Richard R. Hammar | Congress passes massive spending, tax bills. This article is a supplement for the 2016 Church & Clergy Tax Guide produced by Church Law & Tax.
Effect on churches and church staff
In the closing days of 2015, Congress passed a massive spending bill (the "Consolidated Appropriations Act of 2016") to fund the federal government through the end of fiscal year 2016, and a tax bill (the "Protecting Americans from Tax Hikes Act of 2015," or "PATH Act") that, among other things, extended several expiring tax provisions. The two bills amount to some 2,500 pages of text. This article addresses those provisions in each Act that pertain to taxes, and have direct relevance to churches and church staff.
Key point. The congressional Joint Committee on Taxation estimates that the tax provisions will cost $622 billion over the next ten years.
The PATH Act makes over 20 tax relief provisions permanent, including the following:
1. Child tax credit
An individual may claim a tax credit of $1,000 for each qualifying child under the age of 17. The aggregate amount of child credits that may be claimed is phased out for individuals with income over certain threshold amounts. Specifically, the child tax credit amount is reduced by $50 for each $1,000 (or fraction thereof) of modified adjusted gross income over $75,000 for single individuals or heads of households, $110,000 for married individuals filing joint returns, and $55,000 for married individuals filing separate returns. Modified AGI includes certain otherwise excludable income.
To the extent the child tax credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit (the "additional child tax credit") equal to 15 percent of earned income in excess of a threshold dollar amount. This threshold dollar amount is indexed for inflation. Congress previously set the threshold at $3,000 for taxable years 2009 to 2017.
The PATH Act makes permanent the earned income threshold of $3,000.
2. American opportunity tax credit
The American Opportunity Tax Credit is available for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Under this tax credit, taxpayers receive a tax credit based on 100 percent of the first $2,000 of tuition and related expenses (including course materials) paid during the taxable year and 25 percent of the next $2,000 of tuition and related expenses paid during the taxable year. Forty percent of the credit is refundable. This tax credit is subject to a phaseout for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly).
In 2012, Congress extended the American Opportunity Tax Credit for five additional years, through 2017. The Protecting Americans from Tax Hikes Act of 2015 makes this credit permanent.
3. Enhancements to the earned income tax credit made permanent
Under prior law, working families with two or more children qualified for an earned income tax credit equal to 40 percent of the family’s first $12,570 of earned income. In 2009 Congress increased the earned income tax credit to 45 percent for families with three or more children and increased the beginning point of the phaseout range for all married couples filing a joint return (regardless of the number of children) to lessen the marriage penalty.
In 2012, Congress extended for five additional years, through 2017, the 2009 enhancements that increased the EITC for families with three or more children and increased the phaseout range for all married couples filing a joint return.
The Protecting Americans from Tax Hikes Act of 2015 makes these enhancements permanent.
4. Extension of the deduction for certain expenses of elementary and secondary school teachers
In 2012, Congress extended for two years the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom.
This provision expired at the end of 2014, but was made permanent for 2015 and future years by the Protecting Americans from Tax Hikes Act of 2015. The Act also indexes the $250 maximum deduction amount for inflation, and provides that expenses for professional development are also eligible expenses for purposes of the deduction. However, the provisions pertaining to indexing the $250 maximum deduction amount and qualifying professional development expenses apply to taxable years beginning after December 31, 2015.
5. Extension of parity for exclusion from income for employer-provided mass transit and parking benefits
Qualified transportation fringe benefits provided by an employer are excluded from an employee’s gross income for income tax purposes and from an employee’s wages for employment tax purposes. Qualified transportation fringe benefits include parking, transit passes, vanpool benefits, and qualified bicycle commuting reimbursements.
Qualified transportation fringe benefits also include a cash reimbursement (under a bona fide reimbursement arrangement) by an employer to an employee for parking, transit passes, or vanpooling. In the case of transit passes, however, in general, a cash reimbursement is considered a qualified transportation fringe benefit only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.
Before February 17, 2009, the amount that could be excluded as qualified transportation fringe benefits was subject to one monthly limit for combined transit pass and vanpool benefits and a higher monthly limit for qualified parking benefits. Effective for months beginning on or after February 17, 2009, and before January 1, 2015, parity in qualified transportation fringe benefits was provided by temporarily increasing the monthly exclusion for combined employer-provided transit pass and vanpool benefits to the same level as the monthly exclusion for employer-provided parking. As of January 1, 2015, a lower monthly limit again applies to the exclusion for combined transit pass and vanpool benefits. Specifically, for 2015, the amount that can be excluded as qualified transportation fringe benefits is limited to $130 per month in combined transit pass and vanpool benefits and $250 per month in qualified parking benefits. For 2016, the monthly exclusion limit for combined transit pass and vanpool benefits remains at $130; the monthly exclusion limit for qualified parking benefits increases to $255.
The Protecting Americans from Tax Hikes Act of 2015 reinstates parity in the exclusion for combined employer-provided transit pass and vanpool benefits and for employer-provided parking benefits and makes parity permanent. As a result, for 2015, the monthly limit on the exclusion for combined transit pass and vanpool benefits is $250, the same as the monthly limit on the exclusion for qualified parking benefits. Similarly, for 2016 and later years, the same monthly limit will apply on the exclusion for combined transit pass and vanpool benefits and the exclusion for qualified parking benefits.
6. Deduction for state and local sales taxes
Congress enacted legislation in 2004 providing that, at the election of the taxpayer, an itemized deduction may be taken for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes. This provision was added to address the unequal treatment of taxpayers in the nine states that assess no income tax. Taxpayers in these states cannot take advantage of the itemized deduction for state income taxes. Allowing them to deduct sales taxes helps offset this disadvantage.
This provision expired at the end of 2014 but was made permanent for 2015 and future years by the Protecting Americans from Tax Hikes Act of 2015.
7. Tax-free distributions from individual retirement plans for charitable purposes
Congress enacted legislation in 2006 allowing tax-free qualified charitable distributions of up to $100,000 from an individual retirement account ("IRA") to a church or other charity. Note the following rules and conditions:
- A qualified charitable distribution is any distribution from an IRA directly by the IRA trustee to a charitable organization, including a church, that is made on or after the date the IRA owner attains age 70½.
- A distribution will be treated as a qualified charitable distribution only to the extent that it would be includible in taxable income without regard to this provision.
- This provision applies only if a charitable contribution deduction for the entire distribution would be allowable under present law, determined without regard to the generally applicable percentage limitations. For example, if the deductible amount is reduced because the donor receives a benefit in exchange for the contribution of some or all of his or her IRA, or if a deduction is not allowable because the donor did not have sufficient substantiation, the exclusion is not available with respect to any part of the IRA distribution.
This provision expired at the end of 2014 but was made permanent for 2015 and future years by the Protecting Americans from Tax Hikes Act of 2015.
8. Extension and expansion of charitable deduction for contributions of food inventory
The Protecting Americans from Tax Hikes Act of 2015 reinstates and makes permanent the enhanced deduction for contributions of food inventory for contributions made after December 31, 2014. For taxable years beginning after December 31, 2015, the Act modifies the enhanced deduction for food inventory contributions in the following ways:
First, the ten-percent limit on charitable contribution deductions by corporations are made subject to a limitation of 15 percent of taxable income. The general ten-percent limitation for a corporation does not apply to these contributions, but the ten-percent limitation applicable to other contributions is reduced by the amount of these contributions. Qualifying food inventory contributions in excess of these 15-percent limitations may be carried forward and treated as qualifying food inventory contributions in each of the five succeeding taxable years in order of time.
Second, in the case of any contribution of apparently wholesome food which cannot or will not be sold solely by reason of internal standards of the taxpayer, lack of market, or similar circumstances, or by reason of being produced by the taxpayer exclusively for the purposes of transferring the food to an organization described in section 501(c)(3), the fair market value of such contribution shall be determined (1) without regard to such internal standards, such lack of market or similar circumstances, or such exclusive purpose, and (2) by taking into account the price at which the same or substantially the same food items (as to both type and quality) are sold by the taxpayer at the time of the contributions (or, if not so sold at such time, in the recent past).
The PATH Act extends some expiring tax provisions for only two years. These include:
9. Extension of above-the-line deduction for qualified tuition and related expenses
An individual is allowed a deduction for qualified tuition and related expenses for higher education paid by the individual during the taxable year. The deduction is allowed in computing adjusted gross income. Qualified tuition and related expenses include tuition and fees required for the enrollment or attendance of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer with respect to whom the taxpayer may claim a personal exemption, at an eligible institution of higher education for courses of instruction of such individual at such institution. The expenses must be in connection with enrollment at an institution of higher education during the taxable year, or with an academic period beginning during the taxable year or during the first three months of the next taxable year. The deduction is not available for tuition and related expenses paid for elementary or secondary education.
The maximum deduction is $4,000 for an individual whose adjusted gross income for the taxable year does not exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for other individuals whose adjusted gross income does not exceed $80,000 ($160,000 in the case of a joint return). No deduction is allowed for an individual whose adjusted gross income exceeds the relevant adjusted gross income limitations, for a married individual who does not file a joint return, or for an individual with respect to whom a personal exemption deduction may be claimed by another taxpayer for the taxable year. The deduction is not available for taxable years beginning after December 31, 2014.
The amount of qualified tuition and related expenses must be reduced by certain scholarships, educational assistance allowances, and other amounts paid for the benefit of such individual.
The PATH Act reinstates this deduction for 2015, and extends it through 2016.
10. Various clean energy tax benefits
The PATH Act extends through 2016 several energy conservation provisions in the tax code, including:
- the credit for alternative fuel vehicle refueling property installed at a taxpayer's residence
- the credit for energy-efficient new homes
- the credit for fuel cell vehicles
The PATH Act contains a number of provisions under the heading "program integrity." These include:
11. Modification of filing dates of returns and statements relating to employee wage information and nonemployee compensation
Employers must report wage amounts paid to employees on information returns and provide the employee with an annual statement showing wages paid, taxes withheld, and contact information for the employer by January 31 of the following calendar year, using Form W-2. Employers must file an information return with the Social Security Administration (“SSA”) by February 28 of the year following the calendar year for which the return must be filed, reporting wages paid to employees and taxes withheld from employee wages, using Form W-3. However, the deadline for filing Form W-3 (with copies of Forms W-2) with the SSA is extended to March 31 if the form is filed electronically.
Employers must furnish a Form 1099-MISC by January 31 to any person who is paid $600 or more in "nonemployee compensation" during the previous year. Nonemployee compensation generally includes fees for professional services, commissions, awards, travel expense reimbursements, or other forms of payments for services performed for the payor’s trade or business by someone other than in the capacity of an employee. Employers send copies of Forms 1099-MISC issued during the year with a Form 1096 transmittal form to the SSA by February 28 of the following year. As with Form W-3, the deadline for filing Form 1096 is extended to March 31 if the form is filed electronically.
Deadline for Filing Information Returns for Calendar Year 2015
(due in 2016)
deadline using paper forms
deadline if file the form electronically
Deadline for Filing Information Returns for Calendar Year 2016
(due in 2017)
deadline using paper forms
deadline if file the form electronically
Note: if a deadline falls on a weekend, the deadline is the next business day.
The PATH Act requires that Forms W-2, W-3, 1099-MISC, and 1096, be filed by January 31, and eliminates the extended due date (March 31) for electronically filed Forms W-3 and 1096.
These changes are effective for returns and statements relating to calendar years beginning after 2015.
Additionally, the Act requires that no credit or refund for an overpayment for a taxable year shall be made to a taxpayer before the 15th day of the second month following the close of that taxable year, if the taxpayer claimed the EITC or additional child tax credit on the tax return. Individual taxpayers are generally calendar year taxpayers, thus, for most taxpayers who claim the EITC or additional child tax credit this rule would apply such that a refund of tax would not be made to such taxpayer prior to February 15th of the year following the calendar year to which the taxes relate. At the time that a taxpayer files a return claiming a refundable credit, the IRS is generally not in possession of information needed to confirm the taxpayer’s eligibility for such credit, even though employers must report wage amounts paid to employees on information returns and provide the employee with an annual statement showing the aggregate payments made and contact information for the payor by January 31 of the following calendar year. This provision will provide the IRS with additional time to review refund claims for both the EITC and child tax credit in order to reduce fraud and incorrect payments.
The provision pertaining to the payment of certain refunds applies to credits or refunds made after December 31, 2016.
12. Safe harbor for de minimis errors on information returns, payee statements, and withholding
An employer that is required to file information return statements (Forms W-3, 1096) with the SSA, or furnish payee statements (Forms W-2 and 1099-MISC) to employees or contractors, is subject to a penalty that varies based on when, if at all, the information return is filed. The failure to file and failure to furnish penalties are identical, and are adjusted annually to account for inflation.
In 2015, Congress increased the penalties for failure to file information returns (Forms W-3 and 1096) and failure to furnish payee statements (Forms W-2 and 1099-MISC) to the following amounts for information returns and payee statements due after December 31, 2015: The first-tier penalty is $50 per return (if a correct return filed within 30 days after due date); the second-tier penalty is $100 per return (if a correct return filed by August 1); and a third-tier penalty of $250 per return (if a correct return filed after August 1).
For failures or misstatements due to intentional disregard, the penalty per return or statement increased to $500, with no calendar year limit. No distinction between small businesses and other persons required to report is made in such cases.
The PATH Act creates a "safe harbor" from the application of the penalty for failure to file a correct information return and the penalty for failure to furnish a correct payee statement in circumstances in which the information return or payee statement is otherwise correctly filed but includes a de minimis error of the amount required to be reported on such return or statement.
In general, a de minimis error of an amount on the information return or statement need not be corrected if the error for any single amount does not exceed $100. A lower threshold of $25 is established for errors with respect to the reporting of an amount of withholding or backup withholding. The provision requires broker reporting to be consistent with amounts reported on uncorrected returns which are eligible for the safe harbor. If any person receiving payee statements requests a corrected statement, the penalty for failure to file a correct information return and the penalty for failure to furnish a correct payee statement would continue to apply in the case of a de minimis error.
The provision applies to information returns (Forms W-3 and 1096) required to be filed and payee statements (Forms W-2 and 1099-MISC) required to be furnished after December 31, 2016.
13. Prevention of retroactive claims of earned income credit, child tax credit, and American Opportunity Tax Credit
The PATH Act denies to any taxpayer the EITC, child credit, and American opportunity tax credit, with respect to any taxable year for which such taxpayer has a taxpayer identification number that has been issued after the due date for filing the return for such taxable year. Similarly, a qualifying child (in the case of the EITC and child credit) or a student (in the case of the American opportunity credit) is not taken into account with respect to any taxable year for which such child or student is associated with a taxpayer identification number that has been issued after the due date for filing the return for such taxable year.
The provision generally applies to any return of tax, and any amendment or supplement to any return of tax, which is filed after the date of the enactment of the Act (December 18, 2015). However, the provision shall not apply to any return of tax (other than an amendment or supplement to any return of tax) for any taxable year which includes the date of the enactment, if such return is filed on or before the due date for such return of tax.
14. Restrictions on taxpayers who improperly claimed credits in a prior year
A taxpayer who was previously disallowed the EITC may not claim the EITC for a period of ten taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit was due to fraud. Such disallowance period is two years in the case of a taxpayer for which there was a final determination that the taxpayer’s EITC claim was due to reckless or intentional disregard of rules and regulations (but not to fraud).
The PATH Act expands the disallowance rules that apply to the EITC to the child tax credit and the American opportunity tax credit. As a result, if an individual claims the child tax credit or the American opportunity credit in a taxable year, and is denied the credit, and such claim for credit was determined to be due to fraud, or reckless or intentional disregard of the rules, that individual may not claim the credit for the next ten or two years, respectively.
The provision is effective for taxable years beginning after December 31, 2015.
15. Increase the penalty applicable to paid tax preparers who engage in willful or reckless conduct
Tax return preparers are subject to a penalty for preparation of a return or refund claim with respect to which an understatement of tax liability results. If the understatement is due to an “unreasonable position,” the penalty is the greater of $1,000 or 50 percent of the income derived (or to be derived) by the return preparer with respect to that return. Any position that a return preparer does not reasonably believe is more likely than not to be sustained on its merits is an “unreasonable position” unless the position is disclosed on the return or there is “substantial authority” for the position. There is a substantial authority for a position if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.
If the understatement is due to willful or reckless conduct, the penalty increases to the greater of $5,000 or 50 percent of the income derived (or to be derived) by the return preparer with respect to that return.
The PATH Act increases the penalty rate on paid tax return preparers for understatements due to willful or reckless conduct to the greater of $5,000 or 75 percent of the income derived (or to be derived) by the preparer with respect to the return or claim for refund. This provision is effective for returns prepared for taxable years ending after the date of enactment (December 18, 2015).
16. Employer identification number required for American opportunity tax credit
For the American opportunity credit (in addition to the other credits with respect to amounts paid for educational expenses), no credit may be claimed by a taxpayer with respect to the qualifying tuition and related expenses of an individual, unless that individual’s taxpayer identification number is included on the tax return. The tax code imposes no reporting requirement with respect to the identity of the educational institution attended by the individual.
The PATH Act requires that taxpayers claiming the American opportunity tax credit provide the employer identification number of the educational institution attended by the individual to whom the credit relates. This provision requiring the employer identification number is effective for taxable years beginning after December 31, 2015.
17. Rollovers permitted from other retirement plans into SIMPLE retirement accounts
Certain small employers can establish a simplified retirement plan called the savings incentive match plan for employees (“SIMPLE”) retirement plan. SIMPLE plans can be adopted by employers: (1) that employ 100 or fewer employees who received at least $5,000 in compensation during the preceding year; and (2) that do not maintain another employer-sponsored retirement plan. A SIMPLE plan can be either an individual retirement arrangement (an “IRA”) for each employee or part of qualified cash or deferred arrangement (a “section 401(k) plan”).
Generally, distributions from employer-sponsored retirement plans and IRAs can be rolled over on a nontaxable basis to another employer-sponsored retirement plan or IRA. However, under prior law, a distribution from a SIMPLE IRA during the two-year period beginning on the date the employee first participated in the SIMPLE IRA could be rolled over only to another SIMPLE IRA. In addition, because the only contributions that may be made to a SIMPLE IRA are contributions under a SIMPLE plan, distributions from other employer-sponsored retirement plans and IRAs could not be rolled over to a SIMPLE IRA, even after this two-year period.
The PATH Act permits rollovers of distributions from employer-sponsored retirement plans and traditional IRAs (that are not SIMPLE IRAs) into a SIMPLE IRA after the expiration of the two-year period following the date the employee first participated in the SIMPLE IRA (the two-year period during which the additional income tax on distributions from a SIMPLE IRA is 25 percent instead of 10 percent).
There is a two-year grace period for an employer that establishes and maintains a SIMPLE IRA for one or more years and satisfies the 100 employee limit but fails to meet the 100 employee limit in a subsequent year, provided that the reason for the failure is not due to an acquisition, disposition, or similar transaction involving the employer.
This provision applies to contributions to SIMPLE IRAs made after the date of enactment of the bill (December 31, 2015).
18. Church plans
The "Church Plan Clarification Act" was introduced in Congress in 2013 but was not enacted. It was reintroduced in 2015 as part of the PATH Act, and corrects five regulatory issues confronting church retirement plans:
- Controlled Group Rules. The Church Plan Clarification Act establishes rules for aggregation of church-related entities for benefits rules and testing purposes that reflect the unique structural characteristics of religious organizations. Currently, the controlled group rules for tax-exempt employers may require certain church-affiliated employers to be included in one controlled group (i.e., treated as a single employer), even though they have little relation to one another. A modification is necessary to the controlled group rules to ensure that multiple church-affiliated entities – which may be related theologically, but have little or no relation to one another in terms of day-to-day operation – are not inappropriately treated as a single employer under the tax code.
- Grandfathered Defined Benefit (“DB”) Plans. Internal Revenue Code (“IRC”) section 403(b) church DB plans established before 1982 are called grandfathered DB plans and were intended to be treated and continue to operate as DB plans. The Church Plan Clarification Act would clarify that that such plans must comply with the benefit accrual limitations applicable to defined benefit plans under IRC section 415(b) and not the accrual limitations applicable to defined contribution plans under IRC section 415(c). This clarification would prevent unintended consequences that can arise from application of both limitations as provided by current law, principally harm to clergy who are lower-paid and closest to retirement.
- Automatic Enrollment. The Church Plan Clarification Act equalizes the availability of automatic enrollment for church and conventional private-sector retirement plans by preempting state laws that may be inconsistent with including auto-enrollment features in church retirement plans.
- Transfers Between 403(b) and 401(a) Plans. It is not uncommon for churches or church-related employers to establish an IRC section 401(a) qualified plan on their own, only to subsequently decide that they would prefer to participate in their denomination’s IRC section 403(b) plan. Current regulations, however, do not allow transfers and mergers between a 403(b) church retirement plan and a 401(a) qualified church retirement plan. This limitation on transfers and mergers increases complexity and administrative costs for church employers and creates more confusion for covered employees when they are covered by more than one plan maintained by the pension board (e.g., multiple account balances, statements, etc.). The Church Plan Clarification Act would allow for such mergers and transfers, decreasing the complexity and administrative costs resulting from current law.
- 81-100 Trusts. The Church Plan Clarification Act allows special tax-exempt investment vehicles (often referred to as “group trusts,” “collective trusts,” or “81-100 trusts”) to accept pooled church plan assets. Many church pension boards hold, on a pooled basis for investment purposes, plan assets and non-plan church-related assets devoted exclusively to church purposes, allow churches the benefit of the board’s greater resources, investment skills, and economies of scale. These pension boards are currently prohibited from investing pooled assets in 81-100 trusts, which forecloses an attractive investment opportunity that achieves diversification at low cost.
The changes made to the controlled group rules and the provision relating to limits on defined benefit section 403(b) plans apply to years beginning before, on, or after the date of enactment (December 18, 2015). The provision relating to automatic enrollment is effective on the date of enactment. The provision relating to plan transfers and mergers applies to transfers or mergers occurring after the date of enactment. The provision relating to investments in group trusts applies to investments made after the date of enactment.
Political Activities by Churches
The Senate rejected a provision in the House version of the Omnibus Appropriations Act that would have denied funds for the IRS to determine that a church is not exempt from taxation for participating in, or intervening in, a political campaign on behalf of (or in opposition to) any candidate for public office unless the IRS Commissioner consented to such a determination, the Commissioner notifies the tax committees of Congress, and the determination is effective 90 days after such notification.
Tax Provisions Included in the Consolidated Appropriations Act of 2016
The Consolidated Appropriations Act of 2016, also enacted by Congress in December of 2015 and which funds the government through fiscal year 2016, contains a few tax provisions, including the following:
- The Act provides a two-year moratorium on the excise tax on high cost health plans ("Cadillac Tax"), provided under the Affordable Care Act. The 40 percent tax was to take effect in 2018 and was imposed on plans that cost more than $10,200 for single health plans and $27,500 for family plans. The Act postpones the tax until 2020.
- The Act provides a one-year extension of the Internet Tax Freedom Act, which bans states and localities from taxing Internet access or placing multiple and discriminatory taxes on Internet commerce, but allows grandfathered states and localities through June 2020 to phase-out existing taxes.
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