A More Indepth Look at Individual And Business Tax Provisions included in Trade Package

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The Bipartisan Congressional Trade Priorities and Accountability Act of 2015 and the Trade Preferences Extension Act of 2015. President Obama signed both bills into law on June 29, 2015. Effective dates on the tax provisions of these new laws vary, with some provisions retroactive to January 1, 2015, or earlier, and others effective only for tax years starting after December 31, 2015.

TRADE PREFERENCES EXTENSION ACT OF 2015

The Trade Preferences Extension Act extends a number of trade agreements as well as trade adjustment assistance (TAA) and the Health Coverage Tax Credit (HCTC). It also revises several other Tax Code provisions.

Trade Adjustment Assistance (TAA) is a group of programs that provide federal job-training and other assistance to workers, firms, farmers, and communities that have been adversely impacted by foreign trade, including workers who have been separated from employment because their jobs moved overseas or as a result of increased imports.

Health Coverage Tax Credit

Individuals who qualify for Trade Adjustment Assistance (TAA) may be eligible for the HCTC. The HCTC provides a refundable credit for 72.5 percent of a covered individual’s premiums for qualified health insurance of the individual and qualifying family members. The Health Coverage Tax Credit for eligible individuals receiving Trade Act assistance is extended for all months beginning before January 1, 2020, and is modified to work alongside the premium assistance tax credit.

The HCTC had expired after 2013. The Trade Preferences Extension Act makes the HCTC available retroactively to the start of 2014. Lawmakers directed the IRS to publicize the retroactive extension of the HCTC.

Covered individuals. Generally, a covered individual is an individual who is an eligible TAA recipient, an eligible alternative TAA recipient, an eligible Reemployment TAA recipient or an eligible Pension Benefit Guaranty Corporation (PBGC) pension recipient. Certain family members may be eligible to receive the HCTC.

Qualified health insurance. Covered individuals may apply the HCTC to help offset the cost of qualified health insurance, which includes certain COBRA continuation coverage; coverage under a health insurance program offered to state employees or a comparable program; and certain coverage under a group health plan that is available through the employment of the eligible individual’s spouse. Covered individuals cannot be enrolled in Medicaid, Medicare, CHIP, TRICARE, or certain other federal programs.

The Trade Preferences Extension Act includes a number of provisions describing the relationship between the HCTC and the premium assistance tax credit, such as the HCTC’s coordination with advance payments of the premium tax credit to prevent a double benefit.

Child Tax Credit

The Trade Preferences Extension Act limits the child tax credit for taxpayers who elect to exclude from gross income for a tax year any amount of foreign earned income or foreign housing costs. These taxpayers are no longer allowed to claim the refundable portion of the child tax credit (also called the additional child tax credit) for the tax year.

The maximum amount of foreign earned income that an individual may exclude in 2015 is $100,800. The maximum amount of foreign housing costs that an individual may exclude in 2015 is, in the absence of Treasury adjustment for geographic differences in housing costs, $16,128.

The change is effective immediately and retroactively for tax years beginning after December 31, 2014. The refundable portion of the $1,000 child credit was expanded for tax years beginning after 2008 and before 2017 under earlier legislation.

The calculation of earned income for purposes of determining the additional child tax credit amount takes into account only earned income that is used to determine taxable income. Thus, taxpayers living abroad with income in excess of the maximum Code Sec. 911 exclusion amount for the tax year would potentially be eligible for the additional child tax credit. In contrast, other taxpayers living abroad but earning less than the maximum excludible foreign income amount would not be entitled to a refundable child tax credit.

Information Returns

A penalty may be imposed for filing information returns/furnishing payee statements after the due date or filing returns/furnishing payee statements without all required or corrected information, among other reasons. Penalties may be reduced if the failure is corrected within certain time frames. The Trade Preferences Extension Act revises the penalty structure, effective for information returns and payee statements required to be filed/furnished after 2015.

The penalty for a single failure will increase from $100 to $250; the maximum penalty for all failures during a calendar year will increase from $1.5 million to $3 million. If the failure is corrected within 30 days of the required filing date, the penalty for a single violation will increase to $50 (up from $30); the penalty for all failures would increase to $500,000 (up from $250,000). The lower limitations for persons with gross receipts of $5 million or less will also increase.

If the failure to properly file a correct information return is due to intentional disregard of the rules, the penalty is at least $250 for each improper return, and there is no cap on the total penalties imposed.

Education Incentives

Educational institutions are required to provide Form 1098-T, Tuition Statement, to students who attend their institution, and file a copy of Form 1098-T with the IRS. Under the Trade Preferences Extension Act, the American Opportunity Tax Credit (the HOPE credit) and the Lifetime Learning Credit as well as the tuition and fees deduction will no longer be allowed unless the taxpayer possesses a valid information return (Form 1098-T, Tuition Statement) from the educational institution.

The provision is effective for tax years beginning after the date of enactment of the Trade Preferences Extension Act. Under current law, the tuition and fees deduction expired on January 1, 2015; however the expectation is that another “extenders” bill will extend it, which presumably is the reason it was included now under the reporting rules.

The provision effectively means that taxpayers claiming these education incentives will have to wait to file their returns until they receive Form 1098-T, which could impact individuals who file early in the filing season in anticipation of a large refund.

Educational Institutions

The Trade Preferences Extension Act waives certain penalties for educational institutions that fail to file information returns with accurate taxpayer identification numbers (TINs) of students. The educational institution must certify that it properly requested the TIN but was unable to collect it from the student. The provision is effective for returns required to be made, and statements required to be furnished, after December 31, 2015.

Corporate Estimated Tax Shift

Included in the Trade Preferences Extension Act is a corporate estimated tax shift, designed to accelerate revenues needed to offset some of the cost of other provisions in the Act. For corporations with at least $1 billion in assets, the amount of corporate estimated tax due in July, August or September 2020 is increased by eight percent and the amount of the next required installment is reduced to reflect the prior increase.

TRADE PRIORITIES AND ACCOUNTABILITY ACT

The Bipartisan Congressional Trade Priorities and Accountability Act ( P.L. 114-26) contains Trade Promotion Authority (TPA) for the Trans-Pacific Partnership. The bill also includes theDefending Public Safety Employees’ Retirement Act. This Act allows an expanded group of federal law enforcement officers, firefighters and air traffic controllers to make penalty-free withdrawals from governmental plans after age 50.

Public Safety Officers

Generally, taxpayers who receive an early distribution from a qualified retirement plan are subject to a 10 percent penalty, unless an exemption exists. Current law provides an exemption for qualified public safety officers. The Defending Public Safety Employees’ Retirement Act expands the exemption to include certain federal law enforcement officers, federal firefighters, customs and border protection officers, and air traffic controllers. The provision applies to distributions made after December 31, 2015.

Background. A taxable distribution from a qualified retirement plan or traditional IRA is generally subject to a 10-percent additional tax if made before the participant reaches age 59 ½.

The 10-percent additional tax does not apply to a distribution from a qualified plan (but not an IRA or SEP) made to an employee after separation from service after reaching age 55. In the case of a distribution to a qualified public safety employee from a governmental plan, the exemption applies if made to the employee after separation from service after reaching age 50.

The exemption for qualified public safety employees is limited to distributions from a governmental plan that is a defined benefit plan providing specific retirement benefits usually in the form of a pension or annuity plan. The exemption is not available for distributions from a governmental plan that is a defined contribution plan providing a separate account for each employee such as a section 401(k) plan.

Expanded exemption. Effective for distributions after December 31, 2015, the exemption to the 10-percent additional tax on early distributions from a governmental plan for qualified public safety employees is expanded to include federal law enforcement officers, federal firefighters, and air traffic controllers. The exemption is also expanded to apply to distributions from governmental plans that are defined contributions plans or other types of plans.

If you have any questions regarding these new provisions or their impact to your specific situation, please do not hesitate to contact us.

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