The Consolidated Appropriations Act of 2016 entered into law on December 18, 2015. This is a far reaching legislation that authorized $1.1 trillion in spending and $700 billion in tax breaks. In this blog, we focus on a few clauses that are important to our clients. This includes the permanent extension of various expired tax provisions, which is beneficial as it removes uncertainty to the future. Also included are new restrictions, penalties, and requirements for claiming credits which of course raise the level of compliance and consequences for non-compliance. The changes affect the Child Tax Credit, the American Opportunity Credit, and the Earned Income Tax Credit.
Child Tax Credit
The Child Tax Credit allows a $1,000 tax credit to a taxpayer for each qualifying child under the age of 17. Eligibility is subject to income falling within certain thresholds. The Additional Child Tax Credit is a refundable portion of this credit that is limited to 15% of the excess of taxable income over $3,000. The threshold was scheduled to increase from $3,000 to $10,000, however the new legislation permanently sets the threshold at $3,000.
Example:
- Taxpayer has $20,000 of earned income for the year. The calculation to determine the maximum additional child tax credit under new legislation is ($20,000 – $3,000) x 15% = $2,550. Whereas the calculation to determine the maximum additional child tax credit without new legislation would have been ($20,000 – $10,000) x 15% = $1,500.
American Opportunity Tax Credit
The American opportunity credit allows a $2,500 tax credit to a taxpayer for each eligible student with qualified educational expenses. Eligibility is subject to income being below certain amounts. There is a refundable portion of this credit of up to $1,000. The credit was originally set to expire in 2017, however the new legislation makes the credit permanent. The legislation also requires taxpayers to report the employer identification number (EIN) of the educational institution to which the taxpayer makes qualified payments.
Penalties
The legislation also includes new penalties on taxpayers who fraudulently or recklessly claim the child tax credit and new due diligence requirements on tax preparers who file a return with the credit.
Retroactive Claims Eliminated
Additionally, the legislation prohibits retroactive claims of the child tax credit on both amended and original returns. It does this by preventing taxpayers from claiming the credits for any prior year in which the taxpayer or qualifying child did not have a taxpayer identification number (ITIN or SSN). Taxpayers are no longer allowed to file a tax return and claim any of these credits if either the taxpayer or qualifying child has an identification number that was issued after the due date for filing the return for the taxable year.
This clause could reduce credits for some taxpayers even if they do everything on a timely basis. Issuance of social security numbers for taxpayers living overseas can often be delayed for six months or more. The issuance dates are clearly printed on the social security cards.
Tip: Make sure to apply for an automatic six month tax filing extension if you are awaiting the issuance of one or more social security cards for members of your family. As long as the cards are issued prior to the tax filing deadline, including extensions, then the relevant credits remain valid.