The addition of these two credits to the required due diligence of paid preparers in preparing a return that claims either or both was made by the PATH Act (P.L. 114-113, 12/18/15). The statutory language added at §6695(g) implied that regulations were needed. The IRS released draft Form 8867 and instructions in summer 2016, but did not release the regulations until 12/5/16. [TD 9799 (12/5/16) and REG 102952-16 (12/5/16)]
This article explains the nature of and eligibility rules, who can claim the credit, qualifying expenses, the amount and limitations, and how to report them on form 1040 and supporting schedules.
In writing a summary of a recent Tax Court summary opinion, I realized that a 2015 law change may cause problems for some students trying to claim the American Opportunity Tax Credit (Section 25A), Lifetime Learning Credit (Sec. 25A) or Section 222 above the line tuition deduction starting in 2016. A 2015 law changes requires an individual to have received a Form 1098-T from the university in order to claim the tax benefit. Read More
On Monday, June 29th of 2015 President Obama signed into law H.R. 1295 entitled “The Trade Preferences Extension Act of 2015” (hereinafter “TPEA”) which not only extended a trade deal between the U.S. and sub-Saharan Africa but also included a number of tax-related provisions within the bill in connection to the Health Coverage Tax Credit (e.g., claimed on IRS Form 8885); the American Opportunity and Lifetime Learning Tax Credits (e.g., claimed on IRS Form 8863); and the Hope Scholarship Tax Credit (e.g., claimed on IRS Form 8863).
As a legislative synopsis from the Hill, the Senate approved TPEA by unanimous consent on June 24th of 2015 and within twenty four hours the House of Representatives on June 25th approved TPEA by a 286-to-138 margin. “I thought I’d start off the week with Read More
A Thomson Reuters tax analyst explains what’s new, changed, or no longer available on the 2012 individual income tax return. 13 Mar 2013
Shared in Parts I, II and III.
Tax breaks that no longer apply for 2012:
The District of Columbia first-time homebuyer credit cannot be claimed for homes bought after 2011.
Explanation of Provisions
These regulations propose to amend the regulations under sections 162 and 262. The proposed regulations under section 162 provide that expenses paid or incurred for local lodging may be deductible as ordinary and necessary expenses of a taxpayer’s trade or business, including the trade or business of being an employee. The proposed regulations provide a safe harbor for certain local lodging at a business meeting, conference, or other activity or function. Other local lodging expenses may be deductible as business expenses depending on the facts and circumstances.
The proposed regulations under section 262 provide that a taxpayer’s costs incurred for local lodging are personal expenses unless the expenses are deductible under section 162. Comments are specifically requested on whether the section 262 regulations should be amended to provide that local lodging expenses are not personal expenses if they are deductible under section 212.
The proposed regulations also amend the regulations under section 262 to remove references to section 217 that are obsolete. Section 217 was amended by the Revenue Reconciliation Act of 1993, Public Law 103-66 (107 Stat. 417). Under the amendments, lodging when not traveling away from home and meals are not deductible as moving expenses.
Par. 2. Section 1.162-31 is added to read as follows:
§1.162-31 Expenses paid or incurred for lodging when not traveling away from home.
(a) In general. Expenses paid or incurred for lodging when not traveling away from home (local lodging) generally are personal, living, or family expenses that are nondeductible under section 262(a). Under certain circumstances, however, expenses for local lodging may be deductible under section 162(a) as ordinary and necessary expenses paid or incurred in connection with carrying on a taxpayer’s trade or business, including a trade or business as an employee. Whether local lodging expenses are paid or incurred in carrying on a taxpayer’s trade or business is determined under all the facts and circumstances. One factor is whether the taxpayer incurs the expense because of a bona fide condition or requirement of employment imposed by the taxpayer’s employer. Expenses paid or incurred for local lodging that is lavish or extravagant under the circumstances or that primarily provides an individual with a social or personal benefit are not incurred in carrying on a taxpayer’s trade or business.
(b) Safe harbor for local lodging at business meetings and conferences. An individual’s expenses for local lodging will be treated as ordinary and necessary business expenses if—
(1) The lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function;
(2) The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter;
(3) If the individual is an employee, the employee’s employer requires the employee to remain at the activity or function overnight; and
(4) The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.
(c) Examples. The provisions of this section are illustrated by the following examples. In each example the employer and the employees meet all other requirements (such as substantiation) for deductibility of the expense and for exclusion from income as a working condition fringe or payment under an accountable plan.
Example 1. (i) Employer conducts training for its employees at a hotel near employer’s main office. The training is directly connected with employer’s trade or business. Some employees attending the training are traveling away from home and some employees are not traveling away from home. Employer requires all employees attending the training to remain at the hotel overnight for the bona fide purpose of facilitating the training. Employer pays the costs of the lodging at the hotel directly to the hotel and does not treat the value as compensation to the employees.
(ii) Employer has a noncompensatory business purpose for paying the lodging expenses. Employer is not paying the expenses primarily to provide a social or personal benefit to the employees. If the employees who are not traveling away from home had paid for their own lodging, the expenses would have been deductible under section 162(a) as ordinary and necessary business expenses of the employees. Therefore, the value of the lodging is excluded from the employees’ income as a working condition fringe under section 132(a) and (d).
(iii) Employer may deduct the lodging expenses, including lodging for employees who are not traveling away from home, as ordinary and necessary business expenses under section 162(a).
Example 2. (i) The facts are the same as in Example 1, except that the employees pay the cost of their lodging at the hotel directly to the hotel, Employer reimburses the employees for the cost of the lodging, and Employer does not treat the reimbursement as compensation to the employees.
(ii) Employer is reimbursing the lodging expenses for a noncompensatory business purpose and not primarily to provide a social or personal benefit to the employees. The employees incur the expenses in performing services for the employer. If employer had not reimbursed the employees who are not traveling away from home for the cost of the lodging, the expenses would have been deductible under section 162(a) as ordinary and necessary business expenses of the employees. Therefore, the reimbursements to the employees are made under an accountable plan and are excluded from the employees’ gross income.
(iii) Employer may deduct the lodging expense reimbursements, including reimbursements for employees who are not traveling away from home, as ordinary and necessary business expenses under section 162(a).
Shared in Parts I, II and III.
While it looked as if the U.S. Congress would go over the fiscal cliff and allow many tax provisions to expire, in the end, Congress extended most of the expiring provisions. This means that 2012 return preparation will not be as difficult as it could have been. “But that doesn’t mean you can let your guard down on the Form 1040,” says Jeffrey Pretsfelder, CPA/Esq., a senior tax analyst at Thomson Reuters. “Like every other year, you must be on top of new or changed provisions on the 2012 form 1040 and provisions that were in effect last year but are no longer in effect this year.”
Here are the top new or changed items on the 2012 Form 1040:
New items and changes that apply whether or not the individual is a business owner:
2010 Roth IRAs and pension distributions. In 2010, a taxpayer could have rolled over monies from a regular Individual Retirement Account (IRA) to a Roth IRA, converted a regular IRA to a Roth IRA, or taken similar steps with a “designated Roth account,” and deferred the taxes that were due on the rollover, conversion, etc. Part of that deferred tax is due as part of 2012 tax.
Transfers from IRA to charity. The provision that excludes up to $100,000 of qualified charitable distributions (distributions to a charity from an IRA if the taxpayer is at least 70 ½ years old and meets other requirements) has been extended. If the taxpayer elects, a qualified charitable distribution made in January 2013 will be treated as made in 2012.
Local lodging expenses may be deductible.
New rules permit businesses and employees to deduct local lodging expenses under limited circumstances.
New limits on first-year write-offs for vehicles. While a part of the cost of a vehicle may be deductible in many circumstances, there are limits. First-year limits for vehicles first placed in service in 2012 are $11,160 for autos and $11,360 for light trucks or vans (if bonus depreciation rules apply) and $3,160 and $3,360, respectively (if bonus depreciation rules do not apply).
Adoption credit less favorable. “The maximum credit you can take for adopting a child decreased from $13,360 per child for 2011 to $12,650 per child for 2012, notes Pretsfelder. “And, if it is no longer refundable because your credit exceeds your 2012 tax, the credit will reduce your tax to zero, but the excess amount is not refunded to you (although you may be able to carry it forward to 2013).”
Child tax credit form changes. New Form 1040, Schedule 8812 replaces Form 8812 for computing the refundable child tax credit. The schedule also contains a new section which must be completed if claiming either the refundable or the nonrefundable credit for one or more children who have individual taxpayer identification numbers (ITINs) instead of social security numbers.
Education credit form changes. Form 8863, Education Credits, has a significantly different format for 2012. New Part III asks for additional information about each student for whom the taxpayer is claiming an education credit. And a separate Part III must be completed for each student for whom the taxpayer is claiming a credit.
Inflation adjustments. As is the case every year, there are inflation-related adjustments for 2012. For example, the standard deduction, the deduction for each exemption, and the amount a taxpayer can earn and still get an IRA deduction, all increased based on inflation.
Tax payment voucher is mandatory. In past years, filing of Form 1040-V, Payment Voucher, was voluntary for paper (versus e-filed) returns where tax was
New items and changes that apply to business owners:
Decrease in special depreciation allowance. Businesses that acquired qualified property in 2011 could, in many cases, claim a 2011 special depreciation allowance equal to 100 percent of the cost of the property. With limited exceptions, a business that acquired qualified property in 2012 can only take a special depreciation allowance equal to 50 percent of the cost of the property.
Self-employment tax’s reduced rate. The self-employment tax rate is 13.3 percent. This is the same rate as applied to 2011, but it is lower than previous year rates.
Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)
The Internal Revenue Service has found that changes in Form 8863, Education Credits, are delaying more than 600,000 tax returns, many of which appear to come from H&R Block. The IRS acknowledged in an email Friday that it revised the form for tax year 2012 “to help taxpayers and tax preparers understand the qualifications for the American Opportunity Tax Credit. Checkboxes for lines 23-26 were added to confirm basic qualifications for taxpayers claiming this credit. If these lines are left blank, there will be a delay in the processing of the taxpayer’s return. To avoid delays, ensure your clients complete Form 8863 correctly.”
The IRS originally warned about the delays last month, telling preparers that they needed to fill out Yes or No in response to certain questions asking whether students had completed four years of post-secondary education before 2012 and whether they had ever been convicted before the end of 2012 of a federal or state felony for possession or distribution of a controlled substance (see IRS Warns of Problems with Education Credit Filings). However, it turns out the IRS had actually made further changes in the programming of the forms so that an N needed to be filled out instead of a No. The form itself, though, has checkboxes next to the words Yes and No. All this confusion has led to many frustrating refund delays for taxpayers, particularly at the nation’s largest tax prep chain, H&R Block. On Sunday, Block posted a message on its Facebook page saying it was working to resolve the issues with the IRS after being inundated with complaints from customers.
“H&R Block has confirmed with the IRS that there was an issue with certain tax returns filed before February 22, 2013 that included certain education tax credits claimed on Form 8863,” the company wrote. “We have worked with the IRS to expedite a solution to this issue for all of our affected clients. If you received this letter of notice requesting additional information for Form 8863 and already responded to the IRS, or have not received a notification to date, there is no additional action needed at this time. For those clients who have received notification from the IRS and have yet to respond, please call your local H&R Block office or 800-HRBLOCK. The office or customer service agent will be able to better serve you and provide next steps. For those clients who received the IRS notice regarding form 8863 that said it would take 6-8 weeks to receive a refund after this issue was resolved, we are assured it will not take that long. We continue to work with the IRS and as we have more specifics on timing and any other updated information, we will share it with our clients.”
An IRS spokesperson told MarketWatch on Tuesday that the problem was delaying the processing of about 10 percent of the approximately 6.6 million tax returns filed with the Form 8863. Block has apparently been the major recipient of thousands of complaints on Facebook and Twitter about the problem. The IRS is able to process the tax returns now that it knows the source of the errors, but because that means there are extra steps involved, taxpayers will still be subject to delays. One recent comment on Block’s Facebook page from a customer indicated they have been waiting a month and a half for their tax refund.
Block updated the Facebook page Tuesday to say that it was going to reach out individually to the taxpayers who were affected, referring obliquely to articles like the one on MarketWatch as well as other outlets like USA Today and Forbes about the problem. “Sorry for the late update but we’ve always assured you we would share information as soon as it becomes available,” said Block. “There continues to be a lot of information floating around regarding the Form 8863 issue that is impacting a number of our clients. We wanted to give you a place to go to get those facts and the next steps for those in this situation. In addition to this page on our website, we are reaching out to each and every one of you individually to give you direction and give you the facts. Please look for those emails, calls or letters starting tomorrow. Again, we apologize for the inconvenience this has caused and we’re glad to hear some clients are already seeing their refund status change due to the work with the IRS. Please keep checking here and on the website for the latest information.”
On the new page about the situation on its site, Block stated, “The IRS has informed us and other impacted providers that they are currently processing these returns. This review process means the IRS may need 4-6 weeks from this date to issue a refund. H&R Block clients are already reporting a change in their refund status since the IRS began processing these returns.”
Block added that the IRS is reminding taxpayers to check the “Where’s My Refund?” tool on IRS.gov to learn the status of their tax refund, but since the site is updated overnight by the IRS, taxpayers do not need to check it more than once a day. Early in tax season, the IRS asked taxpayers not to check “Where’s My Refund?” too often because it was getting bogged down with requests from anxious taxpayers (see IRS Asks Preparers and Taxpayers to Limit Use of ‘Where’s My Refund’ Tool).
Block said no additional action is needed for H&R Block clients who have already received an IRS letter requesting additional information for Form 8863 and already responded to the IRS; or have not received an IRS letter about Form 8863 to date. For those H&R Block clients who have received a letter from the IRS and have yet to respond, they are asked to call their local H&R Block office or 800-HRBLOCK. “The IRS has stopped sending letters based on this Form 8863 issue to this group of affected H&R Block clients,” Block noted.
The glitch is also causing problems for taxpayers who are applying for financial aid through the Free Application for Federal Student Aid program. Block advised that there are manual steps they can take that will allow their FAFSA application to proceed while their return is still processing. The Department of Education suggests that if the tax return has not yet been processed by the IRS, they can manually enter the tax return data on the application. They can then return to the online FAFSA to update the information when the return has been processed. The information about this is posted on the FAFSA section of the Department of Education’s website.
Block offered a statement of regret to its clients, saying, “H&R Block appreciates that this issue may cause problems for our clients and we are doing everything in our power to address the processing of these returns. We will continue to update clients as more information becomes available. We thank our clients for their patience while we continue to work with the IRS to expedite the filing process on their behalf.”
The delays in tax refunds this year after the last-minute fiscal cliff deal are also starting to have an impact on the economy at large. Walmart CFO Charles Holley told an investor conference Tuesday that the big box retailer has cashed $2.7 billion worth of tax refund checks this year so far in the U.S., compared to approximately $4 billion at this time last year, according to Reuters.
What with all the confusion this tax season, including the late start to the season and delays in forms including the one for education tax credits, the last thing that taxpayers and preparers needed was a major software bug caused by a difference of one letter in the alphabet. To paraphrase an old saying, sometimes…
“No really does mean No!”
What do you think? Feel Free To Comment.
By Michael Cohn, Editor-in-Chief, Accounting Today.com, March 13, 2013
Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)