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Review of Tax Return Due Dates, Including Extensions

The Federal Income TaxReturn

The due date for 2016 individual federal income tax returns (Forms 1040, 1040A, and 1040EZ) is April 17, 2017, which falls on a Friday. Taxpayers can request an automatic six-month extension of time to file their return by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, by the original due date of April 17,2017.

If the taxpayer’s return is not filed by the initial due date or by the extended due date (assuming an extension request is timely filed), the law imposes on the taxpayer a penalty of 5% of the amount of tax required to be shown on the return (less any earlier payments and credits) for the first month it is overdue, plus an additional 5% for each month (or fraction of a month) the failure continues without reasonable cause. However, the penalty is capped at 25% of the amount of tax required to be shown on the return (less any earlier payments andcredits).

There is a minimum penalty for failure to file any income tax return within 60 days of the due date (including extensions), except if due to reasonable cause and not willful neglect. This minimum penalty is the lesser of $135 or the amount of tax required to be shown on the return. Thus, the minimum penalty cannot be imposed unless there is an underpayment of tax and taxpayers who owe no taxes can file late and still avoid this penalty; there is also no penalty for failure to file if a taxpayer is due arefund.

The 5% failure-to-file penalty is reduced (but not below the above minimum) by the amount of any failure-to-pay penalty (which is one-half of 1%) for that month. If the failure to file is fraudulent, however, the penalty is increased to 15% for each month (or fraction of a month) the return is overdue, up to a 75%maximum. 

The FBAR Report

Under the Bank Secrecy Act (“BSA”), taxpayers who have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, that had a balance of $10,000 or more at any time during 2015 are required to report the account annually by filing a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (formerly Form TD F-90.22-1 and commonly known as the “FBARfor “foreign bank account reporting”). The 2016 FBAR returns must be received by the IRS no later than April 17, 2017. No extensions are permitted. All FinCEN Forms 114 must now be filed electronically. 

The BSA E-Filing System supports electronic filing of FinCEN Form 114 (either individually or in batches) through a secure network. The BSA E-Filing System is hosted on a secure website accessible on the Internet at http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html. Instructions for electronically filing the FinCEN Form 114 can be found at:http://bsaefiling.fincen.treas.gov/docs/FBAR_EFILING.pdf.


New Tax Law/RecentUpdates

Citizens and residents of the United States are subject to tax on their worldwide income. Thus, regardless of where a U.S. citizen or U.S. resident lives, works, or has income, the income tax filing requirements are applicable tothem.

 

Filing requirement thresholds are based on the personal exemption and standard deduction available to a particular taxpayer. Since the personal exemption amount for 2015 is $4,000 and the 2015 standard deduction for single taxpayers is $6,300, a taxpayer who qualifies for “single” return filing status is required to file a federal income tax return for 2015 if their gross income exceeds $10,300 ($4,000 personal exemption + $6,300 standard deduction = $10,300). The following table summarizes the basic 2015 filingthresholds:

 

 

 

Personal Exemption

Basic Standard Deduction

 

Filing Threshold

Single

$4,000

$6,300

$10,300

Married-Joint

$8,000

$12,600

$20,600

Married-Separate

$4,000

$6,300

$10,300

Head ofHousehold

$4,000

$9,250

$13,250


To determine the actual 2015 filing threshold, the additional standard deduction must also be taken into account. Given the availability of the additional standard deduction, the maximum filing threshold for 2015 would apply to married taxpayers filing a joint return that are both 65 or older and both blind, in which case a federal income tax return would only have to be filed if gross income exceeded$25,600.

Since the maximum over 65/blind additional standard deductions on any return is four (two foreach spouse), the complete spectrum of filing thresholds for 2015 is summarized asfollows:

 

 

Number of 65 or Over/BlindAdditions

 

0

1

2

3

4

Single

$10,300

$11,850

$13,400

---

---

Married-Joint

$20,600

$21,850

$23,100

$24,350

$25,600

Married-Separate

$10,300

$11,550

$12,800

$14,050*

$15,300*

Head ofHousehold

$13,250

$14,800

$16,350

---

---

 

New Personal ExemptionAmounts

The Internal Revenue Code (“Code”) provides that a certain amount of a taxpayer’s income is not subject to income tax. This is achieved by allowing a deduction known as the “personal exemption” on each individual tax return. Personal exemption amounts and other deductions (either the standard deduction of itemized deductions) are subtracted from adjusted gross income (“AGI”) in computing taxable income. Generally, there is allowed a personal exemption for the taxpayer and one for the taxpayer’s spouse (if filing a married-joint return) for the taxable year. There are also exemptions allowed for dependents but these are called dependent exemptions. The 2015 personal exemption amount is $4,000, up from $3,950 for2014.

 

Not all taxpayers will be able to take the full amount of this exemption. The amount begins to phase- outonce the taxpayer’s AGI reaches a certain level. For most taxpayers, the personal exemption is reduced by 2% for each $2,500 (or any fractional portion of $2,500) by which the taxpayer’s AGI exceeds a threshold amount based on the taxpayer’s filing status. For taxpayers filing married-separate returns the 2% reduction applies for each $1,250 (or any fractional portion of $1,250) by which the taxpayer’s AGI exceeds the thresholdamount.

 

The threshold amounts for 2015 are $154,950 for taxpayers filing married-separate returns, $258,250 forsingletaxpayers,and$309,900fortaxpayersfilingmarried-joint(aswellasqualifying widow/widower taxpayers). Because the phase-out is 2% for each $2,500 of AGI ($1,250 in the caseof married-separate taxpayers) exceeding the threshold, mathematically the personal exemptions of a taxpayer will be completely eliminated when AGI exceeds the threshold by $122,500 ($61,250 for married-separate taxpayers). The chart below summarizes these threshold and complete phase-out amounts for 2015 personalexemptions:

 

FilingStatus

Phase-OutBegins

Phase-OutComplete

Married FilingJointly

309,900

432,400

QualifyingWidow(er)

309,900

432,400

Head ofHousehold

284,050

406,550

Single

258,250

380,750

Married FilingSeparately

154,950

216,200

 

 

New Standard Deduction Amounts

Most taxpayers have two options with respect to determining deductions to arrive at taxable income. Generally, taxpayers may choose either the standard deduction allowed for all taxpayers with a given filing status (as detailed below) or they may instead choose to itemize their deductions on Schedule A of Form 1040. The one exception to this rule applies to married taxpayers who file married-separate returns. In that case, if one spouse chooses to itemize, the other spouse must also itemize and may not take the standard deduction; in other words, the standard deduction is zero for a taxpayer filing a married-separate return whose spouse itemizes. 

The standard deduction is composed of the “basic” standard deduction and an “additional” standard deduction for taxpayers who are age 65 or older, blind, or both. The amount of the basic standard deduction depends on the taxpayer’s filing status. For the 2015 tax year the basic standard deduction for single taxpayers as well as those filing married-separate returns (subject to the requirement for such taxpayers to itemize as discussed above) is $6,300. Taxpayers who qualify for the head-of-household filing status get a standard deduction of $9,250. Married taxpayers who file married-joint returns are allowed a standard deduction of $12,600 on their 2015 jointreturn.

For tax year 2015, the basic standard deduction of individuals who can be claimed as dependents by another taxpayer is limited to the greater of: (i) $1,000 or (ii) $350 plus the individual’s earned income for the year (limited to a maximum of$6,300). 

For those taxpayers filing single or head-of-household returns for 2015, the additional standard deduction is $1,550. The amount of the additional standard deduction for married taxpayers(whether

Filing married-joint or married separate) is $1,250. Remember that an additional standard deduction is allowed for each taxpayer (i.e., both spouses on a married-joint return) who has attained the age of 65 by the end of the tax year and for each taxpayer who isblind.

A married taxpayer who files a married-separate return can claim an additional standard deduction based on their spouse’s age or blindness if their spouse has no gross income and cannot be claimed as a dependent of another taxpayer. 

For purposes of the additional standard deduction, a taxpayer is considered to have attained the age of 65 on the day before their 65th birthday.2 Thus, a taxpayer whose 65th birthday is January 1, 2016 (i.e., a taxpayer who was born on January 1, 1951) is entitled to the additional standard deduction on his or her 2015 federal income taxreturn.

A taxpayer is considered blind if his or her centralvisual acuity does not exceed 20/200 in the better eye with correcting lenses, or if his or her visual acuity, though greater than 20/200, is accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees. An individual who is claiming the additional standard deduction for blindness should obtain a statement form an eye doctor or registered optometrist certifying their condition.


IRA Rollover Per Year Limit

 

Generally, a distribution from an IRA or a qualified plan is includible in gross income. There are important exceptions to this rule regarding “rollovers.” An IRA rollover is defined as a distribution from the IRA to the taxpayer that is subsequently re-deposited by the taxpayer into the same IRA account or into another IRA. Rollovers are distinguished from trustee-to-trustee transfers, where the funds are paid directly by one IRA trustee to another IRA trustee, and conversions of traditional IRAs into RothIRAs.

With respect to rollovers, a taxpayer does not have to include in his or her gross income any amount distributed from an IRA if that taxpayer deposits the amount into another eligible plan (including an IRA) within 60 days.3 This provides for a great deal of planning flexibility for taxpayers, allowing, for example, a taxpayer to use amounts in his or her IRA account for a short term financial need. As long as the amount withdrawn is re-deposited into a qualified account within 60 days, there is no income inclusion. 

Note, however, that a rollover generally requires that 20% of the amount distributed be withheld for taxes. This is the case unless the payout: (1) is part of (or in excess of) a required minimumdistribution;

(2) a distribution that constitutes one of a series of substantially equal periodic payments; or (3) a hardship distribution from a 401(k) or 403(b) plan. A hardship distribution is one made on account of an immediate and heavy financial need that is necessary to satisfy that need. The financial need must be for medical care, housing, or educational expenses. A series of substantially equal periodic payments must be made at least annually for a specified period of at least ten years or for the life (or life expectancy) of the recipient or joint lives or expectancies of the recipient and his or her designated beneficiary.

The tax statute law limits the taxpayer to one IRA-to-IRA rollover in any 12-month period.4 In the past, the IRS has interpreted this limitation as applying on an IRA-by-IRA basis, meaning that a rollover from one IRA to another would not affect a rollover involving other IRAs of the same individual. In other words, a taxpayer could engage in as many rollovers as he or she wished, as long as they were from different IRAaccounts.

Since the limitation only applied to rollovers, other transactions escape the application of the limit. For example, trustee-to-trustee transfers between IRAs are not limited. Likewise, conversions from traditional IRAs to Roth IRAs are notlimited.

Because this is a change in the IRS’s long-standing interpretation, some relief is being granted with respect to rollovers that occurred in 2014. IRA distributions rolled over in 2014 will not prevent a 2015 distribution from being rolled over provided the 2015 distribution is from a different IRA involved in the 2014 rollover. For example, suppose the taxpayer has three traditional IRAs (IRA-A, IRA-B andIRA-C).

Assume that in 2014 the taxpayer took a distribution from IRA-A and rolled it into IRA-B. That taxpayer could not roll over a distribution from IRA-A or IRA-B within one year of the 2014 distribution but could roll over a distribution from IRA-C. This transition rule applies only to 2014 distributions and only if different IRAs are involved. Therefore, if the taxpayer took a distribution from IRA-A on January 1, 2015, and rolled it over into IRA-B the same day, he or she could not roll over any other 2015 IRA distributions. The taxpayer could, however, convert one or more of the traditional IRAs into RothIRAs.

In the future, if the taxpayer receives a distribution from an IRA of previously untaxed amounts, he or she must include the amounts in gross income if they made an IRA-to-IRA rollover at any time during the preceding 12 months and will be subject to the 10% early withdrawal tax on the amounts included in gross income if the taxpayer has not reached the age of 59 1/2. If the limitation is violated and the taxpayer deposits the distributed amounts into another (or the same) IRA, such amounts may be treated as excess contributions and taxed at 6% per year as long as they remain in the IRA.Inclusion from gross income of discharge of qualified principal residenceindebtedness

TIPA extends through 2014 the exclusion from gross income of a discharge of qualified principal residence indebtedness. Qualified principal residence indebtedness is acquisition indebtedness up to $2 million with respect to the taxpayers principal residence. The limit is $1 million for married individuals filing separately. It includes indebtedness incurred in the acquisition, construction, or substantial improvement of a principal residence that is secured by the residence, as well as refinancing of debt to the extent the amount does not exceed the amount of the refinanced indebtedness. “Principal residence” has the same meaning as under the home sale exclusion rules of Code section121.

Parity for employer-provided mass transit and parkingbenefits

Notwithstanding the statutory limits on the exclusion of qualified transportation fringe benefits, a parity provision requires that the monthly dollar limitation for (1) transit passes and (2) transportation in a commuter highway vehicle between home and work (including van pools) must be applied as if it were the same as the dollar limitation for that month for employer-provided parking. TIPA extends this parity provision through 2014, so the maximum monthly exclusion amount for transit passes and van pool benefits so that these transportation benefits match the exclusion for qualified parking benefits. These fringe benefits are excluded from an employee’s wages for payroll tax purposes, and from gross income for income tax purposes.

Mortgage insurance premiums treated as qualified residence interest

Premiums paid or accrued by a taxpayer during the tax year for qualified mortgage insurance in connection with acquisition indebtedness for a taxpayers qualified residence is treated as qualified residence interest subject to a phase-out based on the taxpayers adjusted gross income under a special rule. TIPA extends through 2014 the treatment of qualified mortgage insurance premiums as interestfor purposes of the mortgage interest deduction. This deduction phases out ratably for taxpayers with adjusted gross income of $100,000 to $110,000 (half those amounts for married taxpayers filing separately).

Deduction of state and local general salestaxes

Under a special temporary rule taxpayers are allowed to elect (on Schedule A of Form 1040) to deduct state and local general sales and use taxes instead of state and local income taxes. With limited exceptions, a sales or use tax is general if imposed at one rate with respect to the retail sale of a broad range of classes of items. TIPA extends through 2014 the option to take an itemized deduction for state and local general sales taxes in lieu of an itemized deduction for state and local income taxes. The taxpayer may either deduct the actual amount of sales tax paid in the tax year, or, alternatively, an amount prescribed by the IRS.

 

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