By John W. Cashman, Jr., CPA, Tax Manager at Gray, Gray & Gray, LLP
With input from CPAmerica
They say “rust never sleeps,” and the same is apparently true of those people responsible for the U.S. Tax Code. In the last three months of 2014, a number of tax law provisions were revised, some were newly introduced, and others clarified by Tax Court rulings. Not every change affects all taxpayers, but one or more may have an impact on your current or future tax returns. Here’s a quick summary of several of the most recent year-end tax developments.
- A tougher IRA rollover rule. The law limits the number of IRA rollovers that can be made in any 1-year period to one. The Tax Court has held that the limit applies to all of an individual’s IRAs, even though the IRS had stated that the limit applies separately to each IRA an individual owns. The IRS announced that it will adopt the Tax Court’s more restrictive view for distributions after 2014. An individual receiving an IRA distribution on or after Jan. 1, 2015 cannot roll over any portion of the distribution into an IRA if the individual has received a distribution from any IRA in the preceding 1-year period that was rolled over into an IRA. However, as a transition rule for distributions in 2015, a distribution occurring in 2014 that was rolled over is disregarded for purposes of determining whether a 2015 distribution can be rolled over, provided that the 2015 distribution is from an IRA that neither made nor received the 2014 distribution.
- Standard mileage rates up – but also down – for 2015. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 57.5¢ per each business mile traveled after 2014. That’s an increase of 1.5¢ over 2014. But the 2015 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 23¢ per mile, 0.5¢ less per mile than last year.
- New tax-advantaged ABLE accounts. A new law allows states to establish tax-exempt “Achieving a Better Life Experience” (ABLE) accounts, which can be used to save for disability-related expenses. They can be created by individuals to support themselves or by families to support their dependents. Assets can be accumulated, invested, grown and distributed free from federal taxes. Contributions to the accounts are made on an after-tax basis and are not deductible. Assets in the account grow tax-free and are protected from tax as long as they are used to pay qualified expenses. Withdrawals are tax-free if the money is used for disability-related expenses including: education; housing; transportation; employment support; health, prevention, and wellness costs; assistive technology and personal support services. A nonqualified distribution is subject to income tax and a 10% penalty on the part of the distribution attributable to earnings. Each disabled person is limited to one ABLE account, and total annual contributions by all individuals to any one ABLE account can be made up to the inflation-adjusted gift tax exclusion amount ($14,000 for 2015).
- Affordable Health Care Act (ACA) impact on 2014 income tax returns. Individuals without healthcare coverage and those who don’t maintain coverage throughout the year must have an exemption or make an individual shared responsibility payment. Those who already have qualifying health care coverage will only need to check a box to indicate that they satisfy the individual shared responsibility provision when they file their tax returns.
Individuals and families who obtain coverage through the Health Insurance Marketplace (state or federal exchange) may be eligible for a premium tax credit. Eligible individuals and families can choose to have advance credit payments paid directly to their insurance company to lower what they pay out-of-pocket for their monthly premiums.
Early in 2015, individuals who bought health insurance through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, which includes information about their coverage and any premium assistance received. Individuals claiming the premium tax credit, including those who received advance payments of the premium tax credit, must file a federal income tax return for the year and attach Form 8962, Premium Tax Credit. (This is not new to most Massachusetts taxpayers, as the state has required proof of health insurance coverage for several years.)
- Hold that thought! Supreme Court to decide if premium credit is allowed for health insurance purchased on the federal exchange. The ACA makes the health care premium credit available for insurance purchased on an exchange established by a state. The federal exchange was established because many states did not establish their own exchanges. The IRS has issued regulations making the credit available for insurance purchased on a federal exchange. These regulations were challenged in court; one Circuit Court upheld them and another said they were invalid. After these conflicting decisions, the Supreme Court agreed to resolve the issue. The Court’s decision could affect approximately 5 million people receiving a credit for insurance purchased on the federal exchange.
- Group-affiliated personal service corporation avoids flat tax. Normally, a qualified personal service corporation (such as an employee-owned law firm or medical practice) is subject to a flat tax of 35%, unlike other corporations that are subject to graduated rates of 15%, 25% and 34%. The IRS sought to tax one qualified personal service corporation that was part of an affiliated group of corporations at the flat 35% rate. But the Tax Court said that the larger group’s consolidated income, including the income of the qualified personal service corporation, had to be taxed at the graduated rates.
- Ebola exclusion. The IRS has designated the Ebola outbreak occurring in the West African countries of Guinea, Liberia, and Sierra Leone as a qualified disaster for purposes of the income tax exclusion for qualified disaster relief payments.
If you have any questions about these recent tax developments, or about any federal, state or local tax issue, please contact Gray, Gray & Gray’s Tax Department.