Recent IRS developments that may affect a client’s tax situation

Supreme Court upholds subsidies for health care purchased on Federal Exchange. The Supreme Court by a 6-3 vote determined that premium tax credits (also known as health insurance subsidies) under the Affordable Care Act (ACA), are not limited to taxpayers who live in States that have established their own health insurance Exchange but are also available to taxpayers living in States that rely on a Federal Exchange. While acknowledging that the challengers’ arguments were strong, the Supreme Court found that the language of the law was ambiguous in light of the context and structure of the premium tax credit provisions, as well as the role of the subsidies in the ACA as a whole. With these considerations in mind, the Supreme Court concluded that allowing the subsidies for insurance purchased on any Exchange was consistent with the purpose of the ACA.

Supreme Court declares nationwide right to same-sex marriage. The Supreme Court, in a 5-4 decision, struck down four state-wide bans on same-sex marriage, holding that the Fourteenth Amendment requires all States to license a marriage between two people of the same sex. And, since same-sex couples may now exercise the fundamental right to marry in all States, the Court ruled that there is no lawful basis for a State to refuse to recognize a lawful same-sex marriage performed in another State. Tax ramifications of this decision include: a) simplified tax filing for same sex married couples that previously had to file as married for federal purposes and single for state purposes, and b) for unmarried same sex couples, facing the same marriage penalty/marriage benefit factors that other couples face when deciding whether to marry.

Regulations explain new tax-advantaged ABLE accounts. For tax years beginning after Dec. 31, 2014, states may establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts, which can be created by disabled individuals to support themselves or by families to support their disabled dependents. Contributions to the accounts are made on an after-tax basis (i.e., contributions aren’t deductible), but assets in the account grow tax free. Withdrawals are tax-free if the money is used for qualified disability-related expenses. A nonqualified distribution is subject to income tax and a 10% penalty on the part of the distribution attributable to earnings. Each disabled person is limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account can be made up to the inflation-adjusted gift tax exclusion amount ($14,000 for 2015).

Comprehensive IRS regulations provide details on how ABLE accounts work, including the following:

  • A qualified ABLE program may accept cash contributions in the form of cash or a check, money order, credit card payment, or other similar method of payment.
  • If the eligible individual cannot establish the account, the eligible individual’s agent under a power of attorney or, if none, his or her parent or legal guardian may establish the ABLE account for that eligible individual.
  • An eligible individual must present the disability certification, accompanied by the diagnosis, to the qualified ABLE program, and that certification will be treated as filed with the IRS once the qualified ABLE program has received the disability certification.
  • Qualified disability expenses are not limited to expenses for items for which there is a medical necessity or which provide no benefits to others in addition to the benefit to the eligible individual. For example, expenses for common items such as smart phones could be considered qualified disability expenses if they are an effective and safe communication or navigation aid for a child with autism.

Next year’s inflation adjustments for health savings accounts (HSAs). Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers, as well as other persons (e.g., family members), also may contribute on behalf of an eligible individual. A person is an “eligible individual” if he is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a HDHP, unless the other coverage is permitted insurance (e.g., for worker’s compensation, a specified disease or illness, or providing a fixed payment for hospitalization).

The IRS provided the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2016 for health savings accounts (HSAs). For calendar year 2016, the limitation on deductions is $3,350 (no change from 2015) for an individual with self-only coverage. It’s $6,750 (up from $6,650 for 2015) for an individual with family coverage under a HDHP. Each of these amounts is increased by $1,000 if the eligible individual is age 55 or older. For calendar year 2016, an HDHP is a health plan with an annual deductible that is not less than $1,300 (no change from 2015) for self-only coverage or $2,600 (no change from 2015) for family coverage, and with respect to which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 (up from $6,450 for 2015) for self-only coverage or $13,100 for family coverage (up from $12,900 for 2015).

Certain taxpayers can file delinquent FBARs without penalty. “U.S. persons” (U.S. citizens or residents as well as many entities) who have financial interests in or signature authority over certain financial accounts maintained with financial institutions located outside of the U.S. must file a Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate maximum values of the foreign financial accounts exceed $10,000 at any time during the calendar year. The FBAR is a calendar year report and must be filed on or before June 30 of the year following the calendar year being reported. Those required to file an FBAR but who fail to properly file one may be subject to a civil penalty. The IRS’s Offshore Voluntary Disclosure Program (OVDP) offers people with unreported taxable income from offshore financial accounts or other foreign assets an opportunity to fulfill their tax and information reporting obligations, including the FBAR. In addition, streamlined filing compliance procedures are available to certain persons.

The IRS said that U.S. persons should file delinquent FBARs if they don’t need to use either the OVDP or the streamlined filing procedures, have not filed required FBARs, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent FBARs. The IRS will not impose a penalty for the failure to file the delinquent FBARs if the taxpayer: (a) properly reported on its U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs; and (b) has not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

2015 luxury auto depreciation dollar limits and lease income add-backs released. Annual depreciation and expensing deductions for so-called luxury autos are limited to specific dollar amounts. These amounts are inflation-adjusted each year. The IRS has announced that for autos (not trucks or vans) first placed in service during 2015, the dollar limit for the first year an auto is in service is $3,160; for the second tax year, $5,100; for the third tax year, $3,050; and for each succeeding year, $1,875. The dollar limits are the same as those that applied for autos first placed in service in 2014.

For light trucks or vans (passenger autos built on a truck chassis, including minivan and sport-utility vehicles (SUVs) built on a truck chassis) first placed in service during 2015, the dollar limit for the first year the vehicle is in service is $3,460; for the second tax year, $5,600; for the third tax year, $3,350; and for each succeeding year, $1,975. For a light truck or van placed in service in 2015, the dollar figure for the second tax year is $100 higher than the figure that applied for such vehicles first placed in service in 2014. For all other years, the 2015 limit is the same as the 2014 limit.

A taxpayer that leases a business auto may deduct the part of the lease payment representing its business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that auto lessees can’t avoid the effect of the luxury auto limits, however, taxpayers must include a certain amount in income during each year of the lease to partially offset the lease deduction. The amount varies with the initial fair market value of the leased auto and the year of the lease, and is adjusted for inflation each year. The IRS has released a new inclusion amount table for autos first leased during 2015. The amounts in the new table are higher than the figures in the table that applied to autos first leased in 2014.

Cents-per-mile valuation of personal use. An employee’s personal use of an employer-provided auto must be treated as fringe benefit income and valued using one of several methods. One of the acceptable methods allows employers to value personal use at the mileage allowance rate (57.5¢ per mile for 2015). However, the cents-per-mile method may be used only if the auto’s fair market value does not exceed $12,800, as adjusted for inflation. The IRS has announced that the inflation-adjusted figures for vehicles first made available to employees for personal use in 2015 are $16,000 for autos (same as for 2014) and $17,500 (up from $17,300 for 2014) for trucks and vans-i.e., passenger autos built on a truck chassis, including minivans and SUVs built on a truck chassis.