With Congress deadlocked over major tax changes, the biggest news for 2015 is what Congress didn’t do. While eleventh-hour legislation retroactively extended some expiring tax provisions for 2014, those extensions do not carry into 2015. So, absent another last-minute legislative fix, your clients should not count on any of these tax breaks for 2015:
- Election to claim an itemized deduction for state and local sales taxes in lieu of state and local income taxes
- $250 above-the-line deduction for expenses of teachers
- Deduction for mortgage insurance premiums
- Exclusion for discharged home mortgage interest
- Parity for exclusion of employer-provided mass transit and parking benefits
- Nonbusiness energy property credit for energy improvements to a residence
- Above-the-line deduction for qualified tuition and related expenses
- Increased deduction for qualified conservation contributions of real property to charity
- Tax-free IRA distributions for charity
- Credit for health insurance costs of TAA-eligible individuals and PBGC pension recipients
Tax Changes Taking Effect in 2015
Despite the lack of major legislation or administrative guidance, there are some tax changes taking effect in 2015 that may affect your clients’ returns.
One IRA Rollover per Year. Effective Jan. 1, 2015, a client may make only one tax-free IRA rollover per year regardless of how many IRAs the clients owns. Any additional rollovers will not qualify for tax-free treatment, even if the rollovers involve different IRAs.
In the past, the IRS interpreted this one-rollover-per-year rule in Code Section 408(d)(3) to apply on an IRA-by-IRA basis [see Prop. Reg. Åò1.408-4(b)(4)(ii)]. However, in a 2014 decision, the Tax Court held that the one-rollover-per-year rule applies on an aggregate basis [Bobrow, T.C. memo 2014-21]. The IRS subsequently announced that it would follow the Tax Court and withdraw the proposed regulation and revise IRS publications to reflect the Tax Court’s interpretation [IRS Announcement 2014-32].
The IRS will apply the Tax Court interpretation to IRA distributions occurring on or after Jan. 1, 2015. Thus, as a general rule, a client receiving an IRA distribution on or after that date cannot roll over any portion of the distribution if the client received a distribution from any IRA in the preceding 12-month period that was rolled over.
Transition Relief. As a transition for 2015, a distribution occurring in 2014 that was rolled over will be disregarded in determining whether a 2015 distribution is eligible for tax-free rollover treatment, provided the 2015 is not from the IRA that made or received the 2014 rollover distribution.
IRS guidance makes it clear that a rollover from a traditional IRA to a Roth IRA (a Roth IRA conversion) is not subject to the one-rollover-per-year limitation and will be disregarded in applying the limitation to other rollovers. However, a rollover between Roth IRAs will preclude a separate rollover during the one-year period between a client’s individual IRAs, or vice versa.
The one-rollover-per-year rule does not apply to a rollover from a qualified retirement plan to an IRA, nor does it apply to trustee-to-trustee transfers.
Practice Tip. When a rollover is barred by the one-rollover, clients should consider the option of a direct trustee-to-trustee transfer from one IRA to another. A trustee-to-trustee transfer can be accomplished by having the trustee transfer amounts directly from one IRA to another or by having the trustee write a check payable to the receiving IRA trustee.
New Rules for Retirement Plan Distributions. When a retirement plan contains both pre-tax and after-tax amounts, each distribution from the account is treated as including a prorated share of after-tax and pre-tax amounts. (Note, however, that special rules apply to annuity distributions). Under pre-2015 rules, if a single distribution included multiple disbursements, the IRS rules treated each portion as a separate distribution [see IRS Notice 2009-68]. Each part of the distribution was treated as including both after-tax and pre-tax amounts. For example, if a participant directed a distribution to be rolled over in part to the regular IRA and in part to a Roth IRA, each rollover distribution was treated as consisting partly of pre-tax and partly after-tax. The participant could not direct that all pre-tax amounts be directed to the traditional IRA in order to continue to defer tax on those amounts. Instead, pre-tax amounts allocable to the Roth IRA were subject to tax at the time of the rollover.
Effective for distributions in 2015 and later years, a new IRS notice provides that all disbursements that are made at the same time are treated as a single distribution [IRS Notice 2014-54]. If the pretax amount of the aggregated distribution is less than the amount that is directly rolled over to another qualified plan or IRA, then the entire pre-tax amount will be assigned to the rolled over portion of the distribution. If a direct rollover is applied to two or more plans or IRAs, then the participant can select how the pre-tax amount is allocated by informing the plan administrator of the allocation before the rollover. Thus, in our example, the participant can specifically direct pre-tax amounts to the traditional IRA.
Practice Tip. Although multiple disbursements are treated as a single distribution for purposes of allocation of pre- and after-tax amount, each disbursement may be required to be reported on a separate Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. However, the IRS says the allocation rules in its new notice must be taken into account in determining the amount of pre-tax contributions allocated among direct rollovers and amounts paid to the plan participant.
Inflation Adjusted Penalties. Clients who perennially file late or don’t pay on time, should be forewarned that tax penalties are going up. The Tax Increase Prevention Act (Pub. L. No. 113-295 12/19/2014) provides for indexing of certain tax penalties for returns required to be filed after 2014, including the penalty for failure to file a return or pay tax under Code Section 6651.
Practice Tip. Tax pros should be forewarned that the law change also provides for indexing of the tax return preparer penalties under Code Section 6695. These include penalties for failure to sign a client’s return, to provide a copy of the return to the client, to retain a copy or list of returns prepared, to provide an identifying number on a prepared return, to follow due diligence requirements in calculating the earned income credit, and penalties for negotiating a client’s check.
Limit on electronic refunds. Taxpayers can have their refunds electronically deposited into a variety of financial accounts, including checking, savings, and prepaid debit card accounts. The IRS touts direct deposit refunds as quicker and safer than paper checks. However, starting in 2015, the IRS will limit the number of refunds electronically deposited into a single financial account or pre-paid debit card to three. The fourth and subsequent refunds automatically will convert to a paper refund check and be mailed to the taxpayer. Affected taxpayers will receive a notice informing them that the account has exceeded the direct deposit limits and that they will receive a paper refund check in approximately four weeks if there are no other issues with the return.
The IRS notes that the vast majority of taxpayers will not be affected by this limitation. However, the limitation may affect some taxpayers, such as families in which the parent’s and children’s refunds are deposited into a family-held bank account. Taxpayers in this situation should make other deposit arrangements or expect to receive paper refund checks.
Practice Tip. While continuing to encourage the use of direct deposits, the IRS says it is imposing the three-refund limit to prevent refund fraud. The three-refund limit is also intended to prevent tax return preparers from obtaining payment by directly depositing all or part of clients’ refunds in their own accounts. The IRS emphasizes that a refund must only be direct deposited into an account in the taxpayer’s name. Preparer fees cannot be recovered by directly depositing a client’s refund to the preparer’s account or by opening a joint bank account with taxpayers. These actions are subject to penalties under the Internal Revenue Code and to discipline for preparers subject to Treasury Circular 230.