A lot of our attention recently has focused on the passage of multiple tax extenders at year end, and with good reason. Making those provisions permanent helps small businesses and families alike, and allows us to plan with much more certainty as we move forward into 2016. But tax extenders legislation wasn’t the only important news of 2015. An array of federal tax legislation was passed and key U.S. Supreme Court cases decided that will potentially affect returns this year as well as impact refund opportunities for earlier “open” years. Here are some highlights:
Key Federal Tax Legislation
The Bipartisan Budget Act of 2015 repealed the TEFRA unified partnership audit rules, effective for partnership tax years beginning after 2017, and replaces them with streamlined procedures which become mandatory in several years. TEFRA was created in order to reduce the budget gap by generating revenue through closure of tax loopholes and introduction of tougher enforcement of tax rules, as opposed to changing marginal income tax rates. TEFRA was introduced November 13, 1981, and signed into law by President Reagan in 1982.
The 2015 Budget Act also repeals automatic enrollment in certain employer-sponsored health plans and makes a number of pension-related changes.
The Surface Transportation and Veterans Health Care Choice Improvement Act revised some significant return due dates (effective for the 2017 filing season), overruled the Supreme Court’s decision in Home Concrete, and included other tax compliance measures. Most significantly to our clients, the Surface Transportation Act requires consistency between estate tax value and the “stepped-up basis” of assets acquired from a decedent. Executors of large estates are required to disclose to the IRS information identifying the value of each interest received. The IRS issued guidance in Notice 2015-57, setting a February 29, 2016 deadline for statements otherwise due before that date.
In the Trade Preferences Extension Act, a number of tax related provisions were addressed. These include, among others, renewal of the health care tax credit (HCTC), the requirement for taxpayers to possess a valid information return (Form 1098-T, Tuition Statement) to claim certain education deductions and credits, and overhaul of the penalty structure for certain information returns. In addition, the additional child tax credit is refundable if the credit exceeds the income tax due by the taxpayer. Beginning in 2015, the additional child tax credit is not refundable if the taxpayer has claimed a foreign earned income exclusion. This is particularly important for any U.S. expat clients.
The Fixing America’s Surface Transportation (FAST) Act is a multi-year highway and transportation funding bill that includes various excise taxes used to finance the highway fund. Hidden in the Act are new rules for the revocation or denial of U.S. passport in case of certain unpaid taxes and requiring the IRS to use private debt collectors to recover certain tax receivables.
The Don’t Tax Our Fallen Public Safety Heroes and Defending Public Safety Employees’ Retirement Act impact certain federal law enforcement officers, federal firefighters, customs and border patrol officers, and air traffic controllers. If you fall into one of those categories, be sure to discuss these with your tax professional.
Key Court Decisions in 2015
In, King v. Burwell, 135 S. Ct. 2480 (6/25/2015), Premium Tax Credits provided under the Patient Protection and Affordable Care Act were addressed. In response, the IRS has now issued a regulation confirming that a federal tax credit is available to qualifying individuals regardless of whether they purchase insurance on a state-run or federally facilitated exchange.
In the case of Obergefell v. Hodges, Supreme Court No. 14-556, 2015-1 USTC 50,357, the Supreme Court ruled that same-sex marriage is a constitutional right under the Equal Protection Clause and all states should allow same sex couples to file their taxes as married couples. The IRS issued Proposed Regulations on Oct. 21, 2015 to clarify the treatment of same-sex spouses for federal tax purposes.
The decision in Voss v. Commissioner, 116 A.F.T.R.2d 2015-5529 (9th Cir. 8/7/15), specified that two unmarried individuals purchasing a residence together can each deduct interest on a mortgage up to $1 million and home equity debt up to $100,000. Unmarried co-owners of a property are now allowed to apply the mortgage interest deduction on a per-taxpayer basis, rather than on a per-property basis.
In Muniz v. Commissioner, T.C. Memo. 2015-125 (7/9/2015), it was determined that lump-sum alimony payments that were not scheduled to terminate at the death of the payee were determined to not be alimony as defined in Section 71, and were therefore not deductible as alimony. This case serves as a good reminder to help the taxpayer clearly define what payments are considered alimony, child support, or another portion of the settlement in relation to divorce proceedings.
And finally, in Pacific Management Group v. Commissioner, T.C. Memo. 2015-97, the ruling clarified that “proper substantiation” is required to assert attorney-client privilege. Proper substantiation is defined an appropriate log that is kept to track why documents can be withheld from an IRS request for information. In this case, the Tax Court held that the privilege log provided by taxpayer was not adequate to sustain claims of privilege.
Tax law is ever-changing.