New Credit Hurdles for Taxpayers and Tax Pros

Tax Law and News Photo of mature man, recording data from the computer, working on his taxes with tax booklet and pencil in hands

If you prepare returns claiming the earned income tax credit (EITC), you are probably well aware that you and your clients have to negotiate a few hurdles when preparing those credit claims. What’s more, Congress recently raised the bar for EITC claims and added new requirements for claiming other tax credits on the 2016 returns you will be preparing this year.

New Taxpayer Identification Number requirements. Under current rules, a client will not qualify for the EITC unless the client’s taxpayer identification number (TIN) and, if married, the TIN of the client’s spouse, are shown on the return for the credit year. In addition, a qualifying child will not be taken into account in computing the EITC unless the child’s name, age and TIN are shown on the return. For purposes of the EITC, a TIN includes only a Social Security number (SSN), other than a number issued to allow federal benefits, such as Medicare.

Similarly, the child tax credit won’t be allowed to a client for any qualifying child unless the child’s name and TIN are shown on the return. For purposes of the child tax credit, a TIN includes an SSN, an individual taxpayer identification number (ITIN) or an adoption taxpayer identification number (ATIN).

Clients claiming the American Opportunity and Lifetime Learning credits for higher education expenses are also subject to a TIN requirement. No higher education credit will be allowed for qualified tuition and related expenses of a student, unless the client includes the name and TIN of the student on the return for the credit year. As with the child tax credit, for this purpose a TIN includes an ITIN.

The Protecting Americans From Tax Hikes (PATH) Act of 2015 beefs up the TIN requirements in order to prevent retroactive credit claims. A new rule provides that a TIN isn’t valid for EITC purposes, unless it was issued by the Social Security Administration on or before the due date for filing the tax return for the tax year. Similarly, the new law provides that a child tax credit will not be allowed for any qualifying child if a TIN was issued after the return due date.

In the case of the higher education credit, the requirement to provide a TIN in order to claim the American Opportunity Credit for a student’s expenses will not be met, unless the TIN was issued on or before the due date for filing. Note that the new TIN requirement does not apply for purposes of the Lifetime Learning component of the higher education credit.

The TIN requirements generally apply to returns filed after Dec. 18, 2015 (the enactment date of the PATH Act). However, the requirements do not apply to return for a tax year that includes that date (i.e., the 2015 calendar year) if the return is filed on or before the due date. Thus, in most cases, the TIN requirements will first apply to 2016 returns to be filed in 2017.

Payee statements. Another new law change provides that, unless the IRS says otherwise, a higher education credit won’t be allowed unless the taxpayer receives a written payee statement (Form 1098-T, Tuition Statement) from the educational institution. For this purpose, a payee statement received by a dependent is treated as received by the taxpayer. The payee statement requirement applies for tax years beginning after June 29, 2015. Thus, for most taxpayers the requirement will first apply to calendar year 2016 returns. The payee statement requirement also applies to above-the-line deductions for higher education tuition and fees.

Delayed refunds. Starting with 2016 returns, no credit or refund will be made to a taxpayer before the 15th day of the second month following the close of the tax year if the taxpayer claimed the EITC or additional child tax credit on the tax return. Thus, for 2016 calendar year returns, no refunds will be made before Feb. 15 of this year.

Improper credit claims. Under longstanding rules, taxpayers who improperly claim the EITC can be barred from claiming the credit in future years. If the improper claim was due to reckless or intentional disregard of rules or regulations, then the disallowance period is two years following denial of the improper claim. If the improper claim was fraudulent, then the disallowance period is 10 years. The PATH Act extends the credit disallowance rules to the child tax credit and the American Opportunity credit, effective for tax years beginning after 2015.

Preparer penalties. Tax return preparers are subject to special due diligence requirements with respect to EITC claims. Moreover, the tax law imposes a $500 penalty for each failure to comply with the due diligence requirements. Effective for tax years beginning after 2015, the PATH Act extends the penalty for lack of due diligence to claims for the child tax credit or the American Opportunity Tax credit. Due diligence requirements, similar to those for the earned income credit, will apply to child tax credit and American Opportunity credit claims.