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Education Tax Incentives

In general: Tax benefits that may defray the cost of education come in a variety of forms: Scholarships, Awards, Work-Study ……………………………….Page 2 Employer exclusions or tax-free fringe benefits (no comments included herein) ………………………………..NA Education credits and a Limited education deduction …………..Page 3 Student loan interest deductions ………………………………….Page 6 Tax-favored education savings plans …………………………Page 7

Visit our web site at www.pellinigold.com for calculators and links pertaining to: Education Retirement Savings The economy Borrowing Taxes …. And see “Tax Bites” on our home page for an extensive summary of tax topics and general rules.

Awards, Scholarships, Work-Study

(NT) Awards of financial aid based on academic achievement as well as financial need qualify for an exclusion from gross income if the taxpayer is a candidate for a degree and the financial aid is used for "qualified tuition and related expenses." Tuition and fees necessary for enrollment/attendance and courses (books, supplies, etc.) constitute "qualified tuition and related expenses." Incidental expenses, room, and board are not included.

(NT) Scholarship programs and research grants that are given in exchange for services that the recipient must perform constitute wages that have gross income inclusion. However, such grants and programs that are designed to help participants gain skills and that do not represent payment for the recipient's service performance may be qualified for gross income exclusion.

(T) Work-study. This is the type of financial aid where jobs are given to students to help pay their college education costs. Students usually work for the schools they are attending or for other employers. Such awards for work-study are part of the student's taxable gross income. Thanks to the new 10-percent rate bracket, however, a student's earnings, even if the student is limited in taking the standard deduction because of being a dependent of another taxpayer, are rarely taxed at a high rate. FICA social security taxes frequently become the higher tax with which to contend.

Education Credits

HOPE scholarship credit – $1,500 maximum credit per student for each of the first two years of college Enrolled at least half-time 100 percent of the first $1,000 paid and 50 percent of the next $1,000 Lifetime Learning credit – 20 percent of costs, up to a maximum credit of $1,000 per taxpayer (family); $2,000 starting in 2003. The credit is available for 20 percent of the first $5,000 of qualified tuition and fees. Available to students who have completed their first two years (for any college year in which the HOPE credit is not claimed) and are either in the second half of their undergraduate studies or are in graduate school There is no requirement that attendance be at least part-time, and the credit includes any course of instruction, even those taken to acquire or improve job skills. Both credits Are available to the student or the student's parents. If the parents claim the student as a dependent, the parents are entitled to the credits. Generally, a child who is eligible to be claimed as a dependent by parents must be claimed as a dependant even if the result is no deduction for the parents because of limits imposed on high-income taxpayers. Parents who receive no (or minimal) dependency deduction from claiming a child as a dependent may, however, choose to not claim the student as a dependent for the purpose of allowing a student to claim the appropriate education credit.

Education Credits (cont’d)

Income limitations apply (These amounts are adjusted for inflation): The deduction is phased out for single filers having modified adjusted gross income between $41,000 and $50,000. For joint filers, the deduction is phased out for those with modified adjusted gross income between $82,000 and $100,000. Credits are also restricted to "qualified tuition and fees," which excludes payment for courses not related to a degree program, involving sports, games or hobbies, as well as many other expenses associated with college, including room and board, books, equipment, transportation and personal expenses.

Gifts and inheritances are treated as being paid by the taxpayer. This means that a student who is not claimed as a dependent by his or her parents may be eligible to take the credit, even if the student's parents pay his or her tuition, and vice versa

Taxpayers must claim the credits on Form 8863 – see our web site

Education deduction (Created by tax legislation passed in 2001) An “above-the-line deduction” (available whether or not the taxpayer itemizes other deductions) is only scheduled so far by Congress to be available for higher education costs that are paid during 2002 through 2005. The types of expenses that are deductible are the same as those eligible for the Hope and Lifetime Learning credits, generally qualified tuition and fees. The maximum size of the deduction depends on adjusted gross income for the years: 2002 and 2003: $3,000

2004 and 2005: $4,000 or $2,000 depending on income

Income limitations apply: The deduction is eliminated for single filers having modified adjusted gross income over $65,000. For joint filers, the deduction is eliminated for those with modified adjusted gross income over $130,000. In 2004, the $4,000 is reduced to $2,000 for those who’s modified adjusted gross income in greater than the above amounts but less than $80,000 and $160,000, respectively.

Comment

If the taxpayer takes a HOPE credit or Lifetime Learning credit for a student, the qualified tuition and related expenses of that student for the year are not deductible. Some parents who are above the adjusted gross income limit of $100,000 for joint returns ($50,000 for singles) for education credits will qualify for the education deduction because of the $130,000/$65,000 limit. Funds used from an Education IRA or 529 plans do not qualify for the credits or deductions.

Student Loan Interest Deduction

An “above-the-line deduction” for up to $2,500 is allowed annually for interest paid on education loans. Starting in 2002, all the interest paid up to the maximum is deductible (the old rule limited interest to the first 60 months of the loan). Enrolled at least half-time The costs of attendance are generally the costs of tuition, fees, room and board, and related expenses, such as books and supplies. As with the credits, the deduction may be available to the student, his spouse, or his parents--generally, whoever claims the student as a dependent. Income limitations apply: For 2002, the deduction is phased out for single filers having modified adjusted gross income between $50,000 and $65,000 (in 2001, the limits were $40,000 to $55,000). For joint filers, for 2002, the deduction is phased out for those with modified adjusted gross income from $100,000 to $130,000 (in 2001, the limits were $60,000 to $75,000 for married taxpayers filing joint tax returns). Comment

If it is a student loan taken out under the student's name, the parent cannot take the deduction, even if the student is not actually making the payments. A mortgage interest deduction is allowed for tuition paid using a home-equity line of credit.

Savings for Education

Tax Rates For Children … Page 8

Considerations prior to education funding … Page 9

Where to save for college after considering the above

Education Savings Account (ESA) -(Formerly known as the Education IRA) …Page 10

Code Sec. 529 accounts - Qualified Tuition Plan (QTP) … Page 13

UGMA/UTMA accounts … Page 17

Interest on Series EE Savings Bonds … Page 18

Traditional and Roth IRA’s … Page 19

Tax Rates For Children

Tax Rates For Children Under Age 14 Wages are non taxable up to 4,700 Interest, Dividends and Other Non-earned income First$750 Not Taxed Next$750 10% Thereafter at Parent's Rate Over age 13 until age 19 (if not in full time education), age 24 if in full time educational curriculum five (5) months of the year. Wages are non taxable up to $4,700 Interest, Dividends and Other Non-earned income $250Non Taxed All income in excess of the above is taxed: Next$6,00010% Next$27,95015% Next$46,75027%

Considerations prior to education funding

Current Living Needs --- Get a focus on: Essential needs Discretionary spending Set priorities among the above, retirement, special needs and education funding. Retirement Estimate your realistic retirement needs and amount of funding to accomplish such. Funds used for college ultimately have an impact on such Take advantage of employer sponsored 401k plans The benefits of current tax savings, tax deferred growth and employer matching usually insure this investment will outperform the cost of tuition increases resulting in a more sound overall financial plan Note that the allocation of funding among the above will be different for all but … The minimum personal retirement funding most should consider should be the full amount that the employer will match because even if one needs to take an "early" (pre age 59 1/2) withdraw, which will be subject to both taxation and a 10% early withdraw penalty, the penalty will rarely exceed the employer matching contribution.

Education Savings Account (ESA) (Formerly known as the Education IRA) Tax help is not limited to taxpayers who are already paying tuition--it is also provided for those who expect to one day be in that position. The amount that an individual is permitted to contribute to an ESA is limited if modified AGI exceeds certain amounts. For joint filers, the maximum contribution is phased out between an AGI of $190,000 and $220,000. For single filers, the phase out range is $95,000 to $110,000 If parent’s income precludes the use of an ESA, consider having Grandparent’s fund such. Contributions Up to $2,000, (only in the form of cash) per year may be made for each student under 18 (regardless of the number of contributors). Although, after 2001, the age limit is waived for children with special needs. Contributors can be anyone Aren't tax deductible ... but distributions of contributions and earnings are tax-free for eligible expenses, which include tuition, room and board, books, supplies and fees. Must be made to an ESA by the return due date (not including extensions) for the tax year of the contribution Investment Any type of marketable security or savings the contributor chooses. Distributions Are excludable from the beneficiary's gross income to the extent that the distributions do not exceed the qualified higher education expenses incurred during the year in which the distribution is made ESA accounts may now be used not only for college and postgraduate studies, but also for elementary and secondary (K through 12) education tuition and expenses. After 2001, proceeds from an ESA may also be used to pay the tuition for public, private and religious elementary and secondary schools. Covered expenses at these elementary schools include tutoring, computer equipment, room and board, uniforms and extended day program costs.

Education Savings Account (cont’d) Penalty provision A 10% penalty will apply if the beneficiary is required to include a payment or distribution in gross income. (if withdraws are withdrawn for other than qualified education costs). The penalty will not apply (but taxation of earnings will) to distributions: (1) Made to a beneficiary or to the estate of the designated beneficiary after the death of the designated beneficiary;

(2) Attributable to the designated beneficiary being disabled;

(3) Made on account of a scholarship or allowance received by the account holder to the extent the amount of the distribution does not exceed the amount of the scholarship or allowance; or

(4) That constitute the return of excess contributions and earnings thereon (although such earnings must be included in income).

An exception from the 10% penalty also applies to taxpayers who receive taxable distributions from an ESA solely because they claim the education credits under the Hope of Lifetime Learning Credit. Under this exception, the 10% penalty will not apply to the portion of the distribution that is used to pay qualified higher education expenses, but for which the taxpayer elects to claim the education credits under. Form 8606 is used to calculate and report the penalty (see our web site). Amounts not distributed Amounts held in the account may be placed into an ESA for a member of the beneficiary's family. These distributions will not be included in the distributee's gross income provided the rollover occurs within 60 days of the distribution. Similarly, any change in the beneficiary will not constitute a distribution for gross income purposes if the new beneficiary is a member of the family of the original beneficiary

Education Savings Account (cont’d) Termination When the beneficiary reaches age 30, any balance remaining in the account must be distributed and the earnings portion of the distribution is to be included in the beneficiary's gross income. However, prior to reaching age 30, the beneficiary may transfer or rollover the balance to another beneficiary who is a member of the original beneficiary's family.

An ESA is a tax-exempt trust created in the United States exclusively for purposes of paying the qualified higher education expenses of the trust's designated beneficiary Upon the death of the designated beneficiary, any balance remaining to the credit of the beneficiary must be distributed within 30 days to the beneficiary's estate.

Code Sec. 529 accounts Qualified Tuition Plan (QTP) Two types of Code Sec. 529 accounts exist to cover tuition, fees, room and board expenses: Tuition credit plans allow taxpayers to prepay tuition and fees, usually while locking in current rates. Savings plans let taxpayers contribute to accounts set up to fund the educational expenses of a designated individual. These plans allow investment in predetermined pools of stock and bond investments. These accounts used to be restricted to state-run programs, Congress extended eligible prepaid tuition programs to include those established by eligible private educational institutions. Qualifying education expenses include College and Post Graduate Studies Books and Supplies (computer) Room and Board *** NOT K through 12 like ESA Contributions Contributors' can be anyone. Lifetime and single year maximum > $235,000 ... (per Mike Karwic at Merrill Lynch’s 529 plan) However -- Gift and Estate tax considerations create the following practical limits: An individual may make up to an $11,000 annual gift ($22,000 for joint gifts) to any person without being subject to the gift tax or having the amount of the gift apply against the lifetime exclusion ... however A special provision allows up to $55,000 per contributor may be contributed if no contributions are made during the following four years.

Code Sec. 529 accounts - Cont’d Investments Unlike an ESA, the parent or other contributor has little or no control over the manner in which the contributions are invested. Funds are “pooled” with other 529 participants. Pools are actuarially based (more conservative for older students). One can pick a more conservative "Pool" than required. See “distributions” below for ability to “rollover” once per year … as being an avenue to change investment styles and plans. Income Limits: There are no income limits on who can be contributors (like an ESA). Distributions: After 2001, distributions from state-run Code Sec. 529 plans used for a qualifying expense are excluded from gross income; this exclusion is extended to distributions from private plans after 2003. These rules governing nontaxable distributions are, like the rest of the 2001 Act, scheduled to sunset after December 31, 2010, and the Internal Revenue Code would thereafter be applied as if those changes had not been made. If distributions do exceed the beneficiary's qualified higher education expenses, the amount included in income is reduced by the same ratio that expenses bear to the distributions. The exclusion does not preclude taxpayers from claiming education credits with respect to the same beneficiary, as long as the distribution is not used for the same expenses for which the credit is claimed. These rules governing the coordination between QTPs and education credits are, like the rest of the 2001 Act, scheduled to sunset after December 31, 2010, and the Internal Revenue Code would thereafter be applied as if those changes had not been made. After 2001, a transfer of amounts from one QTP to another for the benefit of the same beneficiary is not considered a distribution. Only one transfer may be rolled over within any 12-month period with respect to the same beneficiary. These rules governing transfers are, like the rest of the 2001 Act, scheduled to sunset after December 31, 2010, and the Internal Revenue Code would thereafter be applied as if those changes had not been made

Code Sec. 529 accounts - Distributions/ Distributions: (cont’d)

Changes in beneficiary are not distributions if the old and the new beneficiary are members of the same family. The amount paid or distributed must be transferred to the new QTP account not later than the 60th day after the payment or distribution is made. Members of the same family for this purpose include the following and their spouses: the spouse of the beneficiary; the beneficiary's son or daughter, or a descendent of either; the beneficiary's stepson or stepdaughter; the beneficiary's brother, sister, stepbrother or stepsister; the beneficiary's father or mother, or an ancestor of either; the beneficiary's stepfather or stepmother; a son or daughter of the beneficiary's brother or sister; brother or sister of the beneficiary's father or mother;

the beneficiary's son-in-law, daughter-in law, father-in-law, mother-in-law, brother-in-law or sister-in-law; and

in tax years beginning after 2001, the beneficiary's first cousin. The addition of the first cousin, like the rest of the 2001 Act, is scheduled to sunset after December 31, 2010, and the Internal Revenue Code would thereafter be applied as if those changes had not been made A rollover to a beneficiary that is of a generation lower than the original beneficiary under the generation-skipping transfer tax rules may have gift and generation-skipping tax consequences. A transfer from the designated beneficiary to himself or herself, regardless of whether the transfer is to an account within the same qualified state tuition program or another qualified state tuition program in the same or another state, is not a rollover distribution and is taxable under the general annuity rules.

Code Sec. 529 accounts – (cont’d) Comments: Use of pre-paid tuition plans may reduce a student 's eligibility for subsidized loans, grants or work-study programs. If a QTP withdrawal is not used to pay qualified higher education expenses for a reason other than the death or disability of the designated beneficiary or to the extent that the distribution exceeds amounts not covered by scholarships, a 10-percent penalty shall apply. The account must be a qualified trust is defined as a trust created or organized in the United States for the exclusive benefit of designated beneficiaries Beginning in 2002, taxpayers may claim a Hope scholarship credit in the same year in which they receive a distribution from either an education savings account (ESA) or a qualified tuition program (QTP). However, expenses paid from either a ESA or a QTP cannot be used as the basis for a Hope credit. Estate Plan Comment: If the $55,000 contribution is made, death before the 5th year from the date of contribution will be partially included in estate

UGMA/UTMA accounts. UGMA - Tax-free gifts to minors can be made under the Uniform Gifts to Minors Act (UGMA). In 2002, transfers of up to $11,000 per taxpayer ($22,000 per married couples) can be made to a custodial account. At least some of the earnings will be tax-exempt, and some or all will be taxed at the minor's tax rate. The downsides to UGMA accounts – The gifts are irrevocable May reduce a student 's eligibility for subsidized loans, grants or work-study programs. UMTA - Uniform Transfers to Minors Act (UTMA) operate much the same as UGMA accounts, but permit taxpayers to make tax-free gifts of property to their children. Comments Use Child's Name and social security number on Account … to avoid taxation to parent Child attains full control at age 18 No Investment Restrictions No Use Restrictions Estate Tax Plan - Amount in UGMA account(s) can be included in parent's estate if parent is the custodian or spends on items other than legal obligations of support (as defined by state law). Child Taxation:

Child under age 14:

$20,000 earning a return of 7% = $1,400

As a child reaches the age of 14, he/she may want to have approximately $20,000 in his/her savings … The taxes on the earnings of such amounts will be so low ($75) that one should consider an UGMA … unless their a concern about loosing control of the funds as the child reaches age 18. The tax on $1,400 is $65

Child age 14 or older:

$89,000 earning a return of 7% = $6,250

The tax on $6,250 is $600.

Interest on Series EE Savings Bonds Tax Free Interest Income (subject to income limits) Interest on Series EE U.S. savings bonds that are redeemed by the taxpayer (other than by a married taxpayer filing separately) is excluded from income. The aggregate redemption proceeds (principal and interest) cannot exceed the qualified higher education expenses incurred by the taxpayer, his spouse, and his dependents (for whom the taxpayer is entitled to take a personal exemption) during the same tax year. The exclusion is available only for an individual who (1) has purchased the redeemed bonds after attaining age 24 and (2) is the sole owner of those bonds or the joint owner with his or her spouse. The exclusion is not available to an owner who was not the original purchaser of the bonds from the U.S. unless the original purchaser was the owner's spouse. Bonds purchased by grandparents or others are ineligible unless the child is a dependent of the bond owner at the time of the redemption. Income limitations apply: The tax exemption for accrued interest is subject to a phase-out when the taxpayer's modified adjusted gross income for the year of redemption exceeds a specified level. These figures are adjusted for inflation annually. For married taxpayers filing jointly, the phase-out range $86,450 to $116,400 in 2002. The phase-out range for single taxpayers (including heads of households) is $57,600-$72,600 in 2002 Deferring Interest Income E and EE bonds are purchased at discount and redeemed for a fixed amount at a future date. The increase from purchase price to redemption amount is Interest income that, at the choice of the holder, can be taxed as it accrues or upon redemption. ... So... If child under 14 and is expected to have less than $1,500 of income. Income should be recognized as it accrues since the tax will be $75. If child under 14 and is expected to have more than $1,500 of income. Income should be recognized at maturity since the child is likely to be in low tax brackets. (See child tax rates in this material)

Traditional and Roth IRA’s

Taxpayers may also tap their retirement IRAs for college expenses--

Generally, distributions from retirement plans (as a hardship distribution) and IRAs are exempt from the 10-percent penalty for early withdrawals if used to pay higher education expenses, such as tuition, fees, books, supplies and equipment. Although the penalty is waived, distributions are, nevertheless, subject to regular income tax and permanently reduce the size of the taxpayer's qualified retirement nest egg.

The IRS has issued proposed and temporary regulations under Code Sec. 530A, regarding general requirements for Trump accounts, the establishment of an initial account, including automatic enrollment by the Secretary of the Treasury, and qualified general contributions. Proposed regulations issued in March 2026 (NPRM REG-117270-25) that provided guidance on establishing Trump accounts, but did not establish automatic enrollment due to time constraints in resolving legal and administrative issues, are withdrawn. The temporary regulations apply to tax years beginning on or after January 1, 2026, and expire on September 30, 2029.

The IRS has issued proposed and temporary regulations under Code Sec. 530A, regarding general requirements for Trump accounts, the establishment of an initial account, including automatic enrollment by the Secretary of the Treasury, and qualified general contributions. Proposed regulations issued in March 2026 (NPRM REG-117270-25) that provided guidance on establishing Trump accounts, but did not establish automatic enrollment due to time constraints in resolving legal and administrative issues, are withdrawn. The temporary regulations apply to tax years beginning on or after January 1, 2026, and expire on September 30, 2029.

General Requirements and Establishment of an Account

A Trump account is either (1) an initial Trump account, created or organized by the Treasury Secretary for an eligible individual or (2) a rollover Trump account, which is an account created during the growth period and funded by a qualified rollover contribution from the account beneficiary's existing Trump account. The written governing instrument of a Trump account must generally meet the rules of Code Sec. 408(a)(1) through (6) and Code Sec. 530A(b)(1)(C)(i) through (iii). Any person approved by the IRS as of December 31, 2025, to be a nonbank trustee of an IRA would have automatic approval to act as a trustee of a Trump account. The written instrument must clearly identify the account as a Trump account at the time of creation.

The Secretary may make an election to establish an auto account for a qualifying individual. Another person may elect to establish a Trump account for an eligible individual by filing Form 4547 or via the electronic application or webpage made available by the Secretary. A person may claim an auto account pursuant to Temp. Reg. §1.530A-1T(d)(1)(iv) by establishing a claimed initial Trump account and having the funds in the auto account transferred to the claimed initial Trump account. On or about October 1, 2026, the Secretary shall establish an auto account for each person whom the Secretary has determined to meet the requirements of Temp. Reg. §1.530-A-1T(b)(2) to be an eligible individual, and from whom no prior election has been made. Periodic elections to establish accounts for eligible individuals will be made after that date.

Administration of an auto account is the Secretary's responsibility. During the growth period, an account may only accept qualified general contributions under Code Sec. 530A(f) and a $1,000 pilot program contribution. An auto account's only investment must be its equitable interest in the master group trust, which is a trust established for the exclusive benefit of account beneficiaries of auto accounts for purposes of holding investments of those auto accounts and meets the applicable requirements of Rev. Rul. 81-100, as modified, and is exempt from tax under Code Sec. 408(e).

Qualified General Contributions and Qualified Stock Contributions

Temp. Reg. §1.530A-7T establishes the framework for qualified general contributions to Trump accounts. A qualified general contribution must originate from an eligible donor, be accepted by the Secretary through a Treasury acceptance agreement, be made to beneficiaries within an approved class, and be allocated equally among all beneficiaries in that class. An approved class must include at least 5,000 account beneficiaries and include all account beneficiaries who are still in their growth period, reside in the specified geographic location, and born in one or more years identified in the Treasury acceptance agreement.

The regulations also create rules for qualified stock contributions, allowing eligible donors to contribute certain publicly traded stock issued by domestic corporations directly to Trump accounts. Such stock is generally subject to a minimum holding period ending on the earlier of five years after contribution or the beneficiary’s growth period ending.

Contributions made to qualifying Code Sec. 501(c)(3) organizations to fund general funding contributions are deductible under applicable charitable deduction rules, and gifts to eligible donor organizations are treated as qualifying charitable transfers. A Code Sec. 501(c)(3) organization furthers its exempt purposes by making a qualifying general funding contribution, whether directly or through a donor-advised fund. In addition, such contributions are treated as expenditures for charitable purposes and generally are not considered grants or distributions to individuals for purposes of the private foundation and donor-advised fund expenditure responsibility rules.

T.D. 10056

CC-00226466-26

The IRS has released the 2026-2027 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:

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

The IRS has released the 2026-2027 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:

• 1. the special transportation industry meal and incidental expenses (M&IE) rates,
• 2. the rate for the incidental expenses only deduction,
• 3. 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:

• $80 for any locality of travel in the continental United States (CONUS), and
• $86 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 2026-2027 special per diem rates are:

• $329 for travel to any high-cost locality, and
• $230 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $86 for travel to any high-cost locality, and
• $74 for travel to any other locality within CONUS

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

• $86 for travel to any high-cost locality, and
• $74 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, 1390. 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 2025-54, I.R.B. 2025-41, 479 is superseded.

Notice 2026-60

For 2027, the Social Security wage cap will be $192,300, and Social Security and Supplemental Security Income (SSI) benefits will increase by 3.6 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2027, the Social Security wage cap will be $192,300, and Social Security and Supplemental Security Income (SSI) benefits will increase by 3.6 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 HI 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 2027, the wage base is $192,300. Thus, OASDI tax applies only to the taxpayer’s first $192,300 in wages or net earnings from self-employment. Taxpayers do not pay OASDI tax on earnings that exceed $192,300.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2027

For workers who earn $192,300 or more in 2027:

• an employee will pay a total of $11,922.60 in social security tax ($192,300 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $23,845.20 in social security tax ($192,300 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 2027

Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2027 by 3.6 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

Social Security Fact Sheet: 2027 Social Security Changes

SSA Press Release: Social Security Announces 3.6 Percent Benefit Increase for 2027

The IRS established the IRA Compliance Resolution System (ICRS) to permit IRA owners and custodians to correct failures related to individual retirement arrangements by submitting a request to the IRS. Failures eligible for ICRS include required minimum distribution failures and nonspouse beneficiary rollover failures. The revenue procedure will also govern requests for waivers from the 60-day rollover requirement from IRAs as well as qualified employer-sponsored plans. The revenue procedure is effective May 1, 2027.

The IRS established the IRA Compliance Resolution System (ICRS) to permit IRA owners and custodians to correct failures related to individual retirement arrangements by submitting a request to the IRS. Failures eligible for ICRS include required minimum distribution failures and nonspouse beneficiary rollover failures. The revenue procedure will also govern requests for waivers from the 60-day rollover requirement from IRAs as well as qualified employer-sponsored plans. The revenue procedure is effective May 1, 2027.

Self-Correction Not Available

The new system implements provisions of the SECURE 2.0 Act of 2022, P.L. 117-328, requiring expansion of the Employee Plans Compliance Resolution System (EPCRS) for qualified retirement plans to allow IRA custodians to address eligible inadvertent failures involving IRAs. The new ICRS consists of the IRA Voluntary Correction Program (IVCP), although additional correction programs may be introduced later. Self-correction of IRA failures is not currently available under ICRS. Instead, the IRA custodian or owner must make a submission to the IRS using the provided procedures and pay a fee on the Pay.gov website.

60-Day Rollover Waiver Requests

The procedure also establishes a process for requesting waivers of the 60-day rollover requirement under Code Secs. 402 and 408 through ICRS. During 2027, eligible applicants may request waivers through either ICRS or the existing private letter ruling process. Beginning in 2028, the IRS anticipates that such requests will be permitted only under ICRS.

Waiver requests may involve eligible rollover distributions from IRAs, qualified retirement plans, annuity plans, tax-sheltered annuities and governmental deferred compensation plans. Automatic waivers and waiver relief under previous guidance remains available.

Rev. Proc. 2026-33

The IRS updated the Employee Plans Compliance Resolution System (EPCRS), its comprehensive system of corrections programs for employer-sponsored qualified retirement plans. The updates reflect significant changes to EPCRS made by the SECURE 2.0 Act (P.L. 117-328) and subsequent guidance. Former procedures under Rev. Proc. 2021-30 are modified and superseded. The revised procedures are effective October 22, 2026.

The IRS updated the Employee Plans Compliance Resolution System (EPCRS), its comprehensive system of corrections programs for employer-sponsored qualified retirement plans. The updates reflect significant changes to EPCRS made by the SECURE 2.0 Act (P.L. 117-328) and subsequent guidance. Former procedures under Rev. Proc. 2021-30 are modified and superseded. The revised procedures are effective October 22, 2026.

The bulk of the changes in the revised procedures reflect the SECURE 2.0 Act’s expansion of EPCRS’s Self Correction Program component to permit self-correction of eligible inadvertent failures, including plan loan failures. Other changes made by SECURE 2.0 and incorporated into the revised EPCRS include safe harbor corrections under Code Sec. 414(cc) and the recovery of retirement plan overpayments under Code Sec. 414(aa).

Other changes made in the revised revenue procedure include:

• References to the availability of a separate compliance resolution system for IRA failures.
• Updates reflecting changes to the determination letter and opinion letter programs.
• Revisions to correction methods for SEPs and SIMPLE IRA plans.
• Revisions to procedures for locating lost participants.
• Revisions to the correction principle for failure to obtain spousal consent.
• Changes to the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP), such as revised procedures for a group submission under VCP.

Rev. Proc. 2026-34

The IRS has issued final regulations under Code Sec. 6311 implementing changes made by the Taxpayer First Act. The regulations permit the IRS to pay fees under contracts for processing tax payments by credit or debit card, provided the fees are fully recouped from taxpayers making those payments. The regulations remove restrictions on the IRS’s payment of fees under such contracts and on the imposition of reimbursement fees on persons paying taxes by credit or debit card.

The IRS has issued final regulations under Code Sec. 6311 implementing changes made by the Taxpayer First Act. The regulations permit the IRS to pay fees under contracts for processing tax payments by credit or debit card, provided the fees are fully recouped from taxpayers making those payments. The regulations remove restrictions on the IRS’s payment of fees under such contracts and on the imposition of reimbursement fees on persons paying taxes by credit or debit card.

Payment Processing Fees

The regulations authorize the IRS to enter into contracts for receiving tax payments by credit or debit card if the contracts are cost beneficial to the government. Under certain contracts, the IRS may pay fees, charges, or other monetary consideration to payment processors. If the IRS pays fees under these contracts, it must recoup the full amount from taxpayers making payments by credit or debit card. The reimbursement fees are payable at the time of, and in addition to, the tax payment and are limited to the amounts paid by the IRS under the contracts. The IRS must seek to minimize the fees paid under these arrangements.

Under other contracts, the IRS may elect not to pay fees to payment processors. Such arrangements do not prohibit card issuers, financial institutions, or other persons participating in the transactions from imposing their own fees or charges. The IRS may not receive any portion of those fees.

Error Resolution Procedures

Payments of taxes by credit or debit card, including reimbursement fees paid under the regulations, are subject to applicable error-resolution procedures under the Truth in Lending Act, the Electronic Fund Transfer Act, or similar state or local laws. These procedures apply to errors relating to the credit or debit card account but do not apply to disputes, errors, or adjustments concerning the underlying tax liability. Reimbursement fees paid under the regulations are not taxes imposed by the Internal Revenue Code and are not eligible for refund or credit under Code Sec. 6402.

Applicability

The final regulations amend existing regulations under Code Sec. 6311 to implement changes made by the Taxpayer First Act. The rules apply to tax payments and reimbursement fees made on or after the date of publication in the Federal Register.

T.D. 10060

The IRS has issued proposed and temporary regulations providing guidance on the new federal scholarship tax credit under Code Sec. 25F. Beginning after 2026, an individual may claim a nonrefundable federal income tax credit for contributions to certified scholarship granting organizations (SGOs) issuing scholarships to students in K-12 schools. The regulations clarify how the credit is calculated, including the treatment of state tax credits, credit carryforwards, and substantiation requirements. They also establish immediate administrative rules for SGOs and states that opt into the program and identify SGOs.

The IRS has issued proposed and temporary regulations providing guidance on the new federal scholarship tax credit under Code Sec. 25F. Beginning after 2026, an individual may claim a nonrefundable federal income tax credit for contributions to certified scholarship granting organizations (SGOs) issuing scholarships to students in K-12 schools. The regulations clarify how the credit is calculated, including the treatment of state tax credits, credit carryforwards, and substantiation requirements. They also establish immediate administrative rules for SGOs and states that opt into the program and identify SGOs.

Credit Eligibility and Calculation

An individual may claim a credit for qualified cash contributions made directly to eligible SGOs. The annual credit is generally limited to $1,700 per taxpayer or $3,400 for married individuals filing jointly. Contributions made through pass-through entities, including partnerships and S corporations, are not eligible for the credit. The taxpayer must reduce the federal tax credit by the amount of any state tax credit attributable to the same contribution before applying the federal limitation. Unused credit amounts may be carried forward for up to five years.

A taxpayer claiming the credit may not claim a charitable contribution deduction for the same contribution and must satisfy specified substantiation and reporting requirements. This includes use of a unique donor identification number on new Form 8525. The taxpayer donor must designate contributions as eligible for the credit at the time they are made. Once made, the designation is irrevocable.

A taxpayer may contribute to an eligible SGO regardless of their state of residence, allowing them to support qualifying SGOs across participating states.

Scholarship Granting Organizations

To qualify as an SGO, an organization must be recognized as a tax-exempt public charity, maintain separate accounts for qualified contributions and scholarship funds, and devote at least 90 percent of required expenditures to scholarships. SGOs must verify student eligibility, ensure scholarship funds are used solely for qualified elementary and secondary education expenses, and adopt procedures to prevent scholarships from benefiting disqualified persons. The regulations also require SGOs to register with the IRS, furnish acknowledgments to contributors, file annual reports, and maintain records demonstrating compliance with federal requirements.

State Participation

A state may elect to participate the federal scholarship tax program either through an advanced election or through the submission of a state SGO list. A state seeking to participate must annually certify eligible SGOs and provide the IRS with information demonstrating that the organizations satisfy federal requirements. The IRS will maintain and publish a nationwide list of eligible SGOs upon which taxpayers may generally rely when making contributions and claiming credits.

Applicability

Taxpayers, SGOs, and states may rely on the proposed regulations for qualified contributions beginning on or after January 1, 2027. The temporary regulations apply on or after September 1, 2026, and expire on October 1, 2029.

T.D. 10057

Proposed Regulations, NPRM REG-117199-25

IR 2026-117

The Treasury Department and IRS have issued proposed regulations under Code Sec. 1062 governing the election to pay tax attributable to gain from qualified sales or exchanges of qualified farmland property in four annual installments. The proposed regulations define qualified farmland property and qualified farmers, provide rules for making the election, and address pass-through entities and acceleration events.

The Treasury Department and IRS have issued proposed regulations under Code Sec. 1062 governing the election to pay tax attributable to gain from qualified sales or exchanges of qualified farmland property in four annual installments. The proposed regulations define qualified farmland property and qualified farmers, provide rules for making the election, and address pass-through entities and acceleration events.

Qualified Farmland Property

Qualified farmland property generally is U.S. real property that was used by the taxpayer as a farm for farming purposes, or leased to a qualified farmer for farming purposes, during substantially all of the 10 years preceding the sale or exchange. The property also must be subject to a covenant prohibiting nonfarm use for 10 years following the sale or exchange. A copy of the covenant must be attached to the taxpayer's return for the taxable year of the sale or exchange.

The proposed regulations provide that certain periods of nonuse will be disregarded in applying the 10-year farming use requirement. These include periods during which property is removed from production under a government program, pursuant to recognized farming practices, or because of unforeseen events outside the taxpayer's control, provided the property continues to be maintained for farming purposes.

Election and Installment Payments

Taxpayers would make the election by filing Form 1062, Deferral of Tax on Gain from the Sale or Exchange of Qualified Farmland Property to Qualified Farmers, and Schedule A (Form 1062). Once made, the election generally may be revoked only by paying the remaining unpaid applicable net tax liability. Each installment payment equals 25 percent of the taxpayer's applicable net tax liability. The first installment generally must be paid by the return due date, determined without regard to the extensions, for the taxable year of the sale or exchange.

Pass-Through Entities and Acceleration Events

Under the proposed regulations, partners, S corporation shareholders, beneficiaries, and other owners generally may make the election with respect to applicable net tax liability arising from a qualified sale or exchange by a pass-through entity. Pass-through entities must furnish Schedule A information and the covenant to owners and beneficiaries and report each owner's allocable share of gain.

The proposed regulations also provide rules accelerating unpaid installment payments following certain events. Acceleration events include failure to timely pay an installment, the death of an individual taxpayer, and certain liquidations, dispositions of substantially all assets, and other specified events involving corporations, trusts, and estates. The proposed regulations also provide procedures under which an eligible transferee may assume the remaining installment obligations in certain transactions.

The proposed regulations would apply to qualified sales and exchanges occurring in taxable years ending after publication of final regulations in the Federal Register. Taxpayers may rely on the proposed regulations for qualified sales and exchanges occurring in taxable years beginning after July 4, 2025, provided they apply the rules consistently and in their entirety. Treasury and the IRS requested comments on the proposed regulations and requests for a public hearing within 60 days after publication in the Federal Register.

Proposed Regulations, NPRM REG-117095-25

IR 2026-115

As the excitement of understanding what artificial intelligence can do for the tax profession starts to subside, the conversation is beginning to shift to risk management and risk assessment. To that end, the American Institute of CPAs has launched a new initiative – the Council on AI Risk in Tax (CART) – to help tax professionals manage risk.

As the excitement of understanding what artificial intelligence can do for the tax profession starts to subside, the conversation is beginning to shift to risk management and risk assessment. To that end, the American Institute of CPAs has launched a new initiative – the Council on AI Risk in Tax (CART) – to help tax professionals manage risk.

CART was born out of a risk assessment framework recently developed by former IRS Commissioner Daniel Werfel that was published by AICPA after asking representatives of state tax authorities what he could do for them following his departure from the IRS.

“They said, ‘you know Danny, we are seeing so many interesting, exciting demos of AI products that really have paradigm-shifting productivity … but we don’t know what the risks are. We don’t know what questions we should ask ourselves to make sure that, as a tax authority, we are ready to deploy these powerful AI tools responsibly,” Werfel, senior fellow at Johns Hopkins University School of Government & Policy, said in an interview, adding that they also inquired about questions they should be asking vendors about safety features and other risks they should be looking out for.

“I did some immediate research and learned that there wasn’t an AI risk framework or risk register specific to tax,” he added, leading him develop version one of the recently published risk framework.”

From there, he approached AICPA as the place to publish the framework and through those conversations, created CART as a place for tax professionals and state tax administrators to collaborate on AI risk and further refine the framework.

“With AI, it’s obviously new,” Melanie Lauridsen, AICPA vice president of tax policy and advocacy, added. It’s ever evolving. There’s a huge interest. There’s a lot of unknowns, and there’s nothing really out there right now beyond what I have seen what Danny put forward to help guide people in this area.”

The Framework

The published framework states that it is more than a simple list of “relevant risks. The formulation and activation of the list means the organization has learned to:

• Define how risks show up in practice;

• Assign controls;

• Establish indicators; and

• Make course corrections as the environment evolves.

In this way the register is part of a broader risk governance framework to help organizations chart a sensible path forward from strategy to implementation.”

The publication includes distinct frameworks for both tax authorities and tax preparers. For tax authorities, the publication highlights 20 risk areas across four categories:

• Information integrity – The wrong information reaching taxpayers at scale.
• Fairness and legitimacy – Disparate or unfair treatment across groups.
• Security and data – Compromised systems, corrupted data, or the exploitation of sensitive taxpayer information at AI systems aggregate, surface, or make newly accessible to band actors.
• Institutional capacity – Loss of the knowledge and capacity by the institution needed to govern AI responsibility over time.

For tax preparers, there are 15 risk areas across 5 categories:

• Technical – Incorrect or unreliable AI outputs that establish the conditions for downstream errors.
• Practice – Failures of professional judgement, documentation, or oversight.
• Legal and regulatory – Increased exposure to legal liability (e.g., malpractice claims, regulatory sanctions).
• Business – Erosion of client trust and firm relationships.
• Workforce and Strategic – Loss of the expertise and institutional knowledge needed to practice responsibly.

The framework “establishes a notional risk register for tax authorities and presents that side-by-side with a distinct register for tax preparers,” the framework document states. “It also identifies important areas of overlap across the two.”

A Living Framework

Werfel noted that this is not intended to be a one-and-done framework, but rather a living document that he anticipates will be updated on a regular basis.

“I wanted to give myself six months of feedback and iteration,” he said. “I told CART at our kickoA meeting [that] once we issue version two after six months, then I think it’s an annual [update] from there. But in this form, version one to version two, I wanted to put a little bit more accelerated because that’s the highest risk point for it missing something big in the risk register itself.”

Lauridsen add that convening CART regularly and discussing risks and best practices associated with those risks and updating the framework “is the right approach” as opposed to trying to build a firm set of standards for risk assessment and risk management of AI.

“We don’t know what it’ll be in a month, two months, much less six months or a year,” Lauridsen said, noting the fast evolution AI is currently experiencing. “I think it would be a disservice to come forward with a standard right now.”

She continued: “Right now, it’s more best practices. Everybody’s trying to get their minds and arms around it and how to implement it.”

Werfel added that the feedback will be very important when the framework goes through future iterations, as the CART members will be able to report back when the framework works and more importantly, when it “missed the bullseye” by the cross section of accounting, law firms, government associations and AI vendors.

“My hope is that if it’s oA bullseye, we’ll hear about it and update it,” Werfel said.

He did not rule out seeing the framework converted into an industry standard somewhere down the line, but for now, the focus is to just keep this a framework that users can use as a best practices guide to assessing risks of AI tools that states and practitioners are considering for implementation.

In the near term, Werfel said that an idea was floated to CART to make a voluntary pledge to follow the framework that CART produces. It would be completely voluntary, but a pledge to follow it would be “hopefully helpful to rally attention to AI risk.”

By Gregory Twachtman, Washington News Editor

IRS Chief Counsel, in generic legal advice (AM-2017-003), recently described when a qualified employer may take into account the payroll tax credit for increasing research activities. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) created the payroll credit aimed at start-ups with little or no income tax liabilities. This tax break allows taxpayers to get the cash benefit of the payroll tax credit sooner as they reduce their payroll tax liability as payroll payments are made, instead of having to wait until the end of the quarter to receive the credit.

IRS Chief Counsel, in generic legal advice (AM-2017-003), recently described when a qualified employer may take into account the payroll tax credit for increasing research activities. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) created the payroll credit aimed at start-ups with little or no income tax liabilities. This tax break allows taxpayers to get the cash benefit of the payroll tax credit sooner as they reduce their payroll tax liability as payroll payments are made, instead of having to wait until the end of the quarter to receive the credit.

Background

A qualified business during a tax year may elect to apply a portion of its research credit against the 6.2 percent payroll tax imposed on the employer’s wage payments to employees. This payroll credit for research expenditures is limited to the lesser of: (a) the research credit for the tax year; (b) $250,000; or (c) the amount of the business credit for the tax year, including the research credit that may be carried forward to the tax year immediately after the election year.

Schedule B. Chief Counsel explained that if an employer is a semiweekly schedule depositor, it must complete Schedule B (Form 941), Report of Tax Liability for Semiweekly Schedule Depositors, and attach it to Form 941. Schedule B is also referred to as Record of Federal Tax Liability (ROFTL) for semiweekly schedule depositors. The IRS uses this information to determine if the employer made its federal employment tax deposits on time. Current Instructions for Schedule B describe the payroll tax credit.

Payroll credit

Employers, Chief Counsel explained, know the maximum amount of payroll tax credit potentially available for a quarter at the beginning of the quarter. This is because the return reflecting the payroll tax credit election on Form 6765, Credit for Increasing Research Activities, must have been filed before the quarter begins in which the employer can claim credit. However, the amount of the credit that is allowed for the quarter is limited to the employer Social Security tax on wages paid to the employer's employees during the quarter.

Therefore, as the employer makes payments of wages from the beginning of the quarter for which the payroll tax credit is taken, the employer can take the payroll tax credit into account for purposes of the Schedule B and for purposes of deposit liability on the Form 941 or other employment tax return, provided the employer later files Form 8974, "Qualified Small Business Payroll Tax Credit for Increasing Research Activities," Chief Counsel explained.

Further, the payroll tax credit should be taken against deposit liabilities and reflected on Schedule B as the employer incurs liability for employer Social Security tax on wages paid in the quarter to which it applies, beginning with the first payment of wages in the quarter. "It would be counter to the purpose of the payroll tax credit to allow it as a credit only when the employer files its Form 941 for the quarter claiming the credit and not as the employer is paying wages during the quarter subject to employer Social Security tax," Chief Counsel stated.

Deadline opportunity: The IRS also recently announced that it would allow start-up companies to make the payroll tax credit election on an amended return for the 2016 tax year, but as long as the amended return is filed by December 31, 2017.

Parents incur a variety of expenses associated with children. As a general rule, personal expenditures are not deductible. However, there are several deductions and credits that help defray some of the costs associated with raising children, including some costs related to education. Some of the most common deductions and credits related to minors are the dependency exemption, the child tax credit, and the dependent care credit. Also not to be overlooked are tax-sheltered savings plans used for education, such as the Coverdell Education Savings Accounts (ESAs).

Parents incur a variety of expenses associated with children. As a general rule, personal expenditures are not deductible. However, there are several deductions and credits that help defray some of the costs associated with raising children, including some costs related to education. Some of the most common deductions and credits related to minors are the dependency exemption, the child tax credit, and the dependent care credit. Also not to be overlooked are tax-sheltered savings plans used for education, such as the Coverdell Education Savings Accounts (ESAs).

Dependency exemption. The dependency exemption is a type of deduction that is available for children and other qualifying dependents, subject to phase out if the taxpayer's adjusted gross income (AGI) exceeds prescribed threshold amounts. The amount of the personal exemption, adjusted for inflation, is $4,050 for tax years beginning in 2016 and 2017. The dependency exemption is available for each qualifying child under the age of 19 (under the age of 24 if a full-time student) and with no age restriction for a qualifying individual who is permanently and totally disabled. For 2017, the personal exemption begins to phase out for joint filers starting at $313,800 AGI and completely phasing out at $436,300 AGI ($261,500 and $384,000, respectively for single filers).

Child credit. The child tax credit is available for parents of qualifying children under the age of 17. The credit amount is $1,000 per qualifying child, but once again is subject to phase out if the taxpayer's AGI exceeds prescribed threshold amounts. The phaseout of the child tax credit starts at $110,000 of modified AGI (for unmarried taxpayers, it starts at $75,000). These thresholds are not adjusted for inflation.

Dependent care credit. The dependent care credit may be available to working parents for qualifying children under the age of 13, or for dependents who are physically or mentally incapable of self care. This credit is available not only for direct employment-related expenses that take place at home, but also child-care expenses for tuition paid for pre-K programs, as well as fees paid for after-school activities that double as child care. The dependent care credit is a percentage of eligible work-related expenses. The percentage goes down as adjusted gross income (AGI) goes up. The maximum amount of eligible expenses is $3,000 for taxpayers with one qualifying individual, and $6,000 for taxpayers with two or more qualifying individuals.

The amount of the credit is further determined by multiplying work-related expenses by the “applicable percentage,” which is 35 percent reduced by one percentage point for each $2,000 by which AGI for the tax year exceeds $15,000. However, the applicable percentage cannot go below 20 percent (for those with AGI over $43,000). Thus, the maximum dependent care credit amount overall is $1,050 for one qualifying dependent and $2,100 for two or more qualifying dependents. For those with income above $43,000, the maximum credit for $3,000 of qualifying expenses is $600. Finally, the amount of the employment-related expenses taken into account in calculating the credit may not exceed the lesser of the taxpayer's earned income or the earned income of his spouse if the taxpayer is married at the end of the tax year.

Coverdell education savings accounts. Two education savings entities let individuals pay for education on a tax-favored basis: a Coverdell Education Savings Account (Coverdell ESA or ESA) and a qualified tuition program (QTP, also referred to as a Code Sec. 529 plan). In contrast to Sec. 529 plans, which can only be used to cover college expenses, ESAs can cover expenses from kindergarten through college.

Individuals may open a Coverdell ESA to help pay for the qualified education expenses of a designated beneficiary. Contributions to a Coverdell ESA must be made in cash and are not deductible. In addition, the maximum annual contribution that can be made is limited to $2,000 a year. The annual contribution is phased out for joint filers with modified adjusted gross income (MAGI) at or above $190,000 and less than $220,000 (at or above $95,000 and less than $110,000 for single filers).

Distributions from Coverdell ESAs are not included in the income of the donor or the beneficiary, as long as payouts do not exceed the beneficiary's adjusted qualified education expenses. For purposes of excludable distributions from an ESA, qualified elementary and secondary school expenses (kindergarten through grade 12), include the following costs:

• expenses for tuition, fees, academic tutoring, services for beneficiaries with special needs, books, supplies, and other equipment that are incurred in connection with the designated beneficiary's enrollment or attendance at a public, private or religious school;
• expenses for room and board, uniforms, transportation, and supplementary items and services (including extended day programs) that are required or provided by the school in connection with enrollment or attendance; and
• expenses for the purchase of computer technology or equipment or internet access and related services that will be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in school. This category does not include software designed for sports, games or hobbies unless it is predominantly educational in nature.

Medical expense deduction. For parents who itemize deductions, medical and dental costs paid for their children may be deductible.

If you have any questions regarding tax breaks associated with child care or education expenses, please contact our office.

The Affordable Care Act—enacted nearly five years ago—phased in many new requirements affecting individuals and employers. One of the most far-reaching requirements, the individual mandate, took effect this year and will be reported on 2014 income tax returns filed in 2015. The IRS is bracing for an avalanche of questions about taxpayer reporting on 2014 returns and, if liable, any shared responsibility payment. For many taxpayers, the best approach is to be familiar with the basics before beginning to prepare and file their returns.

The Affordable Care Act—enacted nearly five years ago—phased in many new requirements affecting individuals and employers. One of the most far-reaching requirements, the individual mandate, took effect this year and will be reported on 2014 income tax returns filed in 2015. The IRS is bracing for an avalanche of questions about taxpayer reporting on 2014 returns and, if liable, any shared responsibility payment. For many taxpayers, the best approach is to be familiar with the basics before beginning to prepare and file their returns.

Individual mandate

Beginning January 1, 2014, the Affordable Care Act requires individuals (and their dependents) to have minimum essential health care coverage or make a shared responsibility payment, unless exempt. This is commonly called the "individual mandate."

Employer reporting

Nearly all employer-provided health coverage is treated as minimum essential coverage. This includes self-insured plans, COBRA coverage, and retiree coverage. Large employers will provide employees with new Form 1095-C, Employer-Provided Health Insurance Coverage and Offer, which will report the type of coverage provided. The IRS has encouraged employers to voluntarily report starting in 2015 for the 2014 plan year. Mandatory reporting begins in 2016 for the 2015 plan year.

Marketplace coverage

Coverage obtained through the Affordable Care Act Marketplace is also treated as minimum essential coverage. Marketplace enrollees should expect to receive new Form 1095-A, Health Insurance Marketplace Statement, from the Marketplace. Individuals with Marketplace coverage will indicate on their returns that they have minimum essential coverage. Because so many individuals with Marketplace coverage also qualify for a special tax credit, they will also likely need to complete new Form 8962, Premium Tax Credit (discussed below).

Medicare, Medicaid and other government coverage

Medicare, TRICARE, CHIP, Medicaid, and other government health programs are treated as minimum essential coverage. There are some very narrow exceptions but overall, most government-sponsored coverage is minimum essential coverage.

Exemptions

Some individuals are expressly exempt under the Affordable Care Act from making a shared responsibility payment. There are multiple categories of exemptions. They include:

• Short coverage gap
• Religious conscience
• Federally-recognized Native American nation
• Income below income tax return filing requirement

The short coverage gap applies to individuals who lacked minimum essential coverage for less than three consecutive months during 2014. They will not be responsible for making a shared responsibility payment. Individuals who are members of a religious organization recognized as conscientiously opposed to accepting insurance benefits also are exempt from the individual mandate. Similarly, members of a federally-recognized Native American nation are exempt. If a taxpayer’s income is below the minimum threshold for filing a return, he or she is exempt from making a shared responsibility payment.

The IRS has developed new Form 8965, Health Coverage Exemptions. Taxpayers exempt from the individual mandate will file Form 8965 with their federal income tax return.

Shared responsibility payment

All other individuals - individuals without minimum essential coverage and who are not exempt - must make a shared responsibility payment when they file their 2014 return. For 2014, the payment amount is the greater of: One percent of the person’s household income that is above the tax return threshold for their filing status; or a flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285. The individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014. Taxpayers will report the amount of their individual shared responsibility payment on their 2014 Form 1040.

The IRS has cautioned that it will offset a taxpayer’s refund if he or she fails to make a shared responsibility payment if required. However, the Affordable Care Act prevents the IRS from using its lien and levy authority to collect an unpaid shared responsibility payment.

Code Sec. 36B credit

Only individuals who obtain coverage through the Marketplace are eligible for the Code Sec. 36B premium assistance tax credit. The U.S. Department of Health and Human Services (HHS) has reported that more than two-thirds of Marketplace enrollees are eligible for the credit and many enrollees have received advance payment of the credit.

All advance payments of the credit must be reconciled on new Form 8962, which will be filed with the taxpayer’s income tax return. Taxpayers will calculate the actual credit they qualified for based on their actual 2014 income. If the actual premium tax credit is larger than the sum of advance payments made during the year, the individual will be entitled to an additional credit amount. If the actual credit is smaller than the sum of the advance payments, the individual’s refund will be reduced or the amount of tax owed will be increased, subject to a sliding scale of income-based repayment caps.

A change in circumstance, such as marriage or the birth/adoption of a child, could increase or decrease the amount of the credit. Individuals who are receiving an advance payment of the credit should notify the Marketplace of any life changes so the amount of the advance payment can be adjusted if necessary. Please contact our office if you have any questions about the Code Sec. 36B credit.

IRS officials have told Congress that the agency is ready for the new filings and reporting requirements. Our office will keep you posted of developments.

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.

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.

The answer is no for 2010, but yes, in practical terms, for 2014 and beyond. The health care reform package (the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010) does not require individuals to carry health insurance in 2010. However, after 2013, individuals without minimum essential health insurance coverage will be liable for a penalty unless otherwise exempt.

Shared responsibility

The health care reform package describes health insurance coverage as "shared responsibility." Individuals, employers, the federal government, and the states all have roles to play in guaranteeing that individuals do not lack minimum essential health insurance coverage.

The health care reform package assumes that employer-provided health insurance will continue to be the primary means of delivering coverage after 2013. The health care reform package includes measures that lawmakers hope will keep premium costs down along with tax incentives, so employers continue to offer health insurance. For larger employers (those with 50 or more employees), that "encouragement" is also combined with penalties if alternate health insurance is not offered.

Millions of Americans are also currently covered by Medicaid, Medicare and other government programs. They will continue to be covered by these programs after 2013. Indeed, some of these government programs will be expanded between now and 2013, covering more individuals.

Individual responsibility

Beginning in 2014, the health care reform package imposes a penalty on individuals for each month they fail to have minimum essential health insurance coverage for themselves and their dependents. Another name for the penalty is "shared responsibility payment."

As a baseline, all individuals without minimum essential health insurance coverage will be liable for the penalty. However, the health care reform package expressly excludes certain individuals from liability for the penalty. They include:

• Individuals whose household income is below their income thresholds for filing a federal income tax return;
  
• Individuals who are exempt on religious conscience grounds;
  
• Individuals whose contribution to employer-provided coverage exceeds a threshold percentage;
  
• Hardship cases;
  
• Native Americans;
  
• Undocumented aliens;
  
• Incarcerated individuals;
  
• Individuals with short lapses of minimum essential coverage;
  
• Individuals covered by Medicare, Medicaid and other government programs; and
  
• Certain individuals outside the U.S.

Amount of penalty

The monthly penalty after 2013 is 1/12 of the flat dollar amount or a percentage of income, whichever is greater. For 2014, the flat dollar amount is $95 and the percentage of income is one percent. The flat dollar amount rises to $695 in 2016 (indexed for inflation thereafter) and the percentage of income increases to 2.5 percent.

For individuals under age 18, the flat dollar amount is 50 percent of the amount for adults. Generally, a family's total penalty cannot exceed $285 for 2014 (rising to $2,085 by 2016) or the national average annual premium for the "bronze" level of coverage through a state insurance exchange. By 2014, each state must establish an insurance exchange where individuals can shop for health insurance coverage. The exchanges will have four levels of coverage: bronze, silver, gold, and platinum.

Example. Ana, age 38, is self-employed with a modified adjusted gross income (AGI) of $68,500 for 2014. Ana does not have minimum essential coverage for all 12 months of 2014 and is not exempt from carrying minimum essential coverage because of income or other qualifying reasons. Ana will be liable for a penalty of the greater of $95 or one percent of her modified AGI.

Example. Ana's mother, Barbara, is enrolled in Medicare. Barbara has minimum essential coverage because she is enrolled in Medicare and is not liable for a penalty.

Health insurance tax credits

At the same time the individual responsibility requirement kicks in, the health care reform package provides a refundable health insurance premium assistance tax credit to qualified persons. The premium assistance credit will operate on a sliding scale based on an individual's relationship to the federal poverty level (between 100 and 400 percent).

The healthcare reform package makes the premium assistance tax credit refundable and also provides for advance payment of the credit. Advance payment will be made to the health plan in which the individual is enrolled.

Adult children

There is one important change regarding individual coverage for 2010. Effective September 23, 2010, the health care reform package enables more young adults to remain on their parents' health insurance policies. Generally, employer-sponsored group health plans will be required to provide coverage for adult children up to age 26 if the adult child is ineligible to enroll in another employer-sponsored plan. The health care reform package also extends the employer-provided health coverage gross income exclusion to coverage for adult children under age 27 as of the end of the tax year.

Guidance

The IRS, the U.S. Department of Health and Human Services and other federal agencies are expected to issue extensive guidance on the individual responsibility mandate. Our office will keep you posted on developments.