'Early Bird' gets the Discount: 25% off Tax Preparer. As you'll learn from this newsletter, the 2017 filing season will be special because of the certainty of the tax laws, thanks to the wide-reaching year-end tax bill in 2015. The IRS will be able to release accurate advance drafts of the new forms months before the tax season starts, and your tax software will be more timely, more automated, and more trouble-free. And if you're an 'Early Bird,' you can not only be set for the next tax season but you can get a 25% discount for your effort ... an unusual discount for an unusual tax season to come. But you have to order now because this special discount lasts only through May 15!

Stability for the 2016 tax year

The importance of last year's tax bill. The passage of a panic-driven tax bill at the end of 2015 may not have seemed like big news to many people, since last-minute tax bills have been the norm for the past several years. And the IRS still had to ready its tax forms in a very short time window after it was signed into law. But the Protecting Americans from Tax Hikes Act of 2015 was quite different from prior year-end tax bills. It didn't just reinstate the expired tax breaks for one more year, just to have them expire again the next year. Instead, many of the chronically expiring tax breaks were made permanent, and those that weren't were extended for at least 2 years. Those differences will have a big impact this year because they take pressure off the IRS and software developers to make major changes in too short a time.

Popular tax breaks made permanent. The breaks that were made permanent cover a wide range of taxpayers -- businesses, investors, and individuals:

•   The deduction of up to $250 of teachers' out-of-pocket expenses was not only made permanent but also enhanced by annual indexing with inflation. As a result, line 23 of Form 1040 (Educator expenses) will never again be held in limbo with the label "Reserved."
•   The now permanent benefit of tax-free IRA distributions of up to $100,000 to charities (for taxpayers of age 70-1/2 or older) means that philanthropic retirees will no longer have to wait for a year-end tax bill to decide whether to donate.
•   The now permanent itemized deduction for state and local sales taxes in lieu of state income taxes is a major relief for taxpayers who live in states without income taxes. The option at line 5 of Schedule A (Itemized Deductions) will no longer be held in limbo.
•   The $500,000 ceiling on section 179 depreciation (with phaseout starting at $2 million) was not only made permanent but also enhanced by annual indexing with inflation. Small businesses are the main benefactors, since this ceiling was at risk of dropping back to the former $25,000 ceiling. And there will no longer be any question of the dollar amounts for limitations in Part I of Form 4562 (Depreciation and Amortization).
•   The credit for increasing research and development was not only made permanent but also enhanced by allowing it to offset the AMT (or payroll taxes for certain startups without income tax liability) starting this year. This is easily the most costly tax break in the bill and benefits small businesses as well, but it removes the risk of not being able to expense the costs of your increased new research.
•   The American Opportunity Tax Credit, which was meant to temporarily replace the Hope Credit, is now a permanent replacement on Form 8863 (Education Credits). It provides a credit as high as $2,500, and can be refundable credit for some low-income taxpayers. (It was fomerly scheduled to expire in 2017.)
•   The now permanent enhancement to the child tax credit that lowered the earned income threshold for claiming a refundable part eliminates the periodic uncertainty surrounding Schedule 8812 (Child Tax Credit). Without this change, the threshold was at risk of rising from the current $3,000 to nearly $12,000.
•   Two temporary enchancements to the earned income credit are now permanent. One provides a higher credit for those with 3 or more children. The other raises the income thresholds for phaseout by $5,000 for joint filers. Together, their permanency prevents Schedule EIC and the calulations for Form 1040, line 66a, from changing after 2017 (except for indexing with inflation).
•   The exclusion for all gain on the sale of certain small business stock is now permanent for stock held more than 5 years. This change permanently eliminates the complex reporting for these sales, which traditionally excluded only a portion of the gain.
•   Several breaks that apply only to narrow special interests were made permanent as well. They include the special 15-year straight line depreciation for qualified leasehold improvements, restaurant property, and retail improvements, the allowance of charitable deductions for contributions of food inventory, employer wage credits for active duty members of the uniformed services, and minimum low-income housing credit for buildings that are not federally-subsidized, and several others.

Other breaks are safe for another 5 years. Some breaks that were not made permanent were extended much longer than the usual one or two years:

•   50% bonus depreciation on new property was extended through 2017, then lowered to 40% for 2018, 30% for 2019, and zero thereafter. Together with the permanent changes in section 179 expensing, this extension means that deductions on Form 4562 will not change significantly until the 2018 filing season.
•   The new markets credit was extended through 2019, which means that Form 8874 (New Markets Credit) will stick around until 2020.
•   Work opportunity credit for wages paid to favored groups was extended through 2019, with the long-term unemployed included starting tax year 2016. This means that Form 5884 (Work Opportunity Credit) will also be around until 2020.

Remaining breaks safe until 2017. The remaining breaks reinstated by the year-end tax bill were extended for 2 years -- to tax years 2015 and 2016. As a result, these breaks will not affect the tax forms until the 2018 filing season (for tax year 2017 returns). They include:

•   the exclusion from gross income of forgiven mortgage loans
•   the itemized deduction of mortgage insurance premiums in lieu of interest
•   the deduction from income of up to $4,000 of qualified college tuition and expenses (claimed on Form 8917 (Tuition and Fees Deduction) and reported on line 34 of Form 1040)
•   credits for energy production and conservation (including fuel efficient vehicles, vehicles using alternative fuels, solar energy, biodiesel, and others)

There are also a number of renewed breaks for narrow special interests, including:

•   indian employment credit
•   accelerated depreciation for indian reservation property
•   railroad track maintenance credit
•   3-year depreciation for race horses
•   7-year depreciation for motorsports entertainment complexes
•   expensing for certain movie and television costs
•   mine rescue team training credit
•   empowerment zone incentives

How it all affects Tax Preparer

No surprises for 2016. As you can see from the preceding review, the year-end tax bill ensures that the forms for tax year 2016 will change very little from the forms for tax year 2015. In most cases the only differences you will notice are changes in thresholds due to annual indexing with inflation. This means that the IRS can complete their changes early and release accurate advance or final drafts months before the tax season starts, which has not been the case in recent years. In fact, the IRS had gotten in the practice of releasing advance drafts of the new tax forms that had little in common with the final releases because of the annual year-end tax bills. But that cannot happen this year because of the unique breadth of last year's tax bill.

A smooth 2017 filing season. Not surprisingly, this all ensures that the next filing season will be unusually smooth. Since we can be sure of the tax laws for 2016, we can delve deeper into the tax code in the remaining months of 2016 to improve reliability and automation rather than developing alternative designs for different possible outcomes from year-end congressional action. Timely, reliable, accurate, automated software is more realistic than ever thanks to the prior-year efforts of Congress!

e-file matures with speed and accuracy

2016 was different. IRS e-file has gone through growing pains for several years, with frequent delays, changing standards, and severe limitations on e-file returns over the years. But we noticed a big improvement this year in their specifications and their processing of returns. For the first time since the start of the e-file program, the specifications and standards changed very little from the prior year, so the error rate was the lowest it has ever been. And restrictions on what returns could be e-filed were relaxed as more IRS forms were supported. But the most obvious difference to preparers is the improved feedback from the IRS. You now know whether a return was accepted or not in hours rather than days, which gives you more time to correct any errors!