Newsletters

The IRS has released the annual inflation adjustments for 2023 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

The IRS has released the annual inflation adjustments for 2023 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2023 Income Tax Brackets

For 2023, the highest income tax bracket of 37 percent applies when taxable income hits:

• $693,750 for married individuals filing jointly and surviving spouses,
• $578,125 for single individuals,
• $578,100 for heads of households,
• $346,875 for married individuals filing separately, and
• $14,450 for estates and trusts.

2023 Standard Deduction

The standard deduction for 2023 is:

• $27,700 for married individuals filing jointly and surviving spouses,
• $20,800 for heads of households, and
• $13,850 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,250 or
• the sum of $400, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,500 for married taxpayers and surviving spouses, or
• $1,850 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2023

The AMT exemption for 2023 is:

• $126,500 for married individuals filing jointly and surviving spouses,
• $81,300 for single individuals and heads of households,
• $63,250 for married individuals filing separately, and
• $28,400 for estates and trusts.

The exemption amounts phase out in 2023 when AMT exceeds:

• $1,156,300 for married individuals filing jointly and surviving spouses,
• $578,150 for single individuals, heads of households, and married individuals filing separately, and
• $94,600 for estates and trusts.

Expensing Code Sec. 179 Property in 2023

For tax years beginning in 2023, taxpayers can expense up to $1,160,000 in Code Sec. 179 property. However, this dollar limit is reduced when the cost of Code Sec. 179 property placed in service during the year exceeds $2,890,000.

Estate and Gift Tax Adjustments for 2023

The following inflation adjustments apply to federal estate and gift taxes in 2023:

• the gift tax exclusion is $17,000 per donee, or $175,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $12,920,000; and
• the maximum reduction for real property under the special valuation method is $1,310,000.

2023 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2023 is $120,000.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date of 2023 Adjustments

These inflation adjustments generally apply to tax years beginning in 2023, so they affect most returns that will be filed in 2024. However, some specified figures apply to transactions or events in calendar year 2023.

The 2023 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2022 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. 

The 2023 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2022 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2023 cost-of-living adjustments (COLAs) were released for:

• pension plan dollar limitations, and
• other retirement-related provisions.

Highlights of Changes for 2023

The contribution limit has increased from $20,500 to $22,500 for employees who take part in:

• 401(k),
• 403(b),
• most 457 plans, and
• the federal government’s Thrift Savings Plan

The annual limit on contributions to an IRA increased from $6,000 to $6,500.

The catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

The income ranges increased for determining eligibility to make deductible contributions to:

• IRAs,
• ROTH IRAs, and
• to claim the Saver's Credit.

Phase-Out Ranges

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or their spouse takes part in a retirement plan at work. The phase out depends on the taxpayer's filing status and income.

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $73,000 to $83,000, up from between $68,000 and $78,000.
• For joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $116,000 to $136,000, up from between $109,000 and $129,000.
• For an IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $218,000 and $228,000, up from between $204,000 and $214,000.
• For a married individual covered by a workplace plan filing a separate return, the phase-out range remains between $0 and $10,000.

The phase-out ranges for Roth IRA contributions are:

• $138,000 and $153,000, for singles and heads of household,
• $218,000 and $228,000, for joint filers, and
• $0 to $10,000 for married separate filers.

The income limit for the Saver' Credit is:

• $73,000 for joint filers,
• $54,750 for heads of household, and
• $36,500 for singles and married separate filers.

Lastly, the amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500, up from $14,000.

For 2023, the Social Security wage cap will be $160,200, and social security and Supplemental Security Income (SSI) benefits will increase by 8.7 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2023, the Social Security wage cap will be $160,200, and social security and Supplemental Security Income (SSI) benefits will increase by 8.7 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax

The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent Medicare tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2023, the wage base is $160,200. Thus, OASDI tax applies only to the taxpayer’s first $160,200 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $160,200.

There is no wage cap for Medicare tax.

Maximum Social Security Tax for 2023

For workers who earn $160,200 or more in 2023:

• an employee will pay a total of $9,932.40 in social security tax ($160,200 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $19,864.80 in social security tax ($160,200 x 12.4 percent).

Additional Medicare Tax

Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the Additional Medicare tax.

Benefit Increase for 2023

A cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2023 by 8.7 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The IRS has released the 2022-2023 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. 

The IRS has released the 2022-2023 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

• the special transportation industry meal and incidental expenses (M&IE) rates;
• the rate for the incidental expenses only deduction; and
• the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates

The special M&IE rates for taxpayers in the transportation industry are:

• $69 for any locality of travel in the continental United States (CONUS); and
• $74 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate

The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method

For purposes of the high-low substantiation method, the 2022-2023 special per diem rates are:

• $297 for travel to any high-cost locality; and
• $204 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $74 for travel to any high-cost locality, and
• $64 for travel to any other locality within CONUS.

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $74 for travel to any high-cost locality, and
• $64 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1392. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

Notice 2021-52, I.R.B. 2021-38, 381 is superseded.

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule implementing the beneficial ownership information reporting provisions under the Corporate Transparency Act (CTA), which was enacted as part of the National Defense Authorization Act for Fiscal Year 2021 ( P.L. 116-283). The CTA amended the Bank Secrecy Act by adding a new provision on beneficial ownership reporting ( 31 USC §5336).

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule implementing the beneficial ownership information reporting provisions under the Corporate Transparency Act (CTA), which was enacted as part of the National Defense Authorization Act for Fiscal Year 2021 ( P.L. 116-283). The CTA amended the Bank Secrecy Act by adding a new provision on beneficial ownership reporting ( 31 USC §5336).

The rule is intended to (1) enhance the ability of FinCEN and other agencies to protect U.S. national security and the U.S. financial system from illicit use, and (2) provide essential information to national security, intelligence, and law enforcement agencies, state, local, and tribal officials, and financial institutions, to help prevent illicit actors from laundering or hiding money and other assets in the United States.

The rule requires reporting companies to file reports with FinCEN that identify the beneficial owners of the entity and the entity’s company applicants. The rule also describes who must file a report, what information must be reported, and when a report is due.

Reporting Companies

There are two types of reporting companies: domestic and foreign. A domestic reporting company is a corporation, limited liability company (LLC), or any entity created by filing a document with a secretary of state or any similar office under state or tribal law. A foreign reporting company is an entity formed under the law of a foreign country that is registered to do business in a state or tribal jurisdiction by filing a document with a secretary of state or any similar office.

FinCEN expects limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships to be reporting companies. FinCEN also expects companies with simple management and ownership structures to be the majority of reporting companies.

Twenty-three types of entities are exempt from “reporting company” treatment, including certain governmental authorities, tax-exempt organizations, banks, broker or dealers, investment companies, insurance companies, accounting firms, and others.

An entity that is a “large operating company” is not a reporting company if it:

• employs more than 20 full time employees in the United States;
• has an operating presence at a physical office within the United States; and
• filed a federal income tax or information return in the United States for the previous year demonstrating over $5,000,000 in gross receipts or sales (excluding gross receipts or sales from sources outside the United States).

Other legal entities, including certain trusts, are also excluded to the extent that they are not created by filing a document with a secretary of state or similar office.

Beneficial Owners

A beneficial owner includes any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company. The rule defines “substantial control” and “ownership interest.”

A beneficial owner does not include a minor child; an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; a reporting company employee (but not a senior officer) whose substantial control over or economic benefits from the entity are derived solely from his or her employment status; an individual whose only interest in a reporting company is a future interest through right of inheritance; or a creditor of a reporting company.

Company Applicants

A company applicant is: (1) the individual who directly files the document that creates the entity (for a foreign reporting company, the document that first registers the entity to do business in the United States); and (2) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another.

Reporting companies existing or registered on the effective date of the rule are not required to identify and report on their company applicants. Reporting companies formed or registered after the effective date must report company applicant information but do not need to update it.

Beneficial Ownership Information Reports

In the report filed with FinCEN, a reporting company must identify itself and report four pieces of information about each of its beneficial owners: name, birth date, address, and a unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of that document). Reporting companies created after January 1, 2024, must also provide this information and document image for company applicants.

An individual who provides his or her information to FinCEN directly can obtain a unique identifying number assigned by FinCEN (“FinCEN identifier") which can then be provided to FinCEN on a report instead of the required information about the individual.

Effective Date and Reporting Deadlines

The rule is effective January 1, 2024. Reporting companies created or registered before the effective date have until January 1, 2025, to file their initial reports. Reporting companies created or registered after the effective date have 30 days after receiving notice of their creation or registration to file their initial reports.

A reporting company has 30 days to report changes to the information in its previously filed reports. It also must correct inaccurate information in previously filed reports within 30 days of when it becomes aware or has reason to know of the inaccuracy.

FinCEN has provided a fact sheet which summarizes the new rule.

The IRS issued final regulations to strengthen implementation of the Affordable Care Act by fixing the “family glitch.” The rules amend eligibility for the premium tax credit (PTC) to allow family members of workers who are offered unaffordable family coverage to qualify for premium tax credits. The regulations also add a minimum value rule for family members of employees, based on the benefits provided to the family members. This guidance would affect taxpayers who enroll, or enroll a family member, in individual health insurance coverage through a Health Insurance Exchange (Exchange) and who may be allowed a Premium Tax Credit for the coverage.

The IRS issued final regulations to strengthen implementation of the Affordable Care Act by fixing the “family glitch.” The rules amend eligibility for the premium tax credit (PTC) to allow family members of workers who are offered unaffordable family coverage to qualify for premium tax credits. The regulations also add a minimum value rule for family members of employees, based on the benefits provided to the family members. This guidance would affect taxpayers who enroll, or enroll a family member, in individual health insurance coverage through a Health Insurance Exchange (Exchange) and who may be allowed a Premium Tax Credit for the coverage.

Premium Tax Credit Eligibility

The Premium Tax Credit would be determined based on an employee’s share of the cost of covering the employee and the related individuals. The affordability rule for related individuals represented the better reading of the relevant statutes. This was consistent with Congress’s purpose in the Affordable Care Act (ACA) ( P.L. 111-148) to expand access to affordable health care coverage. The Treasury and the IRS stated that Code Sec. 36B(c)(2)(C)(i), including the flush language that follows Code Sec. 36B(c)(2)(C)(i)(II), was correctly interpreted to provide that the affordability test for a related individual is based on the cost of coverage for the employee and the related individual.

Unless a related individual is also employed by that employer, the related individual may not enroll in the employer’s coverage on a self-only basis. Thus, the minimum essential coverage is what the related individual may enroll in, the family coverage offered by the employer. The affordability for employees is based on the employee’s cost for self-only coverage. The affordability for family members is generally based on the amount an employee must pay to cover the employee and the related individuals included in the employee’s family.

Cost of Coverage

The cost of covering individuals who are offered the coverage but are non-family members is not considered in determining whether the employee’s family members have an offer of affordable employer coverage. Consequently, a non-family member would not need a determination of unaffordable coverage to enroll in an exchange (QHP) and be eligible for the Premium Tax Credit if the individual otherwise qualifies. A non-family member may enroll in a QHP and be eligible for the Premium Tax Credit, if the individual is otherwise eligible, by simply not enrolling in the offered employer coverage. The final regulations do not amend the affordability rule for employees. An individual with multiple offers of employer coverage seeking to enroll in a QHP with advance Premium Tax Credit would provide information to the applicable exchange concerning the required contribution for each coverage offer. The exchange would determine if at least one of the offers is affordable.

In this case, the advance Premium Tax Credit would not be allowed for the individual’s exchange coverage. This process should minimize any burden or confusion relating to whether an individual with multiple offers has an affordable offer that would deny the individual the advance Premium Tax Credit and Premium Tax Credit for exchange coverage. For taxpayers for whom the advance Premium Tax Credit is not paid for their or their family’s QHP coverage, the IRS will update the instructions for Form 8962, Premium Tax Credit (PTC), and Publication 974, Premium Tax Credit (PTC), to address multiple offers of employer coverage.

Minimum Value Rule

The final regulations provide a minimum value rule for related individuals that is separate from the minimum value rule for employees. It requires a plan's share of the total allowed costs of benefits provided to related individuals to be at least 60 percent. This minimum value rule for related individuals is not intended to require the use of a standard population for family members that is separate from the standard population for employees.

Further, an employer plan that provides minimum value to an employee also provides minimum value to related individuals if the scope of benefits and cost sharing including deductibles, co-payments, coinsurance, and out-of-pocket maximums under the plan are the same for employees and family members. The final regulations do not require a departure from the practice of computing minimum value for employees and related individuals based on the provision of benefits to a standard population that includes both employees and related individuals. The final regulations provide that an eligible employer-sponsored plan does not meet minimum value requirements unless it includes substantial coverage of inpatient hospital services and physician services.

Applicability Date

The final regulations apply for tax years beginning after December 31, 2022.

A new revenue procedure provides taxpayer assistance procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a private letter ruling (PLR).

A new revenue procedure provides taxpayer assistance procedures to allow S corporations and their shareholders to resolve frequently encountered issues without requesting a private letter ruling (PLR).

Correcting S Corporation and QSub Election Issues

The new procedure addresses issues that generally do not affect the validity or continuation of an S corporation election, or of an election to treat a S corporation subsidiary as a qualified subchapter S subsidiary (QSub).

The procedure also provides corrective relief procedures to allow taxpayers in some situations to retroactively preserve S elections that are invalid or terminated solely because of certain non-identical governing provisions. A non-identical governing provision is one that, on its own or as part of another governing provision, results in the S corporation having more than one class of stock and, therefore, losing its eligibility to be an S corporation.

The IRS will no longer issue PLRs with respect to certain principal purpose determinations regarding the one class of stock requirement, or comfort rulings regarding certain S corporation and QSub election issues.

Effective Date

The new procedure is generally effective on the date it is published in the Internal Revenue Bulletin.

Under a transition rule, if a taxpayer has a request for a PLR regarding a non-identical governing provision that is postmarked (or if not mailed, received by the IRS) after the procedure is published, the taxpayer has 45 days to notify the Associate Chief Counsel (Passthroughs and Special Industries) of its decision to either:

• rely on this new procedure, withdraw the pending PLR request, and receive a refund of the associated user fee; or
• continue to pursue the pending PLR request.

A taxpayer that fails to notify the IRS is deemed to choose to continue to pursue its pending PLR request.

Effect on Other Documents

Rev. Proc. 2013-30 and Rev. Proc. 2022-1 are amplified, and Rev. Proc. 2022-3 is amplified and modified.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

When Sales of Livestock Are Involuntary Conversions

Sales of livestock due to drought are involuntary conversions of property. Taxpayers can postpone gain on involuntary conversions if they buy qualified replacement property during the replacement period. Qualified replacement property must be similar or related in service or use to the converted property.

Usually, the replacement period ends two years after the tax year in which the involuntary conversion occurs. However, a longer replacement period applies in several situations, such as when sales occur in a drought-stricken area.

Livestock Sold Because of Weather

Taxpayers have four years to replace livestock they sold or exchanged solely because of drought, flood, or other weather condition. Three conditions apply.

First, the livestock cannot be poultry.

Second, the taxpayer must have held the converted livestock for draft, breeding, or dairy purposes.

Third, the weather condition must make the area eligible for federal assistance.

Persistent Drought

The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.

The first drought-free year is the first 12-month period that (1) ends on August 31 in or after the last year of the four-year replacement period, and (2) does not include any weekly period of drought.

Areas Suffering From Drought

The National Drought Mitigation Center produces weekly Drought Monitor maps that report drought-stricken areas. Taxpayers can view these maps at

https://droughtmonitor.unl.edu/

However, the IRS also provided a list of areas where the year ending on August 31, 2022, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.

Senate Finance Committee Chairman Ron Wyden has indicated to the Internal Revenue Service what his expectations for the recently allocated funds from the Inflation Reduction Act are to be used for.

Senate Finance Committee Chairman Ron Wyden has indicated to the Internal Revenue Service what his expectations for the recently allocated funds from the Inflation Reduction Act are to be used for.

In an October 4, 2022, letter to Department of the Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig, Chairman Wyden (D-Ore.) identified, in addition to not increasing the audit rates compared to historic levels for those making less than $400,000, the $80 billion being allocated over the next 10 year should be used for the following:

• Improving customer service,
• Investing in technology to improve service and enforcement,
• Rebalancing of audit rates,
• Cracking down on offshore tax evasion,
• Reducing the tax gap, and
• Rebuilding the IRS Criminal Investigation Division.

As part of the requirements, Chairman Wyden committed to continuing "to work on getting ‘direct hire’ authority for the IRS so it can hire agents more quickly" to address balancing audit rates and allow for the IRS to target more high earners who likely have more complex tax returns.

He also noted that the IRS has, due to "persistent" budget cuts, "conducted virtually no oversight of hundreds of thousands of shell companies in offshore tax havens that it has approved as financial institutions" under the Foreign Account Tax Compliance Act. He said this "shell bank" loophole "significantly increases the risk that wealthy taxpayers underreport offshore income."

"I expect IRA funding to be used to monitor whether offshore entities are properly reporting accounts belonging to U.S. persons, and to take enforcement action against foreign banks and other intermediaries who help conceal income," the letter stated.

Overall, Chairman Wyden hopes the funding will help significantly reduce an estimated tax gap of $600 billion annually.

The American Institute of CPAs has posted comments on guidance recently issued by the Internal Revenue Service regarding the deductibility of payments by partnerships and S corporations for certain state and local taxes.

The American Institute of CPAs has posted comments on guidance recently issued by the Internal Revenue Service regarding the deductibility of payments by partnerships and S corporations for certain state and local taxes.

The October 4, 2022, comment letter to the IRS “addresses PTE tax rulings pertaining to accrual basis taxpayers” and “highlights the confusion of the ‘taxable year in which the payment is made’ language.” A catalog of AICPA comment letters can be found at https://us.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/56175896-aicpa-salt-deduction-pte-timing-letter-10-4-2022-submit.pdf.

AICPA recommends that Treasury and the IRS "issue guidance that provides that [ Notice 2020-75] does not change, and Treasury and IRS did not intend to change, any section 461, or section 461 regulation, principles."

The future of the Affordable Care Act and its associated taxes has moved to the Senate following passage of the American Health Care Act (AHCA) in the House in April. Traditionally, legislation moves more slowly in the Senate than in the House, which means that any ACA repeal and replacement bill may be weeks if not months away.

The future of the Affordable Care Act and its associated taxes has moved to the Senate following passage of the American Health Care Act (AHCA) in the House in April. Traditionally, legislation moves more slowly in the Senate than in the House, which means that any ACA repeal and replacement bill may be weeks if not months away. 

Note. At the time this article was prepared, few details have emerged about discussions in the Senate on the ACA’s taxes. Some senators have predicted that the Senate will write its own ACA repeal and replacement bill. A Congressional Budget Office (CBO) report, issued in late May, scored the House-passed AHCA as eventually causing 23 million fewer individuals to be covered, a number that may prompt the Senate to move further away from the House bill. It is also unclear if a Senate bill would repeal all or some of the ACA’s taxes. A Senate bill could also make other changes to the ACA, such as changes to the individual and employer shared responsibility requirements and the Code Sec. 36B premium assistance tax credit.

Health care taxes

As approved by the House, the AHCA repeals nearly all of the ACA’s taxes and delays the ones it does not repeal immediately. The House-passed version of the AHCA repeals the net investment income (NII) tax, the excise tax on medical devices, and the health insurance provider fee, among others, retroactively to the start of 2017. Further, the House-passed version of the AHCA delays the ACA’s excise tax on high-dollar health plans.

Whether the Senate will go along with repealing all or some of the ACA’s taxes is unclear. Some GOP members of the Senate Finance Committee had previously called for immediate repeal of the additional Medicare tax. Other Republican senators called for immediate repeal of the medical device excise tax. Our office will keep you posted of developments.

Code Sec. 36B credit

Individuals who obtain health insurance through the ACA Marketplace may qualify for a tax credit to help offset the cost of coverage. The House-passed version of the AHCA also revises the Code Sec. 36B premium assistance tax credit. The amount of the credit would vary depending on the taxpayer’s age, among other modifications. Again, it is unclear if the Senate will adopt these changes to the credit or make its own revisions.

Other provisions

An ACA repeal and replacement bill in the Senate also is expected to address, among other things,

• Individual and employer shared responsibility requirements
• Health savings accounts
• Code Sec. 45R small employer health insurance credit
• Branded prescription drug fee
• Medical expense deduction
• Minimum essential health benefits

Other health care bills

Just before Congress’ Memorial Day recess, the House Ways and Means Committee approved several bills related to the House version of the AHCA. One bill would allow individuals who have certain types of COBRA coverage to claim the revised Code Sec. 36B credit. Another bill would disallow advance payments of the credit unless the recipient is a citizen or national of the U.S. or an alien lawfully present in the U.S.

Administrative actions

The U.S. Department of Health and Human Services (HHS), the Department of Labor (DOL) and the IRS administer different parts of the ACA. In May, HHS announced that changes to the direct enrollment process for the ACA Marketplace. HHS also announced that online enrollment for the Small Business Health Options Program (SHOP) would be through an agent or broker.

Please contact our office if you have any questions about health care and taxes.

As “hurricane season” officially begins, the IRS has released a number a tax tips, reminders and other advice to help taxpayers weather the storm of natural disasters and similar emergencies. The underlying theme for all IRS "tax tips" is that recordkeeping has generally become easier in the digital age. However, it remains the primary responsibility of the taxpayer to preserve adequate records whether or not caused by a disaster.

As “hurricane season” officially begins, the IRS has released a number a tax tips, reminders and other advice to help taxpayers weather the storm of natural disasters and similar emergencies. The underlying theme for all IRS "tax tips" is that recordkeeping has generally become easier in the digital age. However, it remains the primary responsibility of the taxpayer to preserve adequate records whether or not caused by a disaster. 

Bottom line: Although the IRS will often extend filing deadlines and generally offer "hot line" accessibility, the "burden of proof" on substantiation and other requirements found within the tax laws is ultimately placed upon the taxpayer’s shoulders. 

Preparation Checklist

The IRS advises taxpayers to consider taking the following steps, among others, to better prepare for hurricanes and other emergencies:

Emergency plans. Personal and business situations change over time, as do preparedness needs. An emergency plan, both at home and in business, whether for safety or to prepare for insurance claims and tax contingencies, should be updated annually.

Digital copies of key documents. The IRS advises that taxpayers should keep a duplicate set of key documents including bank statements, tax returns, identifications and insurance policies in a safe place, away from the original set. The IRS observes that maintaining an additional set of records should be easier these days, with many financial institutions providing statements and documents electronically and on secure internet sites. Even if the original records are only provided on paper, the IRS suggests scanning them into an electronic format.

Taxpayers should also photograph or videotape the contents of their residences, especially items of higher value. The IRS disaster loss workbooks and Publication 584 can help taxpayers compile a room-by-room list of belongings. A photographic record can help taxpayers prove the fair market value of items for insurance and casualty loss claims. Ideally, photos should be stored outside the area of the home or office.

Payroll providers. The IRS suggests that employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. It notes that the bond could protect the employer in the event of default by the payroll service provider.

IRS data storage. Back copies of previously-filed tax returns and all attachments, including Forms W-2, can be requested by filing Form 4506, Request for Copy of Tax Return. Alternatively, transcripts showing most line items on these returns can be ordered through the Get Transcript tool available on the IRS website, or by calling 1-800-908-9946 or by using Form 4506T-EZ, "Short Form Request for Individual Tax Return Transcript" or Form 4506-T, " Request for Transcript of Tax Return."

President Trump on April 26^th, just before his “100 days” in office, unveiled his highly-anticipated tax reform outline –the “2017 Tax Reform for Economic Growth and American Jobs.” The outline calls for dramatic tax cuts and simplification: lower individual tax rates under a three-bracket structure, doubling the standard deduction, and more than halving the corporate tax rate; along with changing the tax treatment of pass-through businesses, expanding child and dependent incentives, and more. Both the alternative minimum tax and the federal estate tax would be eliminated. The White House proposal does not include spending and tax incentives for infrastructure; nor a controversial “border tax.”

President Trump on April 26^th, just before his “100 days” in office, unveiled his highly-anticipated tax reform outline –the “2017 Tax Reform for Economic Growth and American Jobs.” The outline calls for dramatic tax cuts and simplification: lower individual tax rates under a three-bracket structure, doubling the standard deduction, and more than halving the corporate tax rate; along with changing the tax treatment of pass-through businesses, expanding child and dependent incentives, and more. Both the alternative minimum tax and the federal estate tax would be eliminated. The White House proposal does not include spending and tax incentives for infrastructure; nor a controversial “border tax.”

According to White House officials, the President’s proposals set out broad principles with specifics to be hammered-out in coming weeks. Actual “bill language” with details is now expected sometime in June now that the President has thrown his support officially to tax reform.

Individuals

For individuals, the White House proposed consolidating and reducing the tax rates to 10, 25 and 35 percent. Cohn said that no income brackets have yet been developed for the proposed lower rates. The proposal also calls for doubling the standard deduction. "Married couples would have a $24,000 standard deduction," National Economic Council Director Gary Cohn said at a White House briefing. He predicted that doubling the standard deduction would simplify tax filing for millions of Americans.

Along with repealing the federal estate tax, the AMT and the NII tax, the proposal calls for abolishing nearly all individual credits and deductions." The plan eliminates all individual deductions except mortgage interest and charitable deductions," Treasury Secretary Steven Mnuchin has stated. The plan also calls for unspecific tax relief for families with child and dependent care expenses.

The White House plan apparently keeps the current framework for capital gains and dividend taxes. However, it would repeal the 3.8-percent NII tax. "The president looks at [the NII tax] as being a tax on capital," Cohn said.

Businesses

During the campaign, President Trump proposed to reduce the corporate tax rate and cut taxes on small businesses. The plan does both, Cohn and Mnuchin said. The corporate tax rate would fall to 15 percent. "Small and mid-size businesses will be eligible for the 15-percent rate,"  Mnuchin said, referring to partnerships, S corporations and sole proprietorships in which income is currently passed through to their owners at individual income tax rates. "We will make sure that there are mechanisms in place to prevent wealthy people from taking advantage of the rules for small businesses," he added.

The proposal would also move the U.S. to a territorial tax regime. "A territorial system means U.S. companies will pay tax on income related to the U.S.," Mnuchin said. "U.S. companies will not be subject to worldwide income tax," he added.

Not included in the proposal is so-called border adjustability. House Republicans have promoted a border adjustment tax as a way to pay for tax reform. Mnuchin predicted that the president’s plan would "pay for itself" but did not elaborate how. "Lots and lots of details will go into how it will pay for itself. This will pay for itself with growth and closing loopholes," he said.

Another business proposal would provide for a one-time, reduced tax rate on earnings repatriated to the U.S. The White House has not said yet what the rate would be but predicted it would be a "very competitive rate."

Although the employee may end up with the same amount whether something is designated a tip or a service charge, the IRS reporting requirements for the employer do differ. Basically, any amount required to be paid by a customer rather than at the customer’s discretion is considered a service charge by the IRS.

Although the employee may end up with the same amount whether something is designated a tip or a service charge, the IRS reporting requirements for the employer do differ. Basically, any amount required to be paid by a customer rather than at the customer’s discretion is considered a service charge by the IRS.

Tips

Tips are optional payments received by employees and determined by customers. Tips include cash; tips made through a credit card or other electronic payment; the value of noncash tips; and tips paid through tip splitting.

Tips include:

• Cash tips received directly from customers.
• Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.
• The value of any noncash tips, such as tickets, or other items of value.
• Tip amounts received from other employees paid out through tip pools or tip splitting, or other formal or informal tip sharing arrangements.

Employees are required to report cash tips to their employers except tips from any month that total less than $20. Employers are required to retain employee tip records and credit card tip designations, withhold employee income taxes and the employee share of social security and Medicare taxes and report this information to the IRS.

Both directly and indirectly tipped employees must report tips to their employer.

A “directly tipped employee” is any employee who receives tips directly from customers, including one who, after receiving the tips, turns all of them over to a tip pool. Examples of directly tipped employees are waiters, waitresses, bartenders and hairstylists.

An “indirectly tipped employee” is a tipped employee who does not normally receive tips directly from customers. Examples of indirectly tipped employees are bussers, service bartenders, cooks and salon shampooers.

Tips reported to the employer by the employee must be included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (Social Security tips) of the employee's Form W-2 , Wage and Tax Statement. Enter the amount of any uncollected social security tax and Medicare tax in Box 12 of Form W-2.

Service charges

Tips must be made free from compulsion; the customer must have the unrestricted right to determine the amount; the payment may not be subject to employer policy; and the customer has the right to determine who receives the payment. Service charges do not have any of these qualities and are generally reported as regular wages to employees. So-called “automatic gratuities” and any amount imposed on the customer by the employer are service charges, not tips.

Examples of service charges commonly added to a customer's check include:

• Large dining party automatic gratuity
• Banquet event fee
• Cruise trip package fee
• Hotel room service charge
• Bottle service charge (nightclubs, restaurants)

Service charges are generally wages, and they are reported to the employee and the IRS in a manner similar to other wages. On the other hand, special rules apply to both employers and employees for reporting tips. Employers should make sure they know the difference and how they report each to the IRS.

Generally, service charges are reported as non-tip wages paid to the employee. Some employers keep a portion of the service charges. Only the amounts distributed to employees are non-tip wages to those employees.