2016 Federal Income Tax Update

Transcription

1 2016 Federal Income Tax Update By Richard K. Davey E.A., LTC Disclaimer The author has created this information from a variety of sources. It was intended to instruct others about tax law changes and updates. It is not intended to be used as the only source of this information and each user should do their own due diligence to verify the information provided in the materials. Page 1

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3 Table of Contents Protecting Americans from Tax Hikes Act of Tax Law comes from the Strangest Places Due Date... 7 Personal Exemptions and phase outs... 7 Standard Deductions... 7 Kiddie Tax... 8 AMT Exemption Amounts... 8 AMT Phase Outs Tax Rates Tax Rates... 9 Earned Income Tax Credit Standard Mileage Rates... 9 Schedule A Updates Medical Taxes Mortgage Interest Premium deductions Charitable deductions Retirement Plans Employee contribution limits AGI Phase Outs Rollover Rules Education Deductions and Credits American Opportunity Tax Credit Lifetime Learning Credit Student Loan Interest Coverdell Education Savings Accounts Tuition and fees deduction Qualified Transportation Fringe Benefit Foreign Earned Income Exclusion Page 3

4 Estate and Gift tax items Unified Credit against Estate Tax Annual Exclusion for Gifts ABLE Savings Accounts Energy tax provisions extended Due Date Changes Health Coverage Tax Credit Health Care Tax Credits Coverage under COBRA Disqualifying coverage for the HCTC Identity Theft and The Security Summit Safe Harbor on Personal Property Expensing reporting information Affordable Care Act Types of Coverage Exemptions Premium Assistance Credit Eligibility for the Premium Tax Credit Reporting Changes in Circumstances Filing a Federal Tax Return to Claim and Reconcile the Credit Failing to file your tax return may prevent future advance credit payments Due Diligence Checklist (s) Form Tax Preparer Licenses and PTIN Representation requirements Form Form Form Form 1095-A Form 1095-B Form 1095-C Form Page 4

5 Protecting Americans from Tax Hikes Act of 2015 (PATH Act) that was enacted Dec. 18, 2015, and made several changes to the tax law to benefit taxpayers and their families. Section 201 of this new law mandates that no credit or refund for an overpayment for a taxable year shall be made to a taxpayer before Feb. 15 if the taxpayer claimed the Earned Income Tax Credit or Additional Child Tax Credit on the return. Tax Law comes from the Strangest Places The US Appreciation for Olympians and Paralympians Act of 2016 and beyond excludes from gross income of any individual with AGI of $1 Million or less the value of medals and any prize money received from the US Olympic Committee on account of competition in the Olympic or Paralympic Games. The FAA Extension, Safety, and Security Act of 2016 and the Airport and Airway Extension Act of 2016 extended through September 30, 2017 the excise tax on airline items. The Trade Facilitation and Trade Enforcement Act of 2015 increases the penalty under Code Sec for failure to file a return effective for returns required to be file in Calendar years after Failure to file their returns more than 60 days after the due date or extended due date, the minimum penalty tax is the lesser of $ or 100 percent of the unpaid tax. Tax items are Tax Provisions that were addressed in the 2015 EXTENDER BILL and made permanent. Code Individual Provision 62 $250 teacher deduction 164 Election for itemizers to deduct sales tax in lieu of income tax 170 Contributions of real property for qualified conservation purposes 408 IRA transfers to charity in lieu of RMDs Page 5

6 Code 45P Business Provisions Wage Credit for activated military reservists 51 WOTC for employers hiring qualified Veterans and employees from other ` targeted groups EXTENDED 5 YEARS 131 Increased fringe benefit allowance for transit passes % bonus depreciation for qualified purchases EXTENDED 5 YEARS 168 Election to accelerate AMT credit in lieu of bonus depreciation EXTENDED 5 YEARS Year recovery period for qualified leasehold improvements Sec. 168(k), which provides a depreciation deduction equal to 50% of the adjusted basis of qualifying property in the first year it is placed in service (also known as bonus depreciation). The percentage phases down to 40% for property placed in service in 2018 and to 30% for property placed in service in The bill also modifies the AMT rules to increase the amount of unused AMT credits that can be claimed in lieu of bonus depreciation. Bonus depreciation will now be allowed for qualified improvement property. The bill also specifies that certain trees, vines, and fruit-bearing plants will be eligible for bonus depreciation when planted or grafted, rather than when placed in service. 170 Enhanced charitable deductions for food inventory 179 Increased expensing limit ($500,000) 179 Treatment of certain real property as 179 property % gain exclusion for qualified small business stock 1367 Basis adjustment to S corporation stock for charitable contributions 1374 Reduced built in gains recognition period for s corporations PERMANENT TO 5 YEAR PERIOD These items are due to expire on December 31, 2016: 108 Exclusion for personal residence COD income 163 MIP deduction as mortgage interest Page 6

7 222 Tuition deduction 2017 Due Date Form 1040 will be due April 18, 2017 because the 15 th falls on Saturday and emancipation day is Monday April 17. Personal Exemptions and phase outs The personal exemption amount increases for 2016 and The phase-out also increases. Personal Exemption Amount $4,050 $4,050 AGI Phase-out on personal exemptions Single $ 261,500 - $ 384,000 $ 259,400 - $ 381,900 Married Filing Joint $ 313,800 - $ 436,300 $ 311,300 - $ 433,800 Married Filing Separate $ 156,900 - $ 218,150 $ 155,650 - $ 212,900 Head of Household $ 287,650 - $ 410,510 $ 285,350 - $ 407,850 Standard Deductions Standard Deduction Amounts Single $ 6,350 $ 6,300 Married Filing Joint $12,700 $12,600 Married Filing Separate $ 6,350 $ 6,300 Head of Household $ 9,350 $ 9,300 Dependents $ 1,050 $ 1,050 Additional standard deduction amounts for those over 65 years old or those who are blind are: Filing Status Single $1,550 $1,550 Married filing joint return $1,250 $1,250 Head of household $1,550 $1,550 Page 7

8 Kiddie Tax If a child s income is at least $1,050 and not more than $10,000, the parent may elect to claim the child s income on their own return by filing a form The exemption from the kiddie tax is $2,100. This will increase for tax year 2016 to $1,050 and not more than $10,500. The AMT exemption for a child who is subject to the kiddie tax is the lesser of $7,400 plus the child s earned income, or $53,600. This increases in 2016 to $7,400 plus earned income, or $53,900. AMT Exemption Amounts 2016 and 2017: Filing Status Single and Head of Household $54,300 $53,900 Married filing joint & Surviving spouse $84,500 $83,800 Married filing separate $42,250 $41,900 Estates and trusts $24,100 $23,900 AMT Phase Outs The AMT exemption amount begins to phase out at the following taxable income amounts: Filing Status Single and Head of Household $120,700 $119,700 Married filing joint & surviving spouse $160,700 $159,700 Married filing separate $ 80,450 $ 79,850 The excess taxable income above which is subject to the 28% tax rate are as follows: Filing Status All taxpayers except married filing separate $187,800 $186,300 Married filing separate $ 93,900 $ 93, Tax Rates Tax Married Filing Joint or Single Filers Rate Surviving Spouse Head of Household 10% Up to $9,325 Up to $ 18,650 Up to $13,350 15% $9,326 - $37,950 $18,651 - $75,900 $13,351 - $50,800 25% $37,951 - $91,900 $75,901 - $153,100 $50,801 - $131,200 28% $91,901 - $191,650 $153,101 - $233,350 $131,201 - $212,500 Page 8

9 33% $191,651 - $416,700 $233,351 - $416,700 $212,501 - $416,700 35% $416,701 - $418,400 $416,701 - $470,700 $416,701 - $444, % Over $418,401 Over $470,700 Over $444, Tax Rates Tax Married Filing Joint or Single Filers Rate Surviving Spouse Head of Household 10% Not over $9,275 Not over $18,550 Not over $13,250 15% $9,276 - $37,650 $18,551 - $75,300 $13,251 - $50,400 25% $37,651 - $91,150 $75,301 - $151,900 $50,401 - $130,150 28% $91,151 - $190,150 $151,901 - $231,450 $130,151 - $210,800 33% $190,151 - $413,350 $231,451 - $413,350 $210,801 - $413,350 35% $413,351 - $415,050 $413,351 - $466,950 $413,351 - $441, % Over $415,050 Over $466,950 Over $441,000 Earned Income Tax Credit 2017: The enhanced provisions of the Sec. 32 earned income credit were made permanent. These provisions include an increased amount for families with three or more children and an increased phase-out range for married taxpayers filing jointly. The phase-out range is indexed for inflation for years after The bill also prevents retroactive claims of the earned income credit by prohibiting individuals from claiming the credit on an amended return (or original return) for any prior year in which the individual did not have a valid Social Security number. Number of children No children $510 $506 One child $3,400 $3,373 Two children $5,616 $5,572 Three children $6,318 $6,269 Standard Mileage Rates: Below are the standard mileage rates for 2017 and Purpose Business 53.5 cents per mile 54 cents per mile Medical or Moving 17 cents per mile 19 cents per mile Charitable Service 14 cents per mile 14 cents per mile Page 9

10 Schedule A Updates Itemized deductions are phased out for taxpayers with AGI over the following thresholds: Filing Status Single $261,500 $259,400- Married filing a joint return $313,800 $311,300- Married filing separately $156,900 $155,650- Head of household $287,650 $285,350- Medical Maximum Annual limits on HSA changed as follows: Maximum annual contributions Self- only coverage $3,400 $ 3,350 Family coverage $ 6,750 $ 6,750 Age 55 and over + $1, ,000 Minimum Annual Deductible Self Only $ 1,300 $1,300 Family $ 2,600 $2,600 Maximum Out-of-pocket Expenses Self Only Coverage $ 6,550 $ 6,550 Family Coverage $ 13,100 $ 13,100 Taxes The election to deduct sales tax on schedule A instead of state tax withholding has been made permanent. Page 10

11 Mortgage Interest Premium deductions Mortgage Insurance premium are still deductible as mortgage interest until December 31, 2016, this deduction is still phased out on higher income taxpayers. Charitable deductions The provision that allowed a taxpayer over 70½ to make a charitable donation of up to $100,000 directly from their IRA account to a charity has been made permanent. These contributions count as all or part of the required minimum distribution (RMD). Retirement Plans Limits Employee contribution limits are adjusted according to a cost-of-living index. The limits for 2016 and 2017 are as follows: Plan Type Maximum Catch-up Maximum Catch-up 401(k), 403(b), 457(b) $18,000 $6,000 $18,000 $6,000 Defined contributions plans $ SEPs $54,000 None $53,000 None Traditional & Roth IRAs $5,500 $1,000 $5,500 $1,000 SIMPLE IRA, SIMPLE 401(k) $12,500 $3,000 $12,500 $3,000 Defined benefit plans $215,000 None $210,000 None Annual compensation limit $270,000 N/A $265,000 N/A AGI Phase Outs AGI phase outs for traditional and Roth IRA accounts are as follows: 2017 AGI Phase outs Deductible traditional IRA Contributions Single & HH - $62,000-$72,000 MFJ and active - $ 99,000-$119,000 MFJ, not active, spouse active-$ 186,000- $196,000 MFS - $0 - $10,000 Roth IRA Contributions Single - $118,000-$133,000 MFJ - $186,000-$196,000 MFS - $0-$10,000 Page 11

12 2016 AGI Phase outs Deductible traditional IRA Contributions Single & HH - $61,000-$71,000 MFJ and active - $ 98,000-$118,000 MFJ, not active, spouse active-$ 186,000- $194,000 MFS - $0 - $10,000 Roth IRA Contributions Single - $118,000-$133,000 MFJ - $186,000-$196,000 MFS - $0-$10,000 Rollover Rules Only one indirect rollover allowed starting in However, you can have more than one direct rollover. Education Deductions and Credits Starting last year you needed to have a Form 1098-T in order to claim education credits. If you have no 1098-T you have no credit. American Opportunity Tax Credit The credit remains the same. The maximum credit per student is $2, American Opportunity Credit phase out Filing Status Single $80,000 - $90,000 $80,000-$90,000 Married filing joint $160,000 - $180,000 $160,000-$180,000 Lifetime Learning Credit The credit remains unchanged. Filing Status Single $56,000 - $66,000 $55,000 - $65,000 Married filing joint $112,000 - $131,000 $110,000 - $130,000 Page 12

13 Student Loan Interest The maximum deduction for student loan remains at $2,500. Filing Status Married filing joint $135,000 - $165,000 $130,000 - $160,000 Other taxpayers $65,000 - $80,000 $65,000 - $80,000 Coverdell Education Savings Accounts Coverdell education savings accounts are designed to help families save for education expenses and receive tax-free growth of the contributions in the account. They remain status quo; remember that the key benefit here is that these can be used for qualified elementary and secondary education cost as well as higher education. Tuition and fees deduction You may be able to deduct up to $ of Tuition and fees from AGI, until December 31, This deduction is also phased out when income exceed the table below. Filing Status Married filing joint $135,000 - $165,000 $130,000 - $160,000 Other taxpayers $65,000 - $80,000 $65,000 - $80,000 OTHER ITEMS Qualified Transportation Fringe Benefit In 2016, the monthly limitation that can be given to an employee as a non-taxable fringe benefit to use public transportation pass and parking is $255. For 2017 there is no change. Foreign Earned Income Exclusion $101,300 is the foreign income exclusion amount beginning 01/01/2016. This will increase to $102,000 as of 01/01/2017. Page 13

14 Estate and Gift tax items Unified Credit against Estate Tax This amount for 2016 is set at $5,450,000 and will rise to $5,490,000 for Annual Exclusion for Gifts This will remain at $14,000 per year for both 2016 and ABLE Savings Accounts Achieving a Better Life Experience Act amends Code Section 529 to create tax free savings accounts for individuals with disabilities. It is similar to 529 plans for education except these are set up and used to fund a variety of expenses for individuals including medical and dental care, education, community bases supports, employment training, assistive technology, housing and transportation. See list below The annual contribution limit by all participating individuals, including family and friends is $14,000. This is a state sponsored plan like a 529, so until states create the accounts you cannot contribute. It is anticipated that they will be set up some time in Qualified disability expenses (QDE) are expenses related to the blindness or disability of the designated beneficiary and for the benefit of the designated beneficiary. In general, a QDE includes, but is not limited to, the following types of expenses: Education; Housing; Transportation; Employment training and support; Assistive technology and related services; Health; Prevention and wellness; Financial management and administrative services; Legal fees; Expenses for ABLE account oversight and monitoring; Funeral and burial; and, Basic living expenses. Page 14

15 Energy tax provisions extended through 2016 would include: Sec. 25C, which provides a 10% credit for qualified nonbusiness energy property. The bill also updates the Energy Star requirements. Sec. 30B, which provides a credit for qualified fuel cell motor vehicles. Sec. 30C, which provides a 30% credit for the cost of alternative (non-hydrogen) fuel vehicle refueling property. Sec. 30D 10% credit for plug-in electric motorcycles and two-wheeled vehicles. Sec. 40(b) (6), which provides a credit for each gallon of qualified second-generation biofuel produced. Sec. 40A credit for biodiesel and renewable diesel, which includes the biodiesel mixture credit, the biodiesel credit, and the small agri-biodiesel producer credit. Sec. 45(e) (10)(A)(i) production credit for Indian coal facilities. Sec. 45 credits for facilities producing energy from certain renewable resources. Sec. 45L, which provides a credit for each qualified new energy-efficient home constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year. Sec. 168(l), which provides a depreciation allowance equal to 50% of the adjusted basis of qualified second-generation biofuel plant property. Sec. 179D deduction for energy-efficient commercial buildings. Sec. 451(i) special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities. Secs. 6426(c) and 6427(e) excise tax credits for alternative fuels. Page 15

16 Due Date Changes This filing deadline change will take effect for years beginning after December 31, Partnership (1065) return due dates change from April 15 to March 15 (2 ½ months after the close of the tax year). Automatic extensions change to being due September 15 (Six months from due date). C-Corps (1120) change from March 15 to April 15 (3 ½ months after the close of the tax year). Extensions change to being due September 15 (5 months from due date). The exception to this rule is Corporation that have a fiscal year end June 30 will keep the filing date of September 15 (until 2025). Calendar year Trusts (1041) will have an automatic extension of 5 ½ months, ending on September 30. FinCen 114 due dates will change from April 15 to June 30 th. There is an automatic 6-month extension for the report and relief from late filing penalty for the first year a taxpayer is required to file the form. Health Coverage Tax Credit Among other things, the Trade Act retroactively reinstated the Health Coverage Tax Credit (HCTC), which had previously expired on January 1, 2014, and extended its availability through December 31, As discussed below, the reinstated HCTC may require employers to update COBRA notices and summary plan descriptions. In addition, it may present a strategic planning opportunity in certain bankruptcy situations. What is the HCTC? The HCTC is a refundable federal tax credit that was first made available in 2002 to subsidize the cost of qualified health insurance coverage for certain individuals and their qualifying family members (generally an individual s spouse and dependent children). The HCTC s subsidy level varied over time, but it currently covers 72.5% of the premium for qualifying coverage. The HCTC is generally available to an individual who satisfies each of the following conditions: 1) the individual meets the general eligibility requirements described below; 2) the individual pays 50% or more of the cost of coverage for qualified health insurance; 3) the individual does not have other specified coverage; and 4) the individual is not incarcerated or claimed as a dependent by another person. Page 16

17 What are the general eligibility requirements for the HCTC? An individual is generally eligible for the HCTC if the individual meets any of the following criteria: the individual receives a Trade Readjustment Allowance under the Trade Adjustment Assistance (TAA) program, or is eligible for the allowance, but not yet receiving it because the individual has not yet exhausted his or her state unemployment benefits; the individual receives Reemployment Trade Adjustment Assistance benefits; the individual is at least 55 years old and receives payments from the Pension Benefit Guaranty Corporation (PBGC); or the individual is the spouse or dependent of an individual who satisfies any of foregoing criteria. The trade assistance described above is generally for individuals in certain industries whose jobs are lost or threatened due to foreign-trade related circumstances, as determined by the DOL through a specified process. The PBGC pays benefits to participants in terminated, underfunded pension plans. Health Care Tax Credits What is qualified health insurance coverage for the HCTC? The following forms of health insurance coverage are included in the list of qualified health insurance coverage for the HCTC: Coverage under COBRA coverage under a group health plan available through a spouse s employer; coverage under individual health insurance if the eligible individual was covered by the insurance for the entire 30-day period ending on the date the individual became separated from employment that qualified the individual for the benefits described above and, for tax years beginning after December 31, 2015, the insurance was not obtained from an exchange established under the Affordable Care Act (ACA); coverage under a voluntary employees beneficiary association (VEBA); and certain state-qualified health plans, such as state-based continuation coverage or covered offered through a state high-risk pool. Disqualifying coverage for the HCTC An individual may not claim the HCTC if enrolled in any of the following health plans: Medicare Part B; Page 17

18 the Federal Employees Health Benefits Program; Medicaid; or The State Children s Health Insurance Program. In addition, an individual may not claim the HCTC if eligible for Medicare Part A or coverage through the U.S. military health system (i.e., TRICARE). As a practical matter, the Medicare Part A rule essentially limits eligibility for the HCTC to individuals under age 65. How do individuals claim the HCTC? To claim the HCTC, an individual must elect to receive it for an eligible coverage month. This election must be made no later than the due date (including extensions) for the tax return for the taxable year that includes the eligible coverage month and the individual will then receive the HCTC in the form of a refundable credit. Once the election is made, it is irrevocable and will apply for all subsequent eligible coverage months in the taxable year. The Trade Act provides transition relief to make elections for eligible coverage months in taxable years beginning after December 31, 2013 and before July 6, Identity Theft and The Security Summit W-2 Verification Code Testing For filing season 2016, the Internal Revenue Service will test a capability to verify the authenticity of Form W-2 data. This test is one in a series of steps to combat tax-related identity theft and refund fraud. The objective is to verify Form W-2 data submitted by taxpayers on e-filed individual tax returns. The IRS has partnered with certain Payroll Service Providers (PSPs) to include a 16-digit code and a new Verification Code field on a limited number of Form W-2 copies provided to employees. The code will be displayed in four groups of four alphanumeric characters, separated by hyphens. Example: XXXX-XXXX-XXXX-XXXX. The Verification Code will appear on some versions of payroll firms Form W-2 copies B and C, in a separate, labeled box (Copy B is "To be filed with employee's federal tax return" and Copy C is "For employee's records"). The form will include these instructions to taxpayer and tax preparers: Verification Code - If this field is populated, enter this code when it is requested by your tax return preparation software. It is possible your software or preparer will not request the code. The code is not entered on paper-filed returns. Page 18

19 Some Forms W-2 employees receive will have a Verification Code box which is blank. These taxpayers do not need to enter any code data into their tax software product. For the purposes of the test, omitted and incorrect W-2 Verification Codes will not delay the processing of a tax return. The IRS will analyze this pilot data in a test-and-learn review to see if it is useful in evaluating the integrity of W-2 information. The code will not be included in Forms W-2 or W-2 data submitted by the PSPs to the Social Security Administration or any state or local departments of revenue. Nor will this pilot affect state and local income tax returns or paper federal returns. E-Services revalidation is being required for tax professionals that use the e-services platform. This process ranges from super easy to a large pain in your side. Most Software has an increase in security for the users as well as electronic PIN requirement security is also being increased. Safe Harbor on Personal Property Expensing (Notice ) PURPOSE This notice provides an increase in the de minimis safe harbor limit provided in 1.263(a) 1(f)(1)(ii)(D) of the Income Tax Regulations for a taxpayer without an applicable financial statement ( AFS ). BACKGROUND On September 17, 2013, the Treasury Department and the Internal Revenue Service ( IRS ) issued final regulations under , , 1.263(a) 1, 1.263(a) 2, and 1.263(a) 3 (T.D. 9636, I.R.B. 331, 78 Fed. Reg ) to provide guidance on the application of 162(a) and 263(a) of the Internal Revenue Code ( Code ) to amounts paid to acquire, produce, or improve tangible property ( final tangible property regulations ). The final tangible property regulations are applicable to taxable years beginning on or after January 1, Optionally, a taxpayer may choose to apply the final tangible property regulations to taxable years beginning on or after January 1, 2012, and before January 1, In addition to clarifying the requirements under 162(a) and 263(a), the final tangible property regulations also include several simplifying provisions that are elective and prospective in application, and are intended to ease taxpayers compliance with the regulations and reduce administrative burden. Section 1.263(a) 1(f), for example, provides a de minimis safe harbor election that permits a taxpayer to not capitalize, or treat as a material or supply, Page 19

20 certain amounts paid for tangible property that it acquires or produces during the taxable year provided the taxpayer meets certain requirements and the property does not exceed certain dollar limitations. If such requirements are met, amounts paid for the qualifying property generally may be deducted under 162, provided the amount otherwise constitutes an ordinary and necessary business expense in carrying on a trade or business. See 1.263(a) 1(f)(3)(iv). Under 1.263(a) 1(f)(1)(ii)(D), a taxpayer without an AFS (as defined in 1.263(a) 1(f)(4)) may elect to apply the de minimis safe harbor if, in addition to other requirements, the amount paid for the property subject to the de minimis safe harbor does not exceed $500 per invoice (or per item as substantiated by the invoice). In contrast, under 1.263(a) 1(f)(1)(i)(D), a taxpayer with an AFS may elect to apply the de minimis safe harbor if, in addition to other requirements, the amount paid for the property does not exceed $5,000 and the taxpayer treats the amount paid as an expense on its AFS in accordance with its written accounting procedures. A larger safe harbor limitation is reasonable for a taxpayer with an AFS because an AFS provides independent assurance that the taxpayer s de minimis policies are consistent with the requirements of generally accepted accounting principles ( GAAP ) and do not materially distort the taxpayer s financial statement income. The de minimis safe harbor provided under 1.263(a) 1(f) was intended as an administrative convenience whereby a taxpayer is permitted to deduct small dollar expenditures for the acquisition or production of new property or for the improvement of existing property, which otherwise must be capitalized under 263(a). The de minimis safe harbor does not limit a taxpayer s ability to deduct otherwise deductible repair or maintenance costs that exceed the amount subject to the safe harbor. The safe harbor merely establishes a minimum threshold below which all qualifying amounts are considered deductible. Consistent with longstanding federal income tax rules, a taxpayer may continue to deduct all otherwise deductible repair or maintenance costs, regardless of amount. After the final tangible property regulations were issued, the Treasury Department and the IRS received numerous letters from representatives of small business taxpayers requesting that the Treasury Department and the IRS increase the de minimis safe harbor limit for taxpayers that do not have an AFS. In Rev. Proc , I.R.B. 694, the Treasury Department and the IRS formally requested comments on whether it is appropriate to increase the de minimis safe harbor limit provided in 1.263(a) 1(f)(1)(ii)(D) for a taxpayer without an AFS to an amount greater than $500, and, if so, what amount should be used and the justification for considering that amount appropriate. DISCUSSION The Treasury Department and the IRS received more than 150 comment letters suggesting an increase in the amount of the de minimis safe harbor limit for taxpayers without an AFS. The suggested increased amount ranged from $750 to $100,000. Generally, commenters wrote that the $500 limitation was too low to effectively reduce the administrative burden of complying Page 20

21 with the capitalization requirement for small business taxpayers that frequently purchase tangible property in their trades and businesses. Commenters noted that the cost of many commonly expensed items (for example, tablet-style personal computers, smart phones, and machinery and equipment parts) typically surpass the current $500 per item or invoice threshold provided in 1.263(a) 1(f)(1)(ii)(D). Commenters also stated that the $500 threshold does not correspond to the financial accounting policies of many small businesses, which frequently permit the deduction of amounts in excess of $500 as immaterial. Commenters noted that without an increase in the de minimis safe harbor limit for taxpayers without an AFS, a capitalization threshold in excess of $500 can only be substantiated by establishing that a taxpayer s policy results in the clear reflection of income for federal income tax purposes, resulting in additional burden and uncertainty for taxpayers. Finally, many commenters expressed concern regarding the disparate treatment of taxpayers with an AFS compared to those without an AFS under the safe harbor requirements, stating that obtaining an AFS is cost prohibitive for many small businesses and does not adequately justify the substantially lower de minimis ceiling for these taxpayers. Section 1.263(a) 1(f)(1)(ii)(D) permits the IRS to change the safe harbor limit to an amount identified in published guidance in the Federal Register or in the Internal Revenue Bulletin (see (d)(2)(ii)(b)). Having considered taxpayers comments, the goal of the final tangible property regulations to reduce administrative burden, and the concern that taxpayers methods of accounting clearly reflect income, the 1.263(a) 1(f)(1)(ii)(D) de minimis safe harbor limitation for a taxpayer without an AFS is increased from $500 to $2,500. EFFECTIVE DATE This Notice is effective for costs incurred during taxable years beginning on or after January 1, This was raised from $500 to $2, reporting information Effective for returns required to be furnished after 12/31/2016, Mortgage lenders must include additional information on form The will be required to include the following: The amount of outstanding principle The address or location of the property or other description if the property does not have an address The loan origination date Page 21

22 Affordable Care Act Individuals must have health care coverage, have a health coverage exemption, or make a shared responsibility payment with their tax return. Use Form 8965 to report a coverage exemption granted by the Marketplace (also called the Exchange ) or to claim a coverage exemption on your tax return. In addition, use these instructions to figure your shared responsibility payment if for any month you or another member of your tax household had neither health care coverage nor a coverage exemption. Types of Coverage Exemptions Coverage is considered unaffordable - The minimum amount you would have paid for employer-sponsored coverage or a bronze level health plan (depending on your circumstances) is more than 8 percent of your actual household income for the year as computed on your tax return. Short coverage gap - You went without coverage for less than three consecutive months during the year. Income below the return filing threshold - Your gross income or your household income is less than your applicable minimum threshold for filing a tax return. Citizens living abroad and certain noncitizens - You are: A U.S. citizen or resident who spent at least 330 full days outside of the U.S. during a 12- month period; A U.S. citizen who was a bona fide resident of a foreign country or U.S. territory; A resident alien who was a citizen of a foreign country with which the U.S. has an income tax treaty with a nondiscrimination clause, and you were a bona fide resident of a foreign country for the tax year; or Not a U.S. citizen, not a U.S. national, and not an alien lawfully present in the U.S. (For this purpose, an immigrant with Deferred Action for Childhood Arrivals (DACA) status is not considered lawfully present and therefore is eligible for this exemption.) If you meet one of these conditions, you qualify for this exemption even if you have a social security number (SSN). Members of a health care sharing ministry - You are a member of a health care sharing ministry, which is an organization described in section 501(c)(3) whose members share a Page 22

23 common set of ethical or religious beliefs and have shared medical expenses in accordance with those beliefs continuously since at least December 31, Members of Indian Tribes - You are a member of a Federally-recognized Indian tribe, including an Alaska Native Claims Settlement Act (ANCSA) Corporation Shareholder (regional or village), or you were otherwise eligible for services through an Indian health care provider or the Indian Health Service. Incarceration - You are in a jail, prison, or similar penal institution or correctional facility after the disposition of charges. Members of certain religious sects - You are a member of a religious sect in existence since December 31, 1950, that is recognized by the Social Security Administration (SSA) as conscientiously opposed to accepting any insurance benefits, including Medicare and Social Security. Aggregate self-only coverage considered unaffordable - Two or more family members' aggregate cost of self-only employer-sponsored coverage exceeds 8 percent of household income, as does the cost of any available employer-sponsored coverage for the entire family. General hardship - You experienced circumstances that prevented you from obtaining coverage under a qualified health plan, including, but not limited to, homelessness, eviction, foreclosure, domestic violence, death of a close family member, and unpaid medical bills. Coverage considered unaffordable based on projected income - You do not have access to coverage that is considered affordable based on your projected household income. Determined ineligible for Medicaid in a state that did not expand Medicaid coverage - You are determined ineligible for Medicaid solely because the State in which you live does not participate in Medicaid expansion under the Affordable Care Act. Resident of a state that did not expand Medicaid - Your household income is below 138 percent of the federal poverty line for your family size and at any time in 2014, you reside in a state that does not participate in Medicaid expansion under the Affordable Care Act. Unable to renew existing coverage - You were notified that your health insurance policy was not renewable and you consider the other plans available unaffordable. Gap in CHIP coverage - You applied for CHIP coverage during the initial open enrollment period and were found eligible for CHIP based on that application, but had a coverage gap at the beginning of Page 23

24 Premium Assistance Credit Eligibility for the Premium Tax Credit Individuals are allowed a premium tax credit only for health insurance coverage they purchased through the Marketplace for themselves or other members of their tax family. Generally, the members of your tax family are the individuals included on your tax return: yourself, your spouse and your dependents. A credit is not allowed for health insurance coverage purchased outside the Marketplace. Individuals who are eligible to enroll in certain employer-sponsored coverage or government health coverage, like Medicare, Medicaid, or TRICARE, are not eligible for the premium tax credit. Answer the yes-or-no questions in this eligibility chart or use this interview tool to see if you may qualify for the premium tax credit. In general, you may be allowed a premium tax credit if you meet all of the following: You or a family member enrolled in health insurance coverage through the Marketplace for one or more months of the year in which the enrolled individual is not eligible for non- Marketplace health coverage Your health insurance premiums for one or more of those same months are paid by the unextended due date of your return, either through advance credit payments, payment by you, or payment by someone else You are within certain income limits You do not file a married filing separately tax return, unless you meet certain criteria in the IRS Regulations, which allow certain victims of domestic abuse and spousal abandonment to claim the premium tax credit as married filing separately You cannot be claimed as a dependent by another person Income Criteria To be eligible for the premium tax credit, your household income must be at least 100 percent, but no more than 400 percent of the federal poverty line for your family size. There are two exceptions for individuals with household income below 100 percent of the federal poverty line. The instructions to Form 8962 have more information about these exceptions. An individual who meets these income requirements must also meet other eligibility criteria. The amount of the premium tax credit is based on a sliding scale, with greater credit amounts available to those with lower incomes. If the advance credit payments made on your behalf are more than the allowed premium tax credit, you will have to repay some or all the excess. If your projected household income is close to the 400 percent upper limit, be sure to consider the amount of advance credit payments you choose to have paid on your behalf. You want to consider this carefully because if your household income on your tax return is 400 percent or more of the federal poverty line for your family size, you will have to repay all of the advance credit payments made on behalf of you and your family members. Other factors affecting the credit amount include the cost of available insurance coverage, your address, and your family size. Page 24

25 For purposes of claiming the premium tax credit for 2016 for residents of the 48 contiguous states or Washington, D.C., the following table outlines household income that is at least 100 percent, but no more than 400 percent of the federal poverty line: Federal Poverty Line for 2016 Returns 100% of FPL. 400% of FPL One Individual $11,880 up to $47,520 Family of two $16,020 up to $64,080 Family of four $24,300 up to $97,200 The federal poverty guidelines are sometimes referred to as the federal poverty line or FPL. The Department of Health & Human Services determines the federal poverty guideline amounts annually. The government generally adjusts the income limits annually for inflation. The Federal Register publishes a chart reflecting these amounts at the beginning of each calendar year. You can find all of this information on the HHS website. HHS provides three federal poverty guidelines: one for residents of the 48 contiguous states and Washington D.C., one for Alaska residents and one for Hawaii residents. For purposes of the premium tax credit, eligibility for a certain year is based on the most recently published set of poverty guidelines at the time of the first day of the annual open enrollment period for coverage for that year. Example: The federal poverty line for determining eligibility for the premium tax credit for 2016 for a family of four living in Washington, DC, is at least $24,300 but no more than $97,200. That means the family of four could have household income of up to and including $97,200, which is 400 percent of $24,300, without losing eligibility for the premium tax credit. Married Filing Separately If you are married and you file your tax return using the filing status married filing separately, you will not be eligible for the premium tax credit unless you meet certain criteria. Certain victims of domestic abuse and spousal abandonment can obtain relief from this filing status limitation. Details regarding this relief are in the instructions for Form 8962 and Publication 974. You may claim this relief from the joint filing requirement for no more than three consecutive years. Domestic abuse includes physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate, or to undermine the victim s ability to reason independently. All the facts and circumstances are considered in determining whether an individual is abused, including the effects of alcohol or drug abuse by the victim s Page 25

26 spouse. Depending on the facts and circumstances, abuse of the victim s child or other family member living in the household may constitute abuse of the victim. You are a victim of spousal abandonment for a tax year if, taking into account all facts and circumstances, you are unable to locate your spouse after reasonable diligence. Generally, a married taxpayer who lives apart from their spouse for the last six months of the tax year is considered unmarried if they file a separate return, maintain a household that is also the main home of a dependent child for more than half the year and furnish more than half the cost of the household during the tax year. Premium Tax Credit: Claiming the Credit and Reconciling Advance Credit Payments Reporting Changes in Circumstances Filing a Federal Tax Return to Claim and Reconcile the Credit Failing to file your tax return may prevent future advance credit payments When you apply for assistance to help pay the premiums for health coverage through the Marketplace, the Marketplace will estimate the amount of the premium tax credit that you may be able to claim for the tax year using information you provide about your family composition, your projected household income, whether those that you are enrolling are eligible for other non-marketplace coverage, and certain other information. Based on the estimate from the Marketplace, you can choose to have all, some, or none of your estimated credit paid in advance directly to your insurance company on your behalf to lower what you pay out-of-pocket for your monthly premiums. These payments are called advance payments of the premium tax credit or advance credit payments. If you do not get advance credit payments, you will be responsible for paying the full monthly premium. If you received the benefit of advance credit payments, you must file a tax return to reconcile the amount of advance credit payments made on your behalf with the amount of your actual premium tax credit. You must file an income tax return for this purpose even if you are otherwise not required to file a return. If you choose not to get advance credit payments, you can claim the full benefit of the premium tax credit that you are allowed when you file your tax return. This will increase your refund or lower the amount of tax that you would otherwise owe. Reporting Changes in Circumstances If you purchased health insurance coverage through the Marketplace and get assistance in paying premiums through advance credit payments made on your behalf, it is important to report life changes to the Marketplace throughout the year. Page 26

27 Reporting these changes promptly will help you get the proper type and amount of financial assistance. Reporting changes also will help you avoid large differences between the advance credit payments made on your behalf and the amount of the premium tax credit you are allowed when you file your tax return, which may affect your refund or balance due when you file your tax return. Changes in circumstances that can affect the amount of your actual premium tax credit include: Increases or decreases in your household income including lump sum payments like a lump sum payment of Social Security benefits Marriage Divorce Birth or adoption of a child Other changes affecting the composition of your tax family Gaining or losing eligibility for government sponsored or employer sponsored health care coverage Moving to a different address For the full list of changes you should report, visit HealthCare.gov. To estimate the effect that changes in your circumstances may have upon the amount of premium tax credit that you can claim - see this change in circumstances estimator. Filing a Federal Tax Return to Claim and Reconcile the Credit If you received the benefit of advance credit payments, you must file a tax return and use a Form 8962, Premium Tax Credit (PTC) to reconcile the amount of advance credit payments made on your behalf with the amount of your actual premium tax credit. You must file an income tax return for this purpose even if you are otherwise not required to file a return. You must file a federal income tax return and attach Form 8962, Premium Tax Credit (PTC) to the return if: Advance credit payments were paid to your health insurer for you or another individual in your tax family Advance credit payments were paid for an individual, including you, for whom you told the Marketplace you would claim a personal exemption and no one, including you, claims a personal exemption for that individual You choose to claim the premium tax credit For Information about how to fill out this form, see the instructions for Form See Publication 974 for additional instructions for taxpayers in special situations. Page 27

28 If the premium tax credit computed on your return is more than the advance credit payments made on your behalf during the year, the difference will increase your refund or lower the amount of tax you owe. This will be reported in the Payments section of Form If the advance credit payments are more than the amount of the premium tax credit you are allowed, you will add all or a portion of the excess advance credit payments made on your behalf to your tax liability by entering it in the Tax and Credits section of your tax return. This will result in either a smaller refund or a larger balance due. The amount of your excess advance credit payments that you are required to repay may be limited based on your household income and filing status. If your household income is 400 percent or more of the applicable federal poverty line, you will have to repay all of the advance credit payments. The repayment limits are listed in the table below. Repayment Limitation Table Household Income Percentage of Federal Poverty Line Limitation Amount for Single Limitation Amount for all other filing statuses Less than 200% $ 300 $ 600 At least 200%, but less than 300% $ 750 $1,500 At least 300%, but less than 400% $ 1,250 $ 2, % or more No limit No limit If your filing status is Married Filing Separately, the repayment limitation above applies to both spouses separately based on the household income reported on each return. The Marketplace will send you, by January 31 of the year following the year of coverage, a Health Insurance Marketplace statement, Form 1095-A This form shows the amount of the premiums for the health care plan or plans you and your family members enrolled in and certain other information you will need to compute your premium tax credit. Form 1095-A also reports any advance credit payments made on your behalf. You use this information to compute your premium tax credit and to compare any advance credit payments made on your behalf with the amount of your actual premium tax credit. For more information about Form 1095-A see Health Insurance Marketplace Statements. Whether you are reconciling advance credit payments with the credit you are allowed, or are claiming the credit, you should consider e-filing your tax return, because using tax preparation software is the best way to file a complete and accurate tax return. Page 28

29 Failing to file your tax return may prevent future advance credit payments If you choose to get the benefit of advance credit payments, you must file your tax return as soon as possible to ensure you can get advance credit payments made on your behalf from your Marketplace in future years. If you miss the April filing deadline or receive an extension to file until October 15, you should file your return as soon as possible. You should not wait to file. File as soon as possible to reconcile any advance credit payments made on your behalf and to maintain your eligibility for future premium assistance. If advance credit payments are made on behalf of you or an individual in your family, and you do not file a tax return, you will not be eligible for advance credit payments or cost-sharing reductions to help pay for your Marketplace health insurance coverage in future years. This means you will be responsible for the full cost of your monthly premiums and all covered services. In addition, we may contact you to pay back some or all of the advance credit payments that are made on behalf of you or an individual in your family. For example, if you chose to get advance credit payments made on your behalf in 2016, you should file your 2016 tax return as soon as possible. This will help ensure you can receive advance credit payments from your Marketplace in 2017 because Marketplaces will determine eligibility for advance credit payments and cost-sharing reductions for the 2018 coverage year during the fall of You will increase your chances of avoiding a gap in receiving premium assistance if you electronically file your 2016 tax return with Form 8962 as soon as possible. If advance credit payments were made on behalf of you or an individual in your family in 2016, and you did not file a tax return, you will not be eligible for advance credit payments or costsharing reductions to help pay for your Marketplace health insurance coverage in Due Diligence Checklist (s) Form 8867 has been expanded to cover not only EITC but also CTC and AOTC. So we will need to answer questions on the form for each of the of the separate credits. See the form below. Page 29

30 2016 Form 8867 Page 30

31 Tax Preparer Licenses and PTIN Circular 230 generally covers practice before the IRS. People who are unconditionally granted to practice before the IRS are Lawyers, CPA s, and Enrolled Agents. Voluntary Programs Annual Filing Season Program Maintain active PTIN Complete AFTR (Annual Federal Tax Refresher) course and other required CE Hours by December 31 Certain state and nationally tested preparers are exempt Consent to certain Circular 230 practice requirements This will become critical in the near future. Beginning this year there are changes in the level of representation that can be performed by an unenrolled return preparer. Representation requirements Form 1098 Unenrolled return preparers must possess a valid and active Preparer Tax Identification Number (PTIN) to represent a taxpayer before the IRS, and must have been eligible to sign the return or claim for refund under examination. For returns prepared and signed after December 31, 2015, the unenrolled return preparer must also possess (1) a valid Annual Filing Season Program Record of Completion for the calendar year in which the tax return or claim for refund was prepared and signed; and (2) a valid Annual Filing Season Program Record of Completion for the year or years in which the representation occurs. (An Annual Filing Season Program Record of Completion is not required for returns prepared and signed before January 1, 2016). If an unenrolled return preparer does not meet all of the representation requirements, you may authorize the unenrolled return preparer to inspect and/or request your tax information by filing a Form Filing a Form 8821 will not authorize the unenrolled return preparer to represent you. Page 31

32 2016 Form 2848 Page 32

33 2016 Form 1040 Page 33

34 Page 34

35 2016 Form 1095-A Page 35

36 2016 Form 1095-B Page 36

37 2016 Form 1095-C Page 37

38 2016 Form 8962 Page 38