A Few Income Tax Changes to Note in the Recent Trade Legislation

On June 29, 2015, Pres. Obama signed the Trade Preference Extension Act of 2015 and the Trade Priorities and Accountability Act of 2015.  Contained in the new legislation are a few income tax changes to take note of.

1.     The $1,000 child tax credit can be refundable for taxpayers having low adjusted gross income.  Refundable means that if there isn’t enough income tax for the credit to offset, the government will send a check.  A taxpayer working and living in a foreign country can exclude up to $100,800 (in 2015) of foreign earned income, thereby lowering AGI and perhaps qualifying for the refundable credit.  For tax years beginning after 2014, the child care credit will not be refundable to taxpayers claiming the foreign earned income exclusion.

2.     An individual may qualify for the American Opportunity Tax Credit, the Lifetime Learning Tax Credit, or to claim a deduction for AGI for qualified tuition and related expenses to attend college.  There has been no requirement that the individual first obtain a Form 1098-T (tuition statement) from the college before claiming the tax benefit.  Effective for tax years beginning after June 29, 2015 (meaning 2016 tax returns for most people), such individuals may no longer claim these tax benefits without first obtaining Form 1098-T from the college.

3.     Congress has enacted high financial penalties for companies failing to file correct information returns (e.g., Forms 1099).  These high penalties have been scored as revenue raisers to the government, so Congress can spend more money.  Now this bad public policy has been made even worse by increasing penalties effective for information returns due after 2015.  Our elected representatives have designed these penalties to financially destroy businesses that do not comply with the government’s information reporting rules!  And, it is not always easy to comply with these rules, given the complexity of the law and the short time frame from the end of the year to the January 31^st due date.  The penalty is tiered, such that as more time goes by after the due date before the correct filing is made, the higher the penalty.

a.      For corrections made 30 days or less after the due date, the new law increases the penalty from $30 to $50 per item.  The new law doubles the maximum penalty for a year from $250,000 to $500,000.  “Small” taxpayers are exposed to a lesser maximum yearly penalty.  For small taxpayers the yearly maximum increases from $75,000 to $175,000.  A small taxpayer is defined as one having average annual gross receipts of $5 million or less.

b.     If the failure is corrected after 30 days past the due date but by August 1^st, the penalty increases from $60 to $100 per item.  The maximum penalty for a year triples from $500,000 to $1,500,000.  However, for a “small” taxpayer, the maximum penalty increases from $200,000 to $500,000.

c.      For corrections made after August 1^st, the penalty increases from $100 to $250 per item, with the maximum penalty during a calendar year doubling from $1.5 million to $3.0 million.  For a “small” taxpayer, the maximum penalty increases from $500,000 to $1,000,000.

d.     An intentional disregard of the rules to file information return is penalized at $500 per item with no cap on the total penalty that can be assessed!