The IRS has advised newly married individuals to review and update their tax information to avoid delays and complications when filing their 2025 income tax returns. Since an individual’s filing sta...
The IRS has announced several online resources and flexible options for individuals who have not yet filed their federal income tax return for the tax year at issue. Those who owe taxes have been enco...
A district court lacked jurisdiction to rule on an individual’s innocent spouse relief under Code Sec. 6015(d)(3), in the first instance. The individual and her husband, as taxpayers, were liable f...
A limited liability company classified as a TEFRA partnership was not entitled to deduct the full fair market value of a conservation easement under Code Sec. 170. The Court of Appeals affirmed the T...
A married couple was not entitled to a tax refund based on a depreciation deduction for a private jet. The Court found the taxpayers’ amended return failed to state the correct legal basis for the c...
The Colorado Department of Revenue has adopted a new rule to provide guidance regarding the requirements for claiming the alternative transportation options income tax credit. The credit may be claime...
The U.S. Tax Court lacks jurisdiction over a taxpayer’s appeal of a levy in a collection due process hearing when the IRS abandoned its levy because it applied the taxpayer’s later year overpayments to her earlier tax liability, eliminating the underpayment on which the levy was based. The 8-1 ruling by the Court resolves a split between the Third Circuit and the Fourth and D.C. Circuit.
The U.S. Tax Court lacks jurisdiction over a taxpayer’s appeal of a levy in a collection due process hearing when the IRS abandoned its levy because it applied the taxpayer’s later year overpayments to her earlier tax liability, eliminating the underpayment on which the levy was based. The 8-1 ruling by the Court resolves a split between the Third Circuit and the Fourth and D.C. Circuit.
The IRS determined that taxpayer had a tax liability for 2010 and began a levy procedure. The taxpayer appealed the levy in a collection due process hearing, and then appealed that adverse result in the Tax Court. The taxpayer asserted that she did not have an underpayment in 2010 because her then-husband had made $50,000 of estimated tax payments for 2010 with instructions that the amounts be applied to the taxpayer’s separate 2010 return. The IRS instead applied the payments to the husband’s separate account. While the agency and Tax Court proceedings were pending, the taxpayer filed several tax returns reflecting overpayments, which she wanted refunded to her. The IRS instead applied the taxpayer’s 2013-2016 and 2019 tax overpayments to her 2010 tax debt.
When the IRS had applied enough of the taxpayer’s later overpayments to extinguish her 2010 liability, the IRS moved to dismiss the Tax Court proceeding as moot, asserting that the Tax Court lacked jurisdiction because the IRS no longer had a basis to levy. The Tax Court agreed. The taxpayer appealed to the Third Circuit, which held for the taxpayer that the IRS’s abandonment of the levy did not moot the Tax Court proceedings. The IRS appealed to the Supreme Court, which reversed the Third Circuit.
The Court, in an opinion written by Justice Barrett in which seven other justices joined, held that the Tax Court, as a court of limited jurisdiction, only has jurisdiction under Code Sec. 6330(d)(1) to review a determination of an appeals officer in a collection due process hearing when the IRS is pursuing a levy. Once the IRS applied later overpayments to zero out the taxpayer’s liability and abandoned the levy process, the Tax Court no longer had jurisdiction over the case. Justice Gorsuch dissented, pointing out that the Court’s decision leaves the taxpayer without any resolution of the merits of her 2010 tax liability, and “hands the IRS a powerful new tool to avoid accountability for its mistakes in future cases like this one.”
Zuch, SCt
The Internal Revenue Service collected more than $5.1 trillion in gross receipts in fiscal year 2024. It is the first time the agency broke the $5 trillion mark, according to the 2024 Data Book, an annual publication that reviews IRS activities for the given fiscal year.
The Internal Revenue Service collected more than $5.1 trillion in gross receipts in fiscal year 2024.
It is the first time the agency broke the $5 trillion mark, according to the 2024 Data Book, an annual publication that reviews IRS activities for the given fiscal year. It was an increase over the $4.7 trillion collected in the previous fiscal year.
Individual tax, employment taxes, and real estate and trust income taxes accounted for $4.4 trillion of the fiscal 2024 gross collections, with the balance of $565 billion coming from businesses. The agency issued $120.1 billion in refunds, including $117.6 billion in individual income tax refunds and $428.4 billion in refunds to businesses.
The 2024 Data Book broke out statistics from the pilot year of the Direct File program, noting that 423,450 taxpayers logged into Direct File, with 140,803 using the program, which allows users to prepare and file their tax returns through the IRS website, to have their tax returns filed and accepted by the agency. Of the returns filed, 72 percent received a refund, with approximately $90 million in refunds issued to Direct File users. The IRS had gross collections of nearly $35.3 million (24 percent of filers using Direct File). The rest had a return with a $0 balance due.
Among the data highlighted in this year’s publication were service level improvements.
"The past two filing seasons saw continued improvement in IRS levels of service—one the phone, in person, and online—thanks to the efforts of our workforce and our use of long-term resources provided by Congress," IRS Acting Commissioner Michael Faulkender wrote. "In FY 2024, our customer service representatives answered approximately 20 million live phone calls. At our Taxpayer Assistance Centers around the country, we had more than 2 million contacts, increasing the in-person help we provided to taxpayers nearly 26 percent compared to FY 2023."
On the compliance side, the IRS reported in the 2024 Data Book that for all returns filed for Tax Years 2014 through 2022, the agency "has examined 0.40 percent of individual returns filed and 0.66 percent of corporation returns filed, as of the end of fiscal year 2024."
This includes examination of 7.9 percent of taxpayers filing individual returns reporting total positive incomes of $10 million or more. The IRS collected $29.0 billion from the 505,514 audits that were closed in FY 2024.
By Gregory Twachtman, Washington News Editor
IR-2025-63
The IRS has released guidance listing the specific changes in accounting method to which the automatic change procedures set forth in Rev. Proc. 2015-13, I.R.B. 2015- 5, 419, apply. The latest guidance updates and supersedes the current list of automatic changes found in Rev. Proc. 2024-23, I.R.B. 2024-23.
The IRS has released guidance listing the specific changes in accounting method to which the automatic change procedures set forth in Rev. Proc. 2015-13, I.R.B. 2015- 5, 419, apply. The latest guidance updates and supersedes the current list of automatic changes found in Rev. Proc. 2024-23, I.R.B. 2024-23.
Significant changes to the list of automatic changes made by this revenue procedure to Rev. Proc. 2024-23 include:
- (1) Section 6.22, relating to late elections under § 168(j)(8), § 168(l)(3)(D), and § 181(a)(1), is removed because the section is obsolete;
- (2) The following paragraphs, relating to the § 481(a) adjustment, are clarified by adding the phrase “for any taxable year in which the election was made” to the second sentence: (a) Paragraph (2) of section 3.07, relating to wireline network asset maintenance allowance and units of property methods of accounting under Rev. Proc. 2011-27; (b) Paragraph (2) of section 3.08, relating to wireless network asset maintenance allowance and units of property methods of accounting under Rev. Proc. 2011-28; and (c) Paragraph (3)(a) of section 3.11, relating to cable network asset capitalization methods of accounting under Rev. Proc. 2015-12;
- (3) Section 6.04, relating to a change in general asset account treatment due to a change in the use of MACRS property, is modified to remove section 6.04(2)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, because the provision is obsolete;
- (4) Section 6.05, relating to changes in method of accounting for depreciation due to a change in the use of MACRS property, is modified to remove section 6.05(2) (b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, because the provision is obsolete;
- (5) Section 6.13, relating to the disposition of a building or structural component (§ 168; § 1.168(i)-8), is clarified by adding the parenthetical “including the taxable year immediately preceding the year of change” to sections 6.13(3)(b), (c), (d), and (e), regarding certain covered changes under section 6.13;
- (6) Section 6.14, relating to dispositions of tangible depreciable assets (other than a building or its structural components) (§ 168; § 1.168(i)-8), is clarified by adding the parenthetical “including the taxable year immediately preceding the year of change” to sections 6.14(3)(b), (c), (d), and (e), regarding certain covered changes under section 6.14; June 9, 2025 1594 Bulletin No. 2025–24;
- (7) Section 7.01, relating to changes in method of accounting for SRE expenditures, is modified as follows. First, to remove section 7.01(3)(a), relating to changes in method of accounting for SRE expenditures for a year of change that is the taxpayer’s first taxable year beginning after December 31, 2021, because the provision is obsolete. Second, newly redesignated section 7.01(3)(a) (formerly section 7.01(3)(b)) is modified to remove the references to a year of change later than the first taxable year beginning after December 31, 2021, because the language is obsolete;
- (8) Section 12.14, relating to interest capitalization, is modified to provide under section 12.14(1)(b) that the change under section 12.14 does not apply to a taxpayer that wants to change its method of accounting for interest to apply either: (1) current §§ 1.263A-11(e)(1)(ii) and (iii); or (2) proposed §§ 1.263A-8(d)(3) and 1.263A-11(e) and (f) (REG-133850-13), as published on May 15, 2024 (89 FR 42404) and corrected on July 24, 2024 (89 FR 59864);
- (9) Section 15.01, relating to a change in overall method to an accrual method from the cash method or from an accrual method with regard to purchases and sales of inventories and the cash method for all other items, is modified by removing the first sentence of section 15.01(5), disregarding any prior overall accounting method change to the cash method implemented using the provisions of Rev. Proc. 2001-10, as modified by Rev. Proc. 2011- 14, or Rev. Proc. 2002-28, as modified by Rev. Proc. 2011-14, for purposes of the eligibility rule in section 5.01(e) of Rev. Proc. 2015-13, because the language is obsolete;
- (10) Section 15.08, relating to changes from the cash method to an accrual method for specific items, is modified to add new section 15.08(1)(b)(ix) to provide that the change under section 15.08 does not apply to a change in the method of accounting for any foreign income tax as defined in § 1.901-2(a);
- (11) Section 15.12, relating to farmers changing to the cash method, is clarified to provide that the change under section 15.12 is only applicable to a taxpayer’s trade or business of farming and not applicable to a non-farming trade or business the taxpayer might be engaged in;
- (11) Section 12.01, relating to certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers, is modified as follows. First, to provide that section 12.01 applies to a taxpayer that uses a historic absorption ratio election with the simplified production method, the modified simplified production method, or the simplified resale method and wants to change to a different method for determining the additional Code Sec. 263A costs that must be capitalized to ending inventories or other eligible property on hand at the end of the taxable year (that is, to a different simplified method or a facts-and-circumstances method). Second, to remove the transition rule in section 12.01(1)(b)(ii)(B) because this language is obsolete;
- (12) Section 15.13, relating to nonshareholder contributions to capital under § 118, is modified to require changes under section 15.13(1)(a)(ii), relating to a regulated public utility under § 118(c) (as in effect on the day before the date of enactment of Public Law 115-97, 131 Stat. 2054 (Dec. 22, 2017)) (“former § 118(c)”) that wants to change its method of accounting to exclude from gross income payments or the fair market value of property received that are contributions in aid of construction under former § 118(c), to be requested under the non-automatic change procedures provided in Rev. Proc. 2015- 13. Specifically, section 15.13(1)(a)(i), relating to a regulated public utility under former § 118(c) that wants to change its method of accounting to include in gross income payments received from customers as connection fees that are not contributions to the capital of the taxpayer under former § 118(c), is removed. Section 15.13(1)(a)(ii), relating to a regulated public utility under former § 118(c) that wants to change its method of accounting to exclude from gross income payments or the fair market value of property received that are contributions in aid of construction under former § 118(c), is removed. Section 15.13(2), relating to the inapplicability of the change under section 15.13(1) (a)(ii), is removed. Section 15.13(1)(b), relating to a taxpayer that wants to change its method of accounting to include in gross income payments or the fair market value of property received that do not constitute contributions to the capital of the taxpayer within the meaning of § 118 and the regulations thereunder, is modified by removing “(other than the payments received by a public utility described in former § 118(c) that are addressed in section 15.13(1)(a)(i) of this revenue procedure)” because a change under section 15.13(1)(a)(i) may now be made under newly redesignated section 15.13(1) of this revenue procedure;
- (13) Section 16.08, relating to changes in the timing of income recognition under § 451(b) and (c), is modified as follows. First, section 16.08 is modified to remove section 16.08(5)(a), relating to the temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes under section 16.08, because the provision is obsolete. Second, section 16.08 is modified to remove section 16.08(4)(a)(iv), relating to special § 481(a) adjustment rules when the temporary eligibility waiver applies, because the provision is obsolete. Third, section 16.08 is modified to remove sections 16.08(4)(a) (v)(C) and 16.08(4)(a)(v)(D), providing examples to illustrate the special § 481(a) adjustment rules under section 16.08(4)(a) (iv), because the examples are obsolete;
- (14) Section 19.01, relating to changes in method of accounting for certain exempt long-term construction contracts from the percentage-of-completion method of accounting to an exempt contract method described in § 1.460-4(c), or to stop capitalizing costs under § 263A for certain home construction contracts, is modified by removing the references to “proposed § 1.460-3(b)(1)(ii)” in section 19.01(1), relating to the inapplicability of the change under section 19.01, because the references are obsolete;
- (15) Section 19.02, relating to changes in method of accounting under § 460 to rely on the interim guidance provided in section 8 of Notice 2023-63, 2023-39 I.R.B. 919, is modified to remove section 19.02(3)(a), relating to a change in the treatment of SRE expenditures under § 460 for the taxpayer’s first taxable year beginning after December 31, 2021, because the provision is obsolete;
- (16) Section 20.07, relating to changes in method of accounting for liabilities for rebates and allowances to the recurring item exception under § 461(h)(3), is clarified by adding new section 20.07(1)(b) (ii), providing that a change under section 20.07 does not apply to liabilities arising from reward programs;
- (17) The following sections, relating to the inapplicability of the relevant change, are modified to remove the reference to “proposed § 1.471-1(b)” because this reference is obsolete: (a) Section 22.01(2), relating to cash discounts; (b) Section 22.02(2), relating to estimating inventory “shrinkage”; (c) Section 22.03(2), relating to qualifying volume-related trade discounts; (d) Section 22.04(1)(b)(iii), relating to impermissible methods of identification and valuation of inventories; (e) Section 22.05(1)(b)(ii), relating to the core alternative valuation method; Bulletin No. 2025–24 1595 June 9, 2025 (f) Section 22.06(2), relating to replacement cost for automobile dealers’ parts inventory; (g) Section 22.07(2), relating to replacement cost for heavy equipment dealers’ parts inventory; (h) Section 22.08(2), relating to rotable spare parts; (i) Section 22.09(3), relating to the advanced trade discount method; (j) Section 22.10(1)(b)(iii), relating to permissible methods of identification and valuation of inventories; (k) Section 22.11(2), relating to a change in the official used vehicle guide utilized in valuing used vehicles; (l) Section 22.12(2), relating to invoiced advertising association costs for new vehicle retail dealerships; (m) Section 22.13(2), relating to the rolling-average method of accounting for inventories; (n) Section 22.14(2), relating to sales-based vendor chargebacks; (o) Section 22.15(2), relating to certain changes to the cost complement of the retail inventory method; (p) Section 22.16(2), relating to certain changes within the retail inventory method; and (q) Section 22.17(1)(b)(iii), relating to changes from currently deducting inventories to permissible methods of identification and valuation of inventories; and
- (18) Section 22.10, relating to permissible methods of identification and valuation of inventories, is modified to remove section 22.10(1)(d).
Subject to a transition rule, this revenue procedure is effective for a Form 3115 filed on or after June 9, 2025, for a year of change ending on or after October 31, 2024, that is filed under the automatic change procedures of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, as clarified and modified by Rev. Proc. 2015-33, 2015-24 I.R.B. 1067, and as modified by Rev. Proc. 2021-34, 2021-35 I.R.B. 337, Rev. Proc. 2021-26, 2021-22 I.R.B. 1163, Rev. Proc. 2017-59, 2017-48 I.R.B. 543, and section 17.02(b) and (c) of Rev. Proc. 2016-1, 2016-1 I.R.B. 1 .
The Treasury Department and IRS have issued Notice 2025-33, extending and modifying transition relief for brokers required to report digital asset transactions using Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The notice builds upon the temporary relief previously provided in Notice 2024-56 and allows additional time for brokers to comply with reporting requirements.
The Treasury Department and IRS have issued Notice 2025-33, extending and modifying transition relief for brokers required to report digital asset transactions using Form 1099-DA, Digital Asset Proceeds From Broker Transactions. The notice builds upon the temporary relief previously provided in Notice 2024-56 and allows additional time for brokers to comply with reporting requirements.
Reporting Requirements and Transitional Relief
In 2024, final regulations were issued requiring brokers to report digital asset sale and exchange transactions on Form 1099-DA, furnish payee statements, and backup withhold on certain transactions beginning January 1, 2025. Notice 2024-56 provided general transitional relief, including limited relief from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs.
Additional Transition Relief from Backup Withholding, Customers Not Previously Classified as U.S. Persons
Under Notice 2025-33, transition relief from backup withholding tax liability and associated penalties is extended for any broker that fails to withhold and pay the backup withholding tax for any digital asset sale or exchange transaction effected during calendar year 2026.
Brokers will not be required to backup withhold for any digital asset sale or exchange transactions effected in 2027 when they verify customer information through the IRS Tax Information Number (TIN) Matching Program. To qualify, brokers must submit a customer's name and tax identification number to the matching service and receive confirmation that the information corresponds with IRS records.
Additionally, penalties that apply to brokers that fail to withhold and pay the full backup withholding due are limited with respect to any decrease in the value of received digital assets between the time of the transaction giving rise to the backup withholding obligation and the time the broker liquidates 24 percent of a customer’s received digital assets.
Finally, the notice also provides additional transition relief for brokers for sales of digital assets effected during calendar year 2027 for certain preexisting customers. This relief applies when brokers have not previously classified these customers as U.S. persons and the customer files contain only non-U.S. residence addresses.
The IRS failed to establish that it issued a valid notice of deficiency to an individual under Code Sec. 6212(b). Thus, the Tax Court dismissed the case due to lack of jurisdiction.
The IRS failed to establish that it issued a valid notice of deficiency to an individual under Code Sec. 6212(b). Thus, the Tax Court dismissed the case due to lack of jurisdiction.
The taxpayer filed a petition to seek re-determination of a deficiency for the tax year at issue. The IRS moved to dismiss the petition under Code Sec. 6213(a), contending that it was untimely and that Code Sec. 7502’s "timely mailed, timely filed" rule did not apply. However, the Court determined that the notice of deficiency had not been properly addressed to the individual’s last known address.
Although the individual attached a copy of the notice to the petition, the Court found that the significant 400-day delay in filing did not demonstrate timely, actual receipt sufficient to cure the defect. Because the IRS could not establish that a valid notice was issued, the Court concluded that the 90-day deadline under Code Sec. 6213(a) was never triggered, and Code Sec. 7502 was inapplicable.
L.C.I. Cano, TC Memo. 2025-65, Dec. 62,679(M)
A limited partnership classified as a TEFRA partnership was not entitled to exclude its limited partners’ distributive shares from net earnings from self-employment under Code Sec. 1402(a)(13). The Tax Court found that the individuals materially participated in the partnership’s investment management business and were not acting as limited partners “as such.”
A limited partnership classified as a TEFRA partnership was not entitled to exclude its limited partners’ distributive shares from net earnings from self-employment under Code Sec. 1402(a)(13). The Tax Court found that the individuals materially participated in the partnership’s investment management business and were not acting as limited partners “as such.”
Furthermore, the Court concluded that the limited partners’ roles were indistinguishable from those of active general partners. Accordingly, their distributive shares were includible in net earnings from self-employment under Code Sec. 1402(a) and subject to tax under Code Sec. 1401. The taxpayer’s argument that the partners’ actions were authorized solely through the general partner was found unpersuasive. The Court emphasized substance over form and found that the partners’ conduct and economic relationship with the firm were determinative.
Additionally, the Court held that the taxpayer failed to meet the requirements under Code Sec. 7491(a) to shift the burden of proof because it did not establish compliance with substantiation and net worth requirements. Lastly, the Tax Court also upheld the IRS’s designation of the general partner LLC as the proper tax matters partner under Code Sec. 6231(a)(7)(B), finding that the attempted designation of a limited partner was invalid because an eligible general partner existed and had the legal authority to serve.
Soroban Capital Partners LP, TC Memo. 2025-52, Dec. 62,665(M)
Tax reform discussions continue on Capitol Hill with legislation expected to be released very soon. GOP lawmakers in the House and Senate appear to be aiming for a comprehensive overhaul of the Tax Code. President Trump and Republicans in Congress have set out an ambitious schedule of passing a tax reform bill before year-end.
Tax reform discussions continue on Capitol Hill with legislation expected to be released very soon. GOP lawmakers in the House and Senate appear to be aiming for a comprehensive overhaul of the Tax Code. President Trump and Republicans in Congress have set out an ambitious schedule of passing a tax reform bill before year-end.
Tax reform
Although the specifics are not yet known, a GOP tax bill is expected to lower the individual and corporate tax rates and eliminate many tax credits and deductions. The corporate tax rate could be lowered to 20 percent (or in the 20s), the individual tax rates are expected to cap at 35 percent (although a higher rate may be retained), and the list of eliminated credits and deductions is likely to be lengthy. There is also talk of a lower rate for pass-through businesses.
The current Tax Code contains hundreds of credits and deductions, targeted to individuals, businesses and taxpayers of all types. These tax preferences touch on almost every activity. In past years, proposals to repeal tax preferences have met stiff resistance from the taxpayers they benefit.
The Trump Administration and Republicans in Congress appear to support keeping the home mortgage deduction and the charitable contribution deduction for individuals. The research credit is one business incentive that also appears to have support from the White House. Almost every other tax preference could be a candidate for repeal.
The GOP tax bill could also repeal the alternative minimum tax (AMT) and the federal estate tax. The federal gift tax, however, does not appear to be on the chopping block.
Without bill language, it is nearly impossible to envision the components of a GOP tax bill. Left unanswered, at least for now, are some important questions. Will the GOP tax bill be retroactive to January 1, 2017? Will the GOP tax bill expire after 10 years, as some tax bills have in the past? Our office will monitor developments and keep you posted.
Filing season
At this time, it is unclear if any tax law changes would be retroactive to January 1, 2017. If they are, the IRS may have to delay the start of the 2018 filing season. The filing season typically starts in mid-January. The IRS programs its return processing systems for existing tax laws. If the tax laws change, the IRS needs to revise its processing systems and that takes time. Our office will keep you posted.
More tax legislation
While the details of a GOP tax bill take shape, some stand-alone tax bills have been introduced in Congress. They include bills that:
- Exempt more taxpayers from the Affordable Care Act’s individual shared responsibility requirement
- Permit non-itemizers to take above-the-line deductions for charitable contributions.
- Delay the Affordable Care Act’s health insurance provider fee.
- Make taxpayers in Puerto Rico eligible for the earned income tax credit (EITC).
- Create a tax credit for renewable chemicals.
- Treat Native American nations the same as states for certain federal tax purposes.
- Create “Move America” bonds for infrastructure improvements.
- Expand tax-free distributions from IRAs for charitable purposes.
Lawmakers have a short window between now and year-end to pass any tax bills. Please contact our office if you have any questions about tax legislation.
Holiday gifts made to customers are generally deductible as ordinary and necessary business expenses as long as the taxpayer can demonstrate that such gifts maintain or improve customer goodwill. Such gifts must bear a direct relationship to the taxpayer's business and must be made with a reasonable expectation of a financial return commensurate with the amount of the gift. However, the $25 annual limitation per recipient on deductibility is applicable to holiday gifts, unless a statutory exceptions applies.
Holiday gifts made to customers are generally deductible as ordinary and necessary business expenses as long as the taxpayer can demonstrate that such gifts maintain or improve customer goodwill. Such gifts must bear a direct relationship to the taxpayer's business and must be made with a reasonable expectation of a financial return commensurate with the amount of the gift. However, the $25 annual limitation per recipient on deductibility is applicable to holiday gifts, unless a statutory exceptions applies.
Holiday turkeys and other holiday distributions of nominal value made by an employer to employees to promote goodwill are treated as tax-free gifts to those employees instead of taxable compensation. If the employer gives cash, gift certificates or similar items of readily convertible cash value, however, the value of those gifts is considered additional compensation regardless of the amount. But if holiday gift certificates given by an employer to its employees are redeemable only for merchandise and were not convertible to cash, they may be considered tax-free gifts.
Employers can give items worth a "nominal amount" without fear that the IRS will tax the employee. Gifts of items worth more, or a gift of any amount of cash, risks the IRS taking the view that the gift belongs in the employee's gross income. What constitutes a nominal amount is not crystal clear, but keeping a gift under $25 is erring on the safe side. It also assures a situation in which the employer can deduct the expense of the gift while not having it taxable to the employee.
For purposes of federal tax, employers must withhold and pay FICA taxes (7.65%) if they paid a household employee cash wages of at least $2,000 in 2016 or in 2017 ($2,100 in 2018). Employers must pay FUTA tax (6%) if they paid total cash wages of at least $1,000 in a calendar quarter to household employees. A homeowner may be an “employer” to a housekeeper; or, if enough evidence is shown, merely a recipient of services by an independent contractor or self-employed individual.
Nanny tax. For purposes of federal tax, employers must withhold and pay FICA taxes (7.65%) if they paid a household employee cash wages of at least $2,000 in 2016 or in 2017 ($2,100 in 2018). Employers must pay FUTA tax (6%) if they paid total cash wages of at least $1,000 in a calendar quarter to household employees. A homeowner may be an “employer” to a housekeeper; or, if enough evidence is shown, merely a recipient of services by an independent contractor or self-employed individual.
“Employer” status. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you will need an employer identification number (EIN) and you may have to pay employment taxes. If the individual who works in your home is self-employed and you do not direct him or her on specific tasks, you aren't liable as an employer – a difficult hurdle to overcome in the case of childcare. Usually, you aren't a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business.
If you use a placement agency that exercises control over what work is done and how it will be done by a baby-sitter or companion who works in your home, the worker isn't your employee. This control could include providing rules of conduct and appearance and requiring regular reports. In this case, you don't have to pay employment taxes. But, if an agency merely gives you a list of sitters and you hire one from that list, and pay the sitter directly, the sitter may be your employee.
Employer responsibilities. If you have a household employee, you may be subject to:
- Social security and Medicare taxes,
- Federal unemployment tax, and
- Federal income tax withholding.
Social security and Medicare taxes are generally withheld from the employee's pay and matched by the employer. Federal unemployment (FUTA) tax is paid by the employer only and provides for payments of unemployment compensation to workers who have lost their jobs. Federal income tax is withheld from the employee's total pay if the employee asks you to do so and you agree.
An employer must report and pay required employment taxes for household employees on Schedule H of the employer’s Form 1040 or Form 1040A. While withheld amounts do not have to be deposited on a monthly basis, the employer does need an employer identification number (EIN) to include on the employee’s Form W-2 and the employer’s Schedule H. To obtain an EIN, an employer should complete Form SS-4.
An employer must increase either his or her quarterly estimated tax payments or the income tax withholding on his or her own wages in order to satisfy employment tax obligations with respect to household employees. Failure to withhold results in liability for the penalty for underpayment of estimated tax.
Child and dependent care credit. A credit is allowed for a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer, and the taxpayer's spouse if filing a joint return, to be gainfully employed. The Social Security “Nanny” Taxes you pay on wages for qualifying child and dependent care services are themselves considered work-related expenses for purposes of this credit.
Tax writers in Congress are set to begin debating and writing tax reform legislation. On September 27, the White House and GOP leaders in Congress released a framework for tax reform. The framework sets out broad principles for tax reform, leaving the details to the two tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee. How quickly lawmakers will write and pass tax legislation is unclear. What is clear is that tax reform is definitely one of the top issues on Congress’ Fall agenda.
Tax writers in Congress are set to begin debating and writing tax reform legislation. On September 27, the White House and GOP leaders in Congress released a framework for tax reform. The framework sets out broad principles for tax reform, leaving the details to the two tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee. How quickly lawmakers will write and pass tax legislation is unclear. What is clear is that tax reform is definitely one of the top issues on Congress’ Fall agenda.
Individuals
The GOP framework proposes consolidating the current seven individual tax rates into three: 12, 25 and 35 percent. However, the framework leaves open the possibility of an additional top rate “to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”
For individuals, the GOP framework also proposes to:
- Eliminate the alternative minimum tax
- Roughly double the standard deduction
- Repeal the federal estate tax
- Preserve the home mortgage interest deduction and the deduction for charitable contributions
- Eliminate most other itemized deductions
- Repeal the personal exemption for dependents
- Retain tax benefits that encourage work, higher education and retirement security
Family incentives
Family incentives have traditionally garnered bipartisan support in Congress and the GOP framework includes several. The child tax credit, for example, currently phases out when incomes reach certain levels. The GOP framework calls for increasing the income levels for the credit to unspecified amounts. Another proposal would create a new non-refundable $500 credit for non-child dependents. The details would be left to the tax-writing committees.
Businesses
One pillar of the GOP framework is a corporate tax rate cut. The framework calls for a 20 percent corporate tax rate, down from the current 35 percent rate. Businesses that operate as passthroughs, such as S corporations, would have a maximum tax rate of 25 percent, subject to unspecified limitations to prevent abuses.
Other business proposals include:
- Enhanced expensing
- Limiting the deduction for net interest expenses by C corporations
- Eliminating the Code Sec. 199 deduction
- Preserving the research and development credit and tax preferences for low-income housing
- Reforming certain international taxation rules
Drafting legislation
After the GOP framework was released, the chairs of the tax writing committees said their committees would begin drafting legislation. The Ways and Means Committee is made up of 24 Republicans and 16 Democrats. Republicans also have a majority on the Senate Finance Committee but only by two votes (14 to 12). This narrow vote margin is likely to influence any tax bill out of the Senate Finance Committee. Our office will keep you posted of developments.
Extenders
A number of popular but temporary tax incentives have expired. Unless extended, these “extenders” will not be available to taxpayers when they file their 2017 returns in 2018. They include:
- Tax exclusion for canceled mortgage debt
- Mortgage insurance premium deductibility
- Higher education tuition deduction
- Special expensing rules for film, television, and theatrical productions
- Seven-year recovery period for motorsports entertainment complexes
Other tax bills
Several tax-related bills may be taken up by either the House or Senate, including:
- RESPECT Act, passed by the House and waiting for a vote in the Senate, would limit the IRS’s ability to seize assets related to structured transactions
- FY 2018 IRS budget bill, passed by the House and waiting for a vote in Senate, which would fund the IRS for FY 2018
Please contact our office if you have any questions about tax reform, the extenders or other tax bills.