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The IRS released the optional standard mileage rates for 2025. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:business,medical, andcharitable purposesSome mem...
The IRS, in partnership with the Coalition Against Scam and Scheme Threats (CASST), has unveiled new initiatives for the 2025 tax filing season to counter scams targeting taxpayers and tax professio...
The IRS reminded disaster-area taxpayers that they have until February 3, 2025, to file their 2023 returns, in the entire states of Louisiana and Vermont, all of Puerto Rico and the Virgin Islands and...
The IRS has announced plans to issue automatic payments to eligible individuals who failed to claim the Recovery Rebate Credit on their 2021 tax returns. The credit, a refundable benefit for individ...
Massachusetts has updated the rule on charitable contribution deductions for income taxes. The rule explains the deduction allowed for certain charitable contributions against Part B adjusted gross in...
The IRS has recently provided significant relief to non-spouse beneficiaries who inherited an IRA.
The IRS has recently provided significant relief to non-spouse beneficiaries who inherited an IRA after
the deceased owner began taking required minimum distributions (RMDs). In March, the IRS extended its waiver of the excise tax for failing to take an RMD to non-spouse beneficiaries of IRA account holders
who died in 2023 after they were required to begin taking their RMDs. Under the SECURE Act of 2019,
non-spouse beneficiaries have 10 years following the account holder’s death to distribute all of the funds from the inherited IRA. The IRS has interpreted this rule as meaning the beneficiary must take
annual distributions from the IRA for those 10 years. However, the IRS had previously said that it will not require RMDs for beneficiaries of account holders who died in 2020 through 2022.
The employee retention credit (ERC) is being scriutinized by IRS.
The employee retention credit (ERC) was a credit available to employers that kept employees on their
payrolls through pandemic-related shutdowns. However, unscrupulous promoters encouraged
ineligible businesses to claim the credit and the short-staffed IRS was unable to properly investigate
the claims. In fact, the IRS was so overwhelmed with improper claims that in fall 2023, it stopped accepting new ERC claims and has yet to begin accepting them again. The moratorium on new claims has given the IRS the breathing room it needed to send out letters denying previously filed claims and begin asking taxpayers who may not have been eligible for the credit to provide additional information.
Ineligible taxpayers whose claims have yet to be processed may still be able to withdraw their claims. Withdrawing the claim will avoid future repayment, interest and penalties.
written by NATP
Beneficial Ownership Information (BOI) reporting, is required of all companies while in litigation?
While the matter is currently the subject of high-profile litigation that has attracted a lot of headlines, most U.S. businesses are still subject to the Corporate Transparency Act’s (CTA) beneficial ownership
information (BOI) reporting requirements. The March ruling from an Alabama federal judge
found the CTA to be unconstitutional, and the BOI reporting requirements unenforceable, only applies
to the plaintiffs in the case he was hearing: an Ohio small business and members of the National Small
Business Association (NSBA) as of the March 1st decision date.
The Justice Department appealed the Alabama decision, and the Financial Crimes Enforcement
Network (FinCEN) has made it clear that all businesses not involved in the case are subject to the
reporting requirements. That means, beginning in 2024, newly formed businesses must file BOI reports with FinCEN within 90 days of receiving word from the secretary of state that the business was created or registered. By the end of the year, all businesses formed prior to 2024 must file reports. Any business formed after Jan. 1, 2025, must file a BOI report with FinCEN within 30 calendar days of receiving actual or public notice that their creation or registration is effective.
article written by NATP
President Donald Trump targeted federal hiring, including specific rules for the Internal Revenue Service, and the United States’ participation in the global tax framework being developed by the Organisation for Economic Co-operation and Development among his flurry of executive orders signed on the first day of his second term in the Oval Office.
President Donald Trump targeted federal hiring, including specific rules for the Internal Revenue Service, and the United States’ participation in the global tax framework being developed by the Organisation for Economic Co-operation and Development among his flurry of executive orders signed on the first day of his second term in the Oval Office.
In one order, President Trump ordered "a freeze on the hiring of Federal civilian employees, to be applied throughout the executive branch. As part of this freeze, no Federal civilian position that is vacant at noon on January 20, 2025, may be filled, and no new position may be created except as otherwise proved for in this memorandum or other applicable law."
The order calls on the Office of Management and Budget and the Department of Government Efficiency to "submit a plan to reduce the size of the Federal Government’s workforce through efficiency improvements and attrition."
When that plan is created, the executive order will expire, with the exception of hiring for the Internal Revenue Service.
"This memorandum shall remain in effect for the IRS until the Secretary of the Treasury, in consultation with the Director of OMB and the Administrator of [DOGE], determine that it is in the national interest to lift the freeze," the order continues.
The order also prohibits the hiring of contractors to circumvent the order.
In a separate executive order, President Trump has effectively removed the United States from the OECD global corporate tax framework, stating that it "has no force or effect in the United States."
The order goes on to state that "any commitments made by the prior administration on behalf of the United States with respect to the Global Tax Deal have no force or effect within the United States absent any act by the Congress adopting the relevant provisions of the Global Tax Deal."
The framework calls for a 15 percent minimum corporate income tax and has provisions that allow countries to collect a "top-up tax" from companies in countries with a lower rate, something the memo called "retaliatory."
By Gregory Twachtman, Washington News Editor
The Financial Crimes Enforcement Network is keeping beneficial reporting information reporting voluntary even though the Supreme Court has lifted the injunction that was put in place by a lower court to keep the BOI regulation from being enforced.
The Financial Crimes Enforcement Network is keeping beneficial reporting information reporting voluntary even though the Supreme Court has lifted the injunction that was put in place by a lower court to keep the BOI regulation from being enforced.
"In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force," the agency posted to its website on January 24, 2025. "However, reporting companies may continue to voluntarily submit beneficial ownership information reports."
The posting follows a Supreme Court order stating on January 23, 2025, that the injunction put in place by the United States District Court for the Eastern District of Texas on December 5, 2024, was removed.
Justice Ketanji Brown Jackson offered a dissenting opinion on lifting the injunction.
"However likely the Government’s success on the merits may be, in my view, emergency relief is not appropriate because the applicant has failed to demonstrate sufficient exigency to justify our interventions," Justice Jackson wrote, citing two reasons: the Fifth Circuit Court of Appeals has already expedited the hearing of the case and the government has deferred the implementation of the regulations on its own accord.
"The Government has provided no indication that injury of a more serious or significant nature would result if the Act’s implementation is further delayed while the litigation proceeds in the lower courts. I would therefore deny the application and permit the appellate process to run its course," Justice Jackson added.
By Gregory Twachtman, Washington News Editor
The Treasury and IRS have issued final regulations that provide rules for classifying digital and cloud transactions. The rules apply for purposes of the international provisions of the Code.
The rules retain the overall approach of the proposed regulations (NPRM REG-130700-14, August 14, 2019), with some revisions.
The Treasury and IRS also issued proposed regulations that provide sourcing rules for cloud transactions.
The Treasury and IRS have issued final regulations that provide rules for classifying digital and cloud transactions. The rules apply for purposes of the international provisions of the Code.
The rules retain the overall approach of the proposed regulations (NPRM REG-130700-14, August 14, 2019), with some revisions.
The Treasury and IRS also issued proposed regulations that provide sourcing rules for cloud transactions.
Background
Reg. §1.861-18 provides rules for classifying cross-border transactions involving digitized information, specifically computer programs, broadly grouped into the following categories:
- the transfer of a copyright;
- the transfer of a copyrighted article;
- the provision of services for the development or modification of a computer program; and
- the provision of know-how relating to the development of a computer program.
The 1998 final regulations focus on the distinction between the transfer of the copyright itself and transfer of a copyrighted article, using a substance-over-form characterization approach and by examining the underlying rights granted to the transferee. Transfers of copyrights and copyrighted articles are further characterized as complete or partial transfers, resulting in the transfers being characterized as either sales or licenses, in the case of a copyrights, or sales or leases, in the case of a copyrighted articles.
2025 Final Regulations
The 2025 final regulations maintain the basic framework for characterizing transfers of content and extend the characterization framework to digital content. Digital content is generally defined as any computer program or other content protected by copyright law, not just transactions involving computer programs.
The categories of transactions include:
- the transfer of a copyright in the digital content;
- the transfer of a copy of the digital content (a copyrighted article);
- the provision of services for the development or modification of the digital content; and
- the provision of know-how relating to the development of digital content.
The 2025 final regulations also provide for cloud transactions and characterize the transactions as a provision of services.
Cloud transactions are generally defined as transactions through which a person obtains on-demand network access to computer hardware, digital content, or similar resources.
The 2025 final regulations replace the de minimis rule and the concept of arrangement with a predominant character rule that applies to both digital content transactions and cloud transactions. Under the rule, a transaction with multiple elements is characterized based on the predominant character of the transaction.
Request for Comments on 2025 Final Regulations
The Treasury and IRS are considering whether the characterization rules should apply to all provisions of the Code and have requested comments on any specific areas that would be affected, with examples if appropriate. Comments are also requested on any guidance that would be needed and the approach the guidance should take. In addition to general comments, the Treasury and IRS also request comments on the desirability and effect of applying the rules in specific areas and the guidance need.
Comments should be submitted 90 days after the Notice requesting comments is published in the Internal Revenue Bulletin, with consideration for comments submitted after that date that do not delay the guidance. Comments may be submitted electronically via the Federal eRulemaking Portal www.regulations.com or or by mail to: Internal Revenue Service, CC:PA:01:PR (Notice 2025-6, Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044.
Proposed Sourcing Rules for Cloud Transactions
Gross income from a cloud transaction is sourced as services. Under the Code, gross income from the performance of services is sourced to the place where the service is performed.
To determine the place of performance, the proposed regulations would take into account the location of the employees and assets, including both tangible and intangible assets, that contribute to the provision of cloud transactions. The sourcing rules would apply on a taxpayer-by-taxpayer basis.
The place of performance of a cloud transactions is established through a formula composed of a fraction that has three parts-the intangible property factor, the personnel factor, and the tangible property factor. The factors make up the denominator of the fraction. The numerator is the sum of each portion of each factor that is from sources within the United States. The gross income from a cloud transaction multiplied by the fraction is the U.S. source portion of the gross income.
Proposed Regulations, NPRM REG-107420-24
Notice 2025-6
The IRS has released final regulations implementing the clean hydrogen production credit under Code Sec. 45V, as well as the election to treat a clean hydrogen production facility as energy property for purposes of the energy investment credit under Code Sec. 48. The regulations generally apply to tax years beginning after December 26, 2023.
The IRS has released final regulations implementing the clean hydrogen production credit under Code Sec. 45V, as well as the election to treat a clean hydrogen production facility as energy property for purposes of the energy investment credit under Code Sec. 48. The regulations generally apply to tax years beginning after December 26, 2023.
The regulations adopt the proposed regulations (REG-117631-23) with certain modifications. Rules are provided for determining lifecycle greenhouse gas (GHG) emissions rates resulting from hydrogen production processes; petitioning for provisional emissions rates; verifying production and sale or use of clean hydrogen; modifying or retrofitting existing qualified clean hydrogen production facilities; and using electricity from certain renewable or zero-emissions sources to produce qualified clean hydrogen.
Background
The Inflation Reduction Act of 2022 (P.L. 117-169) added Code Sec. 45V to provide a tax credit to produce qualified clean hydrogen produced after 2022 at a qualified clean hydrogen production facility during the 10-year period beginning on the date the facility is originally placed in service.
The credit is calculated by multiplying an applicable amount by the kilograms of qualified clean hydrogen produced. The applicable amount ranges from $0.12 to $0.60 per kilogram depending on the level of lifecycle greenhouse gas emissions associated with the production of the hydrogen. The credit is multiplied by five if the qualified clean hydrogen production facility meets certain prevailing wage and apprenticeship requirements.
Qualified Facility and Emissions Rate
The regulations provide that a qualified clean hydrogen production facility is a single production line that is used to produce qualified clean hydrogen. This includes all components, including multipurpose components, of property that function interdependently to produce qualified clean hydrogen through a process that results in the lifecycle GHG emissions rate used to determine the credit. It does not include equipment used to condition or transport hydrogen beyond the point of production, or feedstock-related equipment.
The lifecycle GHG emissions rate is determined under the latest publicly available 45VH2-GREET Model developed by the Argonne National Laboratory on the first day of the tax year during which the qualified clean hydrogen was produced. If a version of 45VH2-GREET becomes publicly available after the first day of the taxa year of production (but still within such tax year), then the taxpayer may elect to use the subsequent model.
Verifying Production and Sale
Code Sec. 45V requires the clean hydrogen to be produced for sale or use. No hydrogen is qualified clean hydrogen unless its production, sale, or use is verified by an unrelated party. A verification report prepared by a qualified verifier must be attached to a taxpayer’s Form 7210 for each qualified clean hydrogen production facility and for each tax year the Code Sec. 45V credit is claimed. The regulations outline the requirements for a verification report. They also contain requirements for the third-party verifier to perform to attest that the qualified clean hydrogen has been sold or used by a person for verifiable use.
Modified and Retrofitted Facilities
A facility placed in service before 2023 that is modified to produce qualified clean hydrogen may be eligible for the credit so long as the taxpayer’s expenses to modify the facility as chargeable to the capital account. However, merely changing fuel inputs does not constitute a modification for this purpose. A modification must enable to the facility to produce qualified clean hydrogen if it not before the modification to meet the lifecycle GHG emissions rate. Alternatively, an existing facility may be retrofitted to qualify for the credit provided that the fair market value of used property in the facility is not more than 20 percent of the facility’s total value (80/20 Rule).
Energy Credit Election
A taxpayer that owns and places in service a specified clean hydrogen production facility can make an irrevocable election to treat any qualified property that is part of the facility as energy property for purposes of the energy investment credit under Code Sec. 48. The final regulations contain definition of a specified facility, the energy percentage for the investment credit, and the time and manner for making the election. The rules include a safe harbor for determining the beginning of construction and using a provisional emissions rate (PER) to calculate the investment credit.
The IRS issued updates to frequently asked questions (FAQs) about the Energy Efficient Home Improvement Credit (Code Sec. 25C) and the Residential Clean Energy Property Credit (Code Sec. 25D). The former credit applies to qualifying property placed in service on or after January 1, 2023, and before January 1, 2033. The updates pertained to FS-2024-15. More information is available here.
The IRS issued updates to frequently asked questions (FAQs) about the Energy Efficient Home Improvement Credit (Code Sec. 25C) and the Residential Clean Energy Property Credit (Code Sec. 25D). The former credit applies to qualifying property placed in service on or after January 1, 2023, and before January 1, 2033. The updates pertained to FS-2024-15. More information is available here.
Energy Efficient Home Improvement Credit
The credit is limited to $2,000 per taxpayer per taxable year in the aggregate for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves or boilers.
Thus, a taxpayer could claim a total credit of $3,200 if they had sufficient expenditures in property categories (or a home energy audit) subject to the $1,200 limitation and in property categories subject to the $2,000 limitation.
Additionally, a taxpayer can claim the credit only for qualifying expenditures incurred for an existing home, or for an addition to or renovation of an existing home, but not for a newly constructed home.
Residential Clean Energy Property Credit
One of the FAQs mentions that this credit is a nonrefundable personal tax credit. A taxpayer claiming a nonrefundable credit can only use it to decrease or eliminate tax liability.
The credit is generally limited to 30 percent of qualified expenditures made for property placed in service between 2022 and 2032. However, the credit allowed for qualified fuel cell property expenditures is 30 percent of the expenditures, up to a maximum credit of $500 for each half kilowatt of capacity of the qualified fuel cell property.
The IRS has provided updated guidance on the implementation of section 530 of the Revenue Act of 1978 (P.L. 95-600), as amended, regarding controversies involving whether individuals are "employees" for employment tax purposes. Section 530 (which is not an Internal Revenue Code section) provides relief for employers who are involved in worker classification status disputes with the IRS and face large employment tax assessments as a result of the IRS’s proposed reclassifications of workers.
The IRS has provided updated guidance on the implementation of section 530 of the Revenue Act of 1978 (P.L. 95-600), as amended, regarding controversies involving whether individuals are "employees" for employment tax purposes. Section 530 (which is not an Internal Revenue Code section) provides relief for employers who are involved in worker classification status disputes with the IRS and face large employment tax assessments as a result of the IRS’s proposed reclassifications of workers.
Section 530 Safe Harbor
Section 530 provides that an employer will not be liable for federal employment taxes regarding an individual or class of workers if certain statutory requirements are met. Section 530 relief applies only if the taxpayer did not treat the individual as an employee for federal employment tax purposes for the period at issue, and meets each of the following requirements for that period:
- the taxpayer filed all required federal tax returns, including information returns, on a basis that is consistent with the taxpayer’s treatment of the individual as not being an employee (reporting consistency requirement);
- the taxpayer did not treat the individual or any individual holding a substantially similar position as an employee (substantive consistency requirement); and
- the taxpayer had a reasonable basis for not treating the individual as an employee (reasonable basis requirement).
Rev. Proc. 85-18, 1985-1 CB 518, provided instructions for implementing section 530 relating to the employment tax status of independent contractors and employees.
Updated Guidance
The updated guidance clarifies provisions in Rev. Proc. 85-18 regarding the definition of employee, the section 530 requirement for the filing of required returns, and the reasonable basis safe harbor rules. The updated guidance also includes new provisions that reflect certain statutory changes made to section 530 since 1986.
Among other things, the updated guidance amplifies guidelines in Rev. Proc. 85-18 which interpreted the word “treat” for purposes of determining whether a taxpayer did not treat an individual as an employee for section 530 purposes. Under the updated guidance, with respect to any individual, actions that indicate “treatment” of the individual as an employee for section 530 purposes include:
- withholding of income tax or FICA taxes from any payments made;
- filing of an original or amended employment tax return;
- filing or issuance of a Form W-2; and
- contracting with a third party to perform acts required of employers.
Provisions in Rev. Proc. 85-18 that explained how refunds, credits, abatements, and handling of claims applied to taxpayers who were under audit or otherwise involved in administrative or judicial processes with the IRS at the time of enactment of section 530 are no longer applicable and were not included in the updated guidance. Section 530 relief remains available at any stage in the administrative or judicial process if the requirements for relief are met.
Effect on Other Documents
Rev. Proc. 85-18, 1985-1 CB 518, is modified and superseded.
The IRS has issued final regulation identifying certain partnership related-party basis adjustment transactions as transactions of interest (TOI), a type of reportable transaction under Reg. §1.6011-4. Taxpayers that participate and material advisors to these transactions, and substantially similar transactions, are required to disclose as much to the IRS using Form 8886 and Form 8918, respectively, or be subject to penalties.
The IRS has issued final regulation identifying certain partnership related-party basis adjustment transactions as transactions of interest (TOI), a type of reportable transaction under Reg. §1.6011-4. Taxpayers that participate and material advisors to these transactions, and substantially similar transactions, are required to disclose as much to the IRS using Form 8886 and Form 8918, respectively, or be subject to penalties.
Basis Adjustment Transactions
A transaction is covered by the regulations if a partnership with two or more related partners engages in any of the following transactions.
- The partnership makes a current or liquidating distribution of property to a partner who is related to one or more partners, and the partnership increases the basis of one or more of its remaining properties under Code Sec. 734(b) and (c) by more than $10 million ($25 million for tax years before 2025).
- The partnership distributes property to a partner related to one or more partners in liquidation of the partnership interest, and the basis of one or more distributed properties is increased under Code Sec. 732(b) and (c) by more than $10 million ($25 million for tax years before 2025).
- The partnership distributes property to a partner who is related to one or more partners, the basis of one or more distributed properties is increased under Code Sec. 732(d) by more than $10 million ($25 million for tax years before 2025), and the related partner acquired all or a part of its interest in the partnership in a transaction that would have been a basis adjustment transaction had a Code Sec. 754 election been in effect.
A basis adjustment transaction for this purpose would occur if a partner transferred an interest in the partnership to a related partner in a nonrecognition transaction, and the basis of one or more partnership properties is increased under Code Sec. 743(b)(1) and (c) by more than $10 million ($25 million for tax years before 2025).
Retroactive Reporting
The final regulations limit the disclosure rule for open tax years that fall withing a six-year lookback window. The window is the seventy-two-month period before the first month of a taxpayer’s most recent tax year that began before January 14, 2025. The basis increase threshold in a TOI during the six-year lookback period is $25 million.
A taxpayer has until July 13, 2025, to file disclosure statements for TOIs in open tax years for which a tax return has already been filed and that fall within the six-year lookback window. Material advisors have until April 14, 2025, to file their disclosure statements for tax statements made before the final regulations.
Regulations under Code Sec. 2801, which imposes a tax on covered gifts and covered bequests received by a citizen or resident of the United States from a covered expatriate, have been issued.
Regulations under Code Sec. 2801, which imposes a tax on covered gifts and covered bequests received by a citizen or resident of the United States from a covered expatriate, have been issued.
Definitions
Reg. §28.2801-1 provides the general rules of liability imposed by Code Sec. 2801. For purposes of Code Sec. 2801, domestic trusts and foreign trusts electing to be treated as domestic trusts are treated as U.S. citizens. Terms used in chapter 15 of the Code are defined in Reg. §28.2801-2. The definition of the term “resident” is the transfer tax definition, which reduces opportunities to avoid the expatriate tax and is consistent with the purpose of the statute. The definition of “covered bequest” identifies three categories of property that are included in the definition and subject to tax under Code Sec. 2801. Reg. §§28.2801-2(i)(2) and (5) modify the definitions of an indirect acquisition of property.
Exceptions to the definitions of covered gifts and bequests are detailed in Reg. §28.2801-3. The timely payment of the tax shown on the covered expatriate’s gift or estate tax return was eliminated from the regulations as it relates to the exception from the definitions of covered gift and covered bequest. A rule was added in Reg. §28.2801-3(c)(3) that would limit the value of a covered bequest to the amount that exceeds the value of a covered gift to which tax under Code Sec. 2801 was previously imposed.
Covered Gifts and Bequests Made in Trust
Reg. §28.2801-3(d) provides rules regarding covered gifts and covered bequests made in trust, including transfers of property in trust that are subject to a general power of appointment granted by the covered expatriate. Contrary to the gift tax rule treating the trust beneficiary or holder of an immediate right to withdraw as the recipient of property, the rules treat transfers in trust that are covered gifts or bequests as transfers to the trust, which are taxed under Code Sec. 2801(e)(4). Consistent with the estate and gift tax rules, the exercise, release, or lapse of a covered expatriate’s general power of appointment for the benefit of a U.S. citizen or resident is a covered gift or covered bequest. Only for purposes of Code Sec. 2801, a covered expatriate’s grant of a general power of appointment over property not held in trust is a covered gift or bequest to the powerholder as soon as both the power is exercisable and the transfer of the property subject to the power is irrevocable.
Liability for Payment and Computation of Tax
Reg. §28.2801-4 provides rules regarding who is liable for the payment of the tax. In general, the U.S. citizen or resident, including a domestic trust, who receives the covered gift or bequest is liable for paying the tax. A non-electing foreign trust is not a U.S. citizen and is not liable for the tax. The U.S. citizen or resident who receives distributions from a non-electing foreign trust is liable on the receipt of the distribution to the extent the distribution is attributable to a covered gift or bequest. Rules regarding the date on which a recipient receives covered gifts or bequests are explained in Reg. §28.2801-4(d)(8)(ii). Reg. §28.2801-4(a)(2)(iii) is reserved to address charitable remainder and charitable lead trusts.
The manner in which the tax is computed is set forth in Reg. §28.2801-4(e). The value of the covered gift or bequest is the fair market value of the property on the date of its receipt, which is explained in Reg. §28.2801-4(d). A refund is allowed under Code Sec. 6511 if foreign gift or estate tax is paid after payment of the Code Sec. 2801 tax. In that scenario, the U.S recipient should file a claim for refund or a protective claim for refund on or before the application period of limitations has expired.
Foreign Trusts
Reg. §28.2801-5 sets forth rules applicable to foreign trusts, including the computation of the amount of a distribution from a foreign trust that is attributable to a covered gift or bequest made to the foreign trust. The election by a foreign trust to be treated as a domestic trust is explained in Reg. §28.2801-5(d)(3).
Other Rules
Reg. §28.2801-6 addresses special rules, including the determination of basis and the applicability of the generation-skipping transfer (GST) tax to certain Code Sec. 2801 transfers. Reg. §28.2801-6(d) discusses applicable penalties. Reg. §28.2801-7 provides guidance on the responsibility of a U.S. recipient to determine if tax under Code Sec. 2801 is due. Administrative regulations that address filing and payment due dates, returns, extension requests, and recordkeeping requirements with respect to the Code Sec. 2801 tax are also provided.
Due Date of Form 708
Form 708, United States Return of Tax for Gifts and Bequests from Covered Expatriates, is generally due on or before the 15th day of the 18th calendar month following the close of the calendar year in which the covered gift or bequest was received. The due date for Form 708 is further explained in Reg. 28.6071-1. Form 708 has yet to be issued by the IRS.
The regulations are generally effective on January 14, 2025.
The IRS has issued a revenue ruling addressing the federal tax treatment of contributions and benefits under state-administered paid family and medical leave (PFML) programs. The ruling clarifies how these contributions and benefits are classified for income tax, employment tax, and reporting purposes, with distinctions drawn between employer and employee contributions.
The IRS has issued a revenue ruling addressing the federal tax treatment of contributions and benefits under state-administered paid family and medical leave (PFML) programs. The ruling clarifies how these contributions and benefits are classified for income tax, employment tax, and reporting purposes, with distinctions drawn between employer and employee contributions.
PFML Contributions
Mandatory contributions made by employers under PFML programs are classified as excise taxes deductible as ordinary and necessary business expenses under Code Sec. 164. These payments are deemed state-imposed obligations for the purpose of funding public programs and are not included in employees' gross income under Code Sec. 61. In contrast, mandatory contributions withheld from employees’ wages are treated as state income taxes under Code Sec. 164(a)(3). Employees may deduct these amounts on their federal tax returns if they itemize deductions, subject to the state and local tax (SALT) deduction cap under Code Sec. 164(b)(6).
The ruling further specifies the treatment of benefits paid under PFML programs. Family leave benefits, which provide wage replacement during caregiving periods, are included in the recipient’s gross income under Code Sec. 61 but are not considered wages for federal employment tax purposes under Code Sec. 3121. By comparison, medical leave benefits attributable to employee contributions are excluded from gross income under Code Sec. 104(a)(3). However, medical leave benefits attributable to employer contributions are partially taxable under Code Sec. 105 and are subject to FICA taxes.
The ruling also addresses scenarios where employers voluntarily cover portions of employees’ contributions, referred to as "employer pick-ups." Such pick-ups are treated as additional compensation, included in employees’ gross income under Code Sec. 61, and are subject to federal employment taxes. Employers, however, may deduct these payments as ordinary business expenses under Code Sec. 162.
To ensure compliance, the IRS requires states and employers to report benefits exceeding $600 annually under Code Sec. 6041 using Form 1099. Additionally, benefits subject to employment taxes must be reported on Form W-2.
The ruling modifies prior guidance and includes a transition period for 2025 to allow states and employers to adjust their systems to meet reporting and compliance requirements. This clarification provides a framework for managing the tax implications of PFML programs, ensuring consistent treatment across jurisdictions.
Effective Date
This revenue ruling is effective for payments made on or after January 1, 2025. However, transition relief is provided to the states, the District of Columbia, and employers from certain withholding, payment, and information reporting requirements for state-paid medical leave benefits paid made during calendar year 2025.
Effect on Other Guidance
Rev. Rul. 81-194, Rev. Rul. 81-193, Rev. Rul. 81-192, and Rev. Rul. 81-191 are amplified to include the holdings in this revenue ruling that are applicable to the facts in those rulings. Rev. Rul. 72-191, as modified by Rev. Rul. 81-192, is further modified.
Rev. Rul. 2025-4
National Taxpayer Advocate Erin Collins identified the lengthy processing and uncertainty regarding the employee retention credit as being among the ten most serious problems facing taxpayers.
National Taxpayer Advocate Erin Collins identified the lengthy processing and uncertainty regarding the employee retention credit as being among the ten most serious problems facing taxpayers.
"Although the [Internal Revenue Service] has processed several hundred thousand claims in recent months, it was still sitting on a backlog of about 1.2 million claims as of October 26, 2024," Collins noted in her just released 2024 Annual Report to Congress. "Many claims have been pending for more than a year, and with the imminent start of the 2025 filing season, the IRS will shift its focus and resources to administering the filing season, resulting in even longer ERC processing delays."
Collins is calling on the IRS to provide more specific information with claims denials, more transparency on the timing of claims processing, and allowing taxpayers to submit documentation and seek an appeal before disallowing a claim that was not subject to an audit.
In addition to ERC processing, Collins identified delays in processing of tax returns as another serious problem taxpayers are facing, including delays associated with the more than 10 million paper 1040 returns and more than 75 million paper-filed returns and forms overall each year, as well as issues surrounding rejections of e-filed returns, most of which are valid returns. These delays end up delaying refunds and can be particularly hard on low-income filers who are receiving the Earned Income Tax Credit.
"We recommend the IRS continue to prioritize automating its tax processing systems, including by scanning all paper-filed tax returns in time for the 2026 filing season and processing amended tax returns automatically," the report states.
Another processing issue identified in the report deals with delays in processing and refunds for victims of identity theft.
Collins reported that the delays in addressing identity theft issues grew to 22 months in fiscal year 2024, affecting nearly 500,000 taxpayers.
"The IRS has advised us that it has begun to prioritize resolution of cases involving refunds over balance-due returns rather than following its traditional ‘first in, first out’ approach," the report states. "This is somewhat good news, but I strongly encourage the IRS to fix this problem once and for all during the coming year."
Other issues in the top 10 include:
- Taxpayer service is often not timely or adequate;
- The prevalence of tax-related scams;
- Employment recruitment, hiring, training, and retention challenges are hindering transformational change within the industry;
- The dependence on paper forms and manual document review in processing Individual Taxpayer Identification Numbers is causing delays and potential security risks;
- Limited taxpayer financial and tax literacy;
- The IRS’s administration of civil tax penalties is often unfair, inconsistently deters improper behavior, fails to promote efficient administration, and thus discourages tax compliance; and
- Changes to the IRS’s criminal voluntary disclosure practice requirements may be reducing voluntary compliance and negatively impacting the tax gap.
Collins also called on Congress to ensure the IRS receives adequate funding specifically for taxpayer services and technology upgrades, noting that many improvements that are highlighted in the report were made possible by the Inflation Reduction Act, which provided supplemental funding to the agency.
"Much of the funding has generated controversy – namely, the funding allocated for enforcement," the report notes. "But some of the funding has received strong bipartisan support – namely, the funding allocated for taxpayer services and technology modernization."
She reported that telephone service has improved dramatically, correspondence processing has improved dramatically, and in-person has become more accessible following the IRA funding, as well as technology improvements including increased scanning and processing of paper-filed tax returns electronically; increases in electronic correspondence; expansion of secure messaging; the ability to submit forms from mobile phones; and increases in both chatbot and voicebot technology.
"I want to highlight this distinction so that if Congress decides to cut IRA funding, it does not inadvertently throw the baby out with the bathwater," she reports.
By Gregory Twachtman, Washington News Editor
The IRS announced that final regulations related to required minimum distributions (RMDs) under Code Sec. 401(a)(9) will apply no earlier than the 2025 distribution calendar year. In addition, the IRS has provided transition relief for 2024 for certain distributions made to designated beneficiaries under the 10-year rule. The transition relief extends similar relief granted in 2021, 2022, and 2023.
The IRS announced that final regulations related to required minimum distributions (RMDs) under Code Sec. 401(a)(9) will apply no earlier than the 2025 distribution calendar year. In addition, the IRS has provided transition relief for 2024 for certain distributions made to designated beneficiaries under the 10-year rule. The transition relief extends similar relief granted in 2021, 2022, and 2023.
SECURE Act Changes
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) (P.L. 116-94) changed the RMD rules for employees and IRA owners who died after December 31, 2019. Under Code Sec. 401(a)(9)(H)(i), if an employee in a defined contribution plan or IRA owner has a designated beneficiary, the 5-year distribution period has been lengthened to 10 years, and the 10-year rule applies regardless of whether the employee dies before the required beginning date. Proposed regulations would interpret the 10-year rule to require the beneficiary of an employee who died after his required beginning date to continue to take an annual RMD beginning in the first calendar year after the employee’s death. This aspect of the 10-year rule differs from the 5-year rule, which required no RMD until the end of the 5-year period. Thus, the IRS provided transition relief for 2021, 2022, and 2023.
Guidance for Specified RMDs for 2024
Under the transition guidance, a defined contribution plan will not be treated as having failed to satisfyCode Sec. 401(a)(9) for failing to make an RMD in 2024 that would have been required under the proposed regulations. The relief also applies to an individual who would have been liable for an excise tax under Code Sec. 4974. The guidance applies to any distribution that, under the interpretation included in the proposed regulations, would be required to be made under Code Sec. 401(a)(9) in 2024 under a defined contribution plan or IRA that is subject to the rules of Code Sec. 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:
- a designated beneficiary of an employee or IRA owner under the plan if the employee or IRA owner died in 2020, 2021, 2022 or 2023, and on or after the employee’s (or IRA owner’s) required beginning date and the designated beneficiary is not using the lifetime or life expectancy payments exception under Code Sec. 401(a)(9)(B)(iii); or
- a beneficiary of an eligible designated beneficiary if the eligible designated beneficiary died in 2020, 2021, 2022, or 2023, and that eligible designated beneficiary was using the lifetime or life expectancy payments exception under Code Sec. 401(a)(9)(B)(iii).
Applicability Date of Final Regulations
The IRS has announced that final regulations regarding RMDs under Code Sec. 401(a)(9) and related provisions are anticipated to apply for determining RMDs for calendar years beginning on or after January 1, 2025.
The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.
The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.
Even with a wait time of 120 days, taxpayers who find themselves victims of tax refund identity theft likely find the road to resolution a frustrating and time consuming process. This article seeks to explain the various pulleys and levers at play when communicating with the IRS about an identity theft case.
Initiating an ID theft case
A taxpayer may become aware that he or she is a victim of tax-related identity theft when the IRS rejects their tax return because someone has already filed a return using the taxpayer's name and/or social security number. A taxpayer may also receive correspondence directly from the IRS that informs them, prior to filing, that someone has filed a suspicious return under their information. In other cases, a taxpayer may have had his or her identity information compromised and wishes to alert the IRS as to the possibility that he or she may be targeted by an identity thief.
For all such cases, the IRS has created Form 14039, Identity Theft Affidavit. Taxpayers who are actual or potential victims of tax-related identity theft may complete and submit the Affidavit to ensure that the IRS flags the tax account for review of any suspicious activity. Taxpayers who have been victimized are asked to provide a short explanation of the problem and how they became aware of it.
The Identity Theft Affidavit may also be submitted by taxpayers that have not yet become victims of tax-related identity theft, but who have experienced the misuse of their personal identity information to obtain credit or who have lost a purse or wallet or had one stolen, who suspect they have been targeted by a phishing or phone scam, etc. The form asks these taxpayers to briefly describe the identity theft violation, the event of concern, and to include the relevant dates.
Once the Form 14039 has been completed and submitted, the taxpayer should expect to receive a Notice CP01S from the IRS by mail. The Notice CP01S simply acknowledges that the IRS has received the taxpayer's Identity Theft Affidavit and reminds the taxpayer to continue to file all federal tax returns.
IDVerify.irs.gov
The IRS has implemented a pre-screening procedure for suspicious tax returns. Rather than halt the refund process entirely, which can prevent a refund claimed on a legitimately filed return, the IRS has provided taxpayers with the opportunity to verify their identity.
Now when the IRS receives a suspicious return, it will send a Letter 5071C or Notice CP01B to the taxpayer requesting him or her to either visit idverify.irs.gov or call the toll-free number listed on the header of the letter (1-800-830-5084) within 30 days. When the taxpayer does this, the taxpayer will encounter a series of questions asking for personal information. If the taxpayer fails to respond to the verification request or responds and answers a question incorrectly the IRS will flag the return as fraudulent and follow the prescribed procedures for resolving identity theft cases.
Resolving the case
After a tax return has been flagged with the special identity theft processing code, the IRS will assign the case to a tax assistor. TIGTA reported that the IRS assigns each case priority based first on its age and then by case type—for example, with cases nearing the statute of limitations placed first, followed by cases claiming disaster relief, and then identity theft cases. However, TIGTA has reported that cases are frequently reassigned to multiple tax assistors, and there are often long lag times where no work is accomplished toward resolution. National Taxpayer Advocate Nina Olson also noted in her recent "Identity Theft Case Review Report" on a statistical analysis of 409 identity theft cases closed in June 2014 that a significant number of cases experience a period of inactivity averaging 78 days.
After resolution
The IRS has also created the Identity Protection Personal Identification Number (IP PIN) project, which is meant to prevent taxpayers from being victimized by identity thieves a second time after the IRS has resolved their cases and closed them. The IP PIN is a unique six-digit code that taxpayers must entered on their tax return instead
The IRS assigns an IP PIN to a taxpayer by sending him or her a Notice CP01A. Generally this Notice is issued in December in preparation for the upcoming filing season. The taxpayer then enters it into the appropriate box of his or her federal tax return (i.e. Forms 1040, 1040A, 1040EZ or 1040 PR/SS). On paper returns, this box is located on the second page, near the signature line. When e-filing, the tax software or tax return preparer will indicate where the taxpayer should enter the IP PIN, social security number or taxpayer identification number (TIN) at time they file their tax return. The IP PIN is only good for one tax year.
Taxpayers who have been assigned an IP PIN, but who have lost or misplaced it cannot electronically file their tax returns until they have located it. Previously such taxpayers had no way to retrieve their IP PIN and had to file on paper. Beginning on January 14, 2015, however, taxpayers who had lost their IP PINs were able to retrieve them by accessing their online accounts and providing the IRS with specific personal information and answer a series of questions to verify identity.
Latest breach
The IRS announced on May 26th that 100,000 taxpayers became victims of a new identity theft scheme discovered in mid-May 2015. Identity theft criminals used stolen personal identification information to access the IRS's online "Get Transcript" application and illegally download these taxpayers' tax transcripts. The IRS is concerned that the criminals intend to use taxpayers' past-year return information to file false tax returns claiming tax items and refunds that look legitimate and that do not trigger the IRS's filters for finding suspicious returns.
Within this latest breach of security, identity thieves had attempted to download a total of 200,000 transcripts, but had only been successful half of the time, according to an announcement by IRS Commissioner John Koskinen. Because the IRS has yet to see how many taxpayers were actually victimized, the IRS may not provide IP PINs to all of these 200,000 taxpayers. However, the 100,000 taxpayers whose tax transcripts were downloaded will receive free credit monitoring services at the IRS's expense, Koskinen stated.
Sometimes in a rush to file your income tax return, you may unintentionally overlook some income that had to be reported, or a deduction that you should or should not have taken. Now what? The solution is usually straightforward: you should file what is called an amended return.
Taxable income is measured on an annual basis so you cannot generally wait on correcting a mistake by “making up the difference” on the return that you file next year. You need to make the correction(s) directly on a revised return for the same tax year. Form 1040X, Amended U.S. Individual Income Tax Return, is used to amend any individual income tax return. Income tax returns other than individual income tax returns or returns filed on Form 1120, U.S. Corporation Income Tax Return, or Form 1120-A, U.S. Corporation Short Form Income Tax Return, are amended by filing the same form originally used to file the return. Partnerships may use Form 1065X. Amended returns should clearly be marked as such. Some return forms such as Form 1041, U.S. Income Tax Return for Estates and Trusts, contain a box to be checked if it is being filed as an amended return. For returns other than income tax returns, Form 843, Claim for Refund and Request for Abatement, is used to claim a refund.
To amend a non-income tax return other than to claim a refund, the same form originally used to file the return generally should be used. Estate tax returns cannot be amended after they are due. However, supplemental information may be filed that can change the amount of estate tax due from the amount shown on the return.
When to file an amended return. A taxpayer must file an amended return and pay the additional tax due if the taxpayer omitted an item of income or incorrectly claimed a deduction for a tax year for which the limitation period is still open. A tax year ordinarily remains open for three years from the filing of a return. The three-year period starts running the day after the return is filed. A return that is filed early is treated as filed on the due date of the return. The limitations period on assessment for which a return remains open does not start over if an amended return is filed.
If you realize that you made a mistake on your return that is not in IRS’s favor, it is best to correct it through filing an amended return as soon as possible. If the IRS starts to audit you and finds the mistake first before you file your amended return, it can assess penalties on the original amount and treat you as if you had not come forward voluntarily on your own.
Special disaster loss option. Not all amended returns are filed to correct a mistake. One in particular –claiming a disaster loss—may be filed to effectively accelerate a casualty-loss deduction. A taxpayer may elect to deduct a disaster loss in the year of occurrence or the immediately preceding year. To qualify for the election, the loss must occur in a federally-declared disaster area. The election is made on a return (if you have not filed your return yet for the preceding tax year), an amended return or a refund claim. The amount of the deduction is determined using the casualty loss limitations.
The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.
The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.
Dependency deduction
You are allowed one dependency exemption deduction for each person you claim as a qualifying dependent on your federal income tax return. The deduction amount for the 2010 tax year is $3,650. If someone else may claim you as a dependent on their return, however, then you cannot claim a personal exemption (also $3,650) for yourself on your return. Additionally, your standard deduction will be limited.
Only one taxpayer may claim the dependency exemption per qualifying dependent in a tax year. Therefore, you and your spouse (or former spouse in a divorce situation) cannot both claim an exemption for the same dependent, such as your son or daughter, when you are filing separate returns.
Who qualifies as a dependent?
The term "dependent" includes a qualifying child or a qualifying relative. There are a number of tests to determine who qualifies as a dependent child or relative, and who may claim the deduction. These include age, relationship, residency, return filing status, and financial support tests.
The rules regarding who is a qualifying child (not a qualifying relative, which is discussed below), and for whom you may claim a dependency deduction on your 2010 return, generally are as follows:
-- The child is a U.S. citizen, or national, or a resident of the U.S., Canada, or Mexico;
-- The child is your child (including adopted or step-children), grandchildren, great-grandchildren, brothers, sisters (including step-brothers, and -sisters), half-siblings, nieces, and nephews;
-- The child has lived with you a majority of nights during the year, whether or not he or she is related to you;
-- The child receives less than $3,650 of gross income (unless the dependent is your child and either (1) is under age 19, (2) is a full-time student under age 24 before the end of the year), or (3) any age if permanently and totally disabled;
-- The child receives more than one-half of his or her support from you; and
-- The child does not file a joint tax return (unless solely to obtain a tax refund).
Qualifying relatives
The rules for claiming a qualifying relative as a dependent on your income tax return are slightly different from the rules for claiming a dependent child. Certain tests must also be met, including a gross income and support test, and a relationship test, among others. Generally, to claim a "qualifying relative" as your dependent:
-- The individual cannot be your qualifying child or the qualifying child of any other taxpayer; -- The individual's gross income for the year is less than $3,650; -- You provide more than one-half of the individual's total support for the year; -- The individual either (1) lives with you all year as a member of your household or (2) does not live with you but is your brother or sister (include step and half-siblings), mother or father, grandparent or other direct ancestor, stepparent, niece, nephew, aunt, or uncle, or inlaws. Foster parents are excluded.
Although age is a factor when claiming a qualifying child, a qualifying relative can be any age.
Special rules for divorced and separated parents
Certain rules apply when parents are divorced or separated and want to claim the dependency exemption. Under these rules, generally the "custodial" parent may claim the dependency deduction. The custodial parent is generally the parent with whom the child resides for the greater number of nights during the year.
However, if certain conditions are met, the noncustodial parent may claim the dependency exemption. The noncustodial parent can generally claim the deduction if:
-- The custodial parent gives up the tax deduction by signing a written release (on Form 8332 or a similar statement) that he or she will not claim the child as a dependent on his or her tax return. The noncustodial parent must attach the statement to his or her tax return; or
-- There is a multiple support agreement (Form 2120, Multiple Support Declaration) in effect signed by the other parent agreeing not to claim the dependency deduction for the year.
Correctly calculating your estimated tax payments and/or withholding is even more important as the year end approaches. Accurate calculations are especially important as third and fourth quarter payments become due, and your income and expenses for the rest of the year can be more accurately projected.
Estimated tax payments
You are required to pay estimated tax if you receive income from which tax is not withheld, including income from self-employment, dividends and interest, capital gains and losses, rental income, and alimony, and your tax is expected to be $1,000 or more (after subtracting credits and withholding). Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability throughout the year.
Higher-income taxpayers. For higher-income taxpayers whose adjusted gross income (AGI) shown on the preceding year's tax return exceeds $150,000 ($75,000 for married individuals filing separately), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.
Estimated tax payments are due quarterly. For most individuals, the due dates for the 2010 tax year are: April 15, June 15, and September 15 of 2010, and January 15, 2011. Failing to pay enough estimated tax on each installment date may result in a penalty for underpayment of estimated tax, even if you are due a refund. Therefore, properly calculating your payments is vital to avoid the penalties, including calculating adjustments needed in remaining quarters (including as soon as September 15, 2010 for the third quarter).
Third quarter payments are around the corner – September 15, 2010 – for the period June 1 through August 31. Fourth quarter payments will be due January 15, 2011 for the period September 1, 2010 through December 31, 2010. If your total estimated payments and withholding add up to less than 90 percent of what you owe, you may face an underpayment penalty.
Withholding
With the third and fourth quarter payments becoming due, ensure you are properly withholding and paying enough in estimated tax. Look at your projected year-end tax payments as compared with your expected tax liability to determine if your estimated tax payments need some tweaking. If your payments are expected to be less than 90 percent of current-year tax, you will generally need to increase your withholding or make estimated tax payments.
You may want to file a new W-4 with your employer adjusting your withholding to withhold more from your final paychecks for the year if you are currently underwithholding. This will help avoid being subject to a penalty when you file your return.
Adjusting estimated tax payments
A change in your business's income, deductions, credits, and exemptions may also make it necessary to refigure your estimated payments for the remainder of the year. To avoid either a penalty from the IRS or overpaying the IRS interest-free, consider increasing or decreasing the amount of your remaining estimated payments.
If, during the quarter, you learn that a change in your business's anticipated income, deductions, credits, exemptions, or other adjustments will either increase or decrease your business's tax liability, and therefore affecting your required annual payment for the remainder of the year, you should adjust your remaining quarterly payments accordingly.
To change your estimated tax payments, refigure your total estimated payments due. Next, determine the payment due for each remaining payment period. Be careful when refiguring your remaining payments. The IRS may assess a penalty against you when filing your return at the end of the year if an estimated tax payment for a previous period is less than one-fourth of your amended estimated tax. So be cautious when refiguring any tax payments.
Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.
Home sale exclusionGenerally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.
To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.
Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.
Unforeseen circumstances safe harborsThe IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.
Facts and circumstances testIf a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.
Events deemed as unforeseen circumstancesRecently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.
If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.
When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.
When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.
Dependents
One of the most argued points between separating couples regarding taxes is who gets to claim the children as dependents on their tax return, since joint filing is no longer an option. The reason this part of tax law is so important to divorcing parents is that the federal and state exemptions allowed for dependents offer a significant savings to the custodial parent, and there are also substantial child and educational credits that can be taken. The right to claim a child as a dependent from birth through college can be worth over $30,000 in tax savings.
The law states that one parent must be chosen as the head of the household, and that parent may legally claim the dependents on his or her return.
Example: If a couple was divorced or legally separated by December 31 of the last tax year, the law allows the tax exemptions to go to the parent who had physical custody of the children for the greater part of the year (the custodial parent), and that parent would be considered the head of the household. However, if the separation occurs in the last six months of the year and there hasn't yet been a legal divorce or separation by the year's end, the exemptions will go to the parent that has been providing the most financial support to the children, regardless of which parent had custody.
A non-custodial parent can only claim the dependents if the custodial parent releases the right to the exemptions and credits. This needs to be done legally by signing tax Form 8332, Release of Claim to Exemption. However, even if the non-custodial parent is not claiming the children, he or she still has the right to deduct things like medical expenses.
Child support payments are not deductible or taxable. Merely labeling payments as child support is not enough -- various requirements must be met.
Alimony
Alimony is another controversial area for separated or divorced couples, mostly because the payer of the alimony wants to deduct as much of that expense as possible, while the recipient wants to avoid paying as much tax on that income as he or she can. On a yearly tax return, the recipient of alimony is required to claim that money as taxable income, while the payer can deduct the payment, even if he or she chooses not to itemize.
Because alimony plays such a large part in a divorced couple's taxes, the government has specifically outlined what can and can not be considered as an alimony expense. The government says that an alimony payment is one that is required by a divorce or separation decree, is paid by cash, check or money order, and is not already designated as child support. The payer and recipient must not be filing a joint return, and the spouses can not be living in the same house. And the payment cannot be part of a non-cash property settlement or be designated to keep up the payer's property.
There are also complicated recapture rules that may need to be addressed in certain tax situations. When alimony must be recaptured, the payer must report as income part of what was deducted as alimony within the first two payment years.
Property
Many aspects of property settlements are too numerous and detailed to discuss at length, but separating couples should be aware that, when it comes to property distributions, basis should be considered very carefully when negotiating for specific assets.
Example: Let's say you get the house and the spouse gets the stock. The actual split up and distribution is tax-free. However, let's say the house was bought last year for $300,000 and has $100,000 of equity. The stock was bought 20 years ago, is also worth $100,000, but was bought for $10,000. Selling the house would generate no tax in this case and you would get to keep the full $100,000 equity. Selling the $100,000 of stock will generate about $25,000 to $30,000 of federal and state taxes, leaving the other spouse with a net of $70,000. While there may be no taxes to pay for several years if both parties plan to hold the assets for some time, the above example still illustrates an inequitable division of assets due to non-consideration of the underlying basis of the properties distributed.
Under a recent tax law, a spouse who acquires a partial interest in a house through a divorce settlement can move out and still exempt up to $250,000 of any taxable gain. This still holds true if he or she has not lived in the home for two of the last five years, the book states. It also applies to the spouse staying in the home. However, the divorce decree must clearly state that the home will be sold later and the proceeds will be split.
Complications and tax traps can also occur when a jointly owned business is transferred to one spouse in connection with a divorce. Professional tax assistance at the earliest stages of divorce are recommended in situations where a closely held business interest is involved.
Retirement
When a couple splits up, the courts have the authority to divide a retirement plan (whether it's an account or an accrued benefit) between the spouses. If the retirement money is in an IRA account, the individuals need to draw up a written agreement to transfer the IRA balance from one spouse to the other. However, if one spouse is the trustee of a qualified retirement plan, he or she must comply with a Qualified Domestic Relations Order to divide the accrued benefit. Each spouse will then be taxed on the money they receive from this plan, unless it is transferred directly to an IRA, in which case there will be no withholding or income tax liability until the money is withdrawn.
Extreme caution should be exercised when there are company pension and profit-sharing benefits, Keogh plan benefits, and/or IRAs to split up. Unless done appropriately, the split up of these plans will be taxable to the spouse transferring the plan to the other.
Tax Prepayment and Joint Refunds
When a couple prepays taxes by either withholding wages or paying estimated taxes throughout the year, the withholding will be credited to the spouse who earned the underlying income. In community property states, the withholding will be credited equally when spouses each report half of their income. When a joint refund is issued after a couple has separated or divorced, the couple should consult a tax advisor to determine how the refund should be divided. There is a formula that can be used to determine this amount, but it is wisest to use a qualified individual to make sure it is properly applied.
Legal and Other Expenses
To the dismay of most divorcing couples, the massive legal bills most end up paying are not deductible at tax time because they are considered personal nondeductible expenses. On the other hand, if a part of that bill was allocated to tax advice, to securing alimony, or to the protection of business income, those expenses can be deducted when itemizing. However, their total -- combined with other miscellaneous itemized deductions -- must be greater than 2% of the taxpayer's adjusted gross income to qualify.
Divorce planning and the related tax implications can completely change the character of the divorcing couple's negotiations. As many divorce attorneys are not always aware of these tax implications, it is always a good idea to have a qualified tax professional be involved in the dissolution process and planning from the very early stages. If you are in the process of divorce or are considering divorce or legal separation, please contact the office for a consultation and additional guidance.