Congress renews tax breaks in year-end legislation

The Protecting Americans from Tax Hikes Act of 2015 was signed into law on December 18, 2015. The law renews a long list of tax breaks known as "extenders" that have been expiring on an annual basis. This legislation makes some of the rules effective through December 31, 2016. Others are effective through 2019, and some are effective permanently. Provisions in the Act also make changes to existing tax rules that were not part of the extenders. All of these changes will affect your tax planning now and in future years.


Here's an overview of selected provisions.
* The provision for tax-free distributions from IRAs to charities is now permanent. When you're age 70½ and over, this break lets you make a qualified distribution of up to $100,000 from your IRA to a charity. The transfer counts as a required minimum distribution and is excluded from your gross income.

* If you're a homeowner, you can exclude mortgage debt cancellation or forgiveness of up to $2 million for 2015 and 2016. Discharges of qualified mortgage debt can also be excluded after January 1, 2017, if you have a binding written agreement in effect before that date. This tax break is only available for your principal residence.

* If you or a family member is an eligible student, you may be able to claim a tuition and fees above-the-line deduction for qualified higher education expenses for 2015 and 2016. For 2015 tax returns, the maximum deduction is $4,000 when your adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers). The maximum deduction is $2,000 when your AGI is less than $80,000 ($160,000 for joint filers).

* The deduction for up to $250 of out-of-pocket eligible educator expenses is now permanent. It will be indexed for inflation beginning with 2016 tax returns. You claim this deduction "above the line," meaning it's available even if you don't itemize. If you do itemize, you can also generally claim qualified expenses above $250 as a deduction subject to a 2% of adjusted gross income limit.

* The optional itemized deduction for state and local sales taxes in lieu of deducting state and local income taxes is now permanent. This deduction is especially beneficial if you live in a state with no income tax. You may also benefit no matter where you live if you pay sales tax on a large ticket item such as an automobile, boat, or RV.

* When you itemize, you can treat mortgage insurance premiums as deductible home mortgage interest in 2015 and 2016. The deduction is subject to phase-out based on adjusted gross income.

* You may be able to claim a credit of 10% of the cost of energy-saving improvements installed in your home in 2015 and 2016, subject to a lifetime credit limit of $500.

* The maximum Section 179 deduction for qualified business property, including off-the-shelf software, is now permanently set at $500,000 (subject to a taxable income limitation). That means you can immediately write off up to $500,000 of the cost of assets you purchased and placed in service during the year. The deduction is phased out above a $2 million threshold. Both thresholds will be indexed for inflation beginning in 2016.

* You can treat qualified leasehold improvements, qualified retail improvements, and qualified restaurant property as Section 179 property subject to a first-year write-off limit of $250,000 for 2015. Modifications to the definition of certain real property that can be treated as Section 179 property, as well as limitations and the maximum amount available to such property, take effect after 2015. In addition, the thresholds will be indexed for inflation beginning in 2016.

* The additional first-year depreciation deduction, known as "bonus depreciation," is generally extended through 2019 when you buy qualified business property. The deduction is subject to a phase-out beginning in 2018 of 10% per calendar year, but you can deduct up to 50% of the cost of qualified property for 2015 through 2017. You can claim this deduction in conjunction with Section 179.

* The business research and development (R & D) tax credit is made permanent. The law permits eligible small businesses to claim the credit against AMT liability beginning in 2016.

* The work opportunity tax credit is extended for five years (through 2019) when you hire eligible individuals. The credit is also expanded to include qualified long-term unemployment recipients who begin work after December 31, 2015.

The remaining extenders range from such things as enhanced deductions for donating land for conservation purposes to tax credits for energy-efficient new homes.

The Protecting Americans from Tax Hikes Act of 2015 also makes changes to 529 college savings plans, such as including the purchase of computers and related services in the definition of qualified higher education expenses. The law modifies tax-free ABLE accounts for disabled individuals to allow flexibility in choosing a state program, as well as rollovers of amounts from 529 college savings plans to these accounts. The law also delays for two years the "Cadillac tax" on high cost health care plans.

Because the Act was passed so late in the year, it will be important for you to review your 2015 transactions to take advantage of applicable breaks in order to claim them on your 2015 federal income tax return. Also, with the rules now extended through 2016 (and in some cases beyond), you can begin to update your current tax plan with some measure of certainty.

Contact my office for more information and for help determining which changes affect you.

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Watch out for tax scams

The IRS has made preventing identity theft and tax refund fraud a top priority.  An important part of the agency’s fraud prevention program is its campaign to inform taxpayers about the many varieties of tax fraud and how they can keep from becoming victims.

Typical telephone fraud scenario

Picture this: You’re relaxing at home when your phone rings. You don’t recognize the number on the caller identification, but it’s from your area code, so you answer.

“I’m with the IRS,” the caller says. “You owe back taxes. A warrant will be issued if you do not pay, and your local police will arrest you.”

The caller knows your name and may even know the last four digits of your social security number. He tells you how much you owe, and adds that this is a serious matter. “You must submit a payment voucher within the next hour to avoid arrest. We suggest you buy a prepaid debit card immediately.”

The caller gives you a phone number to call once you have acquired a prepaid card so you can settle your debt and the arrest warrant can be canceled.

Can you identify four indicators in the above scenario that tell you this call is the latest addition to the “Dirty Dozen” list of tax scams compiled by the IRS?

Here are the tip-offs:

• An unexpected phone call.  The IRS makes initial contact regarding tax issues in a written letter, sent to you via U.S. postal mail.
• The threat of arrest. Warnings of arrest or other police action are designed to frighten you into agreeing to send money or disclose personal financial information such as your social security number. Local police departments will not threaten to arrest you for federal tax-related issues.
• Request for immediate payment. If you actually owe money for any type of federal tax, payment options are available. You’ll receive notices in the mail detailing the amount due and you’ll have time to respond.
• Payment via prepaid debit card. The IRS does not require you to purchase prepaid cards to pay any tax you may owe, and will not call to ask for personal identification numbers.

The “red flags” seem obvious as you read this. However, tax-related fraud plays on your natural inclination to avoid trouble with official agencies, and the actual phone call will come from a practiced con artist armed with a script and the element of surprise. Under those circumstances, your skepticism might take a back seat to understandable confusion and fear.

How can you protect yourself?

• Advance warning gives you an advantage. Being aware of tax fraud schemes makes it likely you’ll recognize common techniques used by fraudsters, such as threats, multiple calls, and repeated demands for an immediate decision. 
• Be assertive. You have no obligation to answer your phone, engage in conversation, or provide information to anyone who calls you. Let contacts from unknown numbers go to voicemail. If you do answer and the caller’s requests make you uncomfortable, disconnecting immediately is neither rude nor impolite.
• If you choose to contact the IRS directly concerning the call, do not use the phone number the caller gave you. Why? In this latest scam, the number provided will connect you with another con artist in the same organization.

Phony IRS e-mails and websites

The crooks create IRS e-mails and websites that appear to be legitimate. They are designed to look like genuine IRS communications, but they are schemes designed to steal your identity. One of the newest scams is tax refund fraud where your personal data is stolen and used to file a tax return in your name in order to claim a refund. When you then file your return, the IRS rejects it and notifies you that you have already filed.

Another example of these bogus e-mails: You receive a message confirming IRS receipt of your tax return, but the IRS needs more information to process your return. The e-mail looks official and completely legitimate. But it isn’t.

Here’s what the IRS wants you to know about bogus e-mails:

• The IRS does not initiate contact with taxpayers by e-mail or social media to request financial information. 
•  The IRS never asks taxpayers for detailed personal financial information. 
•  The address of the official IRS website is www.irs.gov; don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org, or anything else. 
•  If you receive an e-mail claiming to be from the IRS or directing you to an IRS site, do not reply to the message, open any attachments, or click on any links. 
• To help the IRS fight identity theft and refund fraud, report any bogus correspondence and forward any suspicious e-mail to phishing @ irs.gov.

The IRS strategy

The IRS has developed a comprehensive identity theft strategy that is focused on preventing, detecting, and resolving identity theft cases as soon as possible. Though these scams proliferate during tax filing season, they continue throughout the year as the thieves continue to create new ways to steal identities for financial gain.

The IRS has made numerous announcements in the past to help protect taxpayers from these scams. It repeats the message that it never uses an e-mail, text message, social media, or a phone call to initiate a contact about your tax information. So if you receive what looks like an official IRS e-mail, you should forward it to phishing @ irs.gov. Do not reply to the sender, and do not open any attachments. And if you get a scam phone call, hang up.

Please let us know any time you’re contacted about your tax information. We’re here to keep you safe and informed.

 

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