Are Your Prepared for These Year End Income Tax Issues?
Over the time of the year, I’m sure you’ve noticed the ridiculous way our Congress has acted to update our tax laws. By including tax code provisions in a highway bill, a mass transit bill, and a trade package bill- plus within the Bipartisan Budget Act and the PATH (Protecting Americans from Tax Hikes) Acts. (Those last two were, indeed, logical places to control taxes.)
There is a chance that the lame duck Congressional session may act on some tax regulations, but given that these folks work about 1 day a week- and then complain how many lazy folks are out across the US not entering the workforce (that is the pot calling the kettle black)- I am not sanguine they will. So, unless they do- this will be the last year that mortgage insurance will be deductible and foreclosed home debt will not be a taxable situation, among a few other items that expire this calendar year.
But, I figured it would be helpful if I combined all these changes into a logical mass (which our legislators clearly have not), so you can be prepared for the 2016 tax season. (Remember, you file your taxes for 2016 by April 2017. Oh- and if you are a business, the odds are the date your taxes are due, also changed. More on that below.)
Students and Teachers (PATH Act provisions)
Students got a long-lasting change for deductibility of tuition via the American Opportunity Tax Credit. This provides up to $ 2500 of tax credit for lower-income filers for the first four years of higher education (with a possibility of 40% of the unused credit being received as a refund- if no other taxes are owed). As long as the students are enrolled at the minimum half time for one term of the year and not convicted of drug violations. The real change is that filers must include the EIN of the college or university involved- and demonstrate that they paid the tuition and fees they claim- not what the institutions may list on the 1098-T form.
however, the tuition deduction for other students will expire at the end of this year. Oh, and that generous (sic) deduction teachers get for buying supplies for their students that schools don’t supply is now long-lasting- all $ 250 of it. (Most teachers use at the minimum twice that!)
Pensions and IRA
Folks older than 70.5 years of age no longer have to rush to move their IRA (or portions thereof) to charity, because that provision is long-lasting. (PATH) Please observe that the IRS demands that these transfers not be rollovers. One must use a trustee to move the funds; and that trustee cannot hand you the funds to deliver to the charity. If they do, you lose the exemption. No surprises I am sure when I remind you that there must be a contemporaneous acknowledgement (that method a timely receipt) from the charity for that deductible donation or move.
Heirs and Estates
While nevertheless in the wrong venue, the Highway Bill did fix a big problem. Folks (or entities) that inherit assets from an estate are now required to use the basis filed in the 706 form for their own calculations. (Just so you know, the rules stipulate that estates can value items as per the date of death, or by alternate choice 9 months after that date. Too many “cheaters” would use a different basis for the character they inherited, thereby cheating the tax authorities with different valuations.)
To keep this rule in place, executors are now required to stipulate (i.e., file for 8971 and Schedule A of the 706) said value to all heirs and to the IRS. Which method anyone who inherits character- and thought they didn’t need to file Form 706 because the value of the estate was below the threshold for Estate Tax better reconsider. Otherwise, the heirs may be hit with a penalty for using the wrong basis for that inherited asset when they dispose of same.
Why? Because if a 706 form is never filed, the basis of all assets inherited is now defined as ZERO!!!!! It gets worse. Because if an asset were omitted from Form 706, the basis of that character is now determined to also be ZERO. (Unless the statute of limitations is nevertheless opened, when an Amended 706 can be filed to correct this omission.)
Another kicker. If the 706 form is filed LATE, the basis of all assets that should have been included are also set at ZERO. Some tax advisors feel this one little provision could be challenged in court. But, let’s just be prudent and file all those 706 Estate Tax returns in a timely fact. (Filing a 706 when the estate value is below the filing threshold is called a Protective 706 Filing; we’ve been doing those for years. And, we strenuously examine the assets often to the consternation of the heirs- to ensure that all the non-worthless assets are included. You know, that 36 diamond tennis bracelet your grandma promised you would inherit when you turned 16.)
Oh, yeah. Another really big kicker for this little item. Under IRC 6501, the IRS has three years to catch cheaters who misstate certain items (like income taxes [except for continuing fraud], employment taxes, excise taxes, and for this provision- estate taxes and the results therefrom). No more. If an asset from an estate is misstated so that it can affect more than 25% of the gross income on a tax return will now have a SIX year statute of limitation.
Not surprisingly, the mileage rates for 2016 are lower than they were last year. Business mileage is now deducted as 54 cents a mile; driving for reasons that are medical or moving are only worth 19 cents each. When we excursion to help a charity, we only get 14 cents a mile.
As is typically true, we have no clue what those rates will be for 2017. The IRS typically prepares those well into the calendar year.
The PATH ACT made long-lasting the ability of taxpayers to contribute real character to qualified conservation charities.
Health and Health Insurance
The Highway Bill (yup) came up with a bouquet of flowers for our veterans and folks currently serving in the military. No longer will they be unable to contribute or use HSA (Health Savings Accounts) should they receive VA or armed service benefits.
Along that same vein, the Highway Bill enabled all those who buy- or are provided by their employers- high deductible insurances (about $ 1500 for a single person) to use HSAs, too.
Oh, and assuming Obamacare is not overturned, there is a long-lasting exemption from penalties for those receiving VA or TriCare Health Benefits. (For employers, the Highway Bill also exempts all such employees from being included in calculating the 50 employee (complete-time or equivalent) threshold provisions.)
There were more than a few changes for employers. More than the exemption for the VA and armed service personnel from inclusion in Obamacare provisions mentioned above.
Like ALL 1099s and W-2 are now due by 31 January. That’s a big change for many folks who barely get their stuff together to file 1099’s. It method that companies need to contact their tax professionals really early- to let them verify that all applicable contractors and consultants receive those 1099s on time. Because the penalties have also increased.
The Work Opportunity Credit has been extended by 2019. This applies to Veterans (which is why you keep hearing Comcast advertising its commitment to hire some 10,000 veterans over the next few years- they’re no dummies). Other targeted groups include what are termed those receiving permanent Assistance for Needy Families (TANF), break (what used to be termed Food Stamp) recipients, ex-felons, and some of those living in “empowerment zones”.
Families and Individuals
The PATH ACt made the enhanced child tax credit (up to $ 1000, income dependent) a long-lasting provision of the code. in addition as the Earned Income Tax Credit provisions that were to expire.
Social Security taxes are not going up per se- but the income basis upon which one pays them is. For the last two years, there was a tax holiday for all wage income (or self-employed income) that surpassed $ 118,500. Next year (2017), the taxes will be collected for totals of up to $ 127,200.
If an employee is working overseas and has income and/or a housing allowance, the exclusion provisions have also changed. For 2016, foreign income of $ 101,300 could be excluded from taxation, as could housing benefits that were $ 16,208 or less. Starting 2017, those exclusions become $ 102,100 and $ 16,336, respectively.
There also is further clarification of these foreign exclusions. In particular, these will affect those in the merchant marine or working aboard cruise lines. Because the IRS now holds that when one is in a foreign port, then one is able to claim foreign income. But… when someone operates in international waters, that is NOT a foreign country. That income must be computed (by the number of days one is on said waters) and is not excludable!
Individuals, Businesses, Trusts, Non-Profits that have Foreign Accounts
Some big changes affect those who must file those FBARs (Foreign Bank and Financial Accounts). It used to be you had to report any holdings in a bank, stock account, commodities or future accounts, mutual funds, or [pay attention to this one] poker, gambling or gaming site account that was not a US domicile by 30 June. (This also method a foreign insurance policy that has a cash value or foreign retirement accounts [including inheritances] is a foreign account.) It also covers recent immigrants to the US! These filings are due at the same time as your income tax return. But, while there never was an extension possible for these forms, now there is – for the same six months that obtains for your personal tax filings.
A foreign account does not average that using the Royal Bank of Scotland to house funds in New York City; but having a Citicorp account that is based in Jerusalem or London does. The basic consideration is where the local branch is located, where the account was opened. By the way, accessing foreign funds via PayPal method you have a foreign account.
The FBAR filing uses Form 114 and must be now filed electronically. The requirement to file applies to all taxable entities (individuals and businesses) that have $ 10,000 or more of value on any given day during the tax year. And, the conversion rate for said value is no longer allowed to be daily- but determined by the value on the last day of the tax year.
There is a new interpretation, too. The requirement to file applies not just to the account owner(s), but to anyone with identifying characteristics authority. So, that method people like me that continue client accounts overseas will now have to file these forms, because I can issue checks on those accounts. (I am not responsible for about 100 of them where I write the checks for the clients- but have no identifying characteristics authority.) It also method employees of corporations or businesses or estates that have foreign funds and have identifying characteristics authority must also file Form 114.
All business entities (and trusts and non-profits) should recognize that all entities – and individuals who work for or at those entities- that have identifying characteristics authority for a foreign bank account, stock account, gaming or gambling account are unprotected to these provisions. In other words, all foreign money holdings may subject employees, not just officers of the institutions, to these provisions.
Oh. The IRS also requires those foreign entities where you may or may not have money to file Form 8938, a FATCA (Foreign Account Tax Compliance Act) filing. This covers those financial accounts, stocks, securities, contracts, interests- anything that exceeds the filing threshold. These rules also apply to American entities (individuals, businesses, trusts, etc. that have such interests in excess of the filing threshold! (If one resides in the US, those thresholds are $ 50K for individuals, $ 75$ for married folks on the last day of the year- or $ 100K and $ 150K at any time during the tax year. Those numbers increase by a factor of 4 if one doesn’t reside in the US; the thresholds are $ 200K, $ 300K, $ 400K, and $ 600K, respectively.)
The PATH Act changed the 179 (the capital purchases write-off provisions) Election. For good. The maximum Section 179 write-off is now long-lasting. (It had been extended for a year or two each time Congress had made a change for a while.) That maximum is also to be modificated for inflation starting this year, which is why it is now $ 510,000. additionally, there is a phaseout when the amount of new capitalized character exceeds $ 2.03 million, but not to zero.
For real estate purchases, the maximum Section 179 exclusion is now also $ 500K. (Last year, it was capped at $ 250K.) This includes HVAC (heating, ventilation, and air conditioning), which is a new change. Any recapture of this credit (due to an early sale) is now considered unprotected to ordinary income taxes.
The time to depreciate real estate is now 15 years for qualified leasehold improvements, restaurants, and retail improvements. Bonus depreciation is also allowed for the first half of said improvement value (by 2017), decreasing in 2018 to only 40%, 30% in 2019 and removed completely by 2020. The PATH Act also let bonus depreciation apply to 39 year character (for improvements that were already in service by the entity).
The depreciation limits for vehicles is limited to $ 3160 or 20% of the basis in 2016. However, this year one can write off up to $ 8000 in bonus deprecation (which is reduced to $ 6400 in 2018, $ 4800 in 2019 and then removed forever by 2020) for new (not used) automobiles. Of course, these numbers apply only to vehicles that are used completely for business. There is a reduction for means use that is not fully credited to business usage.
The Bipartisan Budget Act (the one that taxes would typically be addressed) has brought a sea change to the way partnerships will be treated, should the IRS find problems with their tax submissions. The changes do not take effect for a few years- but the time to address the changes is really now.
Basically, the Act stipulates that any change that comes about by an audit are to be collected directly from the partnership- unless the partnership elects out of TEFRA (Tax Equity and Fiscal Responsibility Act of 1982). So, it method that partnership formation, operations, new partner admissions, etc. will all have to be reconsidered.
What changed is this- the partnership can decide to accept an IRS decision that the underpayment is due from the partnership itself or it can elect to have that decision divided up among the partners, according to their percentage ownership or liability percentage. Most advisors are telling partnerships to elect the latter course of action. If the partnership does not so choose, then the IRS will estimate the partnership at the highest tax rate allowed- 39.6%. Of course, if the partnership can prove (to the satisfaction of the IRS) that a lower rate is appropriate, based upon the individual tax rates of the partners, then a lower rate may be allowed. (Don’t bank on the IRS doing so.) However, this underpayment will not be allowed to change the basis of each of the partner’s interests, if the partnership is taxes for the liability.
If the partnership pushes the issues down to the partner level, then each partner is assessed for the tax at its own rate. And, the partnership can issue an modificated (amended) K-1 for the IRS revisions that will change the basis and avoid the double taxation possibility. The partnership has 45 days from the date of the IRS notice of change to make this election.
There is another change that affects partnerships- the PAL (passive active loss) issue. Why? Because most partners and partnerships do not continue pristine time records. (This also affects real estate rentals that are reported on Schedule E, page 1.) There are various definitions that set the PAL issues- for real estate professionals it is a minimum of 750 hours of work a year. The IRS has allowed other partnerships to use different designations, such as 500 hours, or the fact that a particular partner does all the work (already if less than 500 hours), or already when a partner spends 100 hours or more on the partnership and no one else does more.
But, the rules to prove how much participation are gelling. One can use a record of cell phone call records, eMails, or credit card charges. Travel itineraries and receipts can prove how much participation was involved. already affidavits from customers and clients can be used to prove the time one participated in the venture.
The IRS has been starved to death for years by Congress. Partly because one party was angry that the IRS was not automatically granting those “social welfare” organizations (read as political collections and donation farms) tax exemptions without scrutiny. Partly because the IRS is responsible for collecting the penalties for those who don’t comply with Obamacare. (Hoping that this without of funds would make it harder for them to do so.)
But, in my humble opinion, the solution Congress came up with sucks. The IRS has now been empowered to hire those bottom feeders- the outside collection agents, that harass and subject folks to all sorts of intimidation. The logic behind this choice? After all, folks who owe the IRS must be the scum of the earth. (Of course, no one ever considers the fact that the IRS makes mistakes, chooses random numbers to estimate non-filing taxpayers who may truly owe nothing, etc.)
Many clients fall short of having sufficient funds to pay their taxes when due. This entails the taxpayer submitting a form 9465 (Installment Agreement Request). These must be automatically approved if the taxpayer [individual] owes (or will owe) the IRS $ 50,000 or less, with the addition of this request- and all tax forms have been timely submitted. (Businesses are limited to a $ 25,000 maximum, with the same provisos.) However, the fees involved to have the IRS course of action the request have been increased to $ 120, unless the taxpayer agrees to have the IRS zap their bank account automatically each month. Then, the fees are reduced to $ 52. (The IRS has way too many taxpayers “forgetting” to make timely payments. This is a way to incur fewer manpower issues for the service.) However, no matter how the payment is to be processed by the IRS, all low-income taxpayers (a family of 4, with $60K or less in income) won’t have to pay more than $ 43 to institute a payment plan.
The biggest issue? Any taxpayer who is not in compliance with IRS code, who has no installment agreement in place, and owes $ 50,000 in taxes, penalties, and interest can find his passport revoked closest. (If one is not however issued, don’t expect the Department of State to issue one, either.)
There has been no change in the due date for 1040 filing, in that it is nevertheless due on 15 April (or the next business day, should the 15th fall on a weekend or legal holiday). Unless you can prove you were out of the country on 15 April- then you have the right to extend the filing date to 15 June. Or, you filed an extension request- that gives you until 15 October (with the same proviso for when it falls on a weekend or legal holiday).
Here’s where the big changes arrive. And, it is about time. Because too many pass-by entities have been screwing over their partners, their stockholders by delaying their filing. Oh, sure, they may pay a penalty, but that doesn’t help the multitudes who can’t file their taxes in a timely fact due to the lassitude of these entities.
So, from now on, all pass by entities- those are partnerships, LLCs, and S entities must no file their tax returns by the 15th day of the 3rd month after the end of their tax year. Recognize that the IRS allows companies that have “good” reasons to not use a natural year (i.e., 1 January to 31 December) to chose another month to end their tax year. But, for most entities, the due date will now be 15 March. Which gives the partners or the stockholders a month to finish their own tax returns. (Firms that function on the US Government year, which ends 30 September, for example, must file their taxes by 15 November.)
Regular Corporations (C entities) no longer have to file by the 15th day of the 3rd month, but now have until the 4th month. So, for those companies operating on a natural year basis, the due date has been extended (permanently) from 15 March to 15 April. (A similar 15th day of the 4th month after year-end applies for those not operating on a natural year basis.)
Business, Trusts, Non-Profits, and Pension Plan Extensions
There is one more change for C corporations. Their extension is no longer 6 months long- but 5 months. In other words, before when they had to file by 15 March, but could extend the due date until 15 September… nevertheless have that same final extended due date, in spite of that the original filing date is now 15 April.
Partnerships and S entities nevertheless have a 6 month extension- which also falls (for those who use a natural year) on 15 September.
Trusts and Estates of the Deceased file form 1041. The only extension request provided 5 months beyond the due date. Now, the due date is 5.5 months. That method the due date for filing is 15 April, but an extension method the due date can be 30 September.
Non-Profit entities file form 990 on 15 May- or the 15th day of the 5th month after the end of their fiscal year. Extensions used to be provided for 3 months; they now have more time- six month extensions are the new rules.
Employee assistance Plans (Pension Plans, 401(k), welfare plans) must file their tax returns with the IRS by the last day of the 7th month after their year end. (For natural year plans, that method 31 July). Before the plans could extend that deadline by 2.5 months; now the rule provides for an additional month to 3.5 months.
Late Filing Penalties
The minimum penalty for filing late (more than 60 days) has been increased from $ 135 to $ 205. Except in certain situations, that penalty can be reduced to the amount of tax owed, which ever is smaller. (By 2017, the penalty will go up to $ 210.)
Which entities are affected by this change? Individuals (all forms 1040, including non-citizens). Estates and Trusts (Form 1041). Corporate Files (all forms of the 1120 filing). And, Non-Profit entities that can file a 990-T (they have unrelated business income of $ 1000 or more.)
There are more penalties, too. These were included in the Trade Package Legislation. The act included late filing of 1099 forms, W-2s, and 1095 (Health Care Reporting). You will observe that the deadlines for some of these forms have been moved up- so pay attention and file them on time. Because the penalties can be $ 1060 for each delinquent 1099 form- because you have deliberately filed late to the government AND to the payee!
Of course, if you file the 1099 only 30 days late, the penalty is $ 50 (again- for each – the payee and the government). If you get your act together by 1 August, the penalty is $ 100 (again, for each). And, if you miss that date, the penalty is $ 250 each- unless the IRS feels it was intentional (and you know that number is $ 530).
There you have the big changes for the year. Now, you should be ready to file your taxes comes the 1rst of the year. But, don’t expect really fast refunds (as one would have expected before). Because the IRS is going to be checking to make sure the taxpayer is legit- they don’t want all those identity theft and tax fraud situations to acquire.