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Don’t be in the dark: Federal tax changes for the 2014 filing season

July 6, 2022
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  2. Don’t be in the dark: Federal tax changes for the 2014 filing season

Tax season for 2014 returns will be here before you know it, and with it comes the necessity of putting new U.S. Internal Revenue Service (IRS) regulations into practice. The VSCPA wants to make your tax season as painless as possible, so here’s an overview of some of the changes the IRS put in place in 2014. This list is not all-inclusive, so be sure to go straight to the source and visit www.irs.gov/irb to be as current as possible.

MATERIAL ADVISORS AND LISTED TRANSACTIONS

The IRS issued final regulations in July dealing with penalties for material advisors who fail to file true, complete or timely disclosure returns with respect to reportable or listed transactions under Sec. 6707 of the U.S. Tax Code. The new regulations make the following changes:

  • The applicable penalty for a transaction qualifying as both reportable and listed is limited to a single penalty of the greater of $200,000 or 50 percent of the gross income derived by the material advisor (75 percent if the failure is international).
  • For failure to disclose more than one reportable or listed transaction, a separate penalty will be imposed for each transaction.
  • When calculating the penalty in the case of a listed transaction, the gross income derived from the transaction only includes fees earned in connection with the transaction for which the advisor was a material advisor.

LONGEVITY ANNUITY CONTRACTS

Another set of regulations covers longevity annuities, under which individuals pay a premium with part of their retirement account assets for an annuity that will start later in retirement and is guaranteed to run until death. Such annuities did not go well with minimum distribution rules requiring distributions to begin at age 70 ½ or at retirement, but the new regulations are designed to help promote the use of qualified longevity annuity contracts (QLAC). Annuities can qualify as QLACs under the following conditions:

  • The required premium must not exceed $125,000 or 25 percent of the individual’s account balance, whichever is lower.
  • The annuity contract must provide that payouts begin no later than the first day of the month following the purchaser’s 85th birthday.
  • The contract cannot be a variable, indexed or similar contract and may not provide for any commutation benefit, cash surrender right or any such feature unless specifically authorized by the IRS.
  • The contract may include a return-of-premium feature and a surviving spouse annuity, or may provide for a reduced annuity to a non-spouse beneficiary.
  • The contract must state that it is intended to be a QLAC. The regulations provide procedures for modifying existing annuity contracts.

PREMIUM TAX CREDITS FOR DOMESTIC VIOLENCE SURVIVORS

Final regulations released in July include rules that allow victims of domestic violence to claim the Premium Tax Credit for health insurance.

U.S. Treasury Department regulations released in 2012 require married couples to file joint income tax returns to obtain premium tax credits, which are available for individuals earning less than $44,000 and families of four earning less than $90,100. Victims of domestic abuse often file taxes separately from their spouse in order to protect themselves from future abuse.

To combat the disconnect, the IRS and the Treasury released guidance providing that “a married individual who is living apart from his or her spouse, and who is unable to file a joint return as a result of domestic abuse, will be permitted to claim a premium tax credit for 2014 while filing a tax return with a filing status of married filing separately.”

The regulations allow for survivors of domestic violence and spousal abandonment to claim the credits in future open enrollment periods.

RESEARCH EXPENDITURES

Other regulations amend the IRS’s definition of research and experimental expenditures, including a clarification that the ultimate success, failure, sale or other use of research is not relevant to a determination of eligibility for research-related tax credits under Sec. 174 of the Tax Code. The regulations also state that:

  • The Depreciable Property Rule in Secs. 1.174-2(b)(1) and 1.174-2(b)(4) is an application of the general definition of research or experimental expenditures and should not be applied to exclude otherwise eligible expenditures.
  • The term “pilot model” is defined as any representation or model of a product produced to evaluate or resolve uncertainty concerning the product during its development or improvement, including a fully functional representation or model of a product or a component of a product.
  • The new “shrinking-back rule” can be used to address situations in which the requirements are met with respect to a component part of a larger product, but not to the overall product itself.

TRUNCATED TAXPAYER IDENTIFICATION NUMBERS

The IRS issued final regulations on truncated taxpayer identification numbers (TTIN), used as a safeguard against identity theft. The final regulations retain the rule in the proposed regulations that TTINs may not be used on a return filed with the IRS. TTINs are also not permitted to be used:

  • Where prohibited by statute, regulation or other guidance published in the U.S. Internal Revenue Bulletin (IRB), form or instructions
  • Where a statute, regulation or other guidance published in the IRB, form or instructions specifically requires the use of a Social Security number, Individual Taxpayer Identification Number, Adoption Taxpayer Identification Number or Employer Identification Number

Also, a person or entity may not truncate its own taxpayer identification number on any tax form, statement or other document furnished to another person.

DEDUCTING COSTS OF ESTATES AND TRUSTS

Final regulations published in May offer guidance on which costs incurred by estates and trusts are subject to a 2 percent floor for miscellaneous itemized deductions.

The regulations in question affect estates and trusts other than grantor trusts with regard to Sec. 67(a) of the Tax Code, which provides that, for an individual taxpayer, miscellaneous itemized deductions are allowed only if the aggregate of those deductions exceeds 2 percent of adjusted gross income (AGI). Sec. 67 also excludes certain itemized deductions from the definition of “miscellaneous itemized deductions” and provides that the AGI of an estate or trust should be calculated the same way it would be for an individual.

The regulations also state that deductions for costs paid or incurred in connection with the administration of the estate or trust that would not have been incurred if the property were not held in the estate or trust should be treated as allowable in calculating AGI. Those deductions are not subject to the 2 percent floor for miscellaneous itemized deductions.