Reference: IRC Sec 25D and IRS “Residential Property Updated Q&A” [Aug 2016]

The 30% tax credit has been extended for installations completed prior to 12/31/19 for primary residence and second home. (This credit is not available on rentals). From 1/1/2020 through 12/31/2020, the credit is 26%. From 1/1/21 through 12/31/2021, the credit is 22%.

After 12/31/2021, the credit is not available unless extended further by Congress.

Reference: Lowe v. Commissioner, TC Memo 2016-206 & IRS Pub 504, Table 3

Since 2005, divorced parents have had to meet the “physical presence test” to claim their children as dependents.  The child must have lived with the parent for more than half of the year OR the parent who meets that test must give up his/her dependency exemption by filing Form 8332.

In this case, the mother wasn’t the custodial parent and lost the dependency exemption and child tax credit because she couldn’t prove that the child lived with her for more than half of the year as required under Code Sec 152(c).  KEEP GOOD RECORDS… and note that a “day” is counted based on where the child is at midnight.

Reference: IR 2016-141, 10/27/2016

While many qualified plan limits remain unchanged from 2016, some did change.  Here’s two common ones from that list:

Defined contribution plans: Code Sec 415(c)(1)(A) limit increases from $53,000 to $54,000.

Compensation limit: The maximum annual compensation taken into account for plan calculations under various code sections (401, 404, and 408) increases from $265,000 to $270,000. 

Other changes can be viewed in the Bulletin itself.

Ref: United States Tax Reporter Income paragraph 31,114.

For 2017, the Social Security wage base has increased to $127,200 (from $118,500 in 2016). This means that the maximum Social Security paid by an individual on his/her wages in 2017 will be $127,200 * 6.2% = $7,886.40.

Medicare remains unchanged at 1.45% of wages up to $200,000 and 2.35% on wages over $200,000 (without limit).  [The additional 9/10 percent was added as part of the ACA (aka Obamacare) to “wealthy individuals”]..

Source: IRS Rev Proc 2016-47

Generally, once per year, you can take money out of a retirement plan and roll into an IRA or other qualified retirement plan within 60 days.

Under this new procedure, the IRS allows missing the 60 day period for cause under specific circumstances. Those reasons are:

1. Error by the financial institution receiving the contribution
2. The distribution check was misplaced and not cashed
3. The distribution was deposited into a new account thought to be an eligible retirement plan (but it wasn’t)
4. The taxpayer’s residence was severely damaged
5. A member of the taxpayer’s family died
6. The taxpayer or a member of his/her family was seriously ill
7. The taxpayer was incarcerated
8. Restrictions were imposed by a foreign country
9. A postal error occurred
10. Two other circumstances as described in the Revenue Procedure.

30 day safe harbor: The contribution must be placed into a qualifying account within 30 days after the reason listed above no longer exists.

This certification is made in a written statement to the plan administrator or an IRA trustee, custodian, or issuer using the pattern letter in the Procedure. Administrators will likely develop forms for this purpose in short order.

This is great news for taxpayers which will keep them from having to seek an IRS Private Letter Ruling when extenuating circumstances regarding the 60-day rollover period exist.

Source: Affordable Care Act

Since 2013, seniors who itemize on their tax returns have been allowed to deduct health care expenses (e.g., medical, dental, chiropractic, pharmacy, etc) when the total exceeds seven and one-half percent (7.5%) of their adjusted gross income.

Starting in 2017: Seniors NO LONGER GET A BREAK. Under this under-planned and ruthless law, they will now join the rest of the taxpayers and be able to deduct only when the total exceeds ten percent (10%) of their adjusted gross income.

Example: A senior making $60,000 adjusted gross income and in the 15% tax bracket would pay $225 more in federal tax when applying this new law (assuming that he/she had enough deductible medical-type expenses and itemized under the old 7.5% rule).

Source: FTB Tax News, July 2016. and IRS Topic 503 – Deductible Taxes (May 25, 2016)

The California PACE program allows qualifying taxpayers to install energy-saving home improvements and repay those outlays at the time (and with) their property tax payments to the county.

Both the FTB and IRS have made it clear, “Therefore, under the above federal guidance, … neither the principal nor interest amounts paid on a taxpayer’s property tax bill for energy saving projects are deductible real estate taxes.  However, taxpayers may be able to deduct some or all of the interest as a home mortgage interest deduction..”

In our opinion, the existence of these new programs may renew the efforts by the FTB to require the attachment of property tax bills to returns in the future.  (This was proposed a few years ago, but was withdrawn due to administrative costs of the program).  Regardless, this will be a new audit area… especially triggered where property taxes jump from year-to-year.