With so much attention being paid to the end-of-the-year passage of the tax extenders legislation, it is important to remember that an array of federal tax legislation was passed earlier in 2015 that will affect tax return preparation and advising of clients this busy season. Additionally, there were several key court cases in 2015 that will potentially affect clientsí returns moving forward.
Key federal tax legislation
In May of 2015, the Donít Tax Our Fallen Public Safety Heroes Act (PL 114-14) was passed into law and provides that a certain level of compensation paid under Sec. 1201 of the Omnibus Crime Control and Safe Streets Act of 1968 will be excluded from gross income for tax purposes. This 1968 act established federal programs that provide death and education benefits to survivors of fallen law enforcement officers, firefighters, and other first responders as well as disability benefits to officers permanently disabled in the line of duty. The amounts are excluded from gross income and are not subject to any information reporting requirements, therefore payers should not file Form 1099 MISC to report the payments.
The Defending Public Safety Employeesí Retirement Act (PL 114-26) was passed in June of 2015 and provides extended exemption from the 10 percent penalty on retirement plan withdrawals for certain public employees in the year or after the year they turn 50. The exemption from the 10 percent penalty for early withdrawals from a retirement plan includes: certain federal law enforcement officers, federal firefighters, customs and border protection officers, and air traffic controllers. The act is effective for distributions after Dec. 31, 2015, so public safety employees contemplating a 2015 withdrawal who would otherwise be impacted by the 10 percent tax may want to defer such withdrawals to 2016.
Also, in June of 2015, the Trade Preferences Extension Act of 2015 (PL 114-27) was passed into law. This act impacts education tax credits and deductions and affects tax years after 2014. If taxpayers do not possess a valid Form 1098-T from the educational institution, they will no longer be allowed to claim the American Opportunity Tax Credit, the Lifetime Learning Credit, or the tuition and fees deduction under Section 222. Form 1098-T should accompany Form 8863, which is used to claim education credits.
In addition, the child tax credit, known as 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 Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (PL 114-41) was passed into law in July 2015 and is of significance because tax return due dates were impacted. The good news is that the individual filing deadline was not changed and remains April 15. There was also no change to S corporations, as their return due date will remain at March 15. For partnerships, the return due date changes to March 15 or the fifteenth day of the third month after year-end (a six-month extension can be requested). The corporate return due date shifts forward one month to April 15. All changes to tax return due dates are for tax years beginning after Dec. 31, 2015. Special note should be given to the fact that due dates for estimated tax payments will not change.
Reviewing the latest status on key tax legislation initiatives can be a key component of ensuring that your clients are able to take advantage of every credit and refund opportunity available.
Critical court decisions in 2015
Other pieces of critically important information to monitor are verdicts of key judicial proceedings that will ultimate affect how tax law is interpreted moving forward. The following insights are summaries of key cases decided in the courts that will inform how certain tax laws are understood in the future.
One Supreme Court case, King v. Burwell, 135 S. Ct. 2480 (6/25/2015), is related to Premium Tax Credits provided under the Patient Protection and Affordable Care Act. The issue in question was if a federal tax credit could be applied whether the insurance was acquired via a state-run or federal-facilitated exchange. The IRS has now issued a regulation confirming that the 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 on June 26, 2015, 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. Also, the IRS issued Proposed Regulations on Oct. 21, 2015, to clarify the treatment of same-sex spouses for federal tax purposes.
In one recent case, unmarried co-owners of a property were allowed to apply the mortgage interest deduction on a per-taxpayer basis, rather than on a per-property basis. 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.
In Holden v. Commissioner, T.C. Memo. 2015-83 the outcome affects how a taxpayerís education deduction expenditures are viewed. In this case, the taxpayer is a medical doctor and claimed flight lessons as a business deduction, noting he was taking flight lessons to be able to fly to locations for charitable medical work. The regulations under Section 162 allow a taxpayer to deduct expenditures for education if that education either maintains or improves skills that are required by an individual in his employment, trade or business, or meets express requirements set by the individualís employer or by a law or regulation as a condition of continued employment, status, or compensation. The court found that the taxpayer failed to demonstrate that his flying lessons improved or maintained his skills as a doctor, and the deduction for flight lessons was disallowed.
Another case to review is Muniz v. Commissioner, T.C. Memo. 2015-125 (7/9/2015), in which 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 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 the case of Pacific Management Group v. Commissioner, T.C. Memo. 2015-97, the ruling clarified that the proper substantiation is required to assert attorney-client privilege. In this case, they noted proper substantiation was an appropriate log that is kept to track why documents can be withheld from IRS request for information. The Tax Court held in this case that the privilege log provided by taxpayer was not adequate to sustain claims of privilege.
With these key takeaways from 2015 legislation and judicial proceedings in mind, tax professionals can leverage these insights to better serve their clients and ensure proper filings on their behalf.
Patrice Johnson, CPA, is a manager of accounting curriculum for Becker Professional Education, with over 15 years of experience in public accounting and academia, including positions at the University of Georgia and PricewaterhouseCoopers.