Two legislative initiatives passed by Congress last December contain “extenders” and other provisions affecting individual taxpayers. Several of the significant provisions of this legislation are summarized below.
The PATH Act
The “Protecting Americans from Tax Hikes (PATH) Act of 2015” deals with “extenders” — a collection of more than 50 individual and business tax deductions, credits and other tax provisions that have been in force for years, but which have been temporarily extended for short periods of time. Many of these tax-saving provisions expired at the end of 2014. In a refreshing change, Congress has made many of these tax breaks permanent and has extended other provisions for two or five years. The PATH Act also modified many of the provisions. Changes affecting individuals include the following:
- The rule permitting tax-free distributions to charity from an individual retirement account (IRA) of up to $100,000 per taxpayer per year, available to taxpayers age 70 ½ or older, has been revived for 2015 and made permanent. Under this rule, the contributions are not subject to the charitable contribution percentage limits since they were neither included in gross income nor claimed as a deduction on the individual’s tax return. The exclusion from gross income also means that Michigan residents will not pay tax on these distributions.
- The PATH Act retroactively revives and makes permanent the option to claim an itemized deduction for state and local general sales taxes in lieu of a deduction for state and local income taxes. Taxpayers opting to deduct sales taxes may deduct the actual amount of these taxes or an amount prescribed by the IRS. This option is beneficial to taxpayers in states, such as Florida, which do not impose an income tax.
- The PATH Act extends the exclusion for discharged home mortgage debt for two years. The extended exclusion applies to qualified principal residence debt of up to $2 million ($1 million for married individuals filing separately) that is discharged before January 1, 2017. For discharges of debt after December 31, 2016, the exclusion also applies to home mortgage debt dis-charged under a written agreement entered into before January 1, 2017.
- The PATH Act permanently reduces the S corporation recognition period for the “built-in gains tax.” In general, S corporation income flows through to its shareholders, while C corporations are subject to corporate-level tax. A sale of S corporation assets followed by a liquidation is therefore generally subject to one tax level, while a sale of C corporation assets followed by a liquidation is subject to a “double tax” — a corporate-level tax and a shareholder tax on the liquidation.
The “built-in gains tax” is a corporate-level tax imposed on former C corporations that make the S corporation election, and is designed to prevent S corporation elections in contemplation of a sale of assets followed by liquidation. While S corporation rules originally required a ten-year waiting period following an S corporation election to avoid the “built-in gains tax,” the new rules permanently reduce this waiting period to five years. Shareholders contemplating the sale of assets of a former C corporation that has made the S corporation election should have their tax advisors carefully review the implications of this change.
- The PATH Act also retroactively and permanently extends the 100% exclusion, and the exemption from alternative minimum tax treatment, for gain on the disposition of “qualified small business stock” as defined in the Internal Revenue Code. While a detailed discussion of these provisions is beyond the scope of this update, shareholders contemplating the sale of a closely-held corporation should have their tax advisors carefully review possible tax planning opportunities under these provisions.
The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015
The “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” was also passed last December. While this Act was generally designed as a three-month stopgap extension of the Highway Trust Fund and related provisions, the Act contains a number of significant tax provisions, including the following:
- Property received from a decedent generally receives a stepped-up (or stepped-down) tax basis for income tax purposes equal to the date of death value of the property. Tax basis is used to determine the gain or loss upon a sale of the property. The Act includes income tax basis consistency rules that generally provide that the tax basis of property acquired from a decedent shall not exceed the value as finally determined for federal estate tax purposes. The Act includes provisions that require executors to report the date of death valuation information to the IRS and to each person acquiring any property included in the decedent’s gross estate. These new rules are generally effective for property included on an estate tax return filed after July 31, 2015.
- The Act includes revised due dates for partnership tax returns. Partnership returns for tax years beginning after December 31, 2015, will be due by the 15th day of the third month after the end of the tax year. Calendar year partnerships will be required to file by March 15 of the following year, which is one month earlier than under current law. The Act also directs the IRS to modify the maximum extension period allowed for filing partnership returns to six months for tax years beginning after December 31, 2015.
This extension period is one month longer than under current law.
- The extension period for trusts filing Form 1041 is extended to five and a half months for tax years beginning after December 31, 2015. This means that calendar year trusts will be able to receive an extension of time to file Form 1041 to September 30.
- FinCEN Form 114, “Report of Foreign Bank and Financial Accounts,” is used to report a financial interest in or signature authority over a foreign financial account. Under current rules this Form must be received by the Department of Treasury on or before June 30 of the year following the calendar year being reported, with no extensions. Under the new rules contained in the Act, applicable to tax years beginning after December 31, 2015, the Department of Treasury is directed to modify the regulations to provide that the due date for FinCEN Form 114 will be April 15 of the following year, with a maximum extension of a six-month period.
Please contact your Warner Norcross & Judd tax expert if you have any questions regarding this new legislation.
