, as well as unintentional error and intentional fraud.
- Enhanced American opportunity tax credit made permanent – Tax credit of up to $2,500, for parents and students, for expenses paid towards post-secondary education. Please note: Tax preparers may face increased times in completing tax returns next tax season. The tax extenders bill expands the EITC due diligence requirement to two more popular tax credits, the Child Tax Credit and the American Opportunity Tax Credit (Sec. 207). The IRS could consolidate this process by simply modifying IRS Form 8867 (the Paid Preparer’s Earned Income Credit Checklist) or it could add additional forms.
- Extension of deduction of state and local general sales taxes – You still may have the option to choose between deducting state and local income tax or state and local sales tax, which is especially beneficial to you if you live in a state that doesn’t collect state income tax or if you made large purchases and paid substantial local sales tax. For example, taxpayers in the state of Washington with the highest claim rate saved an average of nearly $600 on their 2012 taxes. The State and Local Sales Tax Deduction is most often claimed in states that have either no income tax or limited income tax, but it can also be claimed even if you do have state income tax.
- Extension and modification of deduction for certain expenses of elementary and secondary school teachers – Deduction of up to $250 for expenses of elementary and secondary school teachers.
- Extension of parity for exclusion from income for employer-provided mass transit and parking benefits – Fringe benefits for mass transit and van pools now receive equal tax treatment as employer-provided parking benefits. These fringe benefits are excluded from an employee’s wages for payroll tax purposes and from gross income for income tax purposes.
Incentives for Charitable Giving
- Extension of tax-free distributions from individual retirement plans for charitable purposes – If you are 70 ½ or older, you may be able to exclude from income distributions, up to $100,000 paid, directly to a qualified charity from your IRA account. This is a huge tax savings for retired taxpayers required to receive distributions from their retirement who have paid off their homes and no longer have big tax deductions like mortgage interest.
- Extension and modification of special rules for contributions of capital gain real property made for conservation purposes.
- Extension and modification of charitable deduction for contributions of food Inventory.
- Extension of basis adjustment to stock of S corporations making charitable contributions of property.
Incentives for Growth, Jobs, Investment and Innovation
- Extension and modification of research credit – The extenders bill makes the R&D tax credit (Sec. 103) permanent. For over 20 years, this tax credit has been renewed on temporary 1-2 year time frames in a cycle of uncertainty. Beginning in 2016, eligible small businesses ($50M or less in gross receipts) will be able to claim the R&D tax credit against AMT for the first time and, for some small businesses, against the employer’s payroll tax liability. Given that most small businesses operate as pass-through entities, they would claim this credit on their individual tax return.
- Extension and modification of employer wage credit for employees who are active duty members of the uniformed services – 20 percent payroll tax credit for employees called to active military duty. Beginning next year, companies of any size will be able to claim an employer wage credit for employees called to active military duty. Previously, this credit was only available to companies with 50 or fewer employees.
- Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
- Extension and modification of increased expensing limitations ($500,000) and treatment of certain real property as Sec. 179 property.
- Extension of exclusion of 100 percent of gain on certain small business stock.
- Extension of reduction in S-corporation recognition period for built-in gains tax.
Extensions through 2019
- Work opportunity tax credit – The provision also modifies the credit to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) and increases the credit, with respect to such long-term unemployed individuals, to 40 percent of the first $6,000 of wages.
- Extension and modification of bonus depreciation (50 percent through 2017) – Extends to owned property, as well as leased.
- Extension of new markets tax credit.
Extensions through 2016
Tax Relief for Families and Individuals
- Extension and modification of exclusion from gross income of discharge of qualified principal residence indebtedness – If you experienced a foreclosure, short sale or loan modification, you will still be able to exclude the amount of debt forgiven on your principal residence from your taxable income up to $2 million.
- Extension of above-the-line deduction for qualified tuition and related expenses – College students or parents may still be able to deduct college expenses, including tuition, books and other supplies, up to $4,000, even if you only took one class.
- Extension of mortgage insurance premiums treated as qualified residence interest – Mortgage insurance premiums qualify as interest for the purposes of the mortgage interest deduction.
Incentives for Growth, Jobs, Investment, and Innovation
- Empowerment zone tax incentives – Tax benefits for businesses operating in federally-designated empowerment zones.
- Extension of Indian employment tax credit.
- Extension and modification of railroad track maintenance credit.
- Extension of mine rescue team training credit.
- Extension of qualified zone academy bonds.
- Extension and modification of accelerated depreciation for business property on an Indian reservation.
- Extension of special expensing rules for certain film and television productions.
- Extension and modification of empowerment zone tax incentives.
- Moratorium on medical device excise tax.
Incentives for Energy Production and Conservation
- Extension and modification of credit for nonbusiness energy property – Homeowners who made energy efficient improvements to their homes will still be able to claim the Residential Energy Property Credit, worth up to $500.
- Extension of credit for new qualified fuel cell motor vehicles – If you purchased a vehicle that runs on oxygen and hydrogen, which creates electricity known as a fuel cell vehicle, you may receive a credit up to $4,000 if your vehicle weighs 8,500 pounds or less. If you have a heavier vehicle, your credit may be more depending on the vehicle’s weight.
- Extension of credit for two-wheeled plug-in electric vehicles – 10 percent tax credit for plug-in electric motorcycles and two-wheeled vehicles.
- Energy efficient commercial buildings deduction – Above-the-line tax deduction for energy efficient improvements to commercial buildings.
- Extension and modification of credits, with respect to facilities producing energy, from certain renewable resources.
- Extension of credit for energy-efficient new homes.
PROGRAM INTEGRITY & MISCELLANEOUS PROVISIONS
Family Tax Relief
- Rollovers permitted from other retirement plans into simple retirement accounts – Taxpayers can rollover amounts from employer-sponsored retirement plans (e.g. 401(k) plans) to individual retirement accounts (known as SIMPLE IRAs) without triggering tax consequences, provided the rollover contribution is made after the date of enactment of this law.
- Exclusion for wrongfully incarcerated individuals – Civil damages, restitution or other monetary awards received as compensation for wrongful incarceration not subject to taxation. NOTE: This provision is retroactive, meaning it applies to prior tax years, as well as the upcoming and future tax years.
- Improvements to Sec. 529 accounts.
- Elimination of residency requirement for qualified ABLE programs.
- Requirements for the issuance of ITINs – The provisions in Sec. 203 outline how the IRS may issue taxpayer identification numbers (ITIN) and require that individuals who were issued ITINs before 2013 renew their ITINs on a staggered schedule between 2017 and 2020. Moreover, an ITIN will expire if an individual fails to file a tax return for three consecutive years. The provision also directs the Treasury Department and IRS to study the current procedures for issuing ITINs, with a goal of adopting a system by 2020 that would require all applications to be filed in person. The provision is effective for requests for ITINs made after the date of enactment.
- Truncated SSNs – As further evidence of the increased focus on cybersecurity and prevention of identity theft, both the Omnibus and the tax extenders continue the work of Congress and the IRS Security Summit. The legislative language of the Omnibus requires the IRS to institute and enforce policies and procedures that will safeguard the confidentiality of taxpayer information and protect taxpayers against identity theft. Meanwhile, the Tax Extenders bill gives the IRS authority to issue regulations that require employers to use truncated SSNs on W-2s. This will add an additional safeguard to taxpayers’ personally identifiable information.
- Clarification of enrolled agent credentials – Permits enrolled agents, approved by the IRS, to use the designation “enrolled agent,” “EA” or “E.A.” The provision is effective on the date of enactment (Sec. 410).
- Safe harbor for de minimis errors on information returns and payee statements – The final package establishes a safe harbor from penalties for the failure to file correct information returns and for failure to furnish correct payee statements by providing that if the error is $100 or less ($25 or less in the case of errors involving tax withholding), the issuer of the information return is not required to file a corrected return and no penalty is imposed (Sec. 202). A recipient of such a return (e.g., an employee who receives a Form W-2) can elect to have a corrected return issued to them and filed with the IRS. The provision is effective for returns and statements are required to be filed after December 31, 2016.
- IRS Security Summit Process – The Omnibus Appropriations gave the IRS an additional $290 million “targeted solely for taxpayer services to ensure that the agency responds to taxpayer questions in a timely manner, and to improve fraud detection and prevention and cybersecurity (Sec. 113).” This should help the IRS with the new work developed as a result of the IRS Security Summit and its ability to move forward in the remainder of the Fiscal Year on specific element of the Summit.
- No Funds Language on 6103 – The Omnibus includes language that restricts funds appropriated to the IRS for any purposes that are contrary to regulation 6103 (Sec. 111). Regulation 6103 restricts the government from sharing taxpayer information from the IRS to anyone outside of government. The 6103 regulation is the internal IRS counterpart to the 7216 regulation that governs Industry.
- Modification of filing dates relating to wage information and non-employment – The tax extenders legislative language includes acceleration of information returns, most notably W-2s, W-3, and returns or statements to report non-employee compensation (e.g., Form 1099-MISC), (Sec. 201). Starting in 2017, all of the forms listed above will need to be filed by January 31.
- HHS & Inspector General Reports on ACA tax Subsidies – Legislative language includes additional HHS and Treasury IG reports to Congress on improper payment of ACA tax subsidies. Reports will likely include information about how software companies handled 1095-A forms and overpayments, how well taxpayers understood their need to file and reconcile, and how HHS and states handled re-enrollment into health coverage of those who attested that they had filed a return, or intended to do so. The additional studies will likely focus, in part, on how the tax preparation community handled returns for this population, along with possibly making recommendations that could tighten reporting and filing requirements.
- Increase the penalty applicable to paid tax preparers who engage in willful or reckless conduct – Sec. 210 of the package expands the penalty for tax preparers who engage in willful or reckless conduct, which is currently the greater of $5,000 or 50 percent of the preparer’s income with respect to the return, by increasing the 50 percent amount to 75 percent. The provision applies to returns prepared for tax years ending after the date of enactment.
- Cadillac Tax – Language in the Tax Extenders bill is delayed until 2020. This is the 40 percent excise tax on employer-provided health coverage that exceeds statutory thresholds. Treasury has since issued regulatory guidance indicating that employer-provided contributions to Health Savings Accounts, and employees electing contributions to health-related Flexible Savings Accounts, will also be counted toward the limits.
- Prevention of retroactive claims of earned income credit after issuance of the Social Security number.
- Prevention of retroactive claims of child tax credit.
- Prevention of retroactive claims of American opportunity tax credit.