The IRS has outlined key provisions of the One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025, that introduce new deductions beginning in tax year 2025. The deductions apply through 2028 and cover qualified tips, overtime pay, car loan interest, and a special allowance for seniors.

The IRS has outlined key provisions of the One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025, that introduce new deductions beginning in tax year 2025. The deductions apply through 2028 and cover qualified tips, overtime pay, car loan interest, and a special allowance for seniors.

Under the “No Tax on Tips” provision, employees and self-employed individuals may deduct up to $25,000 in voluntary cash or charged tips received in IRS-designated tip-based occupations. Tips must be reported on Form W-2, Form 1099 or directly on Form 4137. The deduction phases out above $150,000 in modified adjusted gross income ($300,000 for joint filers). Self-employed individuals engaged in a Specified Service Trade or Business under Code Sec. 199A and employees of SSTBs are ineligible.

The “No Tax on Overtime” provision permits workers to deduct the premium portion of overtime pay required under the Fair Labor Standards Act. The deduction is capped at $12,500 ($25,000 for joint filers), with a similar income-based phaseout.

The “No Tax on Car Loan Interest” rule allows individuals to deduct up to $10,000 in interest on loans used to purchase new, personal-use vehicles assembled in the U.S. Qualifying loans must originate after December 31, 2024, and be secured by the vehicle. Used and leased vehicles do not qualify. The deduction phases out for income above $100,000 ($200,000 for joint filers).

Finally, taxpayers aged 65 or older can claim a new $6,000 deduction per person in addition to the current senior standard deduction. The deduction phases out above $75,000 ($150,000 for joint filers).

All deductions are available to itemizing and non-itemizing taxpayers. Transition relief for tax year 2025 will be provided.

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Funding uncertainty and a constantly changing tax law environment are presenting challenges to the Internal Revenue Service as it works to meet legislative and executive mandates to improve the taxpayer experience.

Funding uncertainty and a constantly changing tax law environment are presenting challenges to the Internal Revenue Service as it works to meet legislative and executive mandates to improve the taxpayer experience.

A July Government Accountability Office report highlighted three specific challenges that the agency is facing as it works to improve the taxpayer experience.

GAO noted that "uncertainty about stable multiyear funding hinders efforts to modernize IRS computer systems and offer digital services to quickly resolve taxpayer issues. "

IRS had been using the supplemental funding provided by the Inflation Reduction Act to help address these issues, but those fundings have been a constant target for Republicans in Congress as well as the current Trump Administration, despite regular calls for stable and adequate funding.

The second challenge GAO reported was that "complicated and changing tax laws limit IRS’s ability to offer timely guidance to taxpayers," the report states, though agency officials said it had plans in place to ensure the guidance flowing from the IRS is provided in a manner that is accurate, up-to-date, and available in a user-friendly format.

Staffing was highlighted as the third challenge.

GAO reported that "being unable to hire enough staff trained to help taxpayers can undercut the ability to optimally improve taxpayer experiences. IRS officials said IRS had efforts to boost hiring and training as well as improved systems to enable staff to improve taxpayer experiences."

However, in March 2025, "IRS officials said it was unclear how reductions to the IRA funding and to its staffing will affect these efforts to address the challenges," GAO reported.

The government watchdog also noted that IRS has not established key practices to:

• Define taxpayer experience goals related to service improvements;

• Generate new evidence from measures, analytical tools, and dashboards to track progress with the taxpayer experience goals;

• Involve external stakeholders to help assess the affects of its service improvements on the taxpayer experience; and

• Promote accountability for achieving the taxpayer experience goals.

"IRS officials said establishing an evidence-based approach using these and other key practices has been delayed," GAO reports. "The IRS offices that had been coordinating IRA and taxpayer experience initiatives were disbanded in March 2025 and April 2025, respectively, according to IRS officials."

GAO recommends that the agency "fully establish an evidence-based approach to determine the effects of service improvements on the taxpayer experience."

By Gregory Twachtman, Washington News Editor

Audits on high-income individuals and partnerships have increased in recent years as audits on large corporations have decreased in response to the Internal Revenue Service’s focus on the former group, the Treasury Inspector General For Tax Administration found.

Audits on high-income individuals and partnerships have increased in recent years as audits on large corporations have decreased in response to the Internal Revenue Service’s focus on the former group, the Treasury Inspector General For Tax Administration found.

In a report on trends in compliance activities through fiscal year 2023 dated July 10, 2025, examination starts for partnerships increased 63 percent from FY 2020 (4,106 starts) to FY 2023 (6,709 starts), while examination starts decreased 18 percent in the same time frame from 1,700 to 1,400.

For individuals, the overall combined number of examinations open and closed from FY 2020 through 2023 decreased from 466,921 to 400,446. For individuals with income tax returns of $400,000 or less, the percentage of examinations opened and closed dropped from 94.8 percent to 91.2 percent (442,856 to 365,229) while the percentage of examinations opened and closed for individual income tax returns more than $400,000 increased from 5.2 percent to 8.8 percent (24,065 to 35,217).

"The IRS planned to increase enforcement activities to help ensure tax compliance among high-income and high-wealth individuals," TIGTA reported, adding that it planned to use the supplemental funding provided by the Inflation Reduction Act and that the IRS as of May 2024, the agency plans to audit twice the number of individual returns with more than $400,000 in FY 2024 compared to FY 2023.

However, whether the IRS will be able to meet any compliance goals for both individuals as well as partnerships and corporations is questionable, with agency’s "ability to move forward with hiring efforts in these complex audit areas of corporations, partnerships and high-income individuals is uncertain considering the decreased enforcement funding and recent government staffing cuts."

To that end, the agency’s Field Collection, Campus Collection, and Examination staff is already on a downward trend.

TIGTA reported that the staff decreased from 18,472 employees in FY 2020 to 17,475 in 2023 due to attrition. The Collection staff slightly increased from 7,246 to 7,371 and the Examination staff decreased from 11,226 to 10,104.

"The status of the IRS’s IRA plan, other IRA transformational initiatives, along with the IRS’s hiring plans is uncertain, at best," TIGTA reported. "Although the IRS made substantial progress with hiring 4,048 revenue officers and revenue agents in FY 2024, the recissions of IRA funding, the hiring freeze, early retirement incentives, and future reductions in force present a challenge to improving taxpayer service and enforcing the nation’s tax laws."

The report also noted that in FY 2023, $10.1 billion in enforcement revenue was collected by the Automated Collection System. Field Collection collected a total of $5.9 billion.

In a separate report dated July 10, 2025, TIGTA reported the IRS planned to increase examinations across individuals, partnerships and businesses reporting total positive income of more than $400,000 in FY 2024. The average starts from FY 2019-2023 was 29,466 and the IRS planned to increase that to 70,812. At the same time, the number of returns with a total positive income reported of less and $400,000 is planned to decrease from an average of 452,051 from FY 2019-2023 to 354,792 in FY 2024. But it is not clear whether the agency will be able to meet these targets even though it was on track to meet these goals.

The agency "has not defined key terminology or aspects of its methodology for compliance to meet with these goals as outlined in the 2022 Treasury Directive that higher income earners would be targeted for audit," TIGTA reported. "The IRS stated that the FY 2024 plan was created with the assumptions available at the time. Any subsequent decisions about these issues could affect the effectiveness of future examination plans in meeting compliance requirements."

TIGTA did not make any recommendations in either report and the IRS did not make any comments on them.

By Gregory Twachtman, Washington News Editor

The IRS has released guidance clarifying the withholding and reporting obligations for employers and plan administrators when a retirement plan distribution check is uncashed and later reissued.

The IRS has released guidance clarifying the withholding and reporting obligations for employers and plan administrators when a retirement plan distribution check is uncashed and later reissued.

In the scenario addressed, a plan administrator issued an $800 designated distribution to a former employee, withheld the correct amount of federal income tax under Code Sec. 3405, and sent the remaining balance by check. When that check went uncashed and was subsequently voided, a second check was mailed. Because the original withholding amount was correct and fully remitted, the IRS has concluded that no refund or adjustment is available under Code Secs. 6413 or 6414, as there was no overpayment involved.

For the second check, the IRS has stated that no further withholding is required if the amount reissued is equal to or less than the original distribution. However, if the new amount exceeds the prior distribution—due, for example, to accumulated earnings—the excess portion is treated as a separate designated distribution subject to new withholding under Code Sec. 3405.

With respect to reporting obligations, the IRS noted that Code Sec. 6047(d) requires a Form 1099-R to be filed for designated distributions of $10 or more. For the first check, the $800 distribution must be reported for the applicable year, with the full amount listed in Boxes 1 and 2a, and the tax withheld in Box 4. No additional reporting is required for the second check if the amount is equal to or less than the original. However, if the second check includes an excess of $10 or more, that additional amount must be reported on a separate Form 1099-R for the year in which the second distribution occurs.

Rev. Rul. 2025-15

The Treasury Department and the IRS have withdrawn proposed rules addressing the treatment of built-in income, gain, deduction, and loss taken into account by a loss corporation after an ownership change under Code Sec. 382(h). The withdrawal, effective July 2, 2025, follows public criticism on the proposed regulations’ approach.

The Treasury Department and the IRS have withdrawn proposed rules addressing the treatment of built-in income, gain, deduction, and loss taken into account by a loss corporation after an ownership change under Code Sec. 382(h). The withdrawal, effective July 2, 2025, follows public criticism on the proposed regulations’ approach.

The proposed rules were Reg. §1.382-1, proposed on September 10, 2019 (84 FR 47455), and Reg. §§1.382-1, 1.382-2 and 1.382-7, proposed on January 14, 2020 (85 FR 2061). The proposed regulations would have adopted as mandatory, with certain modifications, (a) the safe harbor net unrealized built-in gain (NUBIG) and net unrealized built-in loss (NUBIL) computation provided in Notice 2003-65, 2003-40 I.R.B. 747, based on the principles of Code Sec. 1374, and (b) the “1374 approach,” (as described in Notice 2003-65) for the identification of recognized built-in gain and recognized built-in loss. The IRS considered that the 1374 approach would make it easier for taxpayers to calculate built-in gains and built-in losses and comply with Code Sec. 382(h).

The IRS received critical comments from practitioners on the proposed rules, leading the agency to conclude that further study is needed before issuing any new proposed regulations.

The proposed regulations are withdrawn. Taxpayers may continue to rely on Notice 2003-65 for applying Code Sec. 382(h) to an ownership change before the effective date of any temporary or final regulations under Code Sec. 382(h).

Proposed Regulations, NPRM REG-125710-18

The Treasury and IRS removed this final rule from the Code of Federal Regulations (CFR) that involved gross proceeds reporting by brokers for effectuating digital asset sales.

The Treasury and IRS removed this final rule from the Code of Federal Regulations (CFR) that involved gross proceeds reporting by brokers for effectuating digital asset sales. The agencies reverted the relevant text of the CFR back to the text that was in effect immediately prior to the effective date of this final rule.

Congress passed a joint resolution disapproving the final rule titled “Gross Proceeds Reporting by Brokers that Regularly Provide Services Effectuating Digital Asset Sales.” The Treasury Department and the IRS were not soliciting comments on this action, nor delaying the effective date.

Effective Date

This final rule is effective on July 11, 2025.

T.D. 10021

A more then 25 percent reduction in the Internal Revenue Service workforce will likely present some significant challenges on the heels of a 2025 tax season described as a "measured success," according to the Office of the National Taxpayer Advocate.

A more then 25 percent reduction in the Internal Revenue Service workforce will likely present some significant challenges on the heels of a 2025 tax season described as a "measured success," according to the Office of the National Taxpayer Advocate.

In the "Fiscal Year 2026 Objectives Report to Congress," National Taxpayer Advocate Erin Collins noted that the 2025 filing season marked the IRS’ "third consecutive year of delivering a generally successful filing season, and by some measures, it was the smoothest yet. Most taxpayers filed their returns and paid their taxes or received their refunds without any delays or intervention from the IRS."

The report highlights that more than 95 percent of individual returns were filed electronically and more than 60 percent of taxpayers received refunds, "the majority within standard processing timeframes."

Despite having a successful season, the agency has reduced its workforce by more than 25 percent since the federal government under President Trump began cutting the federal workforce.

In analyzing what agency functions are affected by this workforce reduction, the report states that "many functions are more visible to taxpayers and directly impact service delivery, while other functions play vital supporting roles in providing taxpayer service and delivering on the IRS’s mission."

Collins in the report when on to encourage Congress ignore requests to cut the IRS budget and ensure the agency is properly staffed and financed.

"The Administration’s budget proposal envisions a 20 percent reduction in appropriated IRS funding next year and an overall reduction of 37 percent after taking into account after taking into account the decrease in supplemental funding from the Inflation Reduction Act. A reduction of that magnitude is likely to impact taxpayers and potentially the revenue collected."

The issues of the workforce reduction could be compounded by the expected permanent extension of the Tax Cuts and Jobs Act.

Collins stated that most of the changes related to the extension won’t take effect until January 1, 2026, "but several provisions impacting tens of millions of taxpayers will likely be effective during the 2025. This suggests additional complexity with taxpayers file their 2025 tax returns during the 2026 filing season and more complexity the following year. In addition, the reduction of more than 25 percent in the IRS workforce has the potential to reduce taxpayer services."

The report also echoed ongoing calls it has made in the past, as well as calls by other stakeholders, to continue to improve its information technology modernization strategy. Collins notes that in recent years, "the agency has made notable strides in modernizing its systems. … If this momentum continues, the IRS will be well positioned to deliver high quality service, enhance the taxpayer experience, and perhaps improve tax compliance at a reduced cost."

She highlighted the improvements that were made possible through the supplemental funding from the Inflation Reduction Act, but added that the Trump Administration has paused indefinitely or cancelled projects and replaced them with nine distinct modernization "’vertical,’ which are technology projects designed to meet specified technology demands."

"While these initiatives are promising, the IRS must provide clear and detailed communication to Congress and the public regarding the objectives, scope, business value, milestones, projected timelines, costs, and anticipated impacts of these nine vertical projects on taxpayer service," the report stated. "Without such transparency, there is a real risk these initiatives could stall or deviate from their intended outcomes."

Collins also made a case for sustained funding for IT improvements, recalling a 2023 blog post where she highlighted that large U.S. banks "spend between $10 billion and $14 billion a year on technology, often more than half on new technology systems. Yet in fiscal year (FY) 2022, Congress appropriated just $275 million for the IRS’s Business Systems Modernization (BSM) account. That’s less than five percent of what the largest banks are spending on new technology each year, and the IRS services far more people and entities than any bank."

By Gregory Twachtman, Washington News Editor

IR-2025-71

The Internal Revenue Service Electronic Tax Administration Advisory Committee (ETAAC) released its 2025 annual report during a public meeting in Washington, D.C., outlining 14 recommendations—ten directed to the IRS and four to Congress. 

The Internal Revenue Service Electronic Tax Administration Advisory Committee (ETAAC) released its 2025 annual report during a public meeting in Washington, D.C., outlining 14 recommendations—ten directed to the IRS and four to Congress. ETAAC operates under the Federal Advisory Committee Act and collaborates with the Security Summit, a joint initiative established in 2015 by the IRS, state tax agencies and the tax industry to address identity theft and cybercrime.

ETAAC recommended that the IRS update tax return forms to strengthen security and reduce fraud and identity theft. It also advised the agency to revise Modernized e-File reject codes and explanations, expand information sharing with state and industry partners, and continue transitioning taxpayers toward fully digital interactions.

Congress was urged to support tax simplification aligned with policy objectives, grant the IRS authority to regulate non-credentialed tax return preparers, ensure stable funding for taxpayer services and operations, and prioritize sustained technology modernization. For more information, visit the Electronic Tax Administration Advisory Committee (ETAAC) page.

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Proposals to reform retirement savings plans were highlighted during an April 2012 hearing by the House Ways and Means Committee.  Lawmakers were advised by many experts to move slowly on making changes to current retirement programs that might discourage employers from sponsoring plans for their workers.  Nevertheless, it is clear that Congress wants to make some bold moves in the retirement savings area of the tax law and that likely it will do so under the broader umbrella of general “tax reform.” While tax reform is gaining momentum, it is unlikely to produce any change in the tax laws until 2013 or 2014. Considering that retirement planning necessarily looks long-term into the future, however, now is not too soon to pay some attention to the proposals being discussed.

Testimony

The Chief of Actuarial Issues and Director of Retirement Policy for the American Society of Pension Professionals and Actuaries testified that current federal tax incentives can transform taxable bonuses for business owners into retirement savings contributions that benefit both owners and employees. “This incentive for the business owner to contribute for other employees results in a distribution of tax benefit that is more progressive than the current income tax structure," she observed.

An American Benefits Council representation warned at the hearing that the wisest course for lawmakers is to not enact new laws that would disrupt the success of the current system. Short-term retirement legislation designed to boost tax revenues generally do so by eliminating the existing savings incentives and eroding the amount that workers actually save.

Committee Chairman Dave Camp, R-Mich. questioned whether the large number of retirement plans now existing with their different rules and eligibility criteria leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings. Ranking member Sander Levin, D-Mich., questioned the value of making tax reform-inspired changes to retirement plans. "Tax reform should approach retirement savings incentives with an eye toward strengthening our current system and expanding participation, not as an opportunity to find revenue," Levin said.

JCT report

In advance of the hearing, the Joint Committee on Taxation (JCT) summarized the tax treatment of current-law retirement savings plans and described some recent reform proposals in a report, “Present Law and Background Relating to the Tax Treatment of Retirement Savings” (JCX-32-12). The report highlighted several of the recent proposals on retirement savings:

Automatic enrollment payroll deduction IRA.  President Obama has proposed mandatory automatic enrollment payroll deduction IRA programs.  An employer that does not sponsor a qualified retirement plan, SEP, or SIMPLE IRA plan for its employees (or sponsors a plan and excludes some employees) would be required to offer an automatic enrollment payroll deduction IRA program with a default contribution to a Roth IRA of three percent of compensation. An employer would not be required to offer the program if the employer has been in existence less than two years or has 10 or fewer employees.

Expand the saver's credit.  The Administration has also proposed to make the retirement savings contribution credit, known as the saver's credit, fully refundable and for the saver’s credit to be deposited automatically in an employer-sponsored retirement plan account or IRA to which the eligible individual contributes. In addition, in place of the current credit ranging from 10 percent to 50 percent for qualified retirement savings contributions up to $2,000 per individual, the proposal would provide a credit of 50 percent of such contributions up to $500 (indexed for inflation) per individual.

Consolidate plans.  The JCT also reviewed two retirement proposals from the Bush administration:  Consolidating traditional and Roth IRAs into a single type of account called Retirement Savings Accounts (RSAs) and creating Lifetime Savings Accounts (LSAs) that could be used to save for any purpose with an annual limit for contributions of $2,000. The JCT explained that the tax treatment of RSAs and LSAs would be similar to the current tax treatment of Roth IRAs (contributions would not be deductible, and earnings on contributions generally would not be taxable when distributed). Additionally, the Bush Administration had proposed to consolidate various current-law employer-sponsored retirement arrangements under which individual accounts are maintained for employees and under which employees may make contributions into a single type of arrangement called an employer retirement savings account (ERSA).

The American Society of Pension Professionals and Actuaries (ASPPA) told the Ways and Means Committee that the large number of plans with different rules and criteria does not reduce the effectiveness of the incentives in increasing retirement savings. ”Consolidating all types of defined-contribution type plans into one type of plan would not be simplification,” the ASPPA cautioned. “It would disrupt savings, and force state and local governments and nonprofits to modify their retirement savings plans and procedures.”

The family partnership is a common device for reducing the overall tax burden of family members. Family members who contribute property or services to a partnership in exchange for partnership interests are subject to the same general tax rules that apply to unrelated partners. If the related persons deal with each other at arm's length, their partnership is recognized for tax purposes and the terms of the partnership agreement governing their shares of partnership income and loss are respected.

Interfamily gifts

Because of the tax planning opportunities family partnerships present, they are closely scrutinized by the IRS. When a family member acquires a partnership interest by gift, however, the validity of the partnership may be questioned. For example, a partnership between a parent in a personal services business and a child who contributes little or no services is likely to be disregarded as an attempt to assign the parent's income to the child. Similarly, a purported gift of a partnership interest may be ignored if, in substance, the donor continues to own the interest through his power to control or influence the donee's business decision. When a partnership interest is transferred to a guardian or trustee for the benefit of a family member, the beneficiary is considered a partner only if the trustee or guardian must act independently and solely in the beneficiary's best interest.

Capital or services

The determination of whether a person is recognized as a partner depends on whether capital is a material income-producing factor in the partnership. Any person, including a family member, who purchases or is given real ownership of a capital interest in a partnership in which capital is a material income-producing factor is recognized as a partner automatically. If capital is not a material income-producing factor (for example, if a partnership derives most income from services, a family member is not recognized as a partner unless all the facts and circumstances show a good faith business purpose for forming the partnership.

If the family partnership is recognized for tax purposes, the partnership agreement generally governs the partners' allocations of income and loss. These allocations are not respected, however, to the extent the partnership agreement does not provide reasonable compensation to the donor for services he renders to the partnership or allocates a disproportionate amount of income to the donee. The IRS can re-allocate partnership income between the donor and donee if these requirements are not met.

Investment partnerships

The general rule for determining gain recognition for marketable securities does not apply to the distribution of marketable securities by an investment partnership to an eligible partner. An investment partnership is a partnership that has never been engaged in a trade or business (other than as a trader or dealer in the certain specified investment-type assets) and substantially all the assets of which have always consisted of certain specified investment-type assets (which do not include, for example, interests in real estate or real estate limited partnerships).

If a family limited partnership (FLP) qualifies as an investment partnership, the FLP could redeem the partnership interest of an eligible partner with marketable securities without the recognition of any gain by the redeemed partner. To qualify, substantially all the assets of the FLP must always have consisted of the eligible investment assets, and the holding of even totally passive real estate interests (real estate that does not constitute a trade or business), for instance, must be kept to a minimum. In addition, any eligible partner must have contributed only the specified investment assets (or money) in exchange for his or her partnership interest.

On February 22, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012.  The new law extends the employee-side payroll tax holiday, giving wage earners and self-employed individuals 12 months of reduced payroll taxes in 2012. 

2011 payroll tax holiday

Until 2011, the Old-Age, Survivors and Disability Insurance (OASDI) tax rate for employees was 6.2 percent (12.4 percent for self-employed individuals who pay both the employee-share and the employer-share).  These taxes help to fund Social Security.

In 2011, a payroll tax holiday took effect.  The payroll tax holiday reduced the employee-share of OASDI taxes by two percentage points from 6.2 percent to 4.2 percent for calendar year 2011 up to the Social Security wage base of $106,800.  The payroll tax holiday also gave a similar percentage reduction to self-employed individuals for calendar year 2011.

Two-month extension

The 2011 payroll tax holiday was originally enacted as a one-year tax break.  It was scheduled to expire after December 31, 2011.

In December 2011, Congress approved a two-month extension of the payroll tax holiday for January and February 2012.  The two-month extension provided for a 4.2 percent OASDI tax rate for individuals receiving wages and a comparable benefit for self-employed individuals through the end of February 2012.

Tough negotiations

In early 2012, lawmakers began negotiations over extending the two-month payroll tax holiday for the remainder of the year.  The 2011 payroll tax holiday had not been offset; that is, the lost revenue had not been made up elsewhere.  The two-month extension had been offset by higher fees on certain government-backed mortgages. Some lawmakers wanted any full-year extension of the payroll tax cut to be offset.

Several offsets were proposed and rejected, including a surtax on individuals with incomes over $1 million and repeal of certain business tax preferences.  In the end, lawmakers could not agree on any offsets and decided to extend the payroll tax holiday without paying for it.  They did agree to pay for extended unemployment benefits and the so-called Medicare “doc fix” with offsets.

The House passed the Middle Class Tax Relief and Job Creation Act of February 17 as did the Senate.  President Obama signed the bill on February 22.

2012 payroll tax holiday

The 2012 payroll tax holiday is essentially an extension of the 2011 payroll tax holiday. This means that wage earners pay OASDI taxes at a rate of 4.2 percent for calendar year 2012 up to the Social Security wage base ($110,100 for 2012). Self-employed individuals also benefit from a two-percentage point reduction in OASDI taxes for calendar year 2012.  The OASDI tax rate for employers, however, is not reduced and remains at 6.2 percent for calendar year 2012.

According to the White House, an “average” taxpayer should expect to see about $1,000 in savings in 2012.  An individual who makes at or above the Social Security wage base for 2012 ($110,100) will see a $2,202 benefit.

No recapture rule

In good news for some taxpayers, the Middle Class Tax Relief and Job Creation Act repeals a recapture rule Congress had imposed on the two-month extension.  The recapture rule was intended to prevent higher income individuals from enjoying too great a benefit from the payroll tax cut if it was not extended for all of 2012.  Because the payroll tax cut has been extended through the end of 2012, the recapture rule is expressly removed in the new law.

Employers and payroll processors

Because the 2012 payroll tax cut holiday is essentially an extension of the 2011 payroll tax cut holiday, employers and payroll processors should expect few glitches. The IRS has reported it anticipates no problems in administering the extension through the end of 2012. It has already issued a revised 2012 Form 941, Employer’s Quarterly Federal Tax Return, for use by employers to cover their revised reporting responsibilities. 

If you have any questions about the 2012 payroll tax holiday, please contact our office.

The new year brings a new tax filing season. Mid-April may seem like a long time away in January but it is important to start preparing now for filing your 2011 federal income tax return.  The IRS expects to receive and process more than 140 million returns during the 2012 filing season.  Early planning can help avoid any delays in the filing and processing of your return.

Records

Initially, you will need to gather your records for 2011. A helpful jumping-off point is to review your 2010 return. Your personal situation may be unchanged from when you filed your 2010 return or it may have changed significantly.  Either way, your 2010 return is a good vantage point for assembling the materials you will need to prepare your 2011 return.

If you need a copy of your previous year(s) return information, you have several options. You can order a copy of your prior-year return. Alternatively, you may order a tax return transcript or a tax account transcript.  A tax return transcript shows most line items from your return as it was originally filed, including any accompanying forms and schedules.  However, a tax return transcript does not reflect any changes you or the IRS made after the return was filed. A tax account transcript shows any later adjustments you or the IRS made after the tax return was filed. 

If you changed your name as a result of marriage or divorce since you filed your 2010 return, you must advise the IRS. Your name as it appears on your return needs to match the name registered with the Social Security Administration. A mismatch will likely delay the processing of your return.

Forms W-2

Many taxpayers cannot begin preparing their 2011 income tax returns until they have their Forms W-2, Wage and Tax Statement. Employers have until January 31, 2012 to send you a 2011 Form W-2 earnings statement.  If you do not receive your W-2 by the deadline, contact your employer. If you do not receive your W-2 by mid-February, contact the IRS.  You still must file your return or request an extension to file even if you do not receive your Form W-2. In certain cases, you may be able to file Form 4852, Substitute for Form W-2, Wage and Tax Statement.

Filing deadline

April 15, 2012 is a Sunday. Returns would normally be due the next day, April 16, 2012. However, April 16 is a holiday in the District of Columbia (Emancipation Day). As a result, the due date for 2011 returns is April 17, 2012.  If the mid-April tax deadline clock runs out, you can get an automatic six-month extension of time to file through October 17. However, this extension of time to file does not give you more time to pay any taxes due.  To obtain an extension, you need to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

Casualty losses

Many taxpayers experienced family, business and personal losses from hurricanes, tropical storms, wild fires, floods, and other natural disasters in 2011.  For federal tax purposes, a casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a hurricane, tornado, fire, or other disaster.

Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally-declared disaster, you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened. This means you can deduct a 2011 loss on your 2011 return or amended return for that preceding tax year (2010).   If you have any questions about a casualty loss, please contact our office.

Retirement savings

Just because the calendar moved from 2011 to 2012 doesn’t necessarily mean you missed out on contributing to a retirement savings plan. You can contribute up to $5,000 to a traditional IRA for 2011 and you can make the contribution as late as April 17, 2012. However, if you or your spouse is covered by an employer retirement plan, this will affect how much, if any, of your contribution is tax deductible.  Individuals age 50 and older may qualify for a catch-up contribution of $1,000 on top of the $5,000 maximum.  Different rules apply to other types of retirement savings plans.  Our office can review these rules in detail with you.

IRS Fresh Start Initiative

In 2011, the IRS announced a new program, called the Fresh Start Initiative, to help distressed taxpayers. The IRS adjusted its lien policies, increased the dollar threshold when liens are generally issued, made it easier for taxpayers to obtain lien withdrawals, and extended the streamlined offer-in-compromise program.  Previously, the IRS had given its employees greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances where a taxpayer has recently lost a job, is relying solely on Social Security, or is paying significant medical bills.

If you are experiencing hardship, the most important thing you can do is to remain in compliance with your tax obligations. If you owe back taxes, now is the time to pay them, if possible, or enter into an installment agreement, if you qualify, with the IRS. The IRS wants to see you making a good faith effort to pay your taxes.

Tax law changes

Along with assembling records and reviewing activities in 2011, it’s a good idea to review some of the tax law changes in 2011 that may affect your return.  Our office can review your 2010 return and see which areas may have been affected by tax law changes for your 2011 return.  In some cases, popular tax incentives that were available in 2010 were extended into 2011. You don’t want to miss out on any available tax breaks.

If you have any questions about preparing for the 2012 filing season, please contact our office.

2011 year end tax planning for individuals lacks some of the drama of recent years but can be no less rewarding.  Last year, individual taxpayers were facing looming tax increases as the calendar changed from 2010 to 2011; particularly, increased tax rates on wages, interest and other ordinary income, and higher rates on long-term capital gains and qualified dividends.

Thanks to legislation enacted at the end of 2010, tax rates are stable for 2011 and 2012, although the uncertainty will return as 2013 approaches, as political pressure in Washington builds to do something quickly for the economy. Ordinary income tax rates for individuals currently are 10, 15, 25, 28, 33 and 35 percent; capital gains rates are zero and 15 percent.

President Obama has proposed to preserve these tax rates for taxpayers with income below $200,000 (individuals) and $250,000 (married couples filing jointly) and to raise the rates for taxpayers in these higher-income brackets. If Congress is gridlocked and takes no action, everybody’s rates will rise, but again, not until 2013.

Expiring tax breaks

Unfortunately, not all is quiet on the tax front despite no dramatic rate changes until 2013. There are some specific tax provisions that will terminate at the end of 2011, unless Congress and the President agree to extend them. These include the tuition and fees above-the-line deduction for high education expenses, which can be as high as $4,000. Another expiring provision is the deduction for mortgage insurance premiums, which covers premiums paid for qualified mortgage insurance.

Several other benefits (“extenders”) are also scheduled to expire after 2011:

• The state and local sales tax deduction;
• The classroom expense deduction for teachers;
• Nonbusiness energy credits;
• The exclusion for distributions of up to $100,000 from an IRA to charity;
• A higher deduction limit for charitable contributions of appreciated property for conservation purposes.

Retirement accounts

An old standby that makes sense from year-to-year is maximizing contributions to an IRA. The contribution is deductible up to $5,000 ($6,000 for taxpayers over 50), depending on some specific taxpayer income levels and circumstances. Taxpayers in a 401(k) plan can reduce their income by contributing to their employer plan, for which the limit in 2011 is $16,500.

In 2010, it was particularly important to consider whether to convert a traditional IRA to a Roth IRA, because the income realized on conversion could be recognized over two years. While a conversion continues to be worthwhile to consider (because distributions from a Roth IRA are not taxable), there are no longer any special break to defer a portion of the income from the conversion.

 Alternative minimum tax

The AMT has been “patched” for 2011. The exemptions have been temporarily increased from the normal statutory levels to the “patched” levels:

• From $33,750 to $48,450 for single individuals;
• From $45,000 to  $74,450 for married couples filing jointly and surviving spouses; and
• From $22,500 to $37,335 for married couples filing separately.

The amounts return to the “normal levels” of $33,750/$45,000/$22,500, respectively, in 2012 unless Congress takes action to maintain the patch. Elimination of the AMT is a goal of long-term tax reform, but the loss of revenue has been considered too high in the past. Without  the “patch,” the Congressional Budget Office estimates that an additional 20 million middle-class taxpayers would suddenly become subject to an AMT once designed only for millionaires.

While planning for the AMT is difficult, taxpayers may want to consider realizing AMT income, such as capital gains, in 2011, when the patch is higher, rather than in 2012.

Conclusion

Taxpayers can take advantage of 2011 provisions to realize last-minute tax benefits. Some of these benefits may not be available in 2012.  It is worthwhile to look at these planning opportunities as part of an overall year-year financial strategy.

Adoptive parents may be eligible for federal tax incentives. The Tax Code includes an adoption tax credit to help defray the costs of an adoption.  Recent changes to the adoption tax credit make it very valuable.

Temporary increase

In 2010, Congress temporarily increased the dollar limitation for the adoption tax credit (and the income exclusion for employer-provided adoption expenses) by $1,000 (from $12,170 to $13,170 for 2010 and indexed for inflation for tax years beginning after December 31, 2010). Congress also made the adoption tax credit refundable for 2010 and 2011. These enhancements, however, are scheduled to expire after December 31, 2011 unless Congress extends them.

Your income is another factor to take into account. You may not receive the full amount of the adoption tax credit for 2010 if your modified adjusted gross income (MAGI) is $182,520 or more. The adoption tax credit is completely phased out if your MAGI is $222,520 or more. These amounts may be adjusted for inflation by the IRS in 2011.  Additionally, to prevent double benefits, the adoption tax credit is coordinated with the exclusion for employer-provided adoption assistance

Qualified expenses

A number of adoption-related expenses may qualify for the tax credit. These expenses include, but are not limited to, reasonable and necessary adoption fees, travel expenses, fees paid to attorneys, and court costs.  The IRS has identified on its website some expenses that are excluded, such as expenses related to the adoption of the child of a taxpayer’s spouse, the costs of a surrogate parenting arrangement, and expenses that violate state or federal law.  Additionally, expenses related to a foreign adoption qualify only if the taxpayer actually adopts the child.  That rule is different if a domestic adoption is unsuccessful.

Eligible child

An eligible child for purposes of the adoption tax credit is an individual who has not attained the age of 18 at the time of the adoption, or is physically or mentally incapable of caring for himself or herself. A child has special-needs if the child otherwise meets the definition of eligible child, the child is a U.S. citizen or resident, a state determines that the child cannot or should not be returned to his or her parent's home, and  a state determines that the child probably will not be adopted unless assistance is provided. 

Form 8839

Taxpayers file Form 8839, Qualified Adoption Expenses, to claim the adoption tax credit.  At this time, Form 8839 cannot be filed electronically; it must be filed on paper because the IRS requires you to attach supporting documentation.

The IRS requires different documents if the adoption is foreign or domestic, final or not final, and if the adoption is of a child with special needs. The IRS has issued special safe harbor rules for certain foreign adoptions. The home country of the child may be included in the safe harbors which streamline some of the documentation requirements.

The IRS recommends that taxpayers keep the following records: Receipts for qualified adoption expenses, final decree, certificate or order of adoption, home study by an authorized placement agency, child placement agreements or court orders, and determination of special needs status by a State or the District of Columbia.

Processing Form 8839 can take some time. One of the most common mistakes taxpayers make is failing to attach supporting documents.   After the IRS conducts an initial review of Form 8839, it notifies taxpayers explaining any additional steps they need to take, such as providing certain documentation to establish whether they are eligible for the credit.

If you have any questions about the adoption tax credit, please contact our office.

Whether for a day, a week or longer, many of the costs associated with business trips may be tax-deductible. The tax code includes a myriad of rules designed to prevent abuses of tax-deductible business travel. One concern is that taxpayers will disguise personal trips as business trips. However, there are times when taxpayers can include some personal activities along with business travel and not run afoul of the IRS.

Business travel

You are considered “traveling away from home” for tax purposes if your duties require you to be away from the general area of your home for a period substantially longer than an ordinary day's work, and you need sleep or rest to meet the demands of work while away. Taxpayers who travel on business may deduct travel expenses if they are not otherwise lavish or extravagant. Business travel expenses include the costs of getting to and from the business destination and any business-related expenses at that destination.

Deductible travel expenses while away from home include, but are not limited to, the costs of:

• Travel by airplane, train, bus, or car to/from the business destination.
• Fares for taxis or other types of transportation between the airport or train station and lodging, the lodging location and the work location, and from one customer to another, or from one place of business to another.
• Meals and lodging.
• Tips for services related to any of these expenses.
• Dry cleaning and laundry.
• Business calls while on the business trip.
• Other similar ordinary and necessary expenses related to business travel.

Business mixed with personal travel

Travel that is primarily for personal reasons, such as a vacation, is a nondeductible personal expense. However, taxpayers often mix personal travel with business travel. In many cases, business travelers may able to engage in some non-business activities and not lose all of the tax benefits associated with business travel.

The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business.

Let’s look at an example. Amanda, a self-employed architect, resides in Seattle. Amanda travels on business to Denver. Her business trip lasts six days. Before departing for home, Amanda travels to Colorado Springs to visit her son, Jeffrey. Amanda’s total expenses are $1,800 for the nine days that she was away from home. If Amanda had not stopped in Colorado Springs, her trip would have been gone only six days and the total cost would have been $1,200. According to past IRS precedent, Amanda can deduct $1,200 for the trip, including the cost of round-trip transportation to and from Denver.

Weekend stayovers

Business travel often concludes on a Friday but it may be more economical to stay over Saturday night and take advantage of a lower travel fare. Generally, the costs of the weekend stayover are deductible as long as they are reasonable. Staying over a Saturday night is one way to add some personal time to a business trip.

Foreign travel

The rules for foreign travel are particularly complex.  The amount of deductible travel expenses for foreign travel is linked to how much of the trip was business related.  Generally, an individual can deduct all of his or her travel expenses of getting to and from the business destination if the trip is entirely for business.

In certain cases, foreign travel is considered entirely for business even if the taxpayer did not spend his or her entire time on business activities. For example, a foreign business trip is considered entirely for business if the taxpayer was outside the U.S. for more than one week and he or she spent less than 25 percent of the total time outside the U.S. on non-business activities. Other exceptions exist for business travel outside the U.S. for less than one week and in cases where the employee did not have substantial control in planning the trip.

Foreign conventions are especially difficult, but no impossible, to write off depending upon the circumstances. The taxpayer may deduct expenses incurred in attending foreign convention seminar or similar meeting only if it is directly related to active conduct of trade or business and if it is as reasonable to be held outside North American area as within North American area.

Tax home

To determine if an individual is traveling away from home on business, the first step is to determine the location of the taxpayer’s tax home. A taxpayer’s tax home is generally his or her regular place of business, regardless of where he or she maintains his or her family home. An individual may not have a regular or main place of business. In these cases, the individual’s tax home would generally be the place where he or she regularly lives.  The duration of an assignment is also a factor. If an assignment or job away from the individual’s main place of work is temporary, his or her tax home does not change. Generally, a temporary assignment is one that lasts less than one year.

The distinction between tax home and family home is important, among other reasons, to determine if certain deductions are allowed. Here’s an example.

Alec’s family home is in Tucson, where he works for ABC Co. 14 weeks a year.  Alec spends the remaining 38 weeks of the year working for ABC Co. in San Diego. Alec has maintained this work schedule for the past three years. While in San Diego, Alec resides in a hotel and takes most of his meals at restaurants.  San Diego would be treated as Alec’s tax home because he spends most of his time there. Consequently, Alec would not be able to deduct the costs of lodging and meals in San Diego.

Accountable and nonaccountable plans

Many employees are reimbursed by their employer for business travel expenses. Depending on the type of plan the employer has, the reimbursement for business travel may or may not be taxable. There are two types of plans: accountable plans and nonaccountable plans.

An accountable plan is not taxable to the employee. Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and federal employment taxes. Accountable plans have a number of requirements:

• There must be a business connection to the expenditure. The expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on his or her individual income tax return.

• There must be adequate accounting by the recipient within a reasonable period of time. Employees must verify the date, time, place, amount and the business purpose of the expenses.

• Excess reimbursements or advances must be returned within a reasonable period of time.

Amounts paid under a nonaccountable plan are taxable to employees and are subject to all employment taxes and withholding.  A plan may be labeled an accountable plan but if it fails to qualify, the IRS treats it as a nonaccountable plan. If you have any questions about accountable plans, please contact our office.

As mentioned, the tax rules for business travel are complex. Please contact our office if you have any questions.

Exempt organizations

Charitable organizations often are organized as tax-exempt entities. To be tax-exempt under Code Sec. 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes in Code Sec. 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization; that is, it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Churches that meet the requirements of Code Sec. 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS.

Tax-exempt organizations must file annual reports with the IRS. If an organization fails to file the required reports for three consecutive years, its tax-exempt status is automatically revoked. Recently, the tax-exempt status of more than 200,000 organizations was automatically revoked. Most of these organizations are very small ones and the IRS believes that they likely did not know about the requirement to file or risk loss of tax-exempt status.  The IRS has put special procedures in place to help these small organizations regain their tax-exempt status.

Contributions

Contributions to qualified charities are tax-deductible. They key word here is qualified. The organization must be recognized by the IRS as a legitimate charity.

The IRS maintains a list of organizations eligible to receive tax-deductible charitable contributions. The list is known as Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986.  Similar information is available on an IRS Business Master File (BMF) extract.

In certain cases, the IRS will allow deductions for contributions to organizations that have lost their exempt status but are listed in or covered by Publication 78 or the BMF extract.  Additionally, private foundations and sponsoring organizations of donor-advised funds generally may rely on an organization's foundation status (or supporting organization type) set forth in Publication 78 or the BMF extract for grant-making purposes.

Generally, the donor must be unaware of the change in status of the organization. If the donor had knowledge of the organization’s revocation of exempt status, knew that revocation was imminent or was responsible for the loss of status, the IRS will disallow any purported deduction.

Churches

As mentioned earlier, churches are not required to apply for tax-exempt status. This means that taxpayers may claim a charitable deduction for donations to a church that meets the Code Sec. 501(c)(3) requirements even though the church has neither sought nor received IRS recognition that it is tax-exempt.

Foreign charities

Contributions to foreign charities may be deductible under an income tax treaty. For example, taxpayers may be able to deduct contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada.  Before donating to a foreign charity, please contact our office and we can determine if the contribution meets the IRS requirements for deductibility.

The rules governing charities, tax-exempt organizations and contributions are complex. Please contact our office if you have any questions.

Many more retirees and others wanting guarantee income are looking into annuities, especially given the recent experience of the economic downturn. While the basic concept of an annuity is fairly simple, complex rules usually apply to the taxation of amounts received under certain annuity and life insurance contracts.

Amounts received as an annuity are included in gross income to the extent that they exceed the exclusion ratio, which is determined by taking the original investment in the contract, deducting the value of any refund features, and dividing the result by the expected yield on the contract as of the annuity starting date. In general, the expected return is the product of a single payment and the anticipated number of payments to be received, i.e., the total amount the annuitant(s) can expect to receive. In the case of a life annuity, the number of payments is computed based on actuarial tables.

If the annuity payments are to continue as long as the annuitant remains alive, the anticipated number of payments is based on the annuitant's (or annuitants') life expectancy at the birthday nearest the annuity starting date. The IRS provides a variety of actuarial tables, within unisex tables generally applicable to all contracts entered into after June 1986. The expected return multiples found in the actuarial tables may require adjustment if the contract specifies quarterly, semiannual or annual payments or if the interval between payments exceeds the interval between the annuity starting date and the first payment.

In connection with annuity calculations, one recent tax law change in particular is worth noting. Under the Creating Small Business Jobs Act of 2010, enacted on September 27, 2010, if amounts are received as an annuity for a period of 10 years or more or on the lives of one or more individuals under any portion of an annuity, endowment, or life insurance contract, then that portion of the contract will now be treated as a separate contract for tax purposes. As result, a portion of such an annuity, endowment, or life insurance contract may be annuitized, while the balance is not annuitized. The allowance of partial annuitization applies to amounts received in tax years beginning after December 31, 2010.

If you need help in "crunching the numbers" on an annuity, or if you'd like advice on what annuity options might best fit your needs, please do not hesitate to contact our office.

A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.

The main advantage of an LLC is that in general its members are not personally liable for the debts of the business. Members of LLCs enjoy similar protections from personal liability for business obligations as shareholders in a corporation or limited partners in a limited partnership. Unlike the limited partnership form, which requires that there must be at least one general partner who is personally liable for all the debts of the business, no such requirement exists in an LLC.

A second significant advantage is the flexibility of an LLC to choose its federal tax treatment. Under IRS's "check-the-box rules, an LLC can be taxed as a partnership, C corporation or S corporation for federal income tax purposes. A single-member LLC may elect to be disregarded for federal income tax purposes or taxed as an association (corporation).

LLCs are typically used for entrepreneurial enterprises with small numbers of active participants, family and other closely held businesses, real estate investments, joint ventures, and investment partnerships. However, almost any business that is not contemplating an initial public offering (IPO) in the near future might consider using an LLC as its entity of choice.

Deciding to convert an LLC to a corporation later generally has no federal tax consequences. This is rarely the case when converting a corporation to an LLC. Therefore, when in doubt between forming an LLC or a corporation at the time a business in starting up, it is often wise to opt to form an LLC. As always, exceptions apply. Another alternative from the tax side of planning is electing "S Corporation" tax status under the Internal Revenue Code.