On December 18, 2015 President
Obama signed the “Protecting Americans from Tax Hikes Act of 2015” (PATH Act).
With significant publicity it was as if it was a Christmas present from
President Obama and Congress to the American people. A few weeks prior President
Obama and Congress played the role of the Christmas Grinch by passing
legislation to revoke passports of U.S. citizens who owe the Internal Revenue
Service an amount greater than $50,000.
United States Passport
Revocation
With little fanfare and buried a
thousand pages deep in a mundane bill is a section entitled “Revocation or
Denial of Passport In Case of Certain Tax Delinquencies.” If an individual has
“seriously delinquent tax debt” which is defined as an unpaid, legally
enforceable Federal tax liability of an individual which has been assessed, is
greater than $50,000 and with respect to which a notice of lien has been filed,
the Commissioner of Internal Revenue can send a certification of unpaid tax
debt to the Secretary of State to commence action to deny or revoke the
passport of said individual. The Commissioner of Internal Revenue must
contemporaneously notify the individual of such action and the individual has a
right to bring a civil action against the United States in a district court or tax
court. It is likely that by the time the individual receives the letter their
passport has already been revoked.
Why this dire consequence? It
has been reported that the Internal Revenue Service is owed $450 billion in
unpaid taxes. The Internal Revenue Service has great difficulty in collecting
unpaid taxes from Americans living outside the United States. While they can
obtain a judgment from a court in the United States to seize bank accounts and
other property, this judgment is mostly unenforceable outside the United
States. I am aware of U.S. citizens residing in Bermuda who have over $50,000
in unpaid income tax debt and who regularly receive threatening letters from
the IRS. I asked a local attorney if a Bermuda court would recognize an unpaid
tax judgment issued by a U.S. court and enforce that judgment in Bermuda. The
answer was “no” and I received that same response from attorneys in many other countries
outside the United States.
The Internal Revenue Service
used to have an office in Doylestown, Pennsylvania consisting of a manager and
7 staff that was responsible for collecting unpaid taxes from Americans and
foreign nationals living in Europe and Africa. During a meeting with the
manager I inquired how often his team traveled to Europe and Africa to chase
down delinquent taxpayers. His response was that they did not have a travel
budget and that their job was to write dunning letters to delinquent taxpayers.
When I asked if these delinquent taxpayers answered the letter his response
was, not really. This bill is expected to collect about $400 million of unpaid
tax over the next 10 years.
Over the last 5 years the
Internal Revenue Service has had significant cuts in staffing and funding. When the Internal Revenue Service became
aware of over 40,000 Americans with an account at UBS in Switzerland they did
not have the manpower to prosecute everyone who had not reported these accounts
or the income that they had received. With FATCA now supplying the Internal
Revenue Service with thousands of more names to investigate this new law will
likely assist the Internal Revenue Service in collecting back taxes. They no
longer need to bring an individual to trial, they can simply have the
Commissioner of Internal Revenue send a certification of unpaid debt to the
Secretary of State to commence action to deny or revoke the passport of said
individual.
“Protecting Americans From Tax Hikes Act of
2015” (PATH)
About 15 years ago Congress
passed a series of tax breaks that primarily affected low and middle income
taxpayers and were meant as a onetime stimulus for this group in an election
year. However, the tax breaks were so popular that each year Congress extended
the tax breaks for another year and this has gone on for the last 14 years. One
issue with these tax breaks was that Congress waited until December of each
calendar year to make the tax breaks effective retroactive until January 1. So
while everyone expected a continuance of the tax break, you could not plan for
it with any degree of certainty. This foolishness has mostly ended with the
passage of the PATH. Those changes that affect individuals are:
State and Local Sales Tax
Deduction The election to claim an
itemized deduction for state and local general sales taxes, in lieu of
deducting state and local income taxes, expired after December 31, 2015. PATH
makes the election permanent.
Teachers’ Classroom Expense
Deduction PATH permanently extends
the above-the- line deduction for elementary and secondary school teachers’
classroom expenses. It also modifies the deduction by indexing the $250 ceiling
amount to inflation beginning in 2016. Additionally, PATH includes
“professional development expenses” within the scope of the deduction.
Charitable Distributions from
IRA’s PATH permanently extends the
provision for individuals age 70 1/2 and older to be allowed to make tax-free
distributions from individual retirement accounts to a qualified charitable
organization. The treatment continues to be capped at a maximum of $100,000 per
taxpayer each year. Amounts in excess of $100,000 must be included in income
but may be taken as an itemized charitable deduction, subject to the usual
annual caps for contributions.
Child Tax Credit PATH makes permanent the reduced earned
income threshold amount of an unindexed $3,000. This provision had been
scheduled to expire after 2017. Under PATH, the child tax credit, available up
to $1,000 for qualifying dependents under age 17, may be refundable to the
extent of 15 percent of the taxpayer’s earned income in excess of $3,000.
American Opportunity Tax
Credit PATH makes permanent the
American Opportunity Tax Credit (AOTC), an enhanced version of the Hope
education credit. The AOTC has been available at an increased level of $2,500,
with adjusted gross income (AGI) phase-out amounts of $80,000 (single) and
$160,000 (married filing jointly). The AOTC had been scheduled to expire after
2017.
Earned Income Credit PATH makes permanent the increase ($5,000) in
phase-out amount for joint filers, scheduled to expire after 2017. PATH also
makes permanent the increased 45 percent credit percentage for taxpayers with
three or more qualifying children. Under prior law, both enhancements had been
available only through 2017.
Code Sec. 179 Expensing Pre-Act, the dollar limit for Code Sec. 179
expensing for 2015 had reverted to $25,000 with an investment limit of
$200,000. PATH permanently sets the Code Sec. 179 expensing limit at $500,000
with a $2 million overall investment limit before phase out (both amounts
indexed for inflation beginning in 2016). PATH also makes permanent the special
Code Sec. 179 expensing for qualified real property. PATH also removes the $250,000
cap related to this category of expenditure beginning in 2016.
100-Percent Gain Exclusion on
Qualified Small Business Stock The
100-percent exclusion allowed for gain on the sale or exchange of qualified
small business stock held for more than five years by non-corporate taxpayers
is made permanent. This benefit has proven a valuable method of funding certain
startups. With a five-year holding period, it obviously still requires a
long-term commitment.
Bonus Depreciation PATH
extends bonus depreciation (additional first-year depreciation) under a
phase-down schedule through 2019: at 50 percent for 2015-2017; at 40 percent in
2018; and at 30 percent in 2019.
Two-Year Extensions for
Individuals PATH renews several
extenders related to individuals, for two years through 2016. Because of their
retroactive application to the start of 2015, two-year provisions will be up
for renewal again at the end of 2016.
Qualified
Tuition/RelatedExpenses Deduction PATH extends through 2016 the above
the-line deduction for qualified tuition and fees for post-secondary education.
Mortgage Debt Exclusion PATH excludes from
income cancellation of mortgage debt on a principal residence of up to $2
million ($1 million for a married taxpayer filing a separate return) through
2016. PATH also modifies the exclusion to apply to qualified principal
residence indebtedness discharged in 2017 if discharge is made under a binding
written agreement entered into in 2016. Without an extension, debt that is
forgiven through a foreclosure, short sale or loan modification could be
treated as taxable income.
Pursuant to the requirements
relating to practice before the Internal Revenue Service, any tax advice in
this communication is not intended to be used, and cannot be used, for the
purpose of (I) avoiding penalties imposed under the United States Internal
Revenue Code, or (ii) promoting, marketing or recommending to another person
any tax related manner.
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