Retirement Plans Can Make Loans, Hardship Distributions to Victims of Hurricane Matthew

From the IRS –

Retirement Plans Can Make Loans, Hardship Distributions to Victims of Hurricane Matthew

WASHINGTON —The Internal Revenue Service today announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Matthew and members of their families. This is similar to relief provided this summer to Louisiana flood victims.

Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.

Retirement plans can provide this relief to employees and certain members of their families who live or work in disaster area localities affected by Hurricane Matthew and designated for individual assistance by the Federal Emergency Management Agency (FEMA). Currently, parts of North Carolina, South Carolina, Georgia and Florida qualify for individual assistance. For a complete list of eligible counties, visit https://www.fema.gov/disasters. To qualify for this relief, hardship withdrawals must be made by March 15, 2017.

The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

This broad-based relief means that a retirement plan can allow a victim of Hurricane Matthew to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.

Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in the announcement.

Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less.  Under current law, hardship distributions are generally taxable. Also, a 10 percent early-withdrawal tax usually applies. Therefore, this should be used as a last option.

Further details are in Announcement 2016-39, posted today on IRS.gov. More information about other relief related to Hurricane Matthew can be found on the IRS disaster relief page.

IRS Now Accepting ITIN Renewal Applications

From the IRS –

IRS Now Accepting ITIN Renewal Applications; Taxpayers Encouraged to Act Soon to Avoid Processing Delays in 2017

WASHINGTON — The Internal Revenue Service reminds taxpayers affected by recent changes involving the Individual Taxpayer Identification Number (ITIN) program that they can now begin submitting their ITIN renewal applications to the IRS.

Under the Protecting Americans from Tax Hikes (PATH) Act of 2015 passed by Congress and signed into law last year, any ITIN not used on a federal tax return at least once in the last three years will no longer be valid for use on a tax return as of Jan. 1, 2017.

If a taxpayer has an ITIN that is scheduled to expire and needs to file a tax return, it’s important not to delay. By submitting the application package in the next few weeks ITIN taxpayers may avoid unnecessary delays and allow for smoother and faster processing.

As part of this effort, the IRS has embarked on a wider education effort to share information with ITIN holders. To help taxpayers, the IRS has prepared a variety of informational materials, including flyers and fact sheets, available in several languages on IRS.gov. In addition to English and Spanish, materials are available in Chinese, Korean, Haitian Creole, Russian and Vietnamese.

The IRS continues to work with partner groups and others in the ITIN community to share information widely about these important changes.

ITINs are used by people who have tax filing or payment obligations under U.S. law but who are not eligible for a Social Security Number. ITIN holders who have questions should visit the ITIN information page on IRS.gov and take a few minutes to understand the guidelines.

Who Should Renew an ITIN

Only ITIN holders who need to file a tax return in 2017 need to renew their ITINs. Taxpayers will need to have a current ITIN in order to file a federal return in 2017. Others do not need to take any action.

  • Taxpayers with ITINs that haven’t been used on a federal income tax return in the last three years won’t be able to file a return unless their ITINs are renewed.
  • ITINs with the middle digits 78 or 79 (xxx-78-xxxx; xxx-79-xxxx) need to be renewed even if the taxpayer has used it in the last three years. The IRS recently mailed more than 300,000 letters (also available inSpanish on IRS.gov) alerting taxpayers with ITINs with middle digits of 78 or 79 of the need to renew their ITINs.

Taxpayers with an ITIN with middle digits of 78 or 79 have the option to renew ITINs for their entire family at the same time. Those who have received a renewal letter from the IRS can choose to renew the family’s ITINs together even if family members have an ITIN with middle digits other than 78 or 79. Family members include the tax filer, spouse and any dependents claimed on the tax return.

How to Renew an ITIN

To renew an ITIN, a taxpayer must fill out a Form W-7 and submit all required documentation. The IRS began accepting ITIN renewals on Oct. 1. There are three ways to submit the W-7 application package:

  • Mail the Form W-7 — along with original identification documents or copies certified by the agency that issued them — to the IRS address listed on the Form W-7 instructions. The IRS will review the identification documents and return them within 60 days.
  • Taxpayers have the option to work with Certified Acceptance Agents(CAAs) authorized by the IRS to help taxpayers apply for an ITIN. CAAs will review all documentation for a taxpayer and certify that an ITIN application is correct before submitting it to the IRS for processing. A CAA can also certify passports and birth certificates for dependents. This saves taxpayers from mailing original documents to the IRS.
  • In advance, taxpayers can call and make an appointment at a designated IRS Taxpayer Assistance Center in lieu of mailing original identification documents to the IRS.

A federal tax return need not be attached to the Form W-7 application if an ITIN is being renewed. However, taxpayers must still note a reason for needing an ITIN on the Form W-7. See the Form W-7 instructions for detailed information.

Reminder for Parents and Students: Check Out College Tax Credits for 2016 and Years Ahead

From the IRS –

Reminder for Parents and Students: Check Out College Tax Credits for 2016 and Years Ahead

WASHINGTON ― With another school year now in full swing, the Internal Revenue Service today reminded parents and students that now is a good time to see if they qualify for either of two college tax credits or other education-related tax benefits when they file their 2016 federal income tax returns next year.

In general, the American Opportunity Tax Credit or Lifetime Learning Credit is available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer, spouse and dependents. The American Opportunity Tax Credit provides a credit for each eligible student, while the Lifetime Learning Credit provides a maximum credit per tax return.

Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year.  To claim these credits on their tax return, the taxpayer must file Form 1040 or 1040A and complete Form 8863, Education Credits.

The credits apply to eligible students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. The credits are subject to income limits that could reduce the amount taxpayers can claim on their tax return.

To help determine eligibility for these benefits, taxpayers should visit theEducation Credits Web page or use the IRS’s Interactive Tax Assistant tool. Both are available on IRS.gov.

Normally, a student will receive a Form 1098-T from their institution by Jan. 31, 2017. This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits.

Many of those eligible for the American Opportunity Tax Credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified education expenses paid during the entire tax year for a certain number of years:

  • The credit is only available for four tax years per eligible student.
  • The credit is available only if the student has not completed the first four years of postsecondary education before 2016.

Here are some more key features of the credit:

  • Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
  • The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • Forty percent of the American Opportunity Tax Credit is refundable. This means that even people who owe no tax can get a payment of up to $1,000 for each eligible student.
  • The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.

The Lifetime Learning Credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American Opportunity Tax Credit, the limit on the Lifetime Learning Credit applies to each tax return, rather than to each student. Also, the Lifetime Learning Credit does not provide a benefit to people who owe no tax.

Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

  • Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
  • The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
  • Income limits are lower than under the American Opportunity Tax Credit. For 2016, the full credit can be claimed by taxpayers whose MAGI is $55,000 or less. For married couples filing a joint return, the limit is $111,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $131,000 or more and singles, heads of household and some widows and widowers whose MAGI is $65,000 or more.

There are a variety of other education-related tax benefits that can help many taxpayers. They include:

  • Scholarship and fellowship grants — generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  • Tuition and fees deduction claimed on Form 8917—for some, a worthwhile alternative to the American Opportunity Tax Credit or Lifetime Learning Credit.
  • Student loan interest deduction of up to $2,500 per year.
  • Savings bonds used to pay for college — though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
  • Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the Earned Income Tax Credit.

The general comparison table in Publication 970 is a useful guide to taxpayers in determining eligibility for these benefits. Details can also be found in the Tax Benefits for Education Information Center on IRS.gov.