PATH Act Places Additional Restrictions on Claims for Certain Credits

On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) into law. In addition to creating and extending various tax incentives and modifying the process for issuance of Individual Taxpayer Identification Numbers (ITINs), the PATH Act also placed restrictions on retroactive claims for the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC) and the American Opportunity Tax Credit (AOTC).

Background  

The Internal Revenue Code provides taxpayers with the opportunity to offset their tax liability using a number of established tax credits. These credits fall into two main categories: refundable and nonrefundable. If the total refundable credit amount available to an individual exceeds his or her tax liability, that individual will receive a cash refund equal to the difference between his or her total refundable credits and his or her tax liability. If an individual's nonrefundable credits exceed his or her tax liability, any excess credit amount will be either lost or carried forward to a future year.

Three of the credits most commonly used by individuals are the EITC, the CTC and the AOTC:

  • EITC: The EITC is a refundable credit available to certain low-income workers. The maximum EITC amounts for 2015 are $6,242 for taxpayers with more than two qualifying children, $5,548 for taxpayers with two qualifying children, $3,359 for taxpayers with one qualifying child and $503 for taxpayers with no qualifying children. In the event that a taxpayer's EITC exceeds his or her tax liability, he or she will receive a refund of any unused credits. 
  • CTC: The CTC provides taxpayers with a nonrefundable credit of up to $1,000 for each of their qualifying children under the age of 17. The total maximum CTC a taxpayer may claim during a taxable year is based on his or her modified adjusted gross income (MAGI). The maximum credit amount decreases by $50 for each $1,000 (or fraction thereof) by which the MAGI of a single individual or head of household exceeds $75,000, the MAGI of a married couple filing jointly exceeds $110,000, or the MAGI of a married individual filing separately exceeds $55,000. In the event that a taxpayer's CTC exceeds his or her tax liability, and he or she is not therefore not able to take the full CTC amount, he or she will be eligible for a refundable additional child tax credit equal to a portion of his or her earned income in excess of $3,000. 
  • AOTC: The AOTC provides qualifying taxpayers with a partially refundable credit of up to $2,500 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student's post-secondary education in a degree or certificate program. The AOTC is equal to 100% of the first $2,000 spent during the taxable year on tuition, fees and course materials, plus 25% of the next $2,000. The maximum credit amount of $2,500 is reduced for taxpayers whose MAGI exceeds $80,000 (for single individuals, head of household and married individuals filing separately) or $160,000 (for joint filers), and the credit is unavailable to taxpayers whose MAGI exceeds $90,000 (for single individuals, head of household and married individuals filing separately) or $180,000 (for joint filers).  In the event that a taxpayer's AOTC exceeds his or her tax liability, he or she may receive a refund equal to the lesser of (1) 40% of his or her total remaining AOTC or (2) $1,000. 

Impact of the PATH Act on Claims for the EITC, CTC and AOTC

The PATH Act implemented three new restrictions on claims by certain taxpayers for the EITC, CTC or AOTC: 

  • Taxpayers receiving their social security numbers in 2015 are prohibited from filing prior year returns (or amending their previously-filed returns for prior years) to claim the EITC; 
  • Taxpayers receiving their ITINs in 2015 are prohibited from filing their prior year returns (or amending their previously-filed returns for prior year) to claim the CTC or AOTC; and 
  • Taxpayers claiming the EITC, CTC or AOTC (both retroactively and prospectively) are prohibited from including a qualifying child (in the case of the EITC or CTC)  or a student (in the case of the AOTC) in their credit calculations for any year in which that child or student did not have an ITIN. 

Taxpayers timely filing their returns for tax year 2015 will be exempt from these restrictions. However, these restrictions still apply to returns filed for tax years prior to 2015, and tax years beginning in on or after January 1, 2016.

For More Information

If you have any questions regarding this update, or would like some additional information regarding these changes, please contact Attorney Alison Helland at Murphy Desmond S.C. by phone at (608) 268-5568 or via e-mail at ahelland@murphydesmond.com.