The Protecting American from Tax Hikes (PATH) Act was passed in 2015 to help protect taxpayers and prevent fraudulent returns. By giving the IRS more time to process certain returns and refunds, the PATH act aims to reduce identity theft and individual tax return fraud.
Nearly every tax preparer will have clients who are impacted by the PATH Act at some point. In addition to other tax-related provisions, the PATH act affects two extremely common tax credits: the Earned Income Tax Credit and the Additional Child Tax Credit.
Other lesser-known provisions of the PATH act affect taxpayers who use ITINs, taxpayers who have been wrongfully incarcerated, and businesses who hire employees from certain target groups. Here’s what every tax professional should know about the PATH Act.
How does the PATH Act affect your tax clients’ taxes?
The PATH Act brought about some important changes that affect your clients, especially regarding tax credits and identification rules. These changes are designed to improve tax compliance, support specific groups, and provide relief for people who have been wrongfully imprisoned.
The Earned Income Tax Credit and Additional Child Tax Credit
The PATH Act contains several provisions, but the most well-known are the mandates concerning the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC). The EITC was increased for workers with three or more children from 40% to 45% of earned income and reduced the marriage penalty by establishing higher phase-out thresholds for joint filers. It also simplified access to the refundable portion of the ACTC for lower-income families by lowering the cap to 15% of earned income over $3,000. Any taxpayers who qualify for the EITC or ACTC will not receive their refunds until the funds are released, typically mid-February, even if they filed weeks earlier. The extra time allows the IRS to prevent more cases of identity theft and fraud.
Work Opportunity Tax Credit
The PATH ACT also extended the Work Opportunity Tax Credit, a tax credit available to businesses who hire from several targeted groups who have “consistently faced barriers to employment” such as veterans and ex-felons. The tax credit is applied against a business’s share of Social Security tax.
Individual Tax Identification Numbers
Under the PATH Act, some taxpayers must renew their ITINs in order to file and avoid delays in receiving their refunds. Taxpayers must request a new ITIN if it has expired and must renew their ITIN if it has not been used in three years. To renew an ITIN, taxpayers must submit a completed Form W-7 along with the necessary documentation to prove their identity and foreign status.
Wrongful-incarceration Exclusion
The PATH Act introduced a provision that allows a person who was once wrongfully incarcerated to exclude civil damages and restitution payment from their income and claim tax refunds on tax that were collected from these payments in prior years.
Other tax breaks made permanent by the PATH Act
- American Opportunity Tax Credit
- Computers Eligible for 529 Plan Distributions
- Educator Expense Deduction
- Electric Vehicle Recharging Equipment Credit
- Mass Transit Exclusion
- Mortgage Debt Forgiveness
- Qualified Charitable Distributions from IRAs
- State and Local Sales Tax Deduction
What do tax preparers need to know about the PATH Act?
- Delayed refunds for early filing clients who qualify for the EITC or ACTC: The EITC and ACTC provisions will be relevant for most tax preparers as these tax credits are extremely common. If you have clients who file early and qualify for the EITC or ACTC, be sure to let them know they will not receive their refund until after February 15, no matter how early they file. You can also direct them to the IRS’s Where’s My Refund? page for updates on the status of their refund.
- Work Opportunity Tax Credit for target groups: If you have business clients, ask if they hire from any of the target groups specified in the Work Opportunity Tax Credit.
- Wrongfully incarcerated clients: Most tax preparers won’t need to know the details of the wrongful incarceration exclusions. If, however, you do have a client who was once wrongfully incarcerated, you will want to review the tax exclusions stipulated in the PATH Act.
- Individual Tax Identification Numbers: ITINs are only for resident and nonresident aliens and their families who do not qualify to get a Social Security number. If you serve any clients who use ITINs, make sure they are aware of the renewal requirements.
- The PATH Act shifted the audit treatment of partnerships: The PATH Act made changes to the way Partnerships and Partners are treated when the entity is audited. It repealed the audit regime for partnerships. This change allows a partnership to make an election to have the partnership treated a certain way in the event the entity is audited. The PATH Act changed the burden of any tax deficiencies to the partnership and away from the partners. This is the opposite of how it was before this PATH Act provision went into effect.
PATH Act penalties for incorrectly claimed credits
Under the PATH Act, if your client claims a refundable credit that’s more than what they owe in taxes, they could face a costly penalty. The law removed an existing exemption from these penalties for mistakes related to refunds and credits associated with the earned income tax credit. As the tax preparer, you can help by accurately preparing your clients’ taxes using TaxSlayer Pro, ensuring they maximize their refund while avoiding costly errors.
