Federal Tax Law Updates
Self-Study Course
(3 Tax Law Updates CE Hours)
Federal Tax Law Updates
Description
This topic covers the changes issued by the IRS and the tax law updates that will apply to tax year 2018. This topic covers the changes resulting from the passage of the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018 and also covers the provisions of the PATH Act (Protecting Americans from Tax Hikes signed into law December 18, 2015) that were extended through tax year 2017. Although several of these provisions remain expired for 2018, historically Congress has extended them and made them retroactive before the end of the current tax year.
Learning Objectives
Upon completing this topic, the student should be aware of the changes issued by the IRS and the tax law updates applicable to the 2018 tax year. Students should also be familiar with the permanent and temporary provisions of the PATH Act pertaining to families and individuals, and businesses and to the changes resulting from the passage of the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018.
Tax Law Updates
The Tax Cuts and Jobs Act (TCJA) was signed by President Trump in December 2017. Congress attached a substantial tax package to the government funding bill enacted on Feb.9, 2018 (the Bipartisan Budget Act of 2018) extending tax provisions that had expired at the end of 2016. Most were only extended for one year and were made available retroactively for the 2017 tax year. To date, the IRS has issued several tax changes for tax year 2018. Following is a list of the pertinent changes and updates to be considered in filing 2018 taxes followed by details about each:
1. Tax return due dates 2. Personal filing requirement 3. Personal exemption
4. Standard deduction 5. New tax rates 6. Child Tax Credit 7. Earned Income Credit 8. Itemized deductions 9. HSA contribution limit 10.Lifetime Learning Credit 11.Adoption credit
13.Traditional and Roth IRA Contribution Limits and Phase Outs 14.Alternative Minimum Tax
15.Section 179 expensing and depreciation 16.Qualified Business Income Deduction 17.Shared Individual Responsibility
Tax Return Dues Dates
The filing deadline for tax year 2019 is Monday, April 15, 2020. The deadline for an automatic extension of individual tax returns is Tuesday, October 15, 2020.Taxpayers can apply for an automatic extension by filing Form 4868 on or before April 15.
Personal Filing Requirement
When gross income exceeds these personal filing thresholds, most taxpayers will be required to file a tax return for tax year 2019:
Taxpayer Filing Status Taxpayer Age Filing Requirement
Single Under 65 $12,200
Single 65 or Older $13,950
Married Filing Joint Under 65 Both Spouses $24,400
Married Filing Joint 65 or Older One Spouse $25,700
Married Filing Joint 65 or Older Both Spouses $27,000
Head of Household Under 65 $18,350
Head of Household 65 or Older $20,000
Married Filing Separate Any Age $12,200
Qualifying Widow(er) Under 65 $24,400
Qualifying Widow(er) 65 or Older $25,700
Personal Exemption
The Tax Cuts and Jobs Act has eliminated the personal exemption amount for taxpayers and their dependents.
Standard Deduction
The standard deduction is available to taxpayers who do not itemize deductions on Schedule A. The available standard deduction amounts for 2019 are shown below by filing status:
Taxpayer Filing
Status Taxpayer Age
Taxpayer
Blindness Standard Deduction
Single Under 65 Not Blind $12,200
Married Filing Joint Under 65 Both
Spouses Not Blind $24,400
Married Filing
Taxpayer Filing
Status Taxpayer Age Blindness Taxpayer Standard Deduction
Married Filing
Separate Under 65 Not Blind $12,200
Head of Household Under 65 Not Blind $18,350
Qualifying
Widow(er) Under 65 Not Blind $24,400
For 2019, the additional standard deduction for people 65 years and over or blind is $1,300. The standard deduction increases to $1,650 for unmarried taxpayers.
The standard deduction amount for an individual who can be claimed as a dependent by another taxpayer cannot exceed the greater of $1,100 or the individual’s earned income plus $350.
New Tax Rates
The following chart shows the 2019 end points for each tax bracket by filing status:
Tax Rate Single Married
Filing Joint Married Filing Separate Head of Household Estates and Trusts 10% $9,700 $19,400 $9,700 $13,850 $2,600 12% $39,475 $78,950 $39,745 $52,850 - 22% $84,200 $168,400 $84,200 $84,200 - 24% $160,725 $321,450 $160,725 $160,700 $9,300 32% $204,100 $408,200 $204,100 $204,100 35% $510,300 $612,350 $306,175 $510,300 $12,750 37% $510,301+ $612,351+ $306,176+ $510,301+ $12,751+
The maximum long-term capital tax rates for high income taxpayers increased from 15% to 20% on qualified dividends and capital gains with the passage of the American Taxpayer Relief Act of 2012.
With the Tax Cuts and Jobs Act, long term capital gains and qualified dividends have their own tax brackets and are no longer tied to ordinary income tax rates. For 2018, the adjusted net capital gains rate is shown below
The maximum long-term capital tax rates for high income taxpayers is now 20% on qualified dividends and capital gains.
Taxpayer Filing Status Rate Range Amount
Single 0% $0-$39,375
Taxpayer Filing Status Rate Range Amount
Single 20% $434,551+
Head of Household 0% $0-$52,750
Head of Household 15% $52,756-$461,700
Head of Household 20% $461,701+
Married Filing Joint and
Surviving Spouse 0% $0-$78,750
Married Filing Joint and
Surviving Spouse 15% $78,751-$488,850
Married Filing Joint and
Surviving Spouse 20% $488,851+
Married Filing Separate 0% $0-$39,375
Married Filing Separate 15% $39,376-$244,425
Married Filing Separate 20% $244,426+
Estates and Trusts 0% $0-$2,650
Estates and Trusts 15% $2,651-$12,950
Estates and Trusts 20% $12,951+
An additional tax is levied on net investment income earned by an individual and an estate or trust of 3.8% of the lesser of net investment income or the following threshold amounts -- $250,000 for joint filers or a surviving spouse, $125,000 for married taxpayers filing separate and $200,000 for all others. For taxpayers with modified adjusted gross income above the threshold, the rate on certain capital gains and dividends is 23.8% while the maximum rate on other investment income (interest, annuities, royalties, rents) is 40.8% (37% plus 3.8%).
Child Tax Credit
For 2019, the child tax credit remains at $2,000 per child with $1,400 as the maximum refundable amount.
Earned Income Credit
For tax year 2019, the following amounts of earned income, the maximum amount of credit and the threshold phase out amounts are shown below:
Filing Status Qualifying No
Children One Qualifying Child Two Qualifying Children Three or More Qualifying Children Earned Income Amount $6,920 $10,370 $14,570 $14,570
Maximum Amount of Credit $529 $3,526 $5,828 $6,557 Single or Head of Household Phaseout Begins $8,650 $19,030 $19,030 $19,030 Single or Head of Household Phaseout Ends $15,570 $41,094 $46,703 $50,162 Married Filing Joint Phaseout Begins $14,450 $24,820 $24,820 $24,820 Married Filing Joint Phaseout Ends $21,370 $46,884 $52,493 $55,952
The earned income tax credit is not allowed if the aggregate amount of investment income exceeds $3,600.
Itemized Deductions (Pease Limitations)
For high income taxpayers who itemize deductions, the previous Pease Limitations no longer apply.
Itemized Medical Expense Deduction
Beginning in tax year 2019, all taxpayers now have a threshold equal to 10.0% (used to be 7.5% for 2018) of AGI before the medical expense deduction can be claimed.
HSA Contribution Limit
The 2019 contribution limit for individuals has increased from $3,450 in 2018 to $3,500 in 2019. The limit for families with high deductible health plans is $7,000.
Lifetime Learning Credit
Taxpayers with a modified adjusted gross income (MAGI) in excess of $58,000 ($116,000 for couples filing jointly) is the 2019 phase out for a reduction in the allowable credit, an increase from $57,000 and $114,000 in 2018.
Adoption Credit
For 2019 the adoption credit for adopting of a child with special needs is $14,080 and the maximum credit allowed for other adoptions is the amount of qualified expenses up to $14,080. The credit phases out for taxpayers with modified adjusted gross incomes over $211,160 and is completely phased out at incomes of $251,160 or more.
Student Loan Interest Deduction
For 2019, the maximum amount of the deduction remains $2,500. Phaseouts apply at MAGI of $70,000 ($140,000 for joint returns) and is completely phased out at $85,000 ($170,000 for joint returns).
Traditional and Roth IRA Contribution Limits and Phase Outs
For 2019, the combined contribution limit to both traditions and Roth IRAs is $6,ooo (up from $5,500 in 2018).
The phase out range for traditional IRA’s in 2019 increases $1,000 to $64,000-$74,000 for single taxpayers and $103,000 to $123,000 for married couples.
The phase out for Roth IRA’s also increases by $2,000 to a range of $122.000 to $137,000 for single filers and $193,000 to $203,000 for married couples.
Alternative Minimum Tax (AMT) Exemption
Beginning with the 2012 American Taxpayer Relief Act, the AMT exemption amounts have been permanently adjusted for inflation. For tax year 2019 and with the new tax law, the AMT exemption amounts are:
Taxpayer Filing Status AMT Exemption Amount Phase Out Threshold
Single $71,700 $510,300
Married Filing Joint and
Surviving Spouse $111,700 $1,020,600
Married Filing Separate $55,850 $510,300
Head of Household $71,700 $510,300
Trust and Estates $25,000 $83,500
Section 179 Expensing and Depreciation
For 2019, the Section 179 expense allows taxpayers to write off certain intangible property costs for the tax year up to $1,020,000 and increases the phase out threshold to $2,550,000. Bonus depreciation under the TCJA allows first year depreciation of 100% of the cost of qualifying business assets placed in service after January 1, 2018 through December 31, 2022.
The depreciation limit for sport utility vehicles is $25,500.
Qualified Business Income Deduction
For 2019, the threshold amount under section 199A was increased to $160,700 for single and head of household returns, $160,725 for married filing separate returns, and $321,400 for married filing joint returns.
Shared Personal Responsibility
The shared personal responsibility payment (penalty for not have adequate or any health insurance coverage) has been eliminated for 2019.
The PATH Act
General
The PATH Act, Protecting Americans from Tax Hikes, was signed into law by President Obama on December 18, 2015.
The PATH Act’s provisions for upholding the integrity of the U.S. program for filing taxes impact employers, taxpayers, and tax preparers alike. Those provisions include:
1. Requiring that forms W-2, W-3 and 1099-Misc be filed on or before January 31 of the year following the calendar year for filing taxes.
2. Providing the IRS with additional time to review refunds based on the earned income credit and the refundable portion of the child tax credit (the Additional Child Tax Credit) to reduce fraud and improper payments beginning with tax year 2016.
3. Establishing a safe harbor from penalties for errors of $100 or less (or $25 or less for tax withholding) and providing that the issuer of the information return does not have to file a corrected return and no penalty is imposed.
4. Requiring individuals issued an ITIN before 2013 renew their ITINs on a staggered schedule between 2017 and 2020. In addition, if an individual fails to file a tax return for 3 consecutive years, the individual’s ITIN will expire. In the future, (with a 2020 goal), all applications for ITINs will be required to be filed in person.
5. Preventing retroactive claims of the earned income credit by amending a return from any prior year when an individual did not have a social security number.
6. Preventing retroactive claims of the child tax credit by amending a return from any prior year when the individual or qualifying child eligible for the credit did not have an ITIN. 7. Preventing retroactive claims of the American Opportunity Tax Credit by amending any
prior year when the individual or student did not have an ITIN.
8. Expanding the paid tax preparer due diligence requirement for the earned income credit and the $500 penalty for noncompliance to include the child tax credit and the American Opportunity Tax Credit.
9. Expanding the current rule barring individuals from claiming the earned income credit for 10 years (fraud) or 2 years (intentional disregard of the rules) to apply to the child tax credit and the American Opportunity Tax Credit.
10.Increasing the paid tax preparer penalty for engaging in willful or reckless conduct which is currently the greater of $5,000 or 50% of the preparer’s income from the return to 75%. 11.Requiring an Employer Identification Number (EIN) of the educational institution to claim
12.Reforming the 1098-T reporting requirement to include only qualified tuition and expenses paid rather than choosing between amounts billed and amounts paid per the current law.
Regardless of whether it is a business owner or a single being doing taxes, both have been known to criticize relying on tax extenders for any serious strategic planning. The definition of a tax extender is a short-term tax provision, those which total close to fifty in number. Typically, most members of Congress will choose to stretch out the expiration of an extender for a two-year time frame. The primary problem for taxpayers is that it lacks a longer length of time, which can be critical when making meaningful strategic planning.
The PATH Act has accomplished considerably more than other laws passed in prior years for typical tax extenders. PATH provides permanency for an array of key tax provisions. Congress extended several provisions that had expired in 2016. Most were available for the 2017 tax year but remain expired for 2018 until Congress extends them before the end of 2018 which has been the lawmakers’ practice.
Some changes are also clearly unrelated to tax extenders.
The PATH Act is deemed as the last and largest scale tax bill during President Obama's time. It is also the start of symbolic legislation, as its impact extends widely across all personal and professional platforms. There has not been such as significant statute passed since the American Tax Relief Act of 2012.
Those working in the field of tax preparation are going to have to become educated as to the primary points surrounding this important legislation. Within the course of this chapter, there are a series of several provisions which were included with the PATH Act and were due to expire at the end of 2016 that Congress extended with the Bipartisan Budget Act of 2018 and that served to amend the 2017 Tax Cuts and Jobs Act. The more knowledgeable tax preparers become with each provision, the easier it will be for professionals to properly prepare tax forms and filings.
Provisions for Families and Individuals
Income and Adjustments
Transit and Parking Benefits Exclusion from Income
There are times when businesses will consent to provide their employees with reimbursement of parking or commuter costs. By putting in place a systematic and sizable nontaxable payment plan, a business can save on workers payroll taxes and employees can save on income tax because the benefit is excluded from wages. However, there is a legal limit allowed per month.
Employers who decide to offer a commuter benefit plan should set up an IRC Section 132(f) plan. This permits all employees to designate pretax dollars be put towards the total commuter expenses. This tax savings plan is considered less of a use- it-or-lose-it penalty
than a flexible spending account (FSA), but still will require documentation for the benefit to qualify.
As to any exclusion from income, there are monthly maximum amounts for qualified transportation benefits under this plan. As of January 1, 2019, employers are also allowed to provide a benefit up to $265 per month for public transit passes and vanpools. The qualified benefit amount for parking is set at up to $265.
A segment of the PATH Act amended section 132(F)(2) of the Internal Revenue Code to create consistency between both the transit benefit tax exclusion and qualified parking benefits. Circumstances in life must always allow for adjustments due to cost of living, and this holds true for transit and parking benefits. The cap has been raised to $530 per month for tax year 2019 for the combined benefit. Eligible employers can use PATH as a platform for providing employees both a foreseeable and flexible comprehensive benefits package. This benefits package can be instrumental for recruiting, and then maintaining, a skilled set of employees. Employers that subsidize transit or vanpool costs of at least $30 can be designated as a Best Workplace for Commuters.
Year Parking Benefit Exclusion Amount Exclusion Amount Transit Benefit
2017 $255 $255
2018 $260 $260
2019 $265 $265
Some companies or corporations find it simpler to utilize a salary deferral program to fund benefits with pretax dollars.
Businesses who are accustomed to having had to report residual transit benefits while withholding taxes (income and FICA) had been held accountable to file Form 941X. This was to be turned in on a quarterly basis with any critical corrections, and it was to be included as gross income. Since the invention of IRS Notice 2016-6, the process has been altered in such a way where it will be easier to record any related adjustments. Any association who has yet to file a fourth quarter form for 2015 for excess transit wage benefits can use a Form 941 instead of the initial 941-X. Less time needed, along will less paperwork to process for all parties.
Discharge of Qualified Principal Residence Indebtedness Exclusion
Property that is owned and considered as collateral against a debt, which is later taken by a lender to satisfy the debt, is viewed as property sold by the seller. This transaction could create a loss cancelled by the lender but included as cancellation of debt income to the seller.
Cancellation of debt income. In cases where a person accepts a loan from a commercial lender, and then the lender cancels or "forgives" the debt, the cancelled amounts are
included as ordinary income. At the time a taxpayer borrows money, these proceeds do not need reporting. This is because the taxpayer was required to repay the lender. Once this financial obligation is omitted, the amount borrowed is then considered reportable income. On the lender's end, they must report the cancelled debt on Form 1099-C.
Example. Jennifer borrows $120,000 and defaults on the loan after repaying $20,000 in principal. The lender sells the property for $75,000 but unable to collect the remaining $25,000 from Jennifer. If the lender subsequently forgives the $25,000 debt, then the canceled debt will become taxable income to Jennifer (unless she qualifies for an exclusion).
Non-recourse debt. Ignoring the specific loan type, if a taxpayer fails to fulfill all his loan payments, any collateral can be seized by the lender. Pertaining to mortgages, collateral is considered the home. The lending source seizes the house, sells it, so the debt is then satisfied. Determining the difference between recourse and non- recourse loans occurs once the totals are together after a property sale or seizure.
Situations where property repossession is the only solution during default is best labelled as a non-recourse loan. If a property ends up in foreclosure, and deficiencies remain, it becomes the owner's issue to resolve. No additional action is possible against a borrower. As lenders are required to be satisfied with the sale of assets to settle a non-recourse debt, there is no income effect to the borrower and no debt to forgive. Borrowers could be responsible to report gains or losses for taxes. To calculate gains and losses, take the amount of debt owed and subtract the fair market value of the asset once repossessed.
Example. Ronda buys a home for $250,000 in a recourse state. She puts 20% down, ($50,000), then gets a mortgage for the remaining $200,000. Home prices usually rise, but in this neighborhood, prices begin to fall and now Ronda’s home is valued at $175,000. The mortgage is “underwater” by $25,000. Because Ronda lives in a recourse state, if she allows the house to go into foreclosure and is sold for $175,00, her lender can seek to collect on the $25,000 of mortgage debt. There is no debt to “forgiven” in this scenario.
Recourse debt. A recourse loan means that a lender is capable of pursuing borrowers for debts owed, regardless of collateral taken. Those who go into default may be faced with lawsuits, wage garnishments, or liens against bank accounts. Lenders may use many methods to get debts paid in full.
Recourse loans can include home equity loans, lines of credit, and cash-out refinancing. Cash outs let borrowers access home equity.
Recourse debt situations treat property possession as if the house was sold to the lender at current fair market value. The price of debt that exceeds market value is called COD (Cancellation of Debt) income.
Example. Saul buys a house for $300,000 with a mortgage of $240,000 in a recourse state. A few years later, he takes out a $40,000 home equity loan (for debt consolidation). Because of a real estate market slump, the home is now valued at $180,000. If Saul turns the house back to his lender and the lender sells the home for $180,000, he can walk away from the first mortgage $60,000 balance, but he is still liable for the $40,000 home equity loan. Since Saul’s home was used as collateral for the first mortgage, the home equity loan is now unsecured debt and the lender can collect on the equity loan. If the lender cancels Saul’s mortgage recourse debt, the forgiven amount would become cancellation of debt income that is taxable.
Mortgage debt relief between 2007 and 2014. Typically, a debt wiped clean by a lender for a mortgage is still considered borrowed, as if this were still COD income amount. This amount is to be included as taxable income unless the law indicates differently.
In 2007, President George W. Bush signed into law The Mortgage Forgiveness Debt Relief Act. Its purpose was to enable homeowners to forego claiming debt incurred on a foreclosed home, a short sale or renegotiated mortgage.
Gross income may be excluded when a discharge, in whole or in part, is provided due to qualified principal residence indebtedness, also referred to as “acquisition indebtedness.” The meaning of acquisition indebtedness on a principal residence refers to debt accumulated after one buys, builds or makes substantial improvements on a home, and lender holds some interest in the property until complete pay off.
Canceled debt may be kept off a tax return if it is debt pertaining to your principal home. However, forgiven fees for second homes, rental or business property, credit cards, and car loans is ineligible for tax relief.
The provision allowing mortgage debt relief expired on January 1, 2015, yet PATH did reinstate protection for homeowners, protecting them from paying taxes on forgiven debt in 2015 and 2016. The limit is up to $2 million for both years.
PATH also offered an exclusion of gross income for the taxpayers whose qualified principal residence indebtedness was discharged on or prior to January 1, 2017 pursuant to a written agreement entered into in 2016.
The Bipartisan Budget Act of 2018 extended principal residence mortgage debt forgiveness from income for 2017.
Educator Expense Adjustment
The IRS does provide a popular above-the-line deduction to elementary and secondary school teachers. It is available to teachers who will, or will not, initiate itemize deductions. The limit of the deduction is at the amount of $250, or $500 for two married teachers who file jointly. There is an entitled amount of employment necessary to be authorized for the
above the line deduction. Instructors have a prerequisite of performing at least 900 hours during the length of a school year. The eligible school, as stated by state law, must have provided elementary or secondary education.
The Tax Cuts and Jobs Act (TCJA) left the educator expense adjustment the same for the 2019 tax year.
For many months prior to the passing of PATH, the educator expense deduction we are discussing expired on December 31st, 2014. Expenses which were unreimbursed for educators were originally claimed as a business expense. The PATH Act provided a permanent extension of the above the line deduction for elementary and secondary teachers. In the 2017 tax year, all pertinent professional development expenses are an itemized deduction on Schedule A as an employee business expense. These employee business expenses for teachers are not deductible as an itemized deduction with the passage of the TCJ Act.
Tuition and Fees Adjustment
The tuition and fees adjustment to income was available in the 2017 tax year but it expired and was not renewed by the Tax Cuts and Jobs Act.
Alimony
In accordance with the Tax Cuts and Jobs Act, deductions for payments made under agreements entered into after December 31, 2018 no longer allows payors to deduct alimony payments nor requires the recipient to report the payments as income.
Payments under existing court orders continue to be deductible and to be reported as income.
Moving Expenses
In accordance with the Tax Cuts and Jobs Act, moving expenses are disallowed except for active members of the military who must relocate due to military orders.
Domestic Production Activities Deduction
Fully eliminated with the Tax Cuts and Jobs Act.
Changes to 529 College Savings Plans
Taxpayers can continue to use savings bonds for education, educational assistance programs provided by employers, 529 Plans and Coverdell education savings plans.
529 Plans can now be used for K-12 expenses. Plans can distribute up to $10,000 each year for tuition incurred for enrollment or attendance at a public, private or religious elementary or secondary school. The $10,000 limit is on a per student basis.
There is a college savings plan which strives to aid families in saving money for eventual college educational expenses. It is a 529 plan operated by a state or an educational
institution. Its namesake is Section 529 of the Internal Revenue Code, which established these savings plans back in 1996.
Let us look at specifying qualified education expenses. Tuition and associated fees, room and board, and supplies are considered qualified higher education expenses. If a student is enrolled at least half time, the cost of room and board is a qualified expense. However, if the student only took one or two classes, the cost of tuition is a still a qualifying expense. At no time is it possible for taxpayers to claim two credits for identical college expenses. Taxpayers will be unable to claim expenses against the AOTC or Lifetime Learning credit for costs that are paid with funds withdrawn from a 529 plan.
Resembling in nature to Roth IRAs, deposits put into 529 plans are not tax deductible. However, a ROTH and a 529 plan both grow tax-deferred. There are some set criteria for plan contributions. Those interested in contributing a full contribution to a Roth IRA must meet a certain income cap. Taxpayers must make less than $193,000 as a married couple, and $122,000 as single in 2019. Further, for contribution caps, its limit is $6,000 per year; $7,000 for those 50 and over. 529 plans have zero restrictions contributions. One of the many benefits of saving for a child's future college education with a 529 plan is that contributions are considered gifts for tax purposes. In 2019, gifts totaling up to $15,000 per individual will qualify for the annual gift tax exclusion. This means if you and your spouse have three children you can jointly give $90,000 without gift-tax consequences, since each child can receive $15,000 in gifts from you and $15,000 in gifts from your spouse. If your total gifts to an individual will be more than $15,000 this year, the excess amount will count against your lifetime estate and gift tax exemption. Individuals may contribute as much as $75,000 to a 529 plan in 2019 if they treat the contribution as if it were spread over a 5-year period. The 5-year election must be reported on Form 709 for each of the 5 years.
If the intended use of a 529 plan distribution is paying higher education expenses, then the distribution is 100% tax free. Say a taxpayer made a $5,000 contribution towards a 529 plan, and the value had grown to $20,000 once a child finally started their college education, the entire $20,000 distribution is tax and penalty free, provided the use is for qualifying educational expenses. Withdrawal of the tax-free earnings portion of a 529 plan distribution for expenses that are non-qualified educational expenses are subject to a 10% penalty plus income tax.
Each state sets its lifetime limits or actual maximum account balances for college savings plans.
Approximately half of states with 529 plans do offer residents a state tax deduction for in-state 529 contributions.
1. Prior to the PATH Act being signed into law, 529 rules labeled computers as a qualified higher education expense, but with a contingency. The beneficiary's institution required computers as a condition of attendance or enrollment to be a qualified education expense. The new law says computers and associated hardware qualify, even if they are not a specific requirement of any school or institution. The one side note is that while still in school, the primary user shall be the beneficiary. An updated list of qualified higher education expenses includes desktop computers, laptops, printers, and other random related technology. Additionally, internet access costs and computer software incorporated into one's studies qualify as well.
2. Previously, 529 account owners who took a withdrawal, paid for the eligible expense and then eventually received a refund would have tax implications to consider. Due to the reimbursement, the withdrawal will become non-qualified, meaning taxes and penalties were added to the withdrawal. Today, the owner can choose to re-contribute the refund to any 529 plan. If the same beneficiary is listed, all penalties and taxes are avoided - provided a refund is re-contributed within 60 days. Here is an example: say a beneficiary received a refund from an eligible educational institution. The student in question unfortunately had to drop out of school due to illness or unforetold circumstances. Any refund could be sent to the 529 account held by the beneficiary. This way, it would not be considered a non-qualified withdrawal, or receive any type of tax or penalty.
3. Any accounts within a 529 program that are owned by the same person and beneficiary can now ignore the intentional pairing up of possessions to be able to calculate earnings. Now, any earnings portion of distributions can be computed by a 529 program account by account.
Changes to Employee Benefits
A few provisions concerning employee benefits are part of the PATH Act. A couple impact retirement plans. As an example, the proposed legislation explains rules which apply to church plans, retirement plan transfers/mergers, investment of church plan assets in group trusts, and automatic enrollment.
The PATH Act contains guidelines for governmental health benefit plans covering the beneficiaries of a deceased person. It addresses effective dates of IRA rollover amounts received by airline employees when an airline is in bankruptcy. As of now, employees can contribute amounts received into an IRA with being subject to annual limits of contributions. The most substantive change to employee benefits concerns SIMPLE IRA's. A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a traditional IRA for small businesses and those that are self-employed. These are less expensive, easier to run than other employer retirement plans, and the contribution limits are higher than the traditional IRA's. Employers are allowed a tax deduction on contributions made to SIMPLE IRA plans. These contributions are untaxed, unlike the distributions, which are subject to tax. What is out of the ordinary about SIMPLE IRA's is that regardless of employee contributions to this account, the
employer must make contributions on their behalf. These can be dollar-for-dollar matches not to exceed 3% of salary, or a flat 2% of pay.
In days past, proceeds from one SIMPLE IRA could be rolled over into another SIMPLE IRA. PATH now permits rollovers of other types, such as from other IRA's or employer sponsored retirement plans into SIMPLE IRA's if done within two years of their original opening date. Upon satisfaction of the two-year period, SIMPLE IRA participants are able to contribute funds from a regular IRA, 401(k), 403 (b) or governmental 457 (b) plans.
Itemized Deductions
Deductions for State and local sales, income and property taxes deducted on Schedule A are now limited. The amount taken together may not exceed $10,000 ($5,000 for married filing separately). Foreign real property tax paid may no longer be deducted.
State and local sales tax deduction
The PATH Act permanently extended the option for taxpayers itemizing deductions on Schedule A to deduct either state and local income taxes or state and local general sales tax. There are two ways to sum up state sales tax deductions to reap the biggest financial rewards. You do a complete count of all actual state sales tax amount paid, which have been proven by receipt. Otherwise, the sales tax deduction calculation is by IRS formula by income and zip code. Whatever provides the higher deduction between state and local income taxes or general sales taxes is usually used on Schedule A.
Pursuant to the PATH Act, Section 164(b)(5) of the IRC is amended to apply a retroactive deduction during 2015, with this being a permanent change for 2016 and all years thereafter. The taxpayers that will primarily benefit are those who itemize deductions and reside in one of seven states that do not have a state income tax. Those are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Not only is this change of big benefit to those tax filers but also to those in other states who paid sales tax on big ticket purchases (such as a car or boat) before the end of the year and who could benefit by comparing their state and local income tax deduction with their general sales tax deduction.
Deduction for mortgage insurance premiums
Individuals putting down less than 20% of the purchase price for a new home normally must pay for mortgage insurance. This insurance provides the lender protection if a borrower happens to default on a loan. People who pay mortgage insurance premiums are allowed a deduction as interest on a mortgage debt. This is allowed if the mortgage was taken out after 2006 and the debt was for the primary home.
This provision did expire for amounts paid or accumulated after December 31, 2014. The PATH Act did extend the mortgage insurance deduction through December 31, 2016. So, now this deduction may be considered as tax-deductible loan interest on Schedule A. The deduction begins to phase out once the taxpayer’s AGI is over $100,000, and fully phases out at $110,000.
This provision was extended for 2017 with the Bipartisan Budget of 2018 but remains expired for 2018 unless extended by Congress.
Charitable distribution from an IRA
The Tax Cuts and Jobs Act increased the allowable deduction for charitable contributions. Taxpayers may now contribute up to 60% of their AGI up from 50%.
Consumers who have made contributions classified as qualified charitable distributions (QCD) over age 70 1/2 have been allowed to donate up to $100,000 directly from an IRA to a qualified charitable organization and to exclude the distribution from income.
Beginning in 2006, taxpayers over the age of 70 1/2 had been allowed to directly donate $100,000 from an IRA to charitable institutions. This is characterized as a qualified charitable distribution, or QCD. The true terminology of a QCD is a type of transfer from an IRA trustee to entities that were general public charities within IRC Section 70.
It would be helpful to clarify the rules governing required minimum distributions (RMD). In today's tax law, RMDs which are taken from a traditional IRA are obligated to begin by April 1st of a calendar year after the owner reaches the age of 70 1/2. Funds withdrawn by the owner of an IRA are added to taxable income. There is a stiff penalty for those required to take an RMD and who fail to take it before the end of each calendar year. The penalty is equal to 50 percent of the amount that should have been withdrawn.
Upon completion of a qualified charitable distribution, the transaction itself may serve to satisfy the yearly required minimum distribution. This rule holds a huge advantage for philanthropic type persons possessing an IRA who do not need an RMD to offset their living expenses. QCD's are not subject to standard federal income tax. However, the distribution must be in the form of a transfer directly from the trustee of the IRA to the charitable organization, not a check payable to the IRA owner.
With respect to the taxation issue surrounding a QCD that is contributed from an IRA, the payee never includes the funds as part of their AGI, nor claims the distribution as a charitable deduction.
Omitting an IRA QCD from the AGI can shelter someone from being elevated to a higher tax bracket. Finally, the earlier explained exclusion can assist wealthy taxpayers avoid a 3.8% Medicare tax on investment income and the itemized deductions phase-out
The rules which had been related to QCD expired in 2015. However, the PATH Act QCD extends the QCD rules indefinitely. Finally, QCDs are found to be a tax code permanent fixture with a flat rate cap amount of $100,000. Actual age of taxpayers must be a minimum of 70 1/2 when the distribution is made. Retired taxpayers should be relieved, as no longer will time be wasted wondering if Congress could solidify solutions before the RMD deadline of December 31st.
If certain persons wish to consider taking advantage of the QCD rule, there are some regulations that should be remembered. Taxpayers should look at philanthropist planning from all angles, including the implied or unimplied income tax implications. Pencil out all goals and objectives once entering the area of estate and gift tax planning. Prepare yourself for any foreseeable loss or limits of any tax-deferred growth on the distribution amounts from the IRA. There truly is a benefit tax wise to the owners of an IRA while working with QCD's. However, holding on to any RMD and awarding appreciated securities to charities tends to be a better strategy when it comes to taxes.
Deduction for contributions of food inventory
There are non-corporate business taxpayers who offer charitable contributions in the form of food inventory. These contributions are made to various tax-exempt organizations. Individual donors include coffee shops, bakeries, grocery stores, restaurants and food processing plants. Further, vendors who work at farmer's markets or conduct community supported agriculture activities can offer to donate surplus inventory. These products previously described can be given as assistance to the homeless or impoverished households. Again, the contribution is to go to tax-exempt organizations to be tax deductible.
Former basis-limited deduction. When a person is donating property for philanthropic reasons, these assets must be appraised or have an assessed value before taking any type of tax deduction. Placing any price or value amount on cash is obvious, however, having to figure out the value of non-cash property is both complex and challenging. When pinpointing a market price for property, the decided upon amount of deduction is the firm and fair market value of the donation at the time it is donated. Types of fair market value donations include books, clothing, household goods and used furniture. An alternative means to value a deduction is the basis in the property. When food inventory is donated to charities, the
amount considered ordinary income property is limited to the basis in the property.
Temporary above-basis deduction. In the year of 2005, Congress proceeded to pass one cutting edge emergency tax act. Its name is Katrina Emergency Tax Relief Act (KETRA), and it enacted endless benefits to taxpayers. One is an allowed above-basis deduction which can be drawn from contributions of food funds. Originally, the primary purpose of KETRA was to count for contributions made up until the completion of the calendar year 2005. After careful thought by Congress, the act turned out to be repeatedly renewed until the date of December 31, 2014.
KETRA was proposed as a temporary provision, and it drafted out a detailed usage list for contributions of consumables to charity. These items are to be given to the ill, infants or indigent individuals, potentially posing an enlarged or enhanced deduction (being more than the basis in the property). One exception to the total food donation is that it cannot exceed 10% of the net income of the tax payer for that tax year.
To receive an enhance deduction for contributing food inventory, the food product must qualify as “apparently wholesome food.” Any upgrade to the provisions above must fall or fare under the designated description of food. This term translates to any form of food intended for human consumption. All meals and meats must measure up to the set government standards pertaining to the quality and labeling for all food products regardless if the items donated may not be marketable due to factors such as freshness, age, appearance or surplus.
Once the identified requirements are met, taxpayers are then allowed to tally up the deduction by taking the basis of the individual inventory and adding half of the profit which would be recognized if the inventory had been sold at its fair market value but not to be more than double the basis of the contributed inventory.
After the PATH Act. Upon expiration of KETRA in 2014, the basis limited deduction had been anticipated to be legalized in 2015. Contrary to any conjecture, the PATH Act placed a permanent reinstatement of enhanced deductions as of the calendar date of January 1, 2015. In the past, ration reservoir contributions were contained to 10% of taxable income, whether it be done by a C Corporation or any other business. Turning towards the tax year after 2015, the limit levels of taxable income increased to a total of 15%. In general, if contributions cap the limitation, they will be considered a carry forward up to five tax years.
Professionals who prepare taxes for food production clients should educate their customers on PATH provisions. Be mindful that food must meet government grades for quality and labeling and must be consumable by all humans. Advise all to maintain memorandums of the fair market value of index donations. Clients are strongly suggested to secure written documentation from any charitable foundation. This should state in writing the proposed food usage and deemed form of disposition. The purpose should follow the determined legal meaning of exempt for the chosen charities - care for the ill, infants or the poor. Any dietary donations could not be turned over for receipt of monetary reimbursement, pieces of property, or any selected services from the charity.
Credits
American Opportunity Tax Credit
The Tax Cuts and Jobs Act did not make any changes to the American Opportunity tax credit. The PATH Act made the American Opportunity Tax Credit permanent. The AOTC took the previous permanent provisions of the Hope Scholarship Credit ($1,800 credit for tuition and related expenses for the first two years of post-secondary education) and increased the credit to $2,500 for each of four years of post-secondary education.
The PATH Act also requires an employee identification number (EIN) of the educational institution to be eligible to take the credit. Beginning with tax years after December 31, 2015, a taxpayer claiming qualified payments for the AOTC must provide the EIN of the educational
institution to which the payments were made. The EIN is reported to the taxpayer on form 1098-T.
The PATH Act reforms the reporting requirements for Form 1098-T. Educational institutions are required to report only qualified tuition and related expenses paid as opposed to the previous law where the institution had to choose between amounts paid and amounts billed. A few items that make a student ineligible for AOTC (other than a felony drug conviction) are a completion of college education for four years, or claiming this credit more than a maximum of four times. To complete calculating this credit, take 100% of the top $2,000 in qualifying expenses, then add 25% of the next $2,000 in expenses. Therefore, the top credit amount is $2,500 based on $4,000 in qualifying expenses. If you are utilizing this credit for four years of undergraduate college education, its total maximum value is $10,000.
It is important to note that the exemption is claimed per pupil. Those who pay taxes could claim AOTC for any of their children who are attending college. Remember to take the whole credit of $2,500 every time you list an eligible dependent on your return.
The individual’s tax liability decreases when an AOTC is claimed. That is the no-reimbursable portion. For example, If the taxpayer owes $3,000, and can take the total non-reimbursed amount of $2,500 as a credit, the balance owing the IRS is $500. A refundable portion of up to $1,000 (40%) is available to taxpayers who owe less than $2,500 in tax as long as the taxpayer is not claimed as a dependent on another taxpayer’s return.
The AOTC is phased out or reduced for taxpayers showing modified adjusted gross incomes between $80,000 and $90,000 ($160,000 to $180,000 for joint filers). Two types of taxpayers are not able to claim this credit. Those are individuals whose earnings exceed the phase out range, and married taxpayers filing separately.
Qualified education expenses are the total tuition, along with all associated costs to attend an eligible institution. Eligibility of an institution is determined by the IRS. Expense items that are counted include books, supplies and equipment. To clarify about costs, those tied to non-educational endeavors are excluded (except if specific to student's degree program). Examples are sports, hobbies, games, and non-credit courses. Expenses involving room and board, transportation, or medical insurance are also not included.
Although there was discussion about reverting the AOTC back to the Hope Credit limits after 2017, the PATH Act makes permanent the American Opportunity Tax Credit. Thus, the maximum credit continues to stay at $2,500, with the MAGI phase out amounts beginning at $80,000 for singles and $160,000 for joint filers.
One other item pertaining to due diligence was placed into law with the PATH Act. Starting with the 2016 tax year, the due diligence penalty placed on tax preparers in determining eligibility for the earned income tax credit (EITC) will also apply in determining eligibility for the American Opportunity Tax Credit.
Reporting requirements. The American Opportunity Tax Credit (AOTC) requires an EIN to be entered on the return. An eligible taxpayer must place the employer identification number of each educational institution receiving payments from the taxpayer under the credit (IRC Section 25A(i)(6)(c).
Retroactive claims. At present, an AOTC is capable of being claimed by using an ITIN. This assumes a taxpayer is not eligible for a social security number. Parallel to the child tax credit, individuals are presently prohibited from a retroactive AOTC claim. This pertains to either original or amended returns for prior years when the taxpayer did not have an ITIN. Thus, the AOTC claim cannot be filed for credit a year after obtaining an ITIN.
Disallowance of the credit. A special point was added that was applicable only to EITC at one time. Any party providing false information, or fraudulently claiming the AOTC, will be barred from the chance to claim the credit. The disallowance is ten years for fraud; two years for reckless disregard of the rules.
Due diligence. Beginning with 2016 tax returns, tax preparers are expected to adhere to due diligence return requirements for AOTC claims. Those who do not live up to their due diligence responsibility may be subject to a $500 penalty per claim.
Child Tax Credit and Additional Child Tax Credit
The credit commonly referred to as the child tax credit (CTC) was allowable to be used by eligible recipient’s beginning in 1998. The CTC was part of the Taxpayer Relief Act of 1997, and it began as being nonrefundable for any family with only one or two qualifying children. This meant that any taxpayer who did not pay any taxes was incapable of claiming any amount of this credit. Those having one or two qualifying children could claim up to $500 per child towards offsetting heir federal income tax liability to a maximum of $1,000.
The credit was doubled with the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 on scheduled increases until it reached $1,000 per child by 2010 and was made partially refundable for those families earning over $10,000 per year indexed for inflation. For those with a tax liability less than $1,000, the credit became refundable as “the additional child tax credit” available to families with earned income over $10,000 but not available to those with earned income less than $10,000. The refundability threshold was lowered from $10,000 to a $3,000 as a temporary measure with the passage of the American Recovery and Reinvestment Tax Act of 2009.
The American Taxpayer Relief Act was passed and in January 2013. It made the 2001 EGTRRA reforms permanent, maintained the maximum credit of $1,000 per child and extended the ARRA refundability threshold of $3,000. until calendar year 2017.
Had the PATH Act not been put into place, the $3,000 refundability threshold would have reverted to the original $10,000 threshold adjusted for inflation or almost $15,000 in 2018. The advanced threshold surely would have stopped the more impoverished (income wise)
from collecting the credit. With the PATH Act, the $3,000 threshold (unadjusted for inflation) is now a permanent placement for figuring the additional refundable portion of the Child Tax Credit.
With the Tax Cuts and Jobs Act, the Child Tax Credit has been expanded to $2,000 per qualifying child and is refundable up to $1,400 with phase outs. Phase outs begin with AGI’s of more than $400,000 for married taxpayers filing jointly and more than $200,000 for all others. The TCJ Act also includes a temporary non-refundable credit of $500 for other qualifying dependents.
Example. For a lower income couple filing a joint return that has earned income of $20,000 per year and no tax liability (due to the standard deduction), it is possible for the couple to receive the entire child tax credit as a refundable additional child tax credit of $1,400 per child in 2018.
Retroactive claims. Under current IRS rules, child tax credits are to be claimed by taxpayers with an ITIN. ITINs are acceptable if one is found ineligible for a social security number. PATH provides provisions to prevent taxpayers from claiming credits for prior years. Attempts made to claim child tax credits for any years where filers did not hold an ITIN will be refused. If a taxpayer tries to claim the year preceding the present year, again, it shall be rejected.
Disallowance of the credit. Long before legalization of recent tax legislation, taxpayers had not been disciplined for falsely claiming the child tax credit. The filing rules regarding EITC claims are also applicable to the child tax credit rules (as they pertain to phony claims). Individuals who the IRS catch creating false claims become barred from claiming the credit for ten years. Those taking the credit found to be intentionally disregarding the rules will be given a two-year ban from filing for the credit.
Due diligence. Commencing in 2016, paid preparers shall be subject to due diligence requirements in determining eligibility for the child tax credit. This is comparable to that which is expected for determining EITC eligibility. If the tax preparer fails to demonstrate having used due diligence, the preparer is subject to a $500 fine per return.
Earned Income Credit
Received both by low and by moderate income tax payers, eligibility for the earned income tax credit (EITC) is determined by income level and number of qualifying children. The EITC is a percentage of inflation adjusted earned income and varies by family size (up to three qualifying children) and filing status. The maximum credit is received by married couples filing jointly with three or more qualifying dependent children.
Since 2009, the earned income credit amount has been increased (by 45%) for families with three or more children and the AGI phase-out range has been increased by $5,000 for couples who are married filing jointly thus reducing the marriage penalty.
Recent legislation has made the advanced provisions of the EITC permanent. The phase-out income threshold for joint filers has been indexed to inflation. The EITC provision allowing families with more than two children to receive a credit of up to $6,431 with an increased phase-out for joint filers is made permanent by the PATH Act. The married filing jointly income phase-out threshold is now adjusted by being indexed to inflation.
Retroactive claims. A prerequisite for claiming the Earned Income Tax Credit (EITC) is that all individuals included on the tax return (taxpayer, spouse and dependent children) must have a valid social security number.
The PATH Act legislatively serves to prohibit EITC retroactive claims by disallowing the credit to be claimed on original or amended returns for a prior tax year when the individual did not have a valid social security number. In other words, filers who attempt to claim the EITC credit with a social security number obtained the year after a filing deadline will be rejected.
Disallowance of the credit. If the IRS determines that a taxpayer claiming the EITC has done so though fraudulent means or by not following the rules to obtain the credit, the IRS may disallow access to the credit for several years.
Reckless disregard of the rules as determined by the IRS may prohibit the taxpayer from receiving the credit for two years and would require the filing of a special form to request resumption of the credit.
If a taxpayer received the credit and it was subsequently determined by the IRS that fraudulent information had been supplied, the penalty is that the EITC may be disallowed for 10 years.
Example. A taxpayer submits copies of school records for his children that did not reflect the children’s address along with documentation from a doctor’s office showing a different address. Under an IRS examination, the taxpayer admitted he knew that he did not meet the eligibility requirements for residency of the children but decided to “try it anyway.” In this instance, the two- year ban would be justified because the taxpayer intentionally disregarded the rules and regulations.
Example. Last year, Ralph listed his girlfriend (who is 23 and a full-time student) on his return as his niece so he could get a larger tax refund. The IRS reviewed his return and subsequently disallowed his entitlement to any EITC credits for that year and the next 10 years for making a fraudulent claim. Moreover, the IRS imposed stiff penalties and interest on the overpaid fraudulent refund.
If for any tax year after 1996, a claim for an EITC credit was either denied or reduced because of reckless disregard or fraud, the taxpayer must complete Form 8862 and attach it to the next tax return to request being able to claim the EITC again.
Due diligence. Paid preparers of federal income tax returns must complete Form 8867, the paid preparer’s earned income credit checklist, and must meet the due diligence requirements in determining the taxpayer’s eligibility for the credit and for the EITC amount. All the questions on the Form 8867 checklist are required to be asked and answered. Form 8867 is attached to any tax return that claims the EITC. Preparers who do not fulfill their due diligence requirements may be assessed a $500 penalty for each tax return in which there is a claim for an earned income credit. It is essential that paid preparers verify the taxpayer’s eligibility for the EITC and retain copies of supporting documentation to avoid a penalty should IRS questions arise.
Home Improvement Residential Energy Credits
The credits for energy efficient new homes, for energy efficient home improvements, for residential energy property were extended by the Bipartisan Budget Act of 2018 for the 2017 tax year but have not been extended by Congress for the 2018 tax year.
Starting in 2005, those who have homes and make energy efficiency improvements can claim credits. The credit gives a home owner a tax benefit to act energy conscious. A credit called the "non-business energy property credit" is listed under IRC Section 25C. This refers to relatively lower cost changes like new doors and windows. "Residential energy efficient property credit" is meant for more expensive or detailed upgrades. These would be solar energy systems, geothermal heat pumps and small wind residential turbines.
The non-business credit ended as of December 31, 2014 while the residential energy credit is available through 2016. A bill attached with PATH, "Consolidated Appropriations Act of 2016" extended the energy credit.
Those claiming this credit must obtain a certification that a product is considered qualified to claim an energy credit. This proof could be collected from the manufacturer's website or on the product label. A separate Form 5695, "Residential Energy Credits" is to be completed, but not forwarded, with a tax return.
Nonbusiness energy property credit (IRC Section 25C). Within the PATH Act is a credit for non-business energy property under IRC Section 25C. It was extended through December 31, 2017.
Section 25C credits are made available for simple energy efficient upgrades like doors, skylights or water heaters. Limits on this credit are broken down by improvement. The credit for advanced main circulating fans is $50, while it is $150 for furnaces and hot water boilers fueled by oil, natural gas or propane, $200 for energy efficient windows, and $300 on items like insulation or high efficiency HVAC systems.
There are some additional limitations to the caps on upgrades. Expenditures related to energy improvements are allowed a 10% credit, with a lifetime limit of $500. Window costs
cannot exceed $200 of the total $500 credit. Prior claims go against the lifetime cap amount, so some taxpayers may have been ineligible for further credits in 2017.
Residential energy efficient property credit (IRC Section 25D). Section 25D contains a residential energy efficient property credit. The established expiration was 2016, but legislation proposed alongside PATH made it allowable to claim qualified expenditures through 2021 but with new phase out limits.
A tax credit equal to 30% of qualifying expenditures for property placed in service from 2016 -2019 is available for the installation of solar panels, geothermal heat pumps, wind turbines, and fuel cells in homes. In 2020, the credit decreases to 26%, to 22% in 2021, and is no longer available in 2022.
Below is a list of energy efficient products that qualify under this credit:
1. Residential solar panels. Solar energy is the cleanest and easiest energy source to obtain and renew. This takes the form of solar radiation, making possible the production of solar electricity. Photovoltaic cells are the concrete foundation for electricity.
Allowed solar electric property costs are ones where solar energy is the electricity method within the home. This extends to labor fees for onsite preparation, assembly or installation of relative equipment. Also, residential solar panels, piping or wiring to connect the energy source to the house.
2. Solar water heaters. The heaters are available in various designs, and come with storage tanks and collectors. This system tries to capture the sun's heat, then keeps it for transformation into eventual liquid form. The solar energy extracted from the sun generates heat, not electricity. Hence, hot water is an asset obtained from solar water heaters.
If one utilized heating equipment for pools or tubs, these are not considered qualified for the credit. When the home and hot tub are heated by this machine, the prorated costs for the home are allowed for use.
3. Fuel cells. A device which alters chemical energy from hydrogen filled fuels into electrical power is called fuel cells. It is meant to conserve energy and is almost completely absent of pollutants.
It taxpayers elect to install qualified fuel cells, a credit of up to 30% of their cost is available. It needs to be located within a principal home and have an electrical capacity of at least 0.5 kilowatts. The credit cannot exceed $500 per half kilowatt.
4. Geothermal heat pumps. Central heating and cooling systems which tap into the Earth's surface to access underground thermal energy are called geothermal heat pumps. The energy is extracted from the Earth to collect a clean heat source.
Income spent on associated piping, wiring, labor or interconnection of ducts is an included expense for geothermal heat pumps. However, amounts used for equipment to heat a hot tub or swimming pool are excluded. The credit was extended through 2021.
5. Small residential wind turbines. That which catches the energy excreted from the wind that is turned into electricity is a wind turbine. The turbine's output feature must be made compatible with a household's electrical system, as in fed into the wiring at the breaker panel. Small wind turbines rated with an electrical capacity of 100 kilowatts or less and costing no more than $4,000 qualify for the tax credit. The credit was extended through 2021.
Up to 30% of installation costs to provide renewable energy sources can also be claimed under the residential energy efficient property credit. This credit does not have an upper limit except in the case of fuel cells and wind turbines.
Costs are considered paid when actual installation has been completed. Therefore, a taxpayer can claim 100% of the costs upon completion even if the item is being financed with a loan being repaid over several tax years. The rule is the credit can only be claimed in the same year as the installation.
On Form 1040, Lines 48-54 are used to report nonrefundable credits with the residential energy credit entered last. The child tax, education, foreign tax, retirement savings contribution, and child and dependent care expense credits will reduce the amount of the nonrefundable residential energy credit that can be used since the total of nonrefundable credits cannot exceed the taxpayer’s tax liability.
Residential energy credit amounts that are unused may be carried over to the following tax year. So, if a taxpayer is unable to claim the full residential energy credit on the 2016 return, the unused portion can be carried over to 2017 as a nonrefundable credit. To claim/calculate the credit, including amounts of carryover, Form 5695, Residential Energy Credits is completed by filling out Part 1 of 5695, "Residential Energy Efficient Property Credit."
Credit for 2-Wheeled Electric Plug-In Vehicles
Vehicles purchased before 2014 were eligible for a credit under IRC Section 30D. The credit pertained to qualifying plug-in electric motorcycles and three wheeled vehicles. Requirements for these motorized vehicles include achieving speeds of at least 45 miles per hour. They must be charged with a battery whose minimal life is 2.5-kilowatt hours. These vehicles must have been produced to operate on public thoroughfares.
Once all requirements are met, and use started by December 21, 2013, the credit was 10% of the vehicle cost, to a maximum of $2,500.
While the credit officially expired for vehicles purchases after December 31, 2013, the PATH Act restored the credit for electric motorcycles purchased in 2015 and 2016 (not 2014). As restored, the amount of the credit is 10% of the purchase price, capped at $2,500.
Entities not eligible for the credit include electric assist bicycles, e-bikes, mopeds, and scooters if incapable of operating safely at highway speeds. The credit for three-wheeled vehicles was not extended.
PATH also made it possible for electric motorcycle chargers to be eligible for the alternative fuel vehicle refueling property credit equal to 30% of the cost up to $1,000 per individual taxpayer.
Example. Niles purchased an electric plug-in motorcycle for $16,000 and a quick charger worth $600. He may claim a $1,600 credit for the motorcycle (10% of $16,000) plus a $180 credit for the charger (30% of $600) on his tax return.
Credit for Fuel Cell Vehicles
Heightened interest in supporting the use of green vehicles is being achieved through tax incentives to offset higher initial cost compared to conventional cars.
Included in the Energy Policy Act of 2005 is the "alternative fuel motor vehicle credit." It was initially used as a credit for advanced lean burn technology vehicles, electric-gas hybrids and fuel cell vehicles (FCV).
By 2014, this credit became limited to just hydrogen fuel cell vehicles. Hydrogen fuel cell vehicles are ones propelled by power obtained through converting chemical energy into electricity by combining oxygen with hydrogen fuel.
The starting credit is $4,000. An additional $1,000-$4,000 credit is available under two conditions: If the fuel economy exceeds the 2002 base fuel economy standard and if the vehicle weight meets the required standard.
The alternative tax credit expired on December 31, 2014. The PATH Act renewed the credit for qualified vehicles purchased after January 1, 2017.
The credit was extended for 2017. However, hybrid and alternative fuel vehicle credits under Section 30B remain expired.
Currently, fuel cell vehicles are available to buy, but inventory is limited. Prime purchase locations are where retail hydrogen fueling stations currently exist.
The current and only car maker marketing "ownable" fuel cell vehicles is Toyota. In late 2016, Honda had scheduled to launch a 2017 model called the Honda Clarity FCV.
The Toyota 2016 Mirai FCV is qualified for a federal tax credit of $8,000. A driver can go, on average, a total of 312 miles on a full tank. Owners might also be able to obtain a state issued carpool sticker, legally allowing single cars to occupy carpool lanes on busy freeways.
A Hyundai Tucson Fuel Cell SUV can only be obtained through a lease agreement. The car qualifies for an FCV credit of $7,500 which is taken by the manufacturer. The eventual benefit to the car owner can be lower lease payments.
If a taxpayer happens to purchase, then use a qualifying car by New Year's Eve, a Form 8910 will need to be completed. Upon completion, it is attached to Form 1040. The credit amount is entered on Line 54 of the 1040, box C is then checked and 8910 is entered on the line next to the box.
The credit for a purchase of a 100% electric car continues to apply in 2016 without requiring a PATH Act extension. The credit is capped by the automaker's volume. Once a producer hits at least 200,000 qualifying vehicles sold in the United States, the credit starts to phase out. Sales are based upon inventory after December 31, 2009.
Provisions for Businesses
Depreciation
Section 179 Expense
The cost of tangible personal property used in a trade or business may be deducted as an expense instead of being depreciated in annual amounts under IRC Section 179 up to a maximum limit. Tangible personal property includes business equipment and machinery, office furniture and computers. A temporary Section 179 deduction was added for computer software.
Under the law in effect in 2015, the Section 179 expense limit was $25,000 per deduction and $200,000 in total investments. The PATH Act increased the limit to $500,000 per deduction and $2,000,000 in total investments before the phase-out begins. The PATH Act made these amounts retroactive to the beginning of 2015 and made them permanent. The deduction limit and maximum business investment limit are indexed for inflation. The deduction limit for 2017 is $510,000 and the maximum business investment limit is $2,030.000. The Tax Cuts and Jobs Act further increased the 2018 deduction limit to $1 million against a maximum business investment of $2.5 million.
There is a relationship between the deduction limit and the investment limit. The maximum annual amount expensed is reduced dollar-for-dollar by the amount of Section 179 property placed in service during the tax year in excess of the investment limit. For businesses with over $2.5 million of property purchase and placed into service, there will be phase out for their expense deduction after $2.5 million.
Taxable income from an active trade or business in any given year limits the Section 179 deduction. If the taxpayer’s net taxable income for the year is less than the Section 179 deduction, the deduction is limited. Taxpayers can’t use Section 179 to deduct more in one year than their net taxable business income for the year. If the property they wish to deduct under Section 179 exceeds their net taxable income, they are limited in their deduction to an amount equal to their net taxable income. What cannot be deducted in the current tax year, can be carried forward as an allowable deduction the following year.
