Tax Changes for Tax Year 2015

by | Feb 2, 2016

Tax Updates for Tax Year 2015

Our goal with this page of our website is to provide for our clients and for the general public a comprehensive and reliable source of information regarding tax updates affecting tax year 2015.

We have tried, as much as possible, to divide the content into different sections so that you can pick out the 2015 tax changes that affect your situation the most.

Get ready for some serious information overload…it might be a good idea to put on a helmet so that your head does not explode from all the 2015 tax changes information that is about to come at you like a hurricane…here we go!

 “Extenders” Legislation Passed Just Before Year-End

At the end of 2015 President Obama signed the “Protecting Americans from Tax Hikes (PATH) Act of 2015.” This legislation retroactively reinstated and extended a wide range of individual and small business tax planning provisions that had previously expired at the end of 2014. Lot of good news for taxpayers in this bill, including:

  • Allow individuals who are at least age 70 ½ to make direct contributions of up to $100,000 tax-free from their IRAs to charity. This provision is made permanent.
  • Giving itemizers the option to deduct state sales tax instead of state income tax and state disability tax. This provision is made permanent.
  • The American Opportunity Tax Credit is made permanent.
  • The Enhanced (Additional) Child Tax Credit is made permanent.
  • Homeowners, in certain situations, may exclude from income up to $2 million dollars in forgiven debt. This provision is extended through 2016.
  • Deductions for private mortgage insurance are extended through 2016.
  • The deduction for teacher supplies for elementary and secondary school teachers up to $250 is make permanent and beginning in 2016 is indexed for inflation but will be rounded to the nearest $50. Eligible schoolteacher expenses now include professional development expenses such as continuing education.
  • The $500,000 section 179 deduction has been make permanent and is indexed for
    inflation beginning in 2016.
  • The 50% Bonus Depreciation rules are extended through 2017.
  • Above the line deduction for qualified tuition and fees are extended through 2016.
  • Alternative Minimum Tax yearly inflation adjustment.
  • The Work Opportunity Tax Credit is extended through 2019 for businesses who hire certain targeted groups which include veterans and qualified long-term unemployed individuals (those unemployed more than 27 weeks). The credit can be as much as $9,600 (up to 40% of the first $24,000 of wages).
  • Section 1202 Small Business Stock Capital Gains Exclusion is made permanent. This provision excludes capital gains on qualifying small business stock acquired and held for more than 5 years under Code Section 1202.

NEW California Earned Income Credit

It’s true people, California now has an Earned Income Credit (EIC) worth up to $2,653 as a refundable tax credit. Here is the California EIC FAQs page.

This credit is aimed at a lower-income taxpayer, the maximum credit is given for income of just under $7,000, and the credit is calculated in much the same way as the federal EIC: a “scaled” credit with the maximum given to people making around $7K per year, and then if you make less than that or more than that, the credit tapers off; credit also, like federal EIC, based on number of qualifying children.

This credit should pop some extra money into the state tax refunds of lower-income filers. It also can change the math for separated parents who are seeking to decide who should claim children; because now the lower-income parent will get a little more for having that child on the return. Feel free to contact our offices to determine the best way to file your taxes for a maximum refund—just because you have a low income does not mean that you cannot benefit from expert tax planning!

 IRS News Including Major “Tightening Up” of Numerous Areas of Tax Enforcement

The IRS made a lot of news in 2015 discussing how the agency was understaffed and audits were, as a result, at an all time low. We would humbly advise taxpayers—and tax preparers—to avoid believing the hype and do not assume that IRS does not have “teeth” anymore. In fact, the IRS is now tightening up numerous areas of tax enforcement, here are some things to be aware of:

  • The IRS has replenished staff and this should (hopefully) lead to better customer service but may also lead to increased audit and enforcement efforts.
  • Taxpayers have a reduced ability to claim tax refunds through filing amended returns for past years. To be specific, taxpayers who did not have an Individual Taxpayer Identification Number (ITIN) or Social in the year for which they are amending tax returns will not be eligible for credits for those years. This will affect, for example, taxpayers who receive a Social Security Number, would have gotten Earned Income Credit for past years if they had a Social Security Numbers, and are now amending past years to claim Earned Income Credit. According to new laws, these amended past year Earned Income Credits will no longer be paid.
  • Tax preparers are facing a huge increase in regulation and paperwork. There is now a due diligence requirements and penalties of up to $500 for tax preparer now apply to Child Tax Credit and American Opportunity Tax Credits.
  • Taxpayers who claim Child Tax Credit and don’t qualify could be barred from getting the credit for up to 10 years.
    Identity theft continues to be a big, hairy, disgusting problem in the tax system. The main scam being perpetrated involves criminals obtaining Social Security numbers of taxpayers and then filing tax returns early in tax season, so as to receive the taxpayer’s tax refund before the taxpayer has filed a return. On average, taxpayers affected by identity theft problems have had to wait an average of 278 days for the IRS to resolve their cases and issue their refunds. In response to demands from enraged taxpayers, the IRS has now changed its policy, and will provide a copy of the falsely-filed tax return(s) to taxpayers affected by identity theft. The IRS has delayed the first round of tax refunds for tax year 2015 (calendar year 2016) and we suspect that it is because they are using increased identity theft detection techniques, in order to try to stop people from receiving tax refunds filed for other people’s tax returns.
  • The number of SCAMS being perpetrated against the American Public by criminals posing as IRS agents is at an all-time high. Starting in 2013 and continuing to this day, for instance, a horrible telephone scam has been perpetrated against millions of taxpayers, mostly targeting immigrants or taxpayers with “foreign-sounding” last names. Professional thieves and bullies have been calling millions of taxpayers and impersonating IRS collections agents and threatening to come to taxpayers’ homes and places of business and seize assets unless taxpayers cough up money to these filthy and despicable phone-jockey thieves. This telephone scam and other scams like it have affected MILLIONS of taxpayers so please be careful!!! If you are being harassed by someone who claims to be an IRS agent but you’re not sure and something smells fishy, do not hesitate to contact our offices, we have helped many taxpayers with these situations and you can hire us to represent you and squash the problem ASAP.

Standard Deduction & Exemption Amounts

Now for some facts and figures:

The 2015 Exemption Allowance is $4,000, up from $3,950 in 2014.

The 2015 Standard Deduction Amounts are:

Filing Status Standard Deduction
Joint & Qualifying Widow(er) $12,600*
Head of Household $9,250*
Single & Married Filing Separately $6,300*

 *Additional standard deduction amounts for those at least 65 and/or blind:

Dependent Standard Deduction

Base Amount

$1,050

Additional Amount*

$350

 *To calculate the standard deduction for a dependent taxpayer, you would add the $350 “Additional Amount” to the earned income of the taxpayer, but not to exceed the standard deduction normally applicable to the taxpayer’s filing status.

Tax Rates and Tax Brackets

Top marginal tax rate remains at 39.6%.

Credit to our friends at Bankrate.com for this tax brackets diagram:

Bankrate2015taxbrackets 

Retirement Plans & Pensions

The maximum deductible contribution to an Individual Retirement Arrangement (IRA) stays at $5,500 per taxpayer for 2015, no increase from 2014, with a $1,000 “catch-up contribution” for any taxpayer age 50 or over. This limit applies to both Traditional and Roth IRAs.

The contribution limit for 401K, 403b, and other elective deferral qualified retirement plans increases to $18,000 in 2015, with an additional $6,000 catch-up contribution allowed for taxpayers age 50 or over.

Contribution limits for SEP IRAs go up to a full $53,000 for 2015, but no additional catch-up contribution is allowed for SEP IRAs.

As you know if you have been doing taxes for seniors, tax planning with regard to retirement income can be very tricky. This year and in the coming years, we expect that tax professionals with a strong knowledge of tax issues affecting seniors will be in high demand. Here at Pronto Income Tax, we have been spending a large amount of time in the past couple years building more and more knowledge about tax planning issues affecting seniors—if you are someone age 55 or over reading this, and needing a tax plan for retirement, feel free to call our offices and get the expert help you need.

One change to be aware of in this area for 2015 is the new “one rollover per year” rule for IRAs. As retirees exit their company 401K plans, literally trillions of dollars will be shifted from company-managed 401K plans to IRAs. New for 2015, the taxpayer conducting an IRA rollover can only do one rollover per 12 month period.

Taxpayers who perform more than one IRA rollover per 12 month period may be forced to pay tax on the excess rollover funds, may have to pay the 10% early withdrawal penalty, may see the funds treated as “excess IRA contributions,” or may even have these funds subject to a 6% per year excise tax for as long as the funds stay in the IRA into which they were improperly rolled-over.

Note, however, that this limitation does not apply to “trustee-to-trustee” direct rollovers. As long as conduct the rollover directly between one trustee and another, then, moving that money is not considered a rollover by IRS and is not subject to this new limitation.

Here is a nice article from Accounting Today that goes further into the details of this new IRA rule.

Alternative Minimum Tax

Beginning in tax year 2013, the Alternative Minimum Tax exemption now adjusts for inflation each year.

The indexing of the AMT to inflation has greatly reduced the number of taxpayers afflicted by AMT not only now but far into the future, as described in this informative TaxPolicyCenter.org article about AMT.

AMT Taxpayers 2013 2  Chart Credit: http://www.taxpolicycenter.org/taxtopics/quick_amt.cfm

The AMT exemption amounts for 2015 are:

Filling Status

AMT Exemption Amounts

Married Joint & Qualifying Widow(er)

 $83,400

Single & Head of Household

 $53,600

Married Filing Separately

 $41,700

 Earned Income Credit

The Earned Income Credit remains the largest anti-poverty program conducted by the federal government, with over $66 billion of EIC disbursed and an average credit amount of $2,407 for tax year 2013 (the most recent year with complete statistics).

In order to qualify for the Earned Incomre Credit (EITC or EIC for short), the earned income and adjusted gross income (AGI) of the taxpayer(s) must both be less than:

If filing…

Qualifying Children Claimed

Zero

One

Two

Three or more

Single, Head of Household or Widowed

$14,820

$39,131

$44,454

$47,747

Married Filing Jointly

$20,330

$44,651

$49,974

$53,267

 The tax year 2015 maximum Earned Income Credit amounts are:

Number of Qualifying Children

0

1

2

3 or More

Max EIC

$503

$3,359

$5,548

$6,242

 Investment income must be $3,400 or less for the year in order for taxpayer to qualify for EIC.

Phase-Out Limits and Other News Affecting High-Income Taxpayers

Taxpayers in the higher income brackets lose some tax benefits due to “phase out” rules. The exemption phase-out and the itemized deduction phase-outs are in effect for 2015 just as they were for 2014 (for 2012 and 2013 these phase-outs were not in effect).

Exemption amounts phase-out by 2% for each $2,500 (or fraction thereof) by which the taxpayer’s AGI exceeds the threshold amount.

Itemized deductions are reduced by the lesser of:

  • 3% of the excess AGI over the threshold amount; or
  • 80% of the itemized deductions otherwise allowable.

Phase-Out Threshold Amounts for Tax Year 2015

Single

$258,250

Head of Household

$284,050

Married filing joint, surviving spouse

$309,900

Married filing separate

$154,950

 Also a sort of tax increase on taxpayers with higher incomes, for 2015, the “wage base” for Social Security tax has been increased from $117,000 to $118,500. Beyond $118,500 of earnings, the taxpayer does not have to pay any more Social Security tax on his or her earnings. Medicare tax however does still apply to all earnings regardless of the amount.

As has been the case for the past two years, high income earners must also pay an extra 0.9 percent Medicare “surtax” on all their earnings above certain designated amounts. For example, a taxpayer who is an employee watches his or her Medicare tax rate go from 1.45 to 2.35 percent on any income above the designated amounts which are as follows:

Earning Amounts Above Which 0.9 Percent Medicare Surtax Applies

Single, Head of Household, or Qualifying Widow(er)

$200,000

Married Filing Jointly

$250,000

Married filing Separately

$125,000

 Note that the 0.9% Medicare surtax income amounts shown above apply to gross earnings and not AGI or MAGI. High-earning self-employed taxpayers above those “threshold amounts” are also be affected by this extra 0.9 Medicare surtax. The earning amounts at which these special taxes apply are not indexed to inflation and will thus stay the same each year.

And then there is the 3.8% Medicare tax on unearned income (including rental income, dividends, capital gains, and interest income) that will continue to apply to higher-income taxpayers.

For Single, Qualifying Widow(er), and Head of Household filing status taxpayers, the 3.8% Medicare tax on unearned income “kicks in” once the taxpayer’s Modified Adjusted Gross Income (MAGI) exceeds $200,000.

For Married Filing Jointly tax returns, the 3.8% Medicare tax on unearned income begins once MAGI exceeds $250,000.

These figures have not changed from 2014 because these taxes are not indexed to inflation.

Capital Gains & Investment Tax News

Starting in 2014 and continuing into 2015, the maximum long-term capital gains rate for individuals who are in the 39.6% marginal tax bracket is now 20%.

Taxpayers who are not in the 39.6% bracket will continue to pay the zero and 15 percent long-term capital gains rates through 2015. Taxpayers in the 15% or lower tax bracket will be eligible for the highly-advantageous zero percent rate. These beneficial rates also apply to qualified dividends.

With the stock market having been way up over the past five years, and the Baby Boomer Generation retiring at a rapid pace, we anticipate increased selling of appreciated stocks over the next two years.

For middle and lower income taxpayers in the 15% or lower marginal tax bracket, the ability to take long-term capital gains and qualified dividend income at a zero percent federal tax rate remains one of the sweetest loopholes in all the tax code.

Affordable Care Act Updates

Oh yeah, and then there is that whole ObamaCare Thing. Indeed, no modern tax update would be complete without a review of the Affordable Care Act. We had to save the best for last to see if you would read this entire page!

Despite numerous efforts to repeal the controversial “meshing” of the health care and tax systems, it looks like the Affordable Care Act is here to stay, and will have a large effect on tax returns this year and for years to come.

In a big picture sense, tax year 2015 (calendar year 2016) can be seen as the first year that the new health care law will have a lot of “bite” to it, so to speak.
Because let’s think for a moment about all the aspects of the new health care law that were either barely enforced or not enforced at all this past tax season:

  • The Forms 1095 were, in most cases, optional. And many insurance providers opted not to provide these forms to taxpayers. Last tax season, many clients received 1095s, but many other didn’t, because it was (in many cases) optional as to whether the insurance company needed to send the form. Expect way more 1095s this year.
  • Last year, the IRS did not seem too intent on pursuing taxpayers who either unintentionally or intentionally misreported the amount of Premium Tax Credit received. Yes some letters went out, and some refunds were delayed, but overall the IRS seemed to take a rather lax approach to “matching up” 1095 Premium Credit “advance” amounts with amounts claimed on the actual 1040. According to this recent report, the IRS did not receive the necessary information in a timely way to verify Premium Tax Credit amounts from many insurers, so that may explain part of the lax enforcement.
  • The “shared responsibility payment,” otherwise known as the penalty (or, if you prefer, the “tax”) for not having health insurance, was relatively light for tax year 2014. No, it is never fun to pay a tax penalty. But if that penalty is $95, it’s not the end of the world.

For 2015, enforcement of the new law will begin in earnest, and we expect major challenges for tax professionals and for taxpayers related to the Affordable Care Act’s continuing implementation.

Let’s start with the three factors shown above:

For tax year 2015, the “information reporting” Forms 1095-A, 1095-B, and 1095-C are no longer optional, but now must be provided to taxpayers by the health insurers. This change alone will create an enormous volume of dead trees that will land with a thump in the mailboxes of you and your neighbors, along with a wide variety of puzzling questions and misinformation from people who “read something on the Internet” and/or “my cousin said this doesn’t apply to me.”

Attention taxpayers: BE CAREFUL OF FILING BEFORE YOU RECEIVE YOUR 1095 FORM. IF YOU FILE AND THEN RECEIVE THIS FORM LATER, YOU WILL HAVE TO AMEND YOUR TAX RETURN. THIS WILL CAUSE AN ADDITIONAL FEE FOR YOU.

We also expect the IRS to increase diligence with regard to Premium Tax Credit audits. Similar to the approach IRS has taken with the Earned Income Credit audits, the IRS may hold portions of the client’s refund related to a “suspect” Premium Tax Credit calculation.

The fact that approximately 800,000 incorrect Form 1095s were sent to taxpayers last tax season is not exactly reassuring in this respect. Remember too that 1095s were being issued to only a small portion of all the taxpayers who had health insurance. Since 1095 reporting is now mandatory, it’s hard not to imagine that the number of erroneous Form 1095s will increase right in line with the number of forms being issued.

As the economy has continued to improve, many taxpayers are earning more at the end of 2015 than they were at the beginning of 2015. How many of these increased-income taxpayers do you think alerted the IRS to their increased wages so that their Premium Tax Credit advance amount would be reduced, as the IRS instructs taxpayers to do in link to IRS Publication 5121?

Don’t mean to sound cynical here, but I think we all know that approximately ZERO PERCENT of taxpayers will voluntarily report an increase income during the year—which means that many taxpayers will be in an “overpaid” situation with regard to the Premium Tax Credit, i.e. they received more Premium Tax Credit than they were supposed to, and now that their income went up, they have to pay back the excess Premium Tax Credit on the 2015 tax return.

According to statistics presented by H&R Block®, this dynamic was already in play last tax season, with this being the money quote:

“Two-thirds of tax filers among its client base who received health insurance coverage under the Affordable Care Act via the state or federal insurance marketplaces had to pay back an average of $729 of the Advance Premium Tax Credit, cutting their potential refund by nearly one-third.”

Not sure about you, but every time I hear the phrase “cutting their potential refund by nearly one-third,” I experience a deep and abiding sense of anxiety…

Let’s break in for a second here with some good news, though, because we don’t want this to turn into pure brutality and make you quit this profession before you even complete this course.

As you hopefully know by now if you’ve dealt with our company in the past, we try to practice a “leave the politics outside the tax office” policy, and instead strive to present unbiased facts for our clients and also for our fellow tax professionals who take our Pronto Tax School education courses. Following in that tradition and without undue fear of offending any of our Anti-ObamaCare Readers who think this new health insurance law is a complete disaster, we should point out that although ObamaCare definitely presents big difficulties and complexities for tax preparation, the new health insurance law has helped quite a number of people to obtain health insurance, including reducing the rate of uninsured from 17.1% to 12.3% in a very short amount of time.

The IRS also has a comprehensive Affordable Care Act Information Center that you should feel free to consult both before and during tax season.

So yeah, that’s the good news, and now back to the other news:

The penalty for not having health insurance has increased substantially in 2015 and will continue to go up in future years.

Credit to Forbes.com for this chart showing the penalty amounts by year:

Obamacare Penalties1Chart courtesy of Forbes.com

So…looks like the penalty amounts have more than tripled in 2015 relative to what they were in 2014.

This tax season, there will be quite a few taxpayers who either 1) have a drastically increased “shared responsibility payment,” or 2) have to pay back a significant portion of their Premium Tax Credit advanced during the year, or 3) both, a.k.a. “Worst of All Worlds.”

In this environment of increased consequences for non-compliance with ObamaCare requirements, your knowledge of exemptions to the penalty is as good as gold, and may offer a way out of paying a pricey penalty.

Here, as documented at this Healthcare.gov link, are the major exceptions to the rule that you must either have had insurance in 2015 or pay a penalty:

  • You’re uninsured for less than 2 months of the year (NOTE: in 2914 it was 3 months but now it’s 2 months)
  • The lowest-priced coverage available to you would cost more than 8% of your household income
  • You don’t have to file a tax return because your income is too low (learn about the filing limit.)
  • You’re a member of a federally recognized tribe or eligible for services through an Indian Health Services provider
  • You’re a member of a recognized health care sharing ministry
  • You’re a member of a recognized religious sect with religious objections to insurance, including Social Security and Medicare
  • You’re incarcerated, and not awaiting the disposition of charges against you
  • You’re not lawfully present in the U.S.

In addition to these exemptions from the penalty, there are also a variety of “hardship exemptions,” as follows:

1. You were homeless.
2. You were evicted in the past 6 months or were facing eviction or foreclosure.
3. You received a shut-off notice from a utility company.
4. You recently experienced domestic violence.
5. You recently experienced the death of a close family member.
6. You experienced a fire, flood, or other natural or human-caused disaster that caused substantial damage to your property.
7. You filed for bankruptcy in the last 6 months.
8. You had medical expenses you couldn’t pay in the last 24 months.
9. You experienced unexpected increases in necessary expenses due to caring for an ill, disabled, or aging family member.
10. You expect to claim a child as a tax dependent who’s been denied coverage in Medicaid and CHIP, and another person is required by court order to give medical support to the child. In this case, you do not have the pay the penalty for the child.
11. As a result of an eligibility appeals decision, you’re eligible for enrollment in a qualified health plan (QHP) through the Marketplace, lower costs on your monthly premiums, or cost-sharing reductions for a time period when you weren’t enrolled in a QHP through the Marketplace.
12. You were determined ineligible for Medicaid because your state didn’t expand eligibility for Medicaid under the Affordable Care Act.
13. Your individual insurance plan was cancelled and you believe other Marketplace plans are unaffordable.
14. You experienced another hardship in obtaining health insurance.

So as you can see there are quite a number of loopholes by which you can avoid paying the penalty. Number 14, “you experienced another hardship,” seems particular promising in its broadness.

According to this Forbes article, most people of modest income levels will not be subject to the penalty at all, and in reality the individual mandate will end up only applying to upper-income individuals…who already had health insurance in the first place.

The IRS has released a one-page Publication 5172 showing the different exemptions through which a taxpayer may avoid paying the penalty.

That there are two ways to claim an exemption to the penalty:

1) The taxpayer can be a total overachiever and apply ahead of time to receive an exemption, and here is a link that you will find helpful if you’d like to apply for an exemption ahead of time.

(But seriously now, let’s be realistic: most taxpayers will not have applied for any exemption ahead of time, and will be looking at you to try to get them out of paying the penalty.)

2) The tax professional can use Form 8965, Health Coverage Exemptions to claim the exemption for your client.

Again, Publication 5172 can give you more information about which exemptions are available.

One last bit of cheery news for you: the Open Enrollment Period for Affordable Care Act insurance plans is November 1, 2015 – January 31, 2016. Last year, if you recall, Open Enrollment ended February 15. A close date of January 31 virtually guarantees that by the time you sit down to do your 2015 tax return, the uninsured taxpayer may not only be hit with a penalty for 2015, but may already be “in the penalty zone” for 2016—with no quick or easy option to get signed up and avoid the 2016 penalty because Open Enrollment ended yesterday…

Having fun yet?

Yes there can be no doubt about it: ObamaCare has plenty of “bite” in 2015 and our humble advice to you is to do everything you can to avoid getting bit!

Standard Mileage Rates and Other Miscellaneous Items

OK Team, we are getting close to the end of this year’s federal tax update, so let’s quickly hit on some of the miscellaneous items that you want to keep in mind:

• 57.5 cents per mile for business miles driven (an increase from the 56 cents per mile rate for 2014).
• 23 cents per mile for medical or moving purposes (a decrease from the 23.5 cents rate for 2014).
• 14 cents per mile for charitable purposes (same as 2014).

The maximum Adoption Credit for 2015 is $13,400 and the credit remains a non-refundable credit.

The estate tax exclusion for 2015 is $5,430,000 (double that for Married Filing Jointly couples).

Estate tax rate for 2015 = 40%.

The annual exclusion for gifts remains at $14,000, no change from 2014.

The “kiddie tax” threshold goes up to $1,050, an increase of $50 from the 2014 amount.

The foreign earned income exclusion rises to $100,800 for 2015, the first time that figure has crossed the $100K mark; taxpayers who are working abroad would file Form 2555 to claim this exclusion on their foreign earnings.

The Health Savings Account (HSA) limits for 2015 are $3,350 for an individual or $6,650 for family coverage. Taxpayers age 55 or older can tack on an extra $1,000 to those limits. HSAs provide a deduction for taxpayers upon contribution, with the added bonus of being able to withdraw funds (including the growth in the account) with no taxes on the distribution, provided withdrawn funds are used for qualified medical expenses.

THAT’S ALL WE HAVE FOR YOU THIS YEAR IN TERMS OF TAX CHANGE AFFECTING TAX YEAR 2015.

WE ARE EXHAUSTED…THE TAX CODE HAS CONTINUED TO THROW MORE CURVEBALLS THAN BURT BLYLEVEN…YOU SNOOZE, YOU LOSE WHEN IT COMES TO TAX CHANGES.

GOOD LUCK THIS TAX SEASON AND IF YOU NEED PROFESSIONAL HELP PLEASE DO NOT HESITATE TO CONTACT OUR OFFICES.