Wolters Kluwer Updates the Latest Changes and Need-to-know Facts for Taxpayers
(RIVERWOODS, IL, January 2016) — Many tax preparation questions were finally answered when the Protecting Americans from Tax Hikes (PATH) Act of 2015, along with a related omnibus spending bill, was signed into law in December. Unlike recent end-of-year tax legislation that temporarily kept certain tax-extender measures from expiring, the PATH Act created $622 billion in tax breaks and generated many permanent Tax Code changes.
The tax break incentives that were made permanent in the PATH Act include:
For Individual Taxpayers:
- The enhanced Child Tax Credit — Up to $1,000 for dependents under age 17 with a $3,000 earned income threshold amount for the refundable portion
- Transit Benefits Parity — Including transit passes and van pool benefits
- Charitable distributions from Individual Retirement Accounts (IRAs) — Covering retirees age 70.5 or older making tax-free contributions of up to $100,000 from their IRAs to qualified charitable organizations
- The American Opportunity Tax Credit (AOTC) — Covering education expenses
- The Teachers’ Classroom Expense Deduction for elementary and secondary school teachers
- The enhanced Earned Income Credit (EIC) — Permanent 45-percent credit for those with three or more qualifying children and reduced marriage penalty
- The option of claiming itemized deductions for state and local sales taxes instead of deducting state and local income taxes
- Greater Code Sec. 179 expensing limits for smaller businesses — Permanent $500,000 expensing limit with inflation adjustments and a $2 million overall investing limit before phase-out
- The Research Tax Credit — Covering specific increases in business-related qualified research expenses and payments to universities and qualified organizations for basic research
New, Temporary Health Care Related Provisions:
- A two-year delay for excise taxes in the Affordable Care Act (ACA) affecting taxpayers choosing more expensive health insurance plans, also known as “Cadillac Plans”
- A one-year moratorium on the ACA health insurance provider fee
- A two-year moratorium on the ACA’s medical device excise tax
Full details are available in the Wolters Kluwer Tax Briefing, Protecting Americans from Tax Hikes Act of 2015.
Need-to-know Tax Season Checklist
___ Tax Filing Deadline Day is April 18 for Most — You have a few extra days to file your taxes in 2016. Since Emancipation Day, an official public holiday in Washington, D.C. recognizing the day President Abraham Lincoln signed District of Columbia Compensated Emancipation Act in 1862, falls on Friday, April 15, tax filing deadline day is on Monday the 18th. Residents in Massachusetts and Maine will have until Tuesday, April 19th to file returns. Both states observe Patriot’s Day on the 18th, commemorating the battles of Lexington and Concord.
___ Health Care-related Taxes and Penalties — For 2015 tax filings, Americans who did not purchase health insurance last year as required by the Affordable Care Act mandate, and do not qualify for an exemption, must pay a penalty of two percent of their household income or $325 per person, depending on which is greater (scheduled to go up to 2.5 percent or $695 for 2016 taxes).
Some taxpayers may also be responsible for:
- The 3.8-percent Net Investment Income (NII) Tax — which applies to the lesser of net investment income or modified Adjusted Gross Income (AGI) in excess of $200,000 for single filers and $250,000 for married, joint return filers.
- The 0.9-percent Additional Medicare Tax — which took effect for 2013 taxes applying to earned income in excess of $200,000 for single filers and $250,000 for married, joint return filers.
___ Personal Exemption, Standard Deduction Increases — For the current tax season, the inflation-adjusted personal exemption amount that taxpayers can claim on Form 1040 is $4,000 — up $50 from last tax season. The personal exemption works like a tax deduction and enables qualifying taxpayers to claim the amount and lower their taxable income. However, those who are claimed as a dependent by another taxpayer are not eligible for their own personal exemption.
Standard deductions for 2015 tax filings are:
- Single or Married and filing separately — $6,300 (up $100)
- Head of household — $9,250 (up $150)
- Married and filing jointly and qualifying widow or widower — $12,600 (up $200)
- Qualifying dependent — Greater of either $1,050 or $350 plus dependent’s earned income up to $6,300
IRS guidelines apply for qualifying children and qualifying relatives who may be claimed as dependents. Taxpayers may also be eligible for additional tax credits related to their qualified dependents, such as the child and dependent care tax credit.
___ Top Tax Bracket for High-income Earners — The top tax rate remains 39.6 percent, which applies for 2015 tax filings to:
- Single taxpayers on taxable income above $413,200
- Filing as head of household on taxable income above $439,000
- Married filing separately on taxable income above $232,425
- Married filing jointly or surviving spouses on taxable income above $464,850
The top tax rate on long-term capital gains and dividends remains at 20 percent for those same taxpayers.
___ Alternative Minimum Tax (AMT) Adjustments — After years of temporary patches to help middle-income earners avoid the AMT, the AMT exclusion amount was increased in 2013 and permanently indexed for inflation. For 2015 tax year filings, the AMT exemption amount is:
- $53,600 for individual taxpayers (up from $52,800 in 2014)
- $41,700 for married couples filing separately (up from $41,050 in 2014)
- $83,400 for married filing jointly (up from $82,100 in 2014)
___ Higher Estate, Gift Tax Exclusion Amounts — The tax-exempt threshold value on estates of those who die in 2016 and for gifts made increases to $5,450,000 (up $20,000 from last year). The same amount also applies to the Generation-Skipping Transfer (GST) tax exemption. Now, estates, lifetime gifts and GSTs of $5.45 million or lower are not subject to estate or gift taxes.
___ IRA Contribution Limits — The maximum annual amount that taxpayers can contribute to their Individual Retirement Accounts (IRAs) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over stays at $1,000.
___ Married Tax Status Recognition — In the Supreme Court’s 5-to-4 decision on June 26, 2015 in the case of Obergfell v. Hodges (2015-1 ustc ¶50,357), the Court ruled that the 14th Amendment requires a state to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when a marriage was lawfully licensed and performed out of state. The decision effectively ended the necessity for same-sex couples in states that did not recognize same-sex marriage to have to file as single individuals for state tax purposes. In 2013, the IRS began recognizing all legally married same-sex couples throughout the nation as “married” for federal tax filings, whether or not they lived in jurisdictions that recognized same-sex marriage at the time.
___ Education Tax Breaks — The American Opportunity Tax Credit has been made permanent. Interest deductions for qualifying student loans as well as employer-provided education assistance benefits became permanent in 2013. Provisions in place for Coverdell Education Savings Accounts are also permanent.
___ Permanent State Sales vs. State Income Tax Deduction Option — As stated above, a provision in the PATH Act of 2015 has made the option of claiming itemized deductions for state and local sales taxes instead of deducting state and local income taxes permanent. Previously, temporary tax break extensions allowed those who itemized deductions to claim their total state income or state sales taxes on their federal tax return — depending on which provided the better tax benefit, but not both. With the provision now permanent, those living in states without an income tax will continue to be able to deduct sales taxes.
___ Base Erosion and Profit Sharing (BEPS) — BEPS refers to international efforts to prevent multinational companies from shifting profits to low- or no-tax jurisdictions. In December 2015, the IRS issued proposed rules governing country-by-country reporting by any U.S. person that is the “ultimate parent entity” of a multinational enterprise (MNE) group. BEPS rules and regulations are designed to create greater international tax reporting transparency, clarify how a tax jurisdiction for an international business is determined and would mostly pertain to tax treatment of business profits invested outside the United States. Proposed BEPS rules are not expected to take hold until 2017 at the earliest.
___ ABLE Act — The Achieving a Better Life Experience (ABLE) Act, was enacted in 2014 and begins for 2015 taxes, although states may not be set up to offer accounts until 2016. It creates tax-favored savings accounts for individuals with disabilities along with some tax-related offsets.
___ Final Repair Regulations and MACRS - Final repair, capitalization and tangible property regulations from the IRS became effective in 2014. They include the Modified Accelerated Cost Recovery System (MACRS) rules applying to businesses when it comes to the capitalization and expensing of physical assets that are purchased, repaired, improved or disposed of. Full details are in this Wolters Kluwer Tax Briefing.
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