2016 Individual Tax Year in Review

Author:  Damien Martin

Damien Martin



BKD Family Office
Private Client Services

910 E. St. Louis Street, Suite 400
P.O. Box 1900
Springfield, MO 65801-1900 (65806)

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With the end of 2016 in sight, individual taxpayers and their advisors should consider the effects of recent tax legislation and IRS guidance.

The PATH Act

On December 18, 2015, the president signed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which provided retroactive, temporary and permanent extensions to numerous popular individual and business tax provisions. These are some key individual provisions the PATH Act retroactively extended and made permanent:

  • Deduction of state and local general sales taxes:  A taxpayer may elect to claim an itemized deduction for state and local general sales taxes in lieu of deducting state and local income taxes.
  • Exclusion of gain on sale of small business stock:  A noncorporate taxpayer may exclude all the gain realized on the disposition of qualified small business stock held for more than five years. This is subject to a per taxpayer limit of the greater of 10 times the basis in the stock or $10 million. The excluded portion of the gain also is excepted from treatment as an alternative minimum tax preference item.
  • Charitable distributions from an individual retirement account (IRA):  A taxpayer who is age 70½ or older can make tax-free distributions from an IRA to a qualified charitable organization—up to $100,000 per tax year. For more information, see “Year-End Planning.”

The PATH Act also made several taxpayer-friendly changes to the Section 529 plan distribution rules for tax years beginning after December 31, 2014:

  • The definition of qualified higher education expenses that qualify as eligible, tax-preferred distributions from
    §529 accounts was expanded to include computer technology and equipment.
  • The requirement to aggregate distributions from §529 accounts was modified to treat any distribution from a §529 account as only coming from that account, even if the taxpayer operates more than one.  This change may be beneficial if some or all distributions aren’t used to pay for qualified higher education expenses.
  • The treatment of refunds of tuition paid with distributions from a §529 account was modified to be treated as a qualified expense if the amount is recontributed to a §529 account within 60 days of receipt.

The following provisions only received a temporary extension under the PATH Act and expire at the end of 2016 absent future legislation:

  • Exclusion of income from discharge of principal residence indebtedness
  • Mortgage insurance premiums treated as qualified residence interest
  • Tuition and fees deduction
  • Nonbusiness energy property credit

For more information on the tax provisions included in the PATH Act, please read the BKD Alert or view this archived BKD webinar.

New Basis Consistency & Information Reporting Requirement

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 created a requirement that the tax basis of any property received from a decedent be consistent with the value reported on the estate tax return and added a new consistent basis reporting requirement. On March 4, 2016, the IRS provided additional guidance by issuing proposed regulations, which added clarification on many fronts, but also proposed several controversial provisions, including a “zero-basis” rule for after-discovered property or property omitted from the estate tax return as well as a reporting requirement on subsequent transfers of inherited property.

With the new reporting requirement, any estate’s executor with a gross estate in excess of the basic exclusion amount that was required to file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, after July 31, 2015, is required to file Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, to report the final estate tax value of property distributed or to be distributed to a beneficiary and furnish any person acquiring (or expected to acquire) property from the estate with a Schedule A. Importantly, for individual taxpayers, any beneficiary receiving a Schedule A from an estate also is required to file a Form 8971 and Schedule(s) A if all or any portion of property being reported—or that's required to be reported to them—on a Schedule A is subsequently transferred to a related transferee in a transaction in which the transferee determines their income tax basis by reference to the transferor’s basis, e.g., a transfer by gift. For this purpose, a related transferee includes a family member, controlled entity or trust of which the transferor is deemed the owner. The subsequent reporting is due 30 days after the date of the distribution or other transfer, and a penalty may be imposed for failure to file.

New Self-Certification Procedure for Late Retirement Plan Rollovers

In Revenue Procedure 2016-47, the IRS established a new self-certification procedure for recipients of qualified retirement plan distributions who inadvertently missed the 60-day requirement to roll the distribution to an eligible retirement plan on a tax-free basis. With the guidance, eligible taxpayers receive relief from missing the requirement if one or more of these 11 mitigating circumstances are met:

  • An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates
  • The distribution, having been made in the form of a check, was misplaced and never cashed
  • The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan
  • The taxpayer’s principal residence was severely damaged
  • A member of the taxpayer’s family died
  • The taxpayer or a member of the taxpayer’s family was seriously ill
  • The taxpayer was incarcerated
  • Restrictions were imposed by a foreign country
  • A postal error occurred
  • The distribution was made on account of a levy under §6331 and the proceeds of the levy have been returned to the taxpayer
  • The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information

For more information on the new self-certification procedure for late retirement plan rollovers, please read the BKD Alert.

Download the 2016 Year-End Tax Advisor here!

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