With a new Republican administration and Congress ensconced in Washington, it is unclear what the tax landscape will look like by the end of 2017. So, short of hauling out a crystal ball, let’s take a look at some recent tax developments that you and your clients can plan for over the remainder of the year and beyond.
Small Employer HRAs
Tax law changes were few and far between during the lame duck session of Congress. However, one law change is noteworthy for your small business clients and their employees. The law authorizes the creation of qualified small employer health reimbursement arrangements (QSEHRAs) to provide reimbursements for medical care for employees and their family members.
Under a longstanding IRS ruling, an employer’s payments or reimbursements for employees’ substantiated premiums for non-employer-sponsored health insurance can be excluded from employees’ incomes [IRC §106; Rev. Rul. 61-146]. However, IRS guidance makes it clear that these seemingly simple plans have one big complication. The plans are considered employer-provided group health plans subject to the full panoply of group health plan requirements, such as the prohibition on annual limits and preventive coverage requirements. What’s more, because such plans cannot meet those requirements, sponsoring employers face potential excise taxes of $100 per day per employee [Notice 2013-54].
Effective for plan years beginning after 2016, the new law creates an exception from the group health plan requirements for QSEHRAs [IRC §9831(d) as added by P.L. 114-255].
An employer is generally eligible to set up a QSEHRA if it employed fewer than 50 employees in the prior year and does not offer group health plan coverage to its employees. The plan must be funded solely by the employer and, with some exceptions, must provide benefits on the same terms and conditions to all employees.
Payments for reimbursements from a QSEHRA are generally excludable from employees’ incomes as employer-provided medical coverage. However, payments or reimbursements cannot exceed $4,950 for an individual employee or $10,000 for an employee and family members. In addition, payments or reimbursements to or for an individual are not excludable from income unless the individual has minimum essential health coverage.
An employee’s QSEHRA benefit for a year must be separately reported on the employee’s Form W-2. Code FF has been added for box 12 of the 2017 Form W-2 to report the QSEHRA benefits.
Severance Paid to Combat Veterans
Another new law change made by the Combat-Injured Veterans Tax Fairness Act (P.L. 114-292) will allow combat-injured veterans to recover income taxes that were improperly collected by the Department of Defense (DOD) on certain disability payments. The DOD is directed to identify severance payments made after Jan. 17, 1991, from which income tax was improperly withheld and to notify affected veterans. The law extends the normal three-year period for filing a refund claim to the date that is one year after the DOD provides an affected veteran with notice of the improper withholding.
Also noteworthy is what the 114th Congress didn’t do before adjourning for the last time in January. Lawmakers left without passing legislation to extend any of 35 provisions that expired at the end of 2016. For individual taxpayers, these unextended “extenders” include:
- The exclusion for discharge of indebtedness on a principal residence [IRC §108]
- Treatment of mortgage insurance premiums as deductible qualified residence interest [IRC §163]
- The above-the-line deduction for qualified tuition and related expenses [IRC §222]
- The nonbusiness energy credit for energy-efficient improvements to a principal residence [IRC §25C]
Medical Expense Deductions
For most of your clients, the deduction floor for medical expenses has been set at 10 percent of adjusted gross income (AGI) since 2013. But that hasn’t been the case for your senior clients. For tax years 2013 through 2016, if either a client or a client’s spouse had reached age 65 before year end, the former 7.5 percent deduction floor continued to apply. For tax years beginning after Dec. 31, 2016, the floor beneath the itemized deduction for medical expenses of taxpayers who are age 65 or older increases from 7.5 percent of AGI to 10 percent of AGI [IRC § 213].
Leave Donation Programs
The IRS provided special tax treatment for leave donation programs in connection with certain natural disasters that occurred in 2016. The special tax treatment applies to donation programs for victims of severe storms and flooding in Louisiana that began on Aug. 11 and programs for victims of Hurricane Matthew, which ravaged the southeast United States from Florida to Virginia in September. Under a leave donation program, employees may donate vacation, sick or personal leave in exchange for cash payments to tax-exempt organizations providing relief for disaster victims. In the case of the IRS-approved programs, donated leave is not includable in income of wages of employees, and the employer may deduct the payments as business expenses or charitable contributions. To qualify, employer payments must be made before Jan. 1, 2018 [Notice 2016-55, Notice 2016-69].
Missed Retirement Plan Rollover Deadlines
As a general rule, to qualify for tax-free treatment, a rollover of funds from an IRA or workplace retirement plan to another eligible plan must be completed within 60 days. Clients who miss the rollover deadline can get a waiver from the IRS if failure to meet the deadline was due to casualty, disaster or other mitigating circumstances. In the past, the only way to get a waiver was to apply for a private letter ruling from the IRS. However, under new IRS rules, taxpayers can self-certify their eligibility for a waiver under specified circumstances, including a bank error, a misplaced distribution check, damage to the taxpayer’s residence, death or illness in the family, or a postal error. (See Rev Proc 2016-47 for a complete list of circumstances in which self-certification is permitted.) The IRS cautions that self-certification doesn’t guarantee a waiver; the IRS can later determine that a waiver is not justified. On the other hand, the new rules permit the IRS to grant a waiver on examination even if the taxpayer did not self-certify or obtain a ruling.
ITIN Replacements Required
Any individual filing a U.S. tax return must enter a taxpayer identification number on the return. Identification numbers are also required for dependents claimed on a return. Generally, this means a Social Security number (SSN). However, in the case of individuals who are not eligible for an SSN, the IRS issues individual tax identification numbers (ITINs).
In the past, ITINs did not carry an expiration date. However, a recent law change provides that an ITIN will expire if an individual fails to file a return or is not included as a dependent on another return for three consecutive years [IRC §6109(i)(3)(B)]. In addition, individuals who were issued ITINs before 2013 are required to renew their ITINs on a staggered schedule between 2017 and 2020.
Under prior rules, a creditor was generally required to furnish Form 1099-C, Cancellation of Debt, if the creditor did not receive any payment on a debt for 36 months. However, those rules were confusing to taxpayers and tax professionals because receipt of a 1099-C as a result of the 36-month rule did not necessarily mean that the debt was discharged or that the taxpayer had to report taxable income from discharge of the debt. New IRS regulations remove the 36-month rule effective for information returns required after 2016.
Installment Agreement Fees
The IRS has hiked the fees for taxpayers entering into installment agreements to pay their taxes [Reg. §§300.1; 300.2].
Effective of agreements normally entered into on or after Jan. 1, 2017, a regular installment agreement under which the taxpayer initiates periodic payment that’s set up in person, by phone or by mail will now cost $225, compared to $120 under prior rules. A taxpayer who sets up a direct debit agreement in person, by phone or by mail will pay a reduced fee of $107, up from $52.
By contrast, a regular agreement that is set up online will cost $149, while a direct debit online payment agreement goes for the bargain price of just $31. Prior rules did not provide reduced rates for online agreements.