Deputy Secretary of the Treasury Wally Adeyemo was out promoting the positives of the Inflation Reduction Act in an apparent effort to counteract the messaging from Republicans who are working to abolish the law as well as to replace the IRS with a national sales tax.

Deputy Secretary of the Treasury Wally Adeyemo was out promoting the positives of the Inflation Reduction Act in an apparent effort to counteract the messaging from Republicans who are working to abolish the law as well as to replace the IRS with a national sales tax.

Speaking January 17, 2023, at a White House event, Deputy Secretary Adeyemo described the law as "the most significant piece of legislation in our country’s history when it comes to building a clean energy future," and highlighted the law’s tax incentives aimed at getting more Americans to invest in clean energy.

For example, he noted the $1,200 available to people for making homes more energy efficient with new insulation, doors, windows, and other upgrades. He also highlighted the up to $2,000 available to upgrade existing furnaces and air conditioners with energy efficient heat pumps, as well as tax credits to help defray the cost of installing solar panels on their home rooftops.

Adeyemo also highlighted the tax incentives related to the purchase of clean vehicles, including up to a $7,500 tax credit for a new vehicle and up to $4,000 for a pre-owned vehicle.

"Treasury is working expeditiously to provide clarity and certainty to taxpayers, so the climate and economic benefits of this historic legislation can be felt as quickly as possible," he said.

Adeyemo also referenced the additional funding the Internal Revenue Service is receiving due to the Inflation Reduction Act. He noted that a "well-resourced IRS … is essential for effective implementation of the IRA’s clean energy credits and other tax benefits, and for ensuring fairness of our tax system overall."

Countering Republican Messaging

Adeyemo’s comments come as Republicans in their new majority in the House of Representatives begin to work on abolishing the IRA and dismantling the IRS.

Already passed in the GOP-led House is the Family and Small Business Taxpayer Protection Act (H.R. 23), which would eliminate the additional IRS funding in the IRA and in particular targets the 87,000 new hires by the agency. GOP messaging continues to misrepresent those new hires as all being IRS agents who will target low- and middle-income taxpayers with audits, despite the stated purposed of those new hires to be primarily for customer service, with the new agents that do get hired to be used to target the wealthiest taxpayers in an effort to ensure they are paying their fair share and to close the tax gap.

Indeed a one-sheet on the H.R. 23 posted to the House Ways and Means website highlights that the bill is targeting the 87,000 new hires which it claims will all be agents. The bill passed the House on January 9, 2023, by a 221-210 vote along party lines. The Senate is likely not going to take up the bill and President Biden already threatened a veto if the bill made it to his desk.

The Congressional Budget Office estimates that enacting this bill would actually reduce revenue by nearly $186 billion and increase the deficit by more than $114 billion.

House Republicans also introduce a bill (H.R. 25) that would abolish the IRS and replace its revenue generating taxation authority with a national sales tax of 23 percent, with a means-tested monthly sales tax rebate available to taxpayers who qualify. No further action on this bill has been taken.

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2023 and the lease inclusion amounts for business vehicles first leased in 2023.

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2023 and the lease inclusion amounts for business vehicles first leased in 2023.

Luxury Passenger Car Depreciation Caps

The luxury car depreciation caps for a passenger car placed in service in 2023 limit annual depreciation deductions to:

• $12,200 for the first year without bonus depreciation
• $20,200 for the first year with bonus depreciation
• $19,500 for the second year
• $11,700 for the third year
• $6,960 for the fourth through sixth year

Depreciation Caps for SUVs, Trucks and Vans

The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2023 are:

• $12,200 for the first year without bonus depreciation
• $20,200 for the first year with bonus depreciation
• $19,500 for the second year
• $11,700 for the third year
• $6,960 for the fourth through sixth year

Excess Depreciation on Luxury Vehicles

If depreciation exceeds the annual cap, the excess depreciation is deducted beginning in the year after the vehicle’s regular depreciation period ends.

The annual cap for this excess depreciation is:

• $6,960 for passenger cars and
• $6,960 for SUVS, trucks, and vans.

Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans

If a vehicle is first leased in 2023, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:

• $60,000 for a passenger car, or
• $60,000 for an SUV, truck or van.

The 2023 lease inclusion tables provide the lease inclusion amounts for each year of the lease.

The lease inclusion amount results in a permanent reduction in the taxpayer’s deduction for the lease payments.

Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts

The depreciation caps and lease inclusion amounts do not apply to:

• cars with an unloaded gross vehicle weight of more than 6,000 pounds; or
• SUVs, trucks and vans with a gross vehicle weight rating (GVWR) of more than 6,000 pounds.

So taxpayers who want to avoid these limits should "think big."

IRS has reminded eligible workers from low and moderate income groups to make qualifying retirement contributions and get the Saver’s Credit on their 2022 tax return. Taxpayers have until the due date for filing their 2022 return, that is April 18, 2023, to set up a new IRA or add money to an existing IRA for 2022. 

IRS has reminded eligible workers from low and moderate income groups to make qualifying retirement contributions and get the Saver’s Credit on their 2022 tax return. Taxpayers have until the due date for filing their 2022 return, that is April 18, 2023, to set up a new IRA or add money to an existing IRA for 2022. The Retirement Savings Contributions Credit, also known as the Saver’s Credit, helps offset part of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements, 401(k) plans and similar workplace retirement programs. The credit also helps any eligible person with a disability who is the designated beneficiary of an Achieving a Better Life Experience (ABLE) account, contribute to that account. The Saver’s Credit is available in addition to any other tax savings that apply, and contributions to both, Roth and traditional IRAs qualify for the credit.

Taxpayers participating in workplace retirement plans must make their contributions by December 31, 2022. The Saver’s Credit supplements other tax benefits available to people who set money aside for retirement. The Service also urges employees who are unable to set aside money in 2022, to schedule their 2023 contributions soon, so their employers can begin withholding them in January, 2023.

The IRS also informs taxpayers about the eligibility and restrictions to Saver's Credit:

• Saver's Credit can be claimed by married couples filing jointly with incomes up to $68,000 in 2022 or $73,000 in 2023, heads of household with incomes up to $51,000 in 2022 or $54,750 in 2023, married individuals filing separately and singles with incomes up to $34,000 in 2022 or $36,500 in 2023.
• Eligible taxpayers must be at least 18 years of age.
• Anyone claimed as a dependent on someone else’s return cannot take the credit, and any person enrolled as a full-time student during any part of 5 calendar months during the year, cannot claim the credit.

A taxpayer’s credit amount is based on their filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs or ABLE accounts. The Service has cautioned that, though the maximum Saver’s Credit is $1,000 ($2,000 for married couples), it was often much less.

The IRS has also announced that, any distributions from a retirement plan or ABLE account, reduces the contribution amount used to figure the credit. For 2022, this rule applies to distributions received after 2019 and before the due date, including extensions, of the 2022 return.

The IRS and Treasury have announced have released a list of clean vehicles that meet the requirements to claim the new clean vehicle tax credit, along with FAQs to help consumers better understand how to access the various tax incentives for the purchase of new and used electric vehicles available beginning January 1, 2023.

The IRS and Treasury have announced have released a list of clean vehicles that meet the requirements to claim the new clean vehicle tax credit, along with FAQs to help consumers better understand how to access the various tax incentives for the purchase of new and used electric vehicles available beginning January 1, 2023. The Service has clarified the incremental cost of commercial clean vehicles in 2023 and stated that, for vehicles under 14,000 pounds, the tax credit was 15-percent of a qualifying vehicle’s cost and 30-percent if, the vehicle is not gas or diesel powered.

The Service has also given a notice of intent to propose regulations on the tax credit for new clean vehicles, to provide clarity to manufacturers and buyers, on changes that take effect automatically on January 1, such as Manufacturer’s Suggested Retail Price limits. The notice has further clarified, that a vehicle would be considered as placed in service, for the purposes of the tax credit, on the date the taxpayer takes possession of the vehicle, which may or may not be the same date as the purchase date.

In order to help manufacturers identify vehicles eligible for tax credit, when the new requirements go into effect after a Notice of Proposed Rulemaking is issued in March, the Treasury also released a white paper on the anticipated direction of their upcoming proposed guidance on the critical minerals and battery components requirements and the process for determining whether vehicles qualify under these requirements.

The Treasury Department and the Internal Revenue Service have issued guidance pertaining to the new credit for qualified commercial clean vehicles, established by the Inflation Reduction Act of 2022 ( P.L. 117-169). Notice 2023-9 establishes a safe harbor regarding the incremental cost of certain qualified commercial clean vehicles placed in service in calendar year 2023.

The Treasury Department and the Internal Revenue Service have issued guidance pertaining to the new credit for qualified commercial clean vehicles, established by the Inflation Reduction Act of 2022 ( P.L. 117-169). Notice 2023-9 establishes a safe harbor regarding the incremental cost of certain qualified commercial clean vehicles placed in service in calendar year 2023.

Credit for Qualified Commercial Clean Vehicles

The amount of the credit is equal to the lesser of (1) 15% of the basis of the vehicle (30% if the vehicle is not powered by a gasoline or diesel internal combustion engine), or (2) the incremental cost of the vehicle. The credit is limited to $7,500 for a vehicle with a gross vehicle weight rating (GVWR) of less than 14,000 pounds, and $40,000 for other vehicles.

A qualified commercial clean vehicle’s incremental cost is the excess of the vehicle’s purchase price over the price of a comparable vehicle. A comparable vehicle is any vehicle that is powered solely by a gasoline or diesel internal combustion engine and is comparable in size and use to the qualified vehicle.

Under Code 45W(c), a qualified commercial clean vehicle includes a vehicle treated as a motor vehicle for purposes of title II of the Clean Air Act and manufactured primarily for use on public streets, roads, and highways (not including street vehicles); and mobile machinery (as defined by Code 4053(8)).

Safe Harbor

The Treasury Department reviewed a Department of Energy incremental cost analysis (DOE analysis) of current costs for all street vehicles in calendar year 2023. The DOE analysis determined and/or provided the following:

• the incremental cost of all street vehicles (other than compact car PHEVs) that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500;
• the incremental cost for compact car PHEVs, including mini-compact and sub-compact cars, will be less than $7,500;
• an incremental cost analysis of current costs for several representative classes of street vehicles with a gross vehicle weight rating of 14,000 pounds or more in calendar year 2023; and
• the incremental cost will not limit the available credit amount for vehicles placed in service in calendar year 2023.

Accordingly, the Treasury Department and IRS will accept a taxpayer’s use of the incremental cost published in the DOE Analysis to calculate the credit amount for compact car PHEVs placed in service during calendar year 2023, and for the appropriate class of street vehicle to calculate the credit amount for vehicles placed in service during calendar year 2023.

A taxpayer's use of $7,500 as the incremental cost for all street vehicles (other than compact car PHEVs) with a gross vehicle weight rating of less than 14,000 pounds to calculate the credit for vehicles placed in service during calendar year 2023.

The IRS announced a delay in reporting thresholds for third-party settlement organizations (TSPOs). As a result of this delay, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan Act of 2021 ( P.L. 117-2).

The IRS announced a delay in reporting thresholds for third-party settlement organizations (TSPOs). As a result of this delay, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan Act of 2021 ( P.L. 117-2).

Background

Code Sec. 6050W requires payment settlement entities to file an information return for each calendar year for payments made in settlement of certain reportable payment transactions. The annual information return must set forth the (1) name, address, and taxpayer identification number (TIN) of the participating payee to whom payments were made; and (2) gross amount of the reportable payment transactions with respect to that payee. The returns must be furnished to the participating payees on or before January 31 of the year following the calendar year for which the return was made. Further, the returns must be filed with the IRS on or before February 28 (March 31 if filing electronically) of the year following the calendar year for which the return was made.

Transition Period

A TPSO will not be required to report payments in settlement of third party network transactions with respect to a participating payee unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200. This condition applies to calendar years beginning before January 1, 2023. The Service will not assert penalties under Code Sec. 6721 or 6722 for TPSOs failing to file or failing to furnish Forms 1099-K unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of transactions exceeds 200.

For returns for calendar years beginning after December 31, 2022, a TPSO would be required to report payments in settlement of third party network transactions with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of such transactions. The delay does not affect requirements of Code Sec. 6050W that were not modified by the American Rescue Plan Act. Taxpayers that have performed backup withholding under Code Sec. 3406(a) during calendar year 2022 must file a Form 1099-K, Payment Card and Third-Party Network Transactions, with the IRS and furnish a copy to the payee if total payments to and withholding from the payee exceeded $600 for the calendar year.

The IRS has notified taxpayers of the applicable reference standard required to be used to determine the amount of the energy efficient commercial building (EECB) property deduction allowed under Code Sec. 179D as amended by the Inflation Reduction Act of 2022 (IRA) ( P.L. 117-169). 

The IRS has notified taxpayers of the applicable reference standard required to be used to determine the amount of the energy efficient commercial building (EECB) property deduction allowed under Code Sec. 179D as amended by the Inflation Reduction Act of 2022 (IRA) ( P.L. 117-169). Further, the IRS has announced the existing reference standard, affirmed a new reference standard and clarified when each of the two reference standards will apply to taxpayers. The effective date of this announcement is January 1, 2023.

The American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America Reference Standard 90.1-2019 has been affirmed as the applicable Reference Standard 90.1 for purposes of calculating the annual energy and power consumption and costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the reference building as follows:

• For property for which construction begins after December 31, 2022, ASHRAE 90.1-2019 will be the applicable standard for property that is placed in service after December 31, 2026.
• Taxpayers who already began or will begin construction by December 31, 2022, or who already placed property in service or will place property in service by December 31, 2026, are not subject to the updated Reference Standard 90.1-2019. For such property, the applicable Reference Standard 90.1 is Reference Standard 90.1-2007.
• Taxpayers who begin construction before January 1, 2023 may apply Reference Standard 90.1-2007 regardless of when the building is placed in service.

The Treasury Department and the IRS have provided guidance announcing that they intend to issue proposed regulations to address the application of the new one-percent corporate stock repurchase excise tax under Code Sec. 4501, which was added by the Inflation Reduction Act of 2022 ( P.L. 117-169).

The Treasury Department and the IRS have provided guidance announcing that they intend to issue proposed regulations to address the application of the new one-percent corporate stock repurchase excise tax under Code Sec. 4501, which was added by the Inflation Reduction Act of 2022 ( P.L. 117-169).

Excise Tax on Stock Repurchases

Beginning in 2023, a publicly traded U.S. corporation is subject to a one-percent excise tax on the value of its stock that the corporation repurchases during the tax year, effective for stock repurchases made after December 31, 2022. Repurchases include stock redemptions, as well as economically similar transactions as determined by the Treasury Secretary.

The excise tax does not apply if:

• the total value of the stock repurchased during the tax year does not exceed $1 million;
• the repurchased stock (or its value) is contributed to an employee pension plan, employee stock ownership plan (ESOP), or similar plan;
• the repurchase is by a regulated investment company (RIC) or a real estate investment trust (REIT);
• the repurchase is part of a reorganization in which no gain or loss is recognized;
• the repurchase is treated as a dividend; or
• the repurchase is by a dealer in securities in the ordinary course of business.

Interim Guidance

The interim guidance is intended to clarify excise tax calculation, and the application of Code Sec. 4501 to certain transactions and other events occurring before the proposed regulations are issued.

Among other things, the interim guidance addresses the $1 million de minimis exception; the stock repurchase excise tax base; redemptions and economically similar transactions; acquisitions by specified affiliates, applicable specified affiliates, or covered surrogate foreign corporations; timing and fair market value of repurchased stock; statutory exceptions; and a netting rule. The guidance also includes illustrative examples.

Reporting

The proposed regulations are anticipated to provide that the stock repurchase excise tax must be reported on IRS Form 720, Quarterly Federal Excise Tax Return. To facilitate the tax computation, the IRS also intends to issue an additional form that taxpayers will be required to attach to Form 720.

Although Form 720 is filed quarterly, the Treasury and IRS expect the proposed regulations to provide that the stock repurchase tax will be reported once per tax year, on the Form 720 that is due for the first full quarter after the close of the taxpayer’s tax year.

Applicability Dates

The proposed regulations are anticipated to provide that rules consistent with those in the guidance will generally apply to repurchases of stock of a covered corporation made after December 31, 2022, and to issuances of stock made during a tax year ending after December 31, 2022. Rules consistent with those in the guidance on purchases funded by applicable specified affiliates will apply to repurchases and acquisitions of stock made after December 31, 2022, that are funded on or after the date the guidance is released to the public.

Until the proposed regulations are issued, taxpayers can rely on the rules in the guidance.

Request for Comments

Interested parties can submit written comments on the rules by or before 60 days after the date the guidance is published in the Internal Revenue Bulletin. Comments may be submitted by the Federal E-rulemaking Portal ( https://www.regulations.gov), or by mail to Internal Revenue Service, CC:PA:LPD:PR ( Notice 2023-2), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044. Refer to Notice 2023-2.

With the transition of leadership from Democrats to Republicans in the House of Representatives comes new rules that legislators must adhere to, and they could have implications on tax policy.

With the transition of leadership from Democrats to Republicans in the House of Representatives comes new rules that legislators must adhere to, and they could have implications on tax policy.

The rules, which were adopted January 9, 2023, almost exclusively along party lines (only one Republican voted against and no Democrats voted in favor), contain two key provisions that could impact tax policy in at least the next two years. First is the need for a supermajority of lawmakers to vote in favor of a tax rate increase and the second is a replacement of the "pay as you go" rule {any increase in spending needs a mechanism to fund the increase) to a "cut as you go" rule, which means any increase in spending in one area must be offset by a cut of funding in another area.

A summary of the rules states that it "restores a requirement for a three-fifths supermajority vote on tax rate increases." This is likely to have little impact as there likely will not be many, if any, proposals to increase taxes coming out of the GOP-led House, especially considering many Republicans signed a pledge to oppose increase taxes.

"While it is unsurprising that Republicans approved this rule, it undermines the stated goal of lowering the debt," Joe Hughes, federal policy analyst at the Institute on Taxation and Economic Policy, stated in a blog on the rules. He added that "there is a clear contradiction in stating that government should take on less debt while putting tight restraints on the government’s ability to pay for things."

The second provision, cut as you go, requires that increases in mandatory spending programs, including programs such as Social Security, Medicare, veterans’ benefits and unemployment compensation, be offset by cuts to other mandatory spending programs.

"This means that the House cannot even pass increases to these programs that are fully paid for with new revenue, unless they also cut some other program in this category," Hughes notes.

This could make passage of enhancements to popular tax provisions more problematic. For example, the cut as you go rule "makes it harder to enhance proven and effective policies like the Child Tax Credit (CTC) or Earned Income Tax Credit (EITC) because the refundable portions of the credits—the amount that can exceed the income tax a family would otherwise owe—are counted as mandatory spending under the budget scoring rules used by Congress," Hughes writes, noting that any improvements would require cuts to another essential program like Social Security or Medicare.

"Advocates and lawmakers hoping to restore the 2021 expansion, or otherwise improve the CTC or EITC, will now face an even tougher road ahead" due to the cut as you go rule, he states.

Despite a significant number of challenges faced by taxpayers in 2022, National Taxpayer Advocate Erin Collins has reason to be more optimistic for 2023.

"We have begun to see the light at the end of the tunnel," Collins wrote in the 2022 annual NTA report to Congress, released on January 11, 2023. "I’m just not sure how much further we have to travel before we see sunlight."

Despite a significant number of challenges faced by taxpayers in 2022, National Taxpayer Advocate Erin Collins has reason to be more optimistic for 2023.

"We have begun to see the light at the end of the tunnel," Collins wrote in the 2022 annual NTA report to Congress, released on January 11, 2023. "I’m just not sure how much further we have to travel before we see sunlight."

She highlighted three key areas that are providing a foundation for the optimistic outlook for this year:

• The IRS has largely worked through its backlog of unprocessed returns, though there still remains a high volume of suspended returns and correspondence;
• Congress has provided funding to increase customer service staffing; and
• The agency has already added 4,000 new customer service and is seeking to add 700 additional employees to provide in-person help at its Taxpayer Assistance Centers.

Collins did caution that while she is optimistic for the future, the near term will still be faced with challenges. In particular, she noted that while new staff are being trained, some of the issues that have been plaguing the IRS will continue.

"As new employees are added, they must be trained." Collins noted. "For most jobs, IRS does not maintain a separate cadre of instructors. Instead, experienced employees must be pulled off their regular caseloads to provide the initial training and act as on-the-job instructors. In the short run, that may mean that fewer employees are assisting taxpayers, particularly experienced employees who are likely to be the most effective trainers."

2022 Challenges

Taking into consideration the time needed to train new employees, some of the challenges from 2022 that were highlighted in the report could still be an issue early into 2023.

That could mean ongoing processing and refund delays. The COVID-19 pandemic created a significant backlog of unprocessed returns and while the IRS has made strides to reducing that backlog, as of December 23, 2022, the agency reported it still has a backlogged inventory of about 400,000 individual tax returns and about 1 million business tax returns. It could also mean ongoing delays in processing taxpayer correspondence and other cases in the Accounts Management function.

Another issue that could linger as more employees are being trained is getting a live person on the telephone. NTA reported that about one in eight calls from taxpayers to the agency made it through to a live person, with hold times for taxpayers averaged 29 minutes.

Tax professionals were able to get through to a live person about ever one in six calls to the Practitioner Priority Service, with about 25 minutes of hold time on average.

"Tax professionals are key to a successful tax administration," Collins wrote. "The challenges of the past three filing seasons have pushed tax professionals to their limits, raising client doubts in their abilities and created a loss of trust in the system."

Recommendations

The report makes a number of recommendations both to the IRS and legislative recommendations to strengthen taxpayer rights and improve tax administration.

To the IRS, Collins recommends a couple of employee-related items – hiring and training more human resource employees to manage the hiring of all agency employees and ensuring all IRS employees are well-trained to do their jobs.

On the IT front, she also recommended improvements to online account accessibility and functionality to make them comparable to private financial institutions’ online accounts, as well as temporarily expand the uses of the documentation upload tool or similar technology. Also, there was a call to enable all taxpayers to e-file their tax returns.

Among the legislative recommendations are amending the “lookback period” to allow tax refunds for certain taxpayers who took advantage of the postponed filing deadlines due to COVID-19; establish minimum standards for paid tax preparers; expand the U.S. Tax Court’s jurisdiction to adjudicate refund cases and assessable penalties; modify the requirement that written receipts acknowledge charitable contributions must predate the filing of a tax return; and make the Earned Income Tax Credit structure simpler.

Before the fast-approaching new year, it’s important to take some time and reflect on year-end tax planning. The weeks pass quickly and the arrival of January 1, 2015 will close the doors to some tax planning strategies and opportunities. Fortunately, there is still time for a careful review of your year-end tax planning strategy.

Before the fast-approaching new year, it’s important to take some time and reflect on year-end tax planning. The weeks pass quickly and the arrival of January 1, 2015 will close the doors to some tax planning strategies and opportunities. Fortunately, there is still time for a careful review of your year-end tax planning strategy.

Traditional year-end planning techniques

For many individuals, a look at traditional year-end tax planning techniques is a good starting point. Spreading the recognition of certain income between 2014 and 2015 is one technique. Individuals need to take into account any possible changes in their income tax bracket. The individual income tax rates for 2014 are unchanged from 2013: 10, 15, 25, 28, 33, 35 and 39.6 percent. Each taxable income bracket is indexed for inflation. The starting points for the 39.6 percent bracket for 2014 are $406,750 for unmarried individuals; $457,600 for married couples filing a joint return and surviving spouses; $432,200 for heads of households; and $228,800 for married couples filing separate returns. For 2014, the top tax rate for qualified capital gains and qualified dividends is 20 percent.

For the second year, individuals also need to plan for potential net investment income (NII) tax liability. The NII tax applies to taxpayers with certain types of income and who fall within the thresholds for liability. Again, spreading income out over a number of years or offsetting the income with both above-the-line and itemized deductions are strategies to consider.

Tax extenders

Many individuals are surprised to learn that some very popular and widely-used tax incentives are temporary. If you claimed the higher education tuition deduction on your 2013 return, you cannot claim it in your 2014 return because the deduction expired after 2013. The same is true for the state and local sales tax deduction, the teachers’ classroom expense deduction, the Code Sec. 25C residential energy credit, transit benefits parity, and more. All of these tax breaks expired after 2013 and unless they are extended by Congress, you will not be able to claim them on your 2014 returns.

Businesses are also affected. A lengthy list of business-oriented tax breaks expired after 2013. They include the Work Opportunity Tax Credit (WOTC), research tax credit, Indian employment credit, employer wage credit for military reservists, special incentives for biodiesel and renewable fuels, tax credits for energy-efficient homes and appliances, and more.

The good news is that Congress is likely to extend these tax breaks, probably for two years, and make the extension retroactive to January 1, 2014. That means taxpayers can claim these incentives on their 2014 returns. One hurdle is when Congress will act. In past years, lawmakers waited until very late in the year, or even until the start of the new year, to vote on an extension of these incentives. Late extension puts extra pressure on the IRS to quickly reprogram its return processing systems. Most likely, the IRS will have to delay the start of the filing season. Our office will keep you posted of developments.

Retirement savings

In 2014, the Tax Court surprised many with its decision that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained (Bobrow, TC Memo. 2014-21). The one-year limitation is not specific to any single IRA maintained by a taxpayer, but instead applies to all IRAs maintained by the taxpayer. The IRS, in turn, announced that it would change its rules to reflect the court’s decision.

The key point to keep in mind is that the Bobrow decision affects only IRA-to-IRA rollovers. The decision does not limit trustee-to-trustee transfers.

Affordable Care Act

Individuals who obtain health insurance through the Affordable Care Act Marketplace (and the federal government estimates they number seven million) have special tax planning considerations, especially if they are eligible for the Code Sec. 36B premium assistance tax credit. The credit is payable in advance to insurers and it appears that most taxpayers have elected this option. These individuals must reconcile the amount paid in advance with the amount of the actual credit computed when they file their tax returns. Changes in circumstances, such as an increase or decrease in income, marriage, birth or adoption of a child, and so on, may affect the amount of the actual credit.

Remember that the Affordable Care Act requires individuals to have minimum essential coverage for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return. Many individuals will qualify for an exemption if they are covered under employer-sponsored coverage. Individuals covered by Medicare also are exempt.

If you have any questions about year-end planning, please contact our office.

Taxpayers will receive some modest relief for the 2015 tax year, thanks to the mandatory annual inflation-adjustments provided under the Tax Code. When there is inflation, indexing of brackets lowers tax bills by including more of people’s incomes in lower brackets—for example by placing taxpayers’ income in the existing 15-percent bracket, rather than the existing 25-percent bracket.

Taxpayers will receive some modest relief for the 2015 tax year, thanks to the mandatory annual inflation-adjustments provided under the Tax Code. When there is inflation, indexing of brackets lowers tax bills by including more of people’s incomes in lower brackets—for example by placing taxpayers’ income in the existing 15-percent bracket, rather than the existing 25-percent bracket.

Wolters Kluwer, CCH has used the formulas specified in the Tax Code and the Department of Labor’s newly-released Consumer Price Index (all urban) for August 2014 to project the inflation-adjusted figures for 2015. (The list provided below is not exhaustive.) The IRS is expected to issue the official figures by December 2014.

2015 tax schedules

Married Filing Jointly (and Surviving Spouses)

Head of Household

Single (Other than Heads of Household and Surviving Spouses)

Married Filing Separate

Estates and Trusts

2015 personal exemption

For 2015, personal exemptions will increase to $4,000, up from $3,950 in 2014. The phase out of the personal exemption for higher income taxpayers will begin after taxpayers pass the same income thresholds set forth for the limitation on itemized deductions, detailed below.

The personal exemption will completely phase out when income surpasses the following levels: $432,400 (married joint filers); $406,550 (Heads of household); $380,750 (unmarried taxpayers); and $216,200 (married filing separate).

2015 standard deduction

For 2015, the standard deduction will be as follows: $6,300 for unmarried taxpayers and married separate filers (up from $6,200 in 2014). For married joint filers, the standard deduction will rise to $12,600, up from $12,400 in 2014. For heads of household, the standard deduction will be $9,250, up from $9,100 in 2014.

The 2015 standard deduction for an individual claimed as a dependent on another taxpayer’s return is either $1,050 or $350 plus the dependent’s earned income, whichever is greater.

The additional standard deduction for the blind and aged increases for married taxpayers to $1,250, up from $1,200 in 2014. For unmarried, aged, or blind taxpayers, the amount of the additional standard deduction remains $1,550.

Limitation on itemized deductions

For higher income taxpayers who itemize their deductions, the limitation on itemized deductions for 2015 will be imposed at the following income levels:

• For married couples filing joint returns or surviving spouses, the income threshold will be $309,900, up from $305,050 for 2014.
• For heads of household, the threshold will be $284,050, up from $279,650 in 2014.
• For single taxpayers, the threshold will be $258,250, up from $254,200 in 2014.
• For married taxpayers filing separate returns, the 2015 threshold will be $154,950, up from $152,525 for 2014.

AMT exemptions

Wolters Kluwer, CCH projects that, for 2015, the AMT exemption for married joint filers and surviving spouses will be $83,400 (up from $82,100 in 2014). For heads of household and unmarried single filers, the exemption will be $53,600 (up from $52,800 in 2014). For married separate filers, the exemption will be $41,700, up from ($41,050 in 2014). For estates and trusts, the exemption will be $23,800 (up from $23,500 in 2014.)

For a child to whom the so-called “kiddie tax” under Code Sec. 1(g) applies, the exemption amount for AMT purposes may not exceed the sum of the child’s earned income for the tax year, plus $7,400 (up from $7,250 for 2014).

Other adjusted amounts

IRA Contributions. The maximum amount of deductible contributions that can be made to an IRA will remain the same for 2015, at $5,500 (or $6,500 for taxpayers eligible to make catch-up contributions). The income phase out ranges increase, however. For 2015, the allowable amount of deductible IRA contributions will phase out for married joint filers whose income is between $98,000 and $118,000 (if both spouses are covered by a retirement plan at work). If only one spouse is covered by a retirement plan at work, the phase out range is from $183,000 to $193,000.

For heads of household and unmarried filers who are covered by a retirement plan at work, the 2015 income phase out range for deductible IRA contributions is $61,000 to $71,000, up from $60,000 to $70,000 for 2014.

Education Savings Bond Interest Exclusion. When U.S. savings bonds are redeemed to pay expenses for higher education, the interest may be excluded from income if the taxpayer’s income is below a certain range. For 2015, the phase-out range for single filers will be from $77,200 to $92,200 (up from $76,000 to $91,000 for 2014). For joint filers the 2015 phase-out range will be $115,750 to $145,750 (up from $113,950 to $143,950 for 2014).

Phase-out of Student Loan Interest Deduction. For 2015, the $2,500 student loan interest deduction will phase out for married joint filers with income between $130,000 and $160,000, the same as for 2014. The 2015 deduction will phase out for single taxpayers with income between $65,000 to $80,000.

Medical Savings Accounts. The minimum–maximum range for premiums used to determine whether a medical savings account (MSA) is tied to a high deductible health plan for 2015 will be $2,200–$3,300 for self-only coverage (up from $2,200 to $3,250 for 2014) and $4,450 to $6,650 for family coverage (up from $4,350 to $6,550 for 2014).

Self-only coverage plans are subject to a $4,450 maximum amount for annual out-of-pocket costs (up from $4,350 for 2014). Family coverage plans have a $8,150 annual limit (up $8,000 for 2014).

Limitation on Flexible Spending Arrangements (FSAs). The limitation on the amount of salary reductions an employee may elect to contribute to a cafeteria plan under an FSA increases to $2,550 for 2015, up $50 from the limit for 2014 and 2013.

Qualified Transportation Fringe Benefits. For 2015, the monthly cap on the exclusion for transit passes and for commuter highway vehicles will be $130, the same as it was for 2014 (parity between transit and parking benefits expired at the end of 2013). The monthly cap on qualified parking benefits will be $250, the same as for 2014.

Estate and Gift Tax. The gift tax annual exemption will remain the same for 2015, at $14,000. However, the estate and gift tax applicable exclusion will increase from $5,340,000 in 2014 to $5,430,000 for 2015.

Gifts to Noncitizen Spouses. The first $147,000 of gifts made in 2015 to a spouse who is not a U.S. citizen will not be included in taxable gifts, up $2,000 from $145,000 in 2014.

Foreign Earned Income/Housing. The amount of the 2015 foreign earned income exclusion under Code Sec. 911 will be $100,800, up from $99,200 for 2014. The maximum foreign earned income housing deduction for 2015 will be $30,240, up from $29,760 for 2014.

As January 1, 2015 draws closer, many employers are gearing up for the “employer mandate” under the Affordable Care Act. For 2015, there is special transition relief for mid-size employers. Small employers (employers with fewer than 50 full-time employees, including full-time equivalent employees) are always exempt from the employer mandate and related employer reporting.

As January 1, 2015 draws closer, many employers are gearing up for the “employer mandate” under the Affordable Care Act. For 2015, there is special transition relief for mid-size employers. Small employers (employers with fewer than 50 full-time employees, including full-time equivalent employees) are always exempt from the employer mandate and related employer reporting.

Employer mandate

Under Code Sec. 4980H, an applicable large employer must make a shared responsibility payment if either:

• The employer does not offer or offers coverage to less than 95 percent (70 percent in 2015) of its full-time employees and their dependents the opportunity to enroll in minimum essential coverage and one or more full-time employee is certified to the employer as having received a Code Sec. 36B premium assistance tax credit or cost-sharing reduction (“Section 4980H(a) liability”); or
• The employer offers to all or at least 95 percent of its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and one or more full-time employees is certified to the employer as having received a Code Sec. 36B premium assistance tax credit or cost-sharing reduction (“Section 4980H(b) liability”).

For purposes of the employer mandate shared responsibility provisions, an employee is a full-time employee for a calendar month if he or she averages at least 30 hours of service per week. Under final regulations issued by the IRS earlier this year, for purposes of determining full-time employee status, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week.

The IRS has provided two methods for determining whether a worker is a full-time employee: the monthly measurement method and the look-back measurement method. The monthly measurement method allows an employer to determine each employee’s status by counting the employee’s hours of service for each month. The look-back measurement method allows employers to determine the status of an employee as a full-time employee during a future period, based upon the hours of service of the employee in a prior period.

In September 2014, the IRS clarified the look-back method in certain circumstances. The IRS described application of the look-back method where an employee moves from one measurement period to another (for example, an employee moves from an hourly position to which a 12-month measurement period applies to a salaried position to which a 6-month measurement period applies). The IRS also described situations where an employer changes the measurement method applicable to employees within a permissible category (for example, an employer changes the measurement period for all hourly employees for the next calendar year from a 6-month to a 12-month measurement period).

Transition relief for mid-size employers

Mid-size employers are exempt from the Code Sec. 4980H employer mandate for 2015 under special transition relief. Employers qualify as mid-size if they employ on average at least 50 full-time employees, including full-time equivalents, but fewer than 100 full-time employees, including full-time equivalents.

The IRS has placed some restrictions on this transition relief for mid-size employers. During the period beginning on February 9, 2014, and ending on December 31, 2014, the employer that reduces the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition is ineligible for the transition relief. A reduction in workforce size or overall hours of service for bona fide business reasons will not be considered to have been made in order to satisfy the workforce size condition, the IRS explained.

Information reporting

Code Sec. 6056 requires certain employers to report to the IRS information about the health insurance, if any, they offer to employees. The IRS has posted draft forms and instructions about Code Sec. 6056 reporting on its website: Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.

Information reporting encompasses (among other things):

• The employer’s name, address, and employer identification number;
• The calendar year for which information is being reported;
• A certification as to whether the employer offered to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan;
• The number, address and Social Security/taxpayer identification number of all full-time employees;
• The number of full-time employees eligible for coverage under the employer’s plan; and
• The employee’s share of the lowest cost monthly premium for self-only coverage providing minimum value offered to that full-time employee.

Code Sec. 6056 reporting for 2015 is mandatory. Although mid-size employers may be exempt from the employer mandate, they are not exempt from Code Sec. 6056 reporting for 2015. The IRS is requiring all Code Sec. 6056 information returns to be filed no later than February 28 (March 31 if filed electronically) of the year immediately following the calendar year to which the return relates.

Please contact our office if you have any questions about preparing for the employer mandate and Code Sec. 6056 reporting.

Every year the IRS publishes a list of projects that are currently on its agenda. For example, the IRS may indicate through this list that it is working on a new set of procedures relating to claiming business expenses. The new 2014–2015 IRS Priority Guidance Plan, just released this September, has indicated that IRS is working on guidance relating to whether employer-provided meals offered on company premises are taxable as income to the employee. In the Priority Guidance Plan’s Employee Benefits Section B.3, the IRS listed: "Guidance under §§119 and 132 regarding employer-provided meals" in its list of projects for the upcoming year.

Every year the IRS publishes a list of projects that are currently on its agenda. For example, the IRS may indicate through this list that it is working on a new set of procedures relating to claiming business expenses. The new 2014–2015 IRS Priority Guidance Plan, just released this September, has indicated that IRS is working on guidance relating to whether employer-provided meals offered on company premises are taxable as income to the employee. In the Priority Guidance Plan’s Employee Benefits Section B.3, the IRS listed: "Guidance under §§119 and 132 regarding employer-provided meals" in its list of projects for the upcoming year.

This could be significant for many employees who could potentially have to report as taxable income what they formerly thought were free meals provided by their employer. Currently, an employer may offer meals to employees on the work premises as a tax-free perk, if the meals are provided for the employer’s convenience. The question of whether the meals are provided for the convenience of the employer is determined, however, on the basis of all the facts and circumstances. Clearer guidance from the IRS may signal that in the future, examiners will pay closer attention to meals provided by employers.

Background

A growing trend among employers is to provide free gourmet meals to their employees. Employers argue this is for their convenience, which if true would make the meals non-taxable. But in some instances the IRS and others have posited that such meals more closely resemble income.

The Tax Code currently sets forth some basic guidelines for how to determine whether meals are being provided “for the convenience of the employer.” First of all, an employment contract or state statute are not determinative of whether the meals are intended as compensation. Secondly, the meals must be provided for a substantial noncompensatory business reason.

Factors indicating that meals are furnished for the convenience of the employer include:

• A short time available for lunch due to legitimate business reasons and not just to shorten the work day;
• The need for availability of employees for emergencies;
• Insufficient other eating facilities nearby; and
• A standard charge for meals regardless of whether they are eaten.

The IRS has also noted in its existing regulations that meals provided simply to promote morale or goodwill of employees, to attract new employees or as a means of providing additional compensation are not considered to be furnished for the convenience of the employer.

Examples

The IRS’s current regulations contain examples of meals that the IRS has considered to be legitimately provided to employees, tax-free, because they are provided for the employer’s conveniences. These include:

• Meals provided by a bank to its bank tellers to retain them on the premises during the lunch hour because the bank's peak workload occurs during the normal lunch period; and
• Meals provided to casino workers, who are required to eat their meals on the premises in order to minimize the security searches they undergo as they come and go, and to ensure that staff does not succumb to the temptations of nearby casinos rather than promptly returning to work.

Conversely, meals provided by a restaurant to a waitress on her days off are not tax-free because they are perks and not for the employer’s convenience.

Under the modified accelerated cost recovery system (MACRS) (which is more commonly known as depreciation), a half-year timing (i.e., averaging) convention generally applies to the depreciation deduction for most assets during anytime within the year in which they are purchased. That is, whether you purchase a business asset in January or in December, it’s treated for depreciation purposes as being purchased on July 1st. However, a taxpayer who places more than 40 percent of its depreciable property (excluding residential rental property and nonresidential real property) into service during the last three months of the tax year must use a mid-quarter convention – decidedly less advantageous. Because of the 40 percent rule, the purchase of a vehicle or other equipment in the last month of the tax year might, in itself, trigger imposition of the mid-quarter convention. Businesses should keep in mind the 40 percent rule especially for year-end tax planning purposes.

Under the modified accelerated cost recovery system (MACRS) (which is more commonly known as depreciation), a half-year timing (i.e., averaging) convention generally applies to the depreciation deduction for most assets during anytime within the year in which they are purchased. That is, whether you purchase a business asset in January or in December, it’s treated for depreciation purposes as being purchased on July 1st. However, a taxpayer who places more than 40 percent of its depreciable property (excluding residential rental property and nonresidential real property) into service during the last three months of the tax year must use a mid-quarter convention – decidedly less advantageous. Because of the 40 percent rule, the purchase of a vehicle or other equipment in the last month of the tax year might, in itself, trigger imposition of the mid-quarter convention. Businesses should keep in mind the 40 percent rule especially for year-end tax planning purposes.

The applicable averaging convention is not elective. Rather, one of three conventions (half-year, mid-month, and mid-quarter) must apply.

Half-year convention. Under this convention, property is treated as placed in service, or disposed, on the midpoint of the tax year. Thus, one-half of the depreciation for the first year of the recovery period is allowed in the tax year in which the property is placed in service, regardless of when the property is placed in service during the tax year. The half-year convention applies to property other than residential rental property, nonresidential real property, and railroad grading and tunnel bores unless the mid-quarter convention applies

Mid-month convention. Under this convention, property is treated as placed in service, or disposed of, on the midpoint of the month. The MACRS deduction is based on the number of months that the property was in service. Thus, one-half month of depreciation is allowed for the month that property is placed in service and for the month of disposition if there is a disposition of property before the end of the recovery period. The mid-month convention applies to residential rental property (including low-income housing), nonresidential real property, and railroad grading and tunnel bores.

Mid-quarter convention. Under this convention, all property (other than the property otherwise excluded) placed in service, or disposed, during any quarter of a tax year is treated as placed in service, or disposed, on the midpoint of the quarter. A quarter is a period of three months. The mid-quarter convention applies to all property (other than residential rental property, nonresidential real property, and railroad grading and tunnel bores) if more than 40 percent of the aggregate bases of such property is placed in service during the last three months of the tax year.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of October 2014.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of October 2014.

October 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 24–26.

October 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 27–30.

October 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 1–3.

October 10
Employees who work for tips. Employees who received $20 or more in tips during September must report them to their employer using Form 4070.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 4–7.

October 15
Individuals. Individuals with automatic 6-month extensions to file their 2013 income tax returns must file Form 1040, 1040A, or 1040EZ, and pay any tax, interest, and penalties due.
Partnerships. Electing large partnerships that obtained a 6-month extension for filing the 2013 calendar year return (Form 1065-B) must now file the return.

October 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 8–10

October 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 11–14

October 22
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 15–17

October 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 18–21

October 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 22–24

October 31
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 25–28

November 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 29–31

Since passage of the Affordable Care Act, several key requirements for employers have been delayed, including reporting of health coverage offered to employees, known as Code Sec. 6056 reporting. As 2015 nears, and the prospects of further delay appear unlikely, employers and the IRS are preparing for the filing of these new information returns.

Since passage of the Affordable Care Act, several key requirements for employers have been delayed, including reporting of health coverage offered to employees, known as Code Sec. 6056 reporting. As 2015 nears, and the prospects of further delay appear unlikely, employers and the IRS are preparing for the filing of these new information returns.

Three related provisions

Three provisions of the Affordable Care Act are closely related: the employer mandate for applicable large employers (ALEs), the Code Sec. 36B premium assistance tax credit and Code Sec. 6056 reporting. To administer the employer mandate and the Code Sec. 36 credit, the IRS must receive information from ALEs, such as the type of health coverage offered, if any, by the ALE, the number of employees, and the cost of coverage.

Who must report?

Not all employers must report under Code Sec. 6056. The most important exception is for employers with fewer than 50 full-time employees, including full-time equivalent employees. These smaller employers are exempt—at all times—from Code Sec. 6056 reporting and the employer mandate.

For 2015, there is also a temporary exemption for some ALEs from the employer mandate only. ALEs are employers that employ on average at least 50 full-time employees, including full-time equivalents but fewer than 100 full-time employees including full-time equivalents. However, mid-size employers must file Code Sec. 6056 information returns for 2015. All other ALEs are subject to the employer mandate for 2015 as well as Code Sec. 6056.

What must be reported?

The IRS has posted draft forms for Code Sec. 6056 reporting on its website: Form 1094-C Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. Draft Instructions for these forms are expected to be released in the near future.

ALEs generally must report:

• The employer's name, address, and employer identification number;
• The calendar year for which information is being reported;
• A certification as to whether the employer offered to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan;
• The number, address and Social Security/taxpayer identification number of all full-time employees;
• The number of full-time employees eligible for coverage under the employer's plan; and
• The employee's share of the lowest cost monthly premium for self-only coverage providing minimum value offered to that full-time employee.

Under IRS regulations, Code Sec. 6056 reporting is optional for 2014. Reporting for 2015 is required. Information returns must be filed no later than March 1, 2016 (February 28, 2016, being a Sunday), or March 31, 2016, if filed electronically.

Simplified method

The IRS has provided ALEs with simplified methods of reporting. Employers that provide a "qualifying offer" to any of their full-time employees may be eligible as are employers that offer coverage to a certain percentage of employees. For more details about the simplified method, please contact our office.

Employers that self-insure

The Affordable Care Act also requires every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs, and other entities that provide minimum essential coverage to file information returns. This is known as "Code Sec. 6055 reporting." The IRS has posted draft versions of Form 1094-B, Transmittal of Health Coverage Information Returns, and Form 1095-B, Health Coverage on its website.

Employers that self-insure have a streamlined way to report for purposes of Code Sec. 6055 reporting and Code Sec. 6056 reporting. The top half of Form 1095-C includes information needed for Code Sec. 6056 reporting; the bottom half includes information needed for Code Sec. 6055 reporting.

If you have any questions about Code Sec. 6056 reporting, please contact our office.

As the 2015 filing season approaches, IRS Commissioner John Koskinen is bracing taxpayers for more reductions in customer service unless the agency receives more funding. According to Koskinen, the IRS is facing its biggest challenge in recent years. Koskinen, who spoke at the annual conference of the National Society of Accountants in August, also predicted that taxpayers will have to wait until after the November elections to learn the fate of many popular but expired tax incentives.

As the 2015 filing season approaches, IRS Commissioner John Koskinen is bracing taxpayers for more reductions in customer service unless the agency receives more funding. According to Koskinen, the IRS is facing its biggest challenge in recent years. Koskinen, who spoke at the annual conference of the National Society of Accountants in August, also predicted that taxpayers will have to wait until after the November elections to learn the fate of many popular but expired tax incentives.

Budget pressures

The IRS has experienced budgetary pressures since 2010. The Budget Control Act of 2011 (BCA) imposed across-the-board spending cuts on many federal agencies, including the IRS. Some funding was restored last year. Looking ahead, the House has voted to cut the IRS's budget by $341 million for Fiscal Year (FY) 2015. The Senate has proposed to increase the IRS's budget by $240 million. Even with the proposed increase, IRS officials have said that the agency's budget would still be seven percent below funding levels for FY 2010.

The funding cuts have drawn criticism from senior IRS officials. "Funding reductions have significantly hampered the IRS's ability to carry out its mission," National Taxpayer Advocate Nina Olson told Congress. Olson warned that "underfunding of the IRS poses one of the greatest long-term risks to tax administration today."

Koskinen echoed Olson's concerns. "Congress is starving our revenue-generating operation. If voluntary compliance with the tax code drops by 1 percent, it costs the U.S. government $30 billion per year," he explained. "The IRS annual budget is only $11 billion per year.

Customer service

For many taxpayers, the most visible impact of the budget cuts has been reductions in customer service. Koskinen said that the IRS has cut 5,200 call center employees because of lack of funding. Wait times to speak with the IRS will increase, he predicted. During the 2014 filing season, the IRS's level of customer service was around 72 percent. The level of customer service for the 2015 filing season could fall to as low as 50 percent without adequate funding, Koskinen cautioned.

Koskinen acknowledged that the funding cuts have fueled efficiencies in the agency's operations. The agency has reduced hiring, offered buyouts to long-time employees, and cut travel and training costs. "We are becoming more efficient but there is a limit," he said. "Eventually the effects will show up. We are no longer going to pretend that cutting funding makes no difference."

Tax extenders

Unless extended, a host of expired tax incentives will be unavailable to taxpayers when they file their 2014 returns. These include widely-used incentives, such as the state and local sales tax deduction, the higher education tuition deduction, and transit benefits parity. Businesses also would be impacted, with failure to renew popular incentives, including the research tax credit and the Work Opportunity Tax Credit.

Legislation to extend many of these incentives will likely not be passed by Congress until after the November elections, Koskinen predicted. "Congress needs to understand that the later these are passed and the more complicated they are, the more challenging it is for taxpayers to file accurate returns on time." Koskinen added that the IRS will be challenged to reprogram its return processing systems for renewal of the tax extenders. As a result, the start of the 2015 filing season could be delayed, he said.

Identity theft

Koskinen lauded the agency's work to curb tax-related indentity theft. This initiative is a high-profile one. The IRS has worked with other federal agencies and state and local governments to discover and prosecute identity thieves. The IRS has also upgraded its return processing systems to uncover fraudulent returns and has assigned special identity protection numbers to victims of identity theft. "We rejected 5.7 million suspicious returns last year that may have been tied to identity theft," he said.

To learn more information or for updates, please contact our offices.

Life expectancies for many Americans have increased to such an extent that most taxpayers who retire at age 65 expect to live for another 20 years or more. Several years ago, a number of insurance companies began to offer a new financial product, often called the longevity annuity or deferred income annuity, which requires upfront payment of a premium in exchange for a guarantee of a certain amount of fixed income starting after the purchaser reaches age 80 or 85. Despite the wisdom behind the longevity annuity, this new type of product did not sell especially well, principally for tax reasons. These roadblocks, however, have largely been removed by new regulations.

Life expectancies for many Americans have increased to such an extent that most taxpayers who retire at age 65 expect to live for another 20 years or more. Several years ago, a number of insurance companies began to offer a new financial product, often called the longevity annuity or deferred income annuity, which requires upfront payment of a premium in exchange for a guarantee of a certain amount of fixed income starting after the purchaser reaches age 80 or 85. Despite the wisdom behind the longevity annuity, this new type of product did not sell especially well, principally for tax reasons. These roadblocks, however, have largely been removed by new regulations.

Treasury and the IRS recently released final regulations (TD 9673) to encourage taxpayers to purchase "qualified longevity annuity contracts" (QLACs) with a portion of their retirement savings held in IRAs or in retirement accounts held under a 401(k), 403(b) or other defined contribution plans that are subject to the rules for required minimum distributions (RMDs). The final regulations are meant to remove or mitigate some of the tax concerns new retirees may face when deciding whether or not to purchase a deferred income annuity.

Longevity Annuities—Generally

Purchase of a longevity annuity provides for a deferred income stream. Although the terms of specific longevity annuity contracts differ from plan to plan, the arrangement generally requires the purchaser to pay the premium as a lump sum to the insurer. The purchaser could be 65 years of age, 55, 50 or some other age, and the insurer would not begin to make payments under the longevity annuity contract until the purchaser had reached the specified age (of no more than 85 years for the tax benefits contained in the final regulations). The amount of the annuity depends on a number of factors, among them: the age at which the contract is purchased; the amount of the premium paid; the contractual interest rate; and the age at which payments begin.

RMDs

Not every individual who reaches retirement age possesses enough spare cash outside of his or her IRAs or other retirement accounts to purchase an income annuity, let alone a longevity annuity that does not begin to pay out for many years. In such cases individuals can purchase an annuity from within an IRA or defined contribution plan account. Prior to the final regulations, however, the RMD rules requiring taxpayers who reach age 70 ½ to begin taking distributions from these accounts would have forced taxpayers to factor the premium amounts into the calculation of their annual taxable distribution. This would have depleted the account funds more quickly than the actual balance, without premium payment, warranted.

QLACs

The final regulations provide that only qualified longevity annuity contracts (QLACs) are eligible for account balance exclusion from the RMD calculation. The regulations define a QLAC as:

• A longevity annuity whose premium payment does not exceed the lesser of $125,000 or 25 percent of the employee’s account balance;
• A contract that provides for payouts to begin no later than the first day of the month following the purchaser’s 85th birthday;
• A contract that does not provide any commutation benefit, cash surrender right, or other similar feature;
• A contract under which any death benefit offered meets the requirements of paragraph A-17(c) of Reg. §1.401(a)(9)-6 (see below for more details);
• A contract that states when issued that it is intended to be a QLAC; and
• A contract that is not a variable contract under Code Sec. 817, an indexed contract, or a similar contract.

The total value of all QLACs held by one person cannot exceed the lesser of $125,000 (indexed for inflation) or 25 percent of all qualified retirement accounts put together. This limitation does not extend to funds held in non-retirement accounts or to funds held in Roth IRAs.

In addition, the amount used to pay the QLAC premium is not taxable when the QLAC is purchased. This means the account holder has a zero basis in the QLAC. Distributions from the QLAC are fully taxable.

Death Benefit

Most longevity annuities do not provide any death benefit for the purchaser's beneficiaries. While some longevity annuity plans do offer a death benefit for the beneficiaries of annuity purchasers who die prematurely, plans that maximize the annuity payment generally provide that the insurer keeps the entire premium amount, plus interest, if the purchaser dies before payouts begin or the contract basis is exhausted.

Return of premium. The final regulations attempt to mitigate some of the risk retirees face when deciding to purchase a QLAC by allowing a QLAC to provide certain death benefits in limited circumstances. Notably, the final regulations add a feature missing from the proposed regulations: return of premium. Under the final rules, a QLAC is authorized to guarantee the return of a purchaser's premium if the purchaser dies before receiving benefits equal to the premium paid.

Surviving spouse. The final regulations provide that, where the purchaser's sole beneficiary under the QLAC is his or her surviving spouse, generally the only benefit permitted to be paid after the purchaser's death is a life annuity that does not exceed 100 percent of the annuity that would have been paid to the employee. The final regulations also allow QLACs to provide the return of premium feature if a surviving spouse who receives a life annuity under the contract dies before the payments equal the premium.

Non-spouse beneficiary/beneficiaries. QLACs may also provide a lifetime annuity to designated non-spouse beneficiaries, but the annuity would likely be reduced. Calculation of an annuity payable to a non-spouse beneficiary would be calculated based on the applicable percentage provided in one of the tables in the final regulations. However, if the QLAC provides a return of premium feature, the applicable percentage that the beneficiary would receive is zero.

Please contact this office if you have any questions on how a qualified longevity annuity might fit into your retirement plans now that the IRS has relaxed some of the rules.