by Robert Fishbein, vice president and corporate counsel, Prudential Financial
This season brings tax changes you should know about as you’re preparing your 2015 return and planning for 2016 and beyond. Here are five areas to keep in mind.
There’s a Delayed Filing Date
If you’re a procrastinator filing at the last minute, you have more time this year. Because Friday, April 15 is a federal holiday, your 2015 income tax return is due the following Monday, April 18. This is also the due date to file for an extension until Oct. 15 or to make an IRA contribution for 2015.
The due date to file your return or for an extension may also be affected by state law. For example, if you live in Maine or Massachusetts, Monday April 18 is a state holiday and you don’t have to file returns until the 19th. But be careful, as the delayed filing date for the 2015 returns may not delay when you must make estimated tax payments.
There are New Steps for Fighting Fraud and ID Theft
Tax return preparation software may now require you to provide your driver’s license number for the IRS and state tax agencies to combat tax return fraud. However, you have no legal obligation to provide that information or to have a driver’s license to file a tax return. But depending on your software, you may need to provide information to file your return. It’s possible that withholding your driver’s license will slow the process.
More tax changes include new anti-ID theft/fraud measure is a 16-digit verification code for online filers. If the code is on your W-2, you’ll need to enter it when prompted by your tax software program. If you fail to provide the code, you won’t be able to e-file your return. Keep in mind not all W-2s will have the code.
Note Health Care Reporting Changes
More tax changes for this year dictate that you must report “minimum essential coverage,” or MEC. If you indicate so on line 61 of your Form 1040, you won’t be subject to a penalty tax. This is the first year employers are required to report if coverage qualifies as MEC, and they must send the applicable form to you by March 31, 2016 (hopefully you got in in time).
Of course, for early filers this means you may not have evidence of your coverage qualifying as MEC, but assuming you know that you have MEC, you can still complete line 61 and file your return for this tax season.
If you do not have MEC, you must pay the penalty tax — currently $325 per adult and $162.50 per child, up to a maximum of $975 — for each month you weren’t covered, unless you can demonstrate you’re eligible for an exemption. Examples include if coverage is considered unaffordable (more than 8 percent of household income per person), if you had a short coverage gap (fewer than three months), or if your income is below the tax return filing threshold.
Watch for Retroactive Reinstatements and Other Tax Changes
Until the end of 2014, taxpayers had been permitted for some time to deduct the greater of their state income tax or their state sales tax. This helped residents of states such as Florida and Texas that don’t have an income tax. The Protecting Americans from Tax Hikes Act of 2015 retroactively extended this provision for 2015. For those who have not tracked their state sales tax payments, there’s a table that provides a safe harbor deduction based on income. Also, the sales tax from the 2015 purchase of a new automobile can be added to the sales tax from the table.
Also reinstated retroactively to the beginning of 2015 are tax changes allowing distributions from an IRA to be paid directly to a charity and excluded from income. The amount donated to charity will avoid income tax. Without this provision, an individual would have to include the amount in income and take a charitable deduction that might not entirely offset the income amount. This provision is available up to $100,000 of charitable donations in a calendar year. You must be 70 ½ or older and required to take IRA distributions.
Roth Recharacterizations May Affect You this Tax Season
If you converted a traditional IRA to a Roth IRA in 2015, and if the converted investment has declined in value, you can recharacterize that amount and not pay income tax on an amount greater than the current value. The law allows this type of ‘do over’ option when you convert to a Roth IRA. For a 2015 conversion, you must recharacterize on or before Oct. 17, 2016 and not convert again to a Roth IRA until 2017.
Prudential Financial, its affiliates, and their financial professionals do not render tax or legal advice. Please consult with your tax and legal advisors regarding your personal circumstances.
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