New Tax Laws: Some Help, Some Hurt

Congress recently passed two measures—the Trade Preferences Extension Act of 2015 and the Surface Transportation and Veterans Health Choice Improvement Act of 2015—that include a number of tax law changes. Here is a brief rundown.

1.     Health coverage tax credit

Individuals who lost jobs because of foreign trade and are eligible for Trade Adjustment Assistance (TAA) or certain other help may qualify for a 72.5% tax credit for health coverage. The credit can be received on an advance basis (i.e., applied toward premiums throughout the year).

The credit had expired at the end of 2013; the new law reinstates it retroactive to January 1, 2014. Anyone eligible for the credit who filed to take it on a 2014 return can file for a refund.

Note: The health coverage tax credit cannot be claimed by someone using the premium tax credit for insurance obtained through a government Marketplace. It’s up to the taxpayer to choose.

2.     Child tax credit

If you claim an exclusion for foreign earned income or foreign housing, you cannot also receive the refundable child tax credit. However, you can forego the exclusion in favor of the credit. This change applies for 2015 and later.

3.     Education-related breaks

For purposes of the American opportunity credit, the lifetime learning credit, and the tuition and fees deduction, you must receive Form 1098-T from the educational institution in order to claim a tax break. This change will take effect with 2016 returns.

4.     Public safety officers

The 10% early distribution penalty from a qualified retirement plan is waived for public safety officers. The new law expands the exemption from the penalty to certain federal law enforcement officers, federal firefighters, customs and border protection officers, and air traffic controllers. This expanded exemption applies to distributions after 2015.

5.     Certain veterans

Veterans receiving benefits from the Veterans Administration for a service-connected disability are no longer barred from having a Health Savings Account. This change applies to months beginning after December 31, 2015.

6.     Basis reporting for heirs

Heirs who inherit property from a decedent receive a stepped up basis to the value on the date of death (with some exceptions). This rule has not been changed. What the new law does is require executors filing federal estate tax returns to report the value of the property to heirs so that the heirs report basis consistent with what is reported on the estate tax returns. (Until now, estates tried to minimize value to reduce estate taxes, while heirs maximized it to save on their capital gains.) This change applies for estate tax returns filed after July 31, 2015.

7.     Mortgage reporting

Lenders must report annually—to borrowers and the IRS—on Form 1098 about interest paid for the year. Starting with statements received in 2017, required information on the form has been expanded to include:

• The mortgage origination date
• The amount of the outstanding principal on the mortgage as of the beginning of the calendar year
• The address of the property securing the mortgage.

8.     6-year statute of limitations

While the IRS usually has three years to audit a return, the period becomes six years when a taxpayer omits more than 25% from gross income. Three years ago, the U.S. Supreme Court said that an overstatement of the basis of property, which produces an understatement of gain, is not an omission from gross income for purposes the longer statute of limitations on audits. The new law effectively reverses this deduction. If gain is minimized by an overstatement of basis, it amounts to an omission of gross income (even though the basis is disclosed on the tax return). This change applies to tax returns filed after July 31, 2015, as well as returns filed before this date for which the statute of limitations has not yet run.

9.     FBAR reporting

Those with foreign financial accounts are required to report annually to the Treasury Department in what is known as FBAR reporting. This is done electronically on FinCEN Form 114 by June 30; no extensions are allowed. However, the new law changes the filing deadline to April 15 and allows an extension of up to six months. This change applies to returns for tax years beginning after 2015 (i.e., 2016 returns filed in 2017).

Conclusion

These aren’t the only tax law changes for the year. Expect to see legislation that extends most or all of the more than 50 tax rules that expired at the end of 2014. Last year, extender legislation didn’t happen until December. Hopefully this year it will be earlier than that.