On December 18, 2015 President Obama signed the “Protecting Americans from Tax Hikes Act of 2015” (PATH Act). With significant publicity it was as if it was a Christmas present from President Obama and Congress to the American people. A few weeks prior President Obama and Congress played the role of the Christmas Grinch by passing legislation to revoke passports of US citizens who owe the Internal Revenue Service an amount greater than $50,000.

US Passport Revocation

With little fanfare and buried a thousand pages deep in a mundane bill is a section entitled “Revocation or Denial of Passport In Case of Certain Tax Delinquencies.” If an individual has “seriously delinquent tax debt” which is defined as an unpaid, legally enforceable Federal tax liability of an individual which has been assessed, is greater than $50,000 and with respect to which a notice of lien has been filed, the Commissioner of Internal Revenue can send a certification of unpaid tax debt to the Secretary of State to commence action to deny or revoke the passport of said individual. The Commissioner of Internal Revenue must contemporaneously notify the individual of such action and the individual has a right to bring a civil action against the United States in a district court or tax court. It is likely that by the time the individual receives the letter their passport has already been revoked.

Why this dire consequence? It has been reported that the Internal Revenue Service is owed $450 billion in unpaid taxes. The Internal Revenue Service has great difficulty in collecting unpaid taxes from Americans living outside the US. While they can obtain a judgment from a court in the US to seize bank accounts and other property, this judgment is mostly unenforceable outside the United States. I am aware of US citizens residing in Bermuda who have over $50,000 in unpaid income tax debt and who regularly receive threatening letters from the IRS. I asked a local attorney if a Bermuda court would recognise an unpaid tax judgment issued by a US court and enforce that judgment in Bermuda. The answer was “no” and I received that same response from attorneys in many other countries outside the US.

The IRS used to have an office in Doylestown, Pennsylvania, consisting of a manager and seven staff, that was responsible for collecting unpaid taxes from Americans and foreign nationals living in Europe and Africa. During a meeting with the manager I inquired how often his team travelled to Europe and Africa to chase down delinquent taxpayers. His response was that they did not have a travel budget and that their job was to write dunning letters to delinquent taxpayers. When I asked if these delinquent taxpayers answered the letter his response was, not really. This bill is expected to collect about $400 million of unpaid tax over the next ten years.

Over the last five years the IRS has had significant cuts in staffing and funding. When the IRS became aware of over 40,000 Americans with an account at UBS in Switzerland they did not have the manpower to prosecute everyone who had not reported these accounts or the income that they had received. With Fatca now supplying the IRS with thousands of more names to investigate this new law will likely assist the IRS in collecting back taxes. They no longer need to bring an individual to trial, they can simply have the Commissioner of Internal Revenue send a certification of unpaid debt to the Secretary of State to commence action to deny or revoke the passport of said individual.

PATH Act

About 15 years ago Congress passed a series of tax breaks that primarily affected low and middle income taxpayers and were meant as a one-time stimulus for this group in an election year. However, the tax breaks were so popular that each year Congress extended the tax breaks for another year and this has gone on for the last 14 years. One issue with these tax breaks was that Congress waited until December of each calendar year to make the tax breaks effective retroactive until January 1. So while everyone expected a continuance of the tax break, you could not plan for it with any degree of certainty. This foolishness has mostly ended with the passage of the PATH. Those changes that affect individuals are:

State and local sales tax deduction

The election to claim an itemised deduction for state and local general sales taxes, in lieu of deducting state and local income taxes, expired after December 31, 2015. PATH makes the election permanent.

Teachers’ Classroom Expense Deduction

PATH permanently extends the above-the-line deduction for elementary and secondary schoolteachers’ classroom expenses. It also modifies the deduction by indexing the $250 ceiling amount to inflation beginning in 2016. Additionally, PATH includes “professional development expenses” within the scope of the deduction.

Charitable Distributions from IRA’s

PATH permanently extends the provision for individuals age 70-and-a-half years and older to be allowed to make tax-free distributions from individual retirement accounts to a qualified charitable organisation. The treatment continues to be capped at a maximum of $100,000 per taxpayer each year. Amounts in excess of $100,000 must be included in income but may be taken as an itemised charitable deduction, subject to the usual annual caps for contributions.

Child Tax Credit

PATH makes permanent the reduced earned income threshold amount of an unindexed $3,000. This provision had been scheduled to expire after 2017. Under PATH, the child tax credit, available up to $1,000 for qualifying dependents under age 17, may be refundable to the extent of 15 per cent of the taxpayer’s earned income in excess of $3,000.

American Opportunity Tax Credit

PATH makes permanent the American Opportunity Tax Credit (AOTC), an enhanced version of the Hope education credit. The AOTC has been available at an increased level of $2,500, with adjusted gross income (AGI) phase-out amounts of $80,000 (single) and $160,000 (married filing jointly). The AOTC had been scheduled to expire after 2017.

Earned Income Credit

PATH makes permanent the increase ($5,000) in phase-out amount for joint filers, scheduled to expire after 2017. PATH also makes permanent the increased 45 per cent credit percentage for taxpayers with three or more qualifying children. Under prior law, both enhancements had been available only through 2017.

Code Sec 179 Expensing Pre-Act, the dollar limit for Code Sec. 179 expensing for 2015 had reverted to $25,000 with an investment limit of $200,000. PATH permanently sets the Code Sec. 179 expensing limit at $500,000 with a $2 million overall investment limit before phase out (both amounts indexed for inflation beginning in 2016). PATH also makes permanent the special Code Sec 179 expensing for qualified real property. PATH also removes the $250,000 cap related to this category of expenditure beginning in 2016.

100 per cent Gain Exclusion on Qualified Small Business Stock The 100-percent exclusion allowed for gain on the sale or exchange of qualified small business stock held for more than five years by non-corporate taxpayers is made permanent. This benefit has proven a valuable method of funding certain start-ups. With a five-year holding period, it obviously still requires a long-term commitment.

Bonus Depreciation PATH extends bonus depreciation (additional first-year depreciation) under a phase-down schedule through 2019: at 50 per cent for 2015-2017; at 40 per cent in 2018; and at 30 per cent in 2019.

Two-Year Extensions for Individuals PATH renews several extenders related to individuals, for two years through 2016. Because of their retroactive application to the start of 2015, two-year provisions will be up for renewal again at the end of 2016.

Qualified Tuition/RelatedExpenses Deduction PATH extends through 2016 the above the-line deduction for qualified tuition and fees for postsecondary education.

Mortgage Debt Exclusion

PATH excludes from income cancellation of mortgage debt on a principal residence of up to $2 million ($1 million for a married taxpayer filing a separate return) through 2016. PATH also modifies the exclusion to apply to qualified principal residence indebtedness discharged in 2017 if discharge is made under a binding written agreement entered into in 2016. Without an extension, debt that is forgiven through a foreclosure, short sale or loan modification could be treated as taxable income.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (I) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of ETS Ltd, PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com