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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 announced penalty relief for the 2025 tax year relating to new information reporting obligations introduced under the One, Big, Beautiful Bill Act (OBBBA). The relief applies to penalties imposed under Code Secs. 6721 and 6722 for failing to file or furnish complete and correct information returns and payee statements.

The IRS has announced penalty relief for the 2025 tax year relating to new information reporting obligations introduced under the One, Big, Beautiful Bill Act (OBBBA). The relief applies to penalties imposed under Code Secs. 6721 and 6722 for failing to file or furnish complete and correct information returns and payee statements.

The OBBBA introduced new deductions for qualified tips and qualified overtime compensation, applicable to tax years beginning after December 31, 2024. These provisions require employers and payors to separately report amounts designated as cash tips or overtime, and in some cases, the occupation of the recipient. However, recognizing that employers and payors may not yet have adequate systems, forms, or procedures to comply with the new rules, the IRS has designated 2025 as a transition period.

For 2025, the Service will not impose penalties if payors or employers fail to separately report these new data points, provided all other information on the return or payee statement is complete and accurate. This relief applies to information returns filed under Code Sec. 6041 and to Forms W-2 furnished to employees under Code Sec. 6051. The IRS emphasized that this transition relief is limited to the 2025 tax year only and that full compliance will be required beginning in 2026 when revised forms and updated electronic reporting systems are available.

Although not mandatory, the IRS encourages employers to voluntarily provide separate statements or digital records showing total tips, overtime pay, and occupation codes to help employees determine eligibility for new deductions under the OBBBA. Employers may use online portals, additional written statements, or Form W-2 box 14 for this purpose.

Notice 2025-62

IR-2025-110

The 2026 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2026 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2026 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2026 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The SECURE 2.0 Act (P.L. 117-328) made some retirement-related amounts adjustable for inflation. These amounts, as adjusted for 2026, include:

• The catch-up contribution amount for IRA owners who are 50 or older is increased from $1,000 to $1,100.
• The amount of qualified charitable distributions from IRAs that are not includible in gross income is increased from $108,000 to $111,000.
• The limit on one-time qualified charitable distributions made directly to a split-interest entity is increased from $54,000 to $55,000.
• The dollar limit on premiums paid for a qualifying longevity annuity contract (QLAC) remains $210,000.

Highlights of Changes for 2026

The contribution limit has increased from $23,500 to $24,500 for employees who take part in:

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

The annual limit on contributions to an IRA increased from $7,000 to $7,500.

The catch-up contribution limit for individuals aged 50 and over for employer retirement plans (such as 401(k), 403(b), and most 457 plans) has increased from $7,500 to $8,000.

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

• IRAs,
• Roth IRAs, and
• to claim the Saver’s Credit.

Phase-Out Ranges

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

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $81,000 to $91,000, up from $79,000 to $89,000.
• For joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $129,000 to $149,000, up from $126,000 to $146,000.
• For an IRA contributor who is not covered by a workplace retirement plan but their spouse is, the phase-out range is $242,000 to $252,000, up from $236,000 to $246,000.
• For a married individual filing separately who is covered by a workplace plan, the phase-out range remains $0 to $10,000.

The phase-out ranges for Roth IRA contributions are:

• $153,000 to $168,000 for singles and heads of household,
• $242,000 to $252,000 for joint filers,
• $0 to $10,000 for married separate filers.

Finally, the income limits for the Saver’s Credit are:

• $80,500 for joint filers,
• $60,375 for heads of household,
• $40,250 for singles and married separate filers.

Notice 2025-67

IR-2025-111

The IRS released interim guidance and announced its intent to publish proposed regulations regarding the exclusion of interest on loans secured by rural or agricultural real property under Code Sec. 139L. Taxpayers may rely on the interim guidance in section 3 of the notice for loans made after July 4, 2025, and on or before the date that is 30 days after the publication of the forthcoming proposed regulations.

The IRS released interim guidance and announced its intent to publish proposed regulations regarding the exclusion of interest on loans secured by rural or agricultural real property under Code Sec. 139L. Taxpayers may rely on the interim guidance in section 3 of the notice for loans made after July 4, 2025, and on or before the date that is 30 days after the publication of the forthcoming proposed regulations.

Partial Exclusion of Interest

Code Sec 139L, as added by the One Big Beautiful Bill Act (P.L. 119-21), provides for a partial exclusion of interest for certain loans secured by rural or agricultural real property. The amount excluded is 25 percent of the interest received by a qualified lender on a qualified real estate loan. A qualified lender will include 75 percent of the interest received on a qualified real estate loan in gross income. A qualified lender is not required to be the original holder of the loan on the issue date of the loan in order to exclude the interest under Code Sec 139L.

Qualified Real Estate Loan

A qualified real estate loan is secured by qualified rural or agricultural property only if, at the time that the interest accrues, the qualified lender holds a valid and enforceable security interest with respect to the property under applicable law. Subject to a safe harbor provision, the amount of a loan that is a qualified real estate loan is limited to the fair market value of the qualified rural or agricultural property securing the loan, as of the issue date of the loan. If the amount of the loan is greater than the fair market value of the property securing the loan, determined as of the issue date of the loan, only the portion of the loan that does not exceed the fair market value is a qualified real estate loan.

The safe harbor allows a qualified lender to treat a loan as fully secured by qualified rural or agricultural property if the qualified lender holds a valid and enforceable security interest with respect to the qualified rural or agricultural property under applicable law and the fair market value of the property security the loan is at least 80 percent of the issue price of the loan on the issue date.

Fair market value can be determined using any commercially reasonable valuation method. Subject to certain limitations, the fair market value of any personal property used in the course of the activities conducted on the qualified rural or agricultural property (such as farm equipment or livestock) can be added to the fair market value of the rural or agricultural real estate. The addition to fair market value may be made if a qualified lender holds a valid and enforceable security interest with respect to such personal property under applicable law and the relevant loan must be secured to a substantial extent by rural or agricultural real estate.

Use of the Property

The presence of a residence on qualified rural or agricultural property or intermittent periods of nonuse for reasons described in Code Sec. 139L(c)(3) does not prevent the property from being qualified rural or agricultural property so long as the the property satisfies the substantial use requirement.

Request for Comments

The Treasury Department and the IRS are seeking comments on the notice in general and on the following specific issues:

• The extent to which the forthcoming proposed regulations address the meaning of certain terms;
• The extent to which the forthcoming proposed regulations address whether property is substantially used for the production of one or more agricultural products or in the trade or business of fishing or seafood processing;
• The extent to which the forthcoming proposed regulations address how the substantial use requirement applies to properties with mixed uses;
• The manner in which the forthcoming proposed regulations address changes involving qualified rural or agricultural property following the issuance of a qualified real estate loan;
• The manner in which the forthcoming proposed regulations address how a qualified lender determines whether the loan remains secured by qualified rural or agricultural property;
• The extent to which the forthcoming proposed regulations address how Code Sec. 139L applies in securitization structures; and
• The extent to which the forthcoming proposed regulations address Code Sec. 139L(d), regarding the application of Code Sec. 265 to any qualified real estate loan.

Written comments should be submitted, either electronically or by mail, by January 20, 2026.

Notice 2025-71

IR-2025-113

The IRShas provided a safe harbor for trusts that otherwise qualify as investment trusts under Reg. §301.7701-4(c) and as grantor trusts to stake their digital assets without jeopardizing their tax status as investment trusts and grantor trusts. The Service also provided a limited time period for an existing trust to amend its governing instrument (trust agreement) to adopt the requirements of the safe harbor.

The IRShas provided a safe harbor for trusts that otherwise qualify as investment trusts under Reg. §301.7701-4(c) and as grantor trusts to stake their digital assets without jeopardizing their tax status as investment trusts and grantor trusts. The Service also provided a limited time period for an existing trust to amend its governing instrument (trust agreement) to adopt the requirements of the safe harbor.

Background

Under “custodial staking,” a third party (custodian) takes custody of an owner’s digital assets and facilitates the staking of such digital assets on behalf of the owner. The arrangement between the custodian and the staking provider generally provides that an agreed-on portion of the staking rewards are allocated to the owner of the digital assets.

Business or commercial trusts are created by beneficiaries simply as a device to carry on a profit-making business that normally would have been carried on through a business organization classified as a corporation or partnership. An investment trust with a single class of ownership interests, representing undivided beneficial interests in the assets of the trust, is classified as a trust if there is no power under the trust agreement to vary the investments of the certificate holders.

Trust Arrangement

The revenue procedure applies to an arrangement formed as a trust that (i) would be treated as an investment trust, and as a grantor trust, if the trust agreement did not authorize staking and the trust’s digital assets were not staked, and (ii) with respect to a trust in existence before the date on which the trust agreement first authorizes staking and related activities in a manner that satisfies certain listed requirements, qualified as an investment trust, and as a grantor trust, immediately before that date. If the listed requirements (described below) are met, a trust's authorization in the trust agreement to stake its digital assets and the resulting staking of the trust's digital assets will, under the safe harbor, not prevent the trust from qualifying as an investment trust and as a grantor turst.

Requirements for Trust

The requirements for the safe harbor to apply are as follows:

• Interests in the trust must be traded on a national securities exchange and must comply with the SEC’s regulations and rules on staking activities.
• The trust must own only cash and units of a single type of digital asset under Code Sec. 6045(g)(3)(D).
• Transactions for the cash and units of digital asset must be carried out on a permissionless network that uses a proof-of-stake consensus mechanism to validate transactions.
• Trust’s digital assets must be held by a custodian acting on behalf of the trust at digital asset addresses controlled by the custodian.
• Only the custodian can effect a sale, transfer, or exercise the rights of ownership over said digital assets, including while those assets are staked.
• Staking of the trust's digital assets must protect and conserve trust property and mitigate the risk that another party could control a majority of the assets of that type and engage in transactions reducing the value of the trust’s digital assets.
• The trust’s activities relating to digital assets must be limited to (1) accepting deposits of the digital assets or cash in exchange for newly issued interests in the trust; (2) holding the digital assets and cash; (3) paying trust expenses and selling digital assets to pay trust expenses or redeem trust interests; (4) purchasing additional digital assets with cash contributed to the trust; (5) distributing digital assets or cash in redemption of trust interests; (6) selling digital assets for cash in connection with the trust's liquidation; and (7) directing the staking of the digital assets in a way that is consistent with national securities exchange requirements.
• The trust must direct the staking of its digital assets through custodians who facilitate the staking on the trust's behalf with one or more staking providers.
• The trust or its custodian must have no legal right to participate in or direct the activities of the staking provider.
• The trust's digital assets must generally be available to the staking provider to be staked.
• The trust's liquidity risk policies must be based solely on factors relating to national securities exchange requirements regarding redemption requests.
• The trust's digital assets must be indemnified from slashing due to the activities of staking providers.
• The only new assets the trust can receive as a result of staking are additional units of the single type of digital asset the trust holds.

Amendment to Trust

A trust may amend its trust agreement to authorize staking at any time during the nine-month period beginning on November 10, 2025. Such an amendment will not prevent a trust from being treated as a trust that qualifies as an investment trust under Reg. §301.7701-4(c) or as a grantor trust if the aforementioned requirements were satisfied.

Effective Date

This guidance is effective for tax years ending on or after November 10, 2025.

Rev. Proc. 2025-31

WASHINGTON – National Taxpayer Advocate Erin Collins told attendees at a recent conference that she wants to see the Taxpayer Advocate Service improve its communications with taxpayers and tax professionals.

WASHINGTON – National Taxpayer Advocate Erin Collins told attendees at a recent conference that she wants to see the Taxpayer Advocate Service improve its communications with taxpayers and tax professionals.

“What I would like to do is improve our responsiveness and communication with fill-in-the-blank, whether it be taxpayer or practitioner, because I think that is huge,” Collins told attendees November 18, 2025, at the American Institute of CPA’s National Tax Conference.

“I think a lot of my folks are working really hard to fix things, but they’re not necessarily communicating as fast and often as they should,” she continued. “So, I would like to see by year-end we’re in a position that that is a routine and not the exception.”

In tandem with that, Collins also told attendees she would like to see the IRS be quicker in terms of how it fixes issues. She pointed to the example of first-time abatement, something she called an “an amazing administrative relief for taxpayers” but one that is only available to those who know to ask for it.

She estimated that there are about one million taxpayers every year that are eligible to receive it and among those, most are lower income taxpayers.

The IRS, Collins noted, agreed a couple of years ago that this was a problem. “The challenge they had was how do they implement it through their systems?”

Collins was happy to report that those who qualify for first-time abatement will automatically be notified starting with the coming tax filing season, although she did not have any insight as to how the process would be implemented.

Patience

Collins also asked for patience from the taxpayer community in the wake of the recently-ended government shutdown, which has increased the TAS workload as TAS employees were not deemed essential and were furloughed during the shutdown.

She noted that TAS historically receives about 5,000 new cases a week and the shutdown meant the rank-and-file at TAS were not working. She said that the service did work to get some cases closed that didn’t require employee help.

“So, any of you who are coming in or have cases, please be patient,” Collins said. “Our guys are doing the best they can, but they do have, unfortunately, a backlog now coming in.”

By Gregory Twachtman, Washington News Editor

The IRS and Treasury have issued final regulations that implement the excise tax on stock repurchases by publicly traded corporations under Code Sec. 4501, introduced in the Inflation Reduction Act of 2022. Proposed regulations on the computation of the tax were previously issued on April 12, 2024 (NPRM REG-115710-22) and final regulations covering the procedural aspects of the tax were issued on July 3, 2024 (T.D. 10002). Following public comments and hearings, the proposed computation regulations were modified and are now issued as final, along with additional changes to the final procedural regulations. The rules apply to repurchases made after December 31, 2022.

The IRS and Treasury have issued final regulations that implement the excise tax on stock repurchases by publicly traded corporations under Code Sec. 4501, introduced in the Inflation Reduction Act of 2022. Proposed regulations on the computation of the tax were previously issued on April 12, 2024 (NPRM REG-115710-22) and final regulations covering the procedural aspects of the tax were issued on July 3, 2024 (T.D. 10002). Following public comments and hearings, the proposed computation regulations were modified and are now issued as final, along with additional changes to the final procedural regulations. The rules apply to repurchases made after December 31, 2022.

Overview of Code Sec. 4501

Code Sec. 4501 imposes a one percent excise tax on the fair market value of any stock repurchased by a “covered corporation”—defined as any domestic corporation whose stock is traded on an established securities market. The statute also covers acquisitions by “specified affiliates,” including majority-owned subsidiaries and partnerships. A “repurchase” includes redemptions under Code Sec. 317(b) and any transaction the Secretary determines to be economically similar. The amount subject to tax is reduced under a netting rule for stock issued by the corporation during the same tax year.

Scope and Definitions

The final regulations clarify the definition of stock, covering both common and preferred stock, with several exclusions. They exclude:

• Additional tier 1 capital not qualifying as common equity tier 1,
• Preferred stock under Code Sec. 1504(a)(4),
• Mandatorily redeemable stock or stock with enforceable put rights if issued prior to August 16, 2022,
• Certain instruments issued by Farm Credit System entities and savings and loan holding companies.

The IRS rejected requests to exclude all preferred stock or foreign regulatory capital instruments, limiting exceptions to U.S.-regulated issuers only.

Exempt Transactions and Carveouts

Several categories of transactions are excluded from the excise tax base. These include:

• Repurchases in connection with complete liquidations (under Code Secs. 331 and 332),
• Acquisitive reorganizations and mergers where the corporation ceases to be a covered corporation,
• Certain E and F reorganizations where no gain or loss is recognized and only qualifying property is exchanged,
• Split-offs under Code Sec. 355 are included unless the exchange is treated as a dividend,
• Reorganizations are excluded if shareholders receive only qualifying property under Code Sec. 354 or 355.

The IRS adopted a consideration-based test to determine whether the reorganization exception applies, disregarding whether shareholders actually recognized gain.

Application to Take-Private Transactions and M&A

The final rules clarify that leveraged buyouts, take-private deals, and restructurings that result in loss of public listing status are not considered repurchases for tax purposes. This reverses prior treatment under proposed rules, aligning with policy concerns that such deals are not akin to value-distribution schemes.

Similarly, cash-funded acquisitions and upstream mergers into parent companies are excluded where the repurchase is part of a broader ownership change plan.

Netting Rule and Timing Considerations

Under the netting rule, the amount subject to tax is reduced by the value of new stock issued during the tax year. This includes equity compensation to employees, even if unrelated to a repurchase program. The rule does not apply where a corporation is no longer a covered corporation at the time of issuance.

Stock is treated as repurchased on the trade date, and issuances are counted on the date the rights to stock are transferred. The IRS clarified that netting applies only to stock of the covered corporation and not to instruments issued by affiliates.

Foreign Corporations and Surrogates

The excise tax also applies to certain acquisitions by specified affiliates of:

• Applicable foreign corporations, i.e., foreign entities with publicly traded stock,
• Covered surrogate foreign corporations, as defined under Code Sec. 7874.

Where such affiliates acquire stock from third parties, the tax is applied as if the affiliate were a covered corporation, but limited only to shares issued by the affiliate to its own employees. These provisions prevent U.S.-parented multinational groups from circumventing the tax through offshore affiliates.

Exceptions Under Code Sec. 4501(e)

The six statutory exceptions remain intact:

• Reorganizations with no gain/loss under Code Sec. 368(a);
• Contributions to employer-sponsored retirement or ESOP plans;
• De minimis repurchases under $1 million per tax year;
• Dealer transactions in the ordinary course of business;
• Repurchases by RICs and REITs;
• Repurchases treated as dividends under the Code.

The IRS expanded the RIC/REIT exception to cover certain non-RIC mutual funds regulated under the Investment Company Act of 1940 if structured as open-end or interval funds.

Reporting and Administrative Requirements

Taxpayers must report repurchases on Form 720, Quarterly Federal Excise Tax Return. Recordkeeping, filing, and payment obligations are governed by Part 58, Subpart B of the regulations. The procedural rules also address:

• Applicable filing deadlines;
• Corrections for adjustments and refunds;
• Return preparer obligations under Code Secs. 6694 and 6695.

These provisions codify prior guidance issued in Notice 2023-2 and reflect technical feedback from tax professionals and stakeholders.

Applicability Dates

The final rules apply to:

• Stock repurchases occurring after December 31, 2022;
• Stock issuances during tax years ending after December 31, 2022;
• Procedural compliance starting with returns due after publication in the Federal Register.

Corporations may rely on Notice 2023-2 for transactions before April 12, 2024, and either the proposed or final regulations thereafter, provided consistency is maintained.

Takeaways

The final regulations narrow the excise tax’s reach to align with Congressional intent: discouraging opportunistic buybacks that return capital to shareholders outside traditional dividend mechanisms. By excluding structurally transformative M&A transactions, debt-like preferred stock, and regulated financial instruments, the IRS attempts to strike a balance between tax enforcement and market practice.

T.D. 10037

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.