Over the course 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 regulate 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 coherent 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 permanent 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 least 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.
On the other hand, 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 permanent- all $ 250 of it. (Most teachers spend at least twice that!)
Pensions and IRA
Folks older than 70.5 years of age no longer have to rush to transfer their IRA (or portions thereof) to charity, because that provision is permanent. (PATH) Please note that the IRS demands that these transfers not be rollovers. One must employ a trustee to transfer 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 means a timely receipt) from the charity for that deductible donation or transfer.
Heirs and Estates
While still 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 property they inherited, thereby cheating the tax authorities with alternative 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 means anyone who inherits property- 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 property is now determined to also be ZERO. (Unless the statute of limitations is still 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 fashion. (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 drive to help a charity, we only get 14 cents a mile.
As is normally true, we have no clue what those rates will be for 2017. The IRS normally prepares those well into the calendar year.
The PATH ACT made permanent the ability of taxpayers to contribute real property 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 purchase- 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 permanent 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 determining the 50 employee (full-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 means that companies need to contact their tax professionals really early- to let them verify that all relevant contractors and consultants receive those 1099s on time. Because the penalties have also increased.
The Work Opportunity Credit has been extended through 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 Temporary Assistance for Needy Families (TANF), SNAP (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 permanent provision of the code. As well 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 exceeded $ 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