The newly signed law (12/18/15) called “Protecting Americans from New Tax Hikes Act of 2015” has some good things and some not so good ones.  Again, I chuckle (because I do not want to cry) at the way our government leaders come up with catchy and, frankly, deceptive phrases to try to make ‘we, the people’ believe that they are actually helping us.  They will always throw a bone or two in there, but when you look at the ‘meat’ of the matter, this act is more about raising our taxes (through increased penalties) than protecting us from tax hikes.  So, as I expound on some of the issues discussed in the act, you be the judge.

First, the good news.  Title I – Extenders– deals with the ‘permanent’ extension of some credits that we already enjoy:

Part I:  Tax Relief for Families and Individuals:

1. The enhanced child tax credit, at an indexed $3000, which was set to expire in 2017, has now been made permanent.
2. The enhanced American Opportunity Tax Credit (AOTC) now takes the permanent provisions of the Hope Scholarship Credit, increases it to $2,500 for four years of post-secondary education and makes them permanent.  (Please note that this credit starts to phase out at $80,000 AGI (single) and $160,000 AGI (married filing jointly).
3. Earned income tax credit (EITC) for low to moderate income earners which was temporarily increased until 2017 for those with three (or more) children has now been made permanent.  And the EITC marriage penalty has been reduced by increasing the phase-out range by $5000. (this is the bone!)
4. Hoorah school teachers!  Your $250 above the line deduction for eligible elementary and secondary school expenses has now been made permanent and beginning 2016 will be ‘indexed for inflation’.  (That should really ‘increase’ your spending money! Ha!)
5. Employees who are reimbursed transportation expenses will permanently be able to exclude from wages and gross income reimbursements of their transit passes and van pool benefits up to amounts that match their qualified parking benefits.
6. The provision also permanently extends the option to claim an itemized deduction for State and Local general sales taxes in lieu of an itemized deduction for State and Local income taxes.

Part II: Incentives for Charitable Giving

1. Charitable deductions for contributions made of real property for conservation purposes has now been permanently extended. In 2016, this provision allows Alaska native corporations to deduct donations of conservation easements up to 100 of taxable income.
2. Up to $100,000 per year can be excluded from gross income for qualified charitable contributions made from an individual retirement account (IRS) for individuals at least 70 ½ years old.  This is now permanent.
3. Non-corporate business taxpayers are now permanently allowed a deduction (up to 10% in 2015 and 15% starting 2016) of charitable contribution of inventory of apparently wholesome food.  Special rules for valuing the food have also been added.
4. The provision permanently extends the modification of the tax treatment of certain payments by a controlled entity to an exempt organization.

1. The rule which provides that a shareholder’s basis in the stock of an S corporation is reduced by the shareholder’s pro rata share of the adjusted basis of property contributed by the S corporation for charitable purposes has now been permanently extended.

Part III – Incentives for Growth, Jobs, Investment, and Innovation.

1. The act provides for a permanent extension and modification of the research credit (R & D) and now allows small businesses ($50 million or less in gross receipts) to claim the credit against the alternative minimum tax (ALT) and certain small businesses may even utilize it against their payroll tax liability.  (Another bone!  Fetch!)
2. In 2016 employers of any size can permanently take a 20% wage credit for employees called to active duty.
3. The provision permanently extends the 15-year recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property.
4. This one is good!  Small businesses can now  permanently expense as section 179 up to the limits that were allowed from 2010 to 2014 ($500,000 up to $2 million, respectively), including computer software.  And in 2016, indexing for inflation will begin and will allow in 2015 the expensing of air conditioning and heating units placed in service after 2015.  The $250,000 real property expense limitation cap has also now been eliminated beginning 2016.
5. Provisions allowing for the pass-through character of interest-related dividends and short-term capital gains dividends from regulated investment companies (RICs) to foreign investors have also been permanently extended.
6. Extension of exclusion of 100 percent of gain on certain small business stock has been made and also for non-corporate taxpayers to stock acquired and held for more than five years.  This provision also permanently extends the rule that eliminates such gain as an AMT preference item.
7. The provision permanently extends the rule reducing to five years (rather than ten years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains.

There are many more, but time and space do not allow me to continue.

Now, the bad news!   Title II – Program Integrity deals mostly with prevention of retroactive credit claims and penalties for errors or wrong filings and changes of dates for filing of certain returns.

1. For tax year beginning 2016, W2 and W3 and 1099 forms will have to be filed with the IRS by January 31^st of the following calendar year. This act also gives the IRS additional time to review refund claims for earned income or child tax credits.
2. The provision establishes a safe harbor from penalties for the failure to file correct information returns and for failure to furnish correct payee statements by providing that if the error is $100 or less ($25 or less in the case of errors involving tax withholding), the issuer of the information return is not required to file a corrected return and no penalty is imposed.  Wow!  Thank you IRS. This is really going to save us some serious penalties!  Ha!

1. An applicant is now able to obtain an ITIN by providing documentation in person to an IRS agent or by mail.  However, all those who have received ITINs prior to 2013 will now be required to renew them on a staggered basis between 2017 and  2020.  If you do not file a tax return for three (3) consecutive years, then the ITIN will automatically expire.  The goal of the IRS is to have everyone file for an ITIN in person by 2020. This one will impact many people.
2. NO RETROACTIVE CLAIMS will now be allowed for earned income, child tax or American Opportunity tax credits after issuance of the social security number.  So, no taxpayer will be able to claim any of these credits for years prior to their date of receiving their social security number.
3. The due diligence requirements for income tax preparers has been expanded and the related penalty for failure to comply. The provision also requires the IRS to study the effectiveness of the due diligence requirements and whether such requirements should apply to taxpayer who file online or by filing a paper form. The provision applies to tax years beginning after December 31, 2015.
4. The provision expands the rules under current law, which bar individuals from claiming the earned income tax credit for ten year if they are convicted of fraud and for two years if they are found to have recklessly or intentionally disregarded the rules, to apply to the child tax credit and American Opportunity Tax Credit. The provision adds math error authority, which permits the IRS to disallow improper credits without a formal audit if the taxpayer claims the credit in a period during which he is barred from doing so due to fraud or reckless or intentional disregard. The provision applies to tax years beginning after December 31, 2015.  So be very careful when claiming these credits!
5. The provision applies the 20-percent penalty for erroneous claims under current law to the refundable portion of credits (reversing the Tax Court decision in Rand v. Commissioner). The provision also eliminates the exception from the penalty for erroneous refunds and credits that currently applies to the earned income tax credit, and the provision provides reasonable-cause relief from the penalty. The provision generally applies to returns filed after December 31, 2015. This is the meat of the issue.  More money for the coffers of the IRS!
6. Tax preparers-beware! You better be on your best behavior.  These penalties are very stiff indeed.  Could be as high as $5000 or 75% of your income for willful or reckless conduct.
7. In order to claim the American Opportunity Tax Credit, you must now report the EIN of the educational institution.

This is only a highlight of what is coming for us in 2016.  So, please look up the actual 2015 Act and read it.  I am sure that you will be thrilled!

Have a great 2016!