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President Donald Trump targeted federal hiring, including specific rules for the Internal Revenue Service, and the United States’ participation in the global tax framework being developed by the Organisation for Economic Co-operation and Development among his flurry of executive orders signed on the first day of his second term in the Oval Office.

The Financial Crimes Enforcement Network is keeping beneficial reporting information reporting voluntary even though the Supreme Court has lifted the injunction that was put in place by a lower court to keep the BOI regulation from being enforced.

The Financial Crimes Enforcement Network is keeping beneficial reporting information reporting voluntary even though the Supreme Court has lifted the injunction that was put in place by a lower court to keep the BOI regulation from being enforced.

"In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force," the agency posted to its website on January 24, 2025. "However, reporting companies may continue to voluntarily submit beneficial ownership information reports."

The posting follows a Supreme Court order stating on January 23, 2025, that the injunction put in place by the United States District Court for the Eastern District of Texas on December 5, 2024, was removed.

Justice Ketanji Brown Jackson offered a dissenting opinion on lifting the injunction.

"However likely the Government’s success on the merits may be, in my view, emergency relief is not appropriate because the applicant has failed to demonstrate sufficient exigency to justify our interventions," Justice Jackson wrote, citing two reasons: the Fifth Circuit Court of Appeals has already expedited the hearing of the case and the government has deferred the implementation of the regulations on its own accord.

"The Government has provided no indication that injury of a more serious or significant nature would result if the Act’s implementation is further delayed while the litigation proceeds in the lower courts. I would therefore deny the application and permit the appellate process to run its course," Justice Jackson added.

By Gregory Twachtman, Washington News Editor

The Treasury and IRS have issued final regulations that provide rules for classifying digital and cloud transactions. The rules apply for purposes of the international provisions of the Code.

The rules retain the overall approach of the proposed regulations (NPRM REG-130700-14, August 14, 2019), with some revisions.

The Treasury and IRS also issued proposed regulations that provide sourcing rules for cloud transactions.

The Treasury and IRS have issued final regulations that provide rules for classifying digital and cloud transactions. The rules apply for purposes of the international provisions of the Code.

The rules retain the overall approach of the proposed regulations (NPRM REG-130700-14, August 14, 2019), with some revisions.

The Treasury and IRS also issued proposed regulations that provide sourcing rules for cloud transactions.

Background

Reg. §1.861-18 provides rules for classifying cross-border transactions involving digitized information, specifically computer programs, broadly grouped into the following categories:

• the transfer of a copyright;
• the transfer of a copyrighted article;
• the provision of services for the development or modification of a computer program; and
• the provision of know-how relating to the development of a computer program.

The 1998 final regulations focus on the distinction between the transfer of the copyright itself and transfer of a copyrighted article, using a substance-over-form characterization approach and by examining the underlying rights granted to the transferee. Transfers of copyrights and copyrighted articles are further characterized as complete or partial transfers, resulting in the transfers being characterized as either sales or licenses, in the case of a copyrights, or sales or leases, in the case of a copyrighted articles.

2025 Final Regulations

The 2025 final regulations maintain the basic framework for characterizing transfers of content and extend the characterization framework to digital content. Digital content is generally defined as any computer program or other content protected by copyright law, not just transactions involving computer programs.

The categories of transactions include:

• the transfer of a copyright in the digital content;
• the transfer of a copy of the digital content (a copyrighted article);
• the provision of services for the development or modification of the digital content; and
• the provision of know-how relating to the development of digital content.

The 2025 final regulations also provide for cloud transactions and characterize the transactions as a provision of services.

Cloud transactions are generally defined as transactions through which a person obtains on-demand network access to computer hardware, digital content, or similar resources.

The 2025 final regulations replace the de minimis rule and the concept of arrangement with a predominant character rule that applies to both digital content transactions and cloud transactions. Under the rule, a transaction with multiple elements is characterized based on the predominant character of the transaction.

Request for Comments on 2025 Final Regulations

The Treasury and IRS are considering whether the characterization rules should apply to all provisions of the Code and have requested comments on any specific areas that would be affected, with examples if appropriate. Comments are also requested on any guidance that would be needed and the approach the guidance should take. In addition to general comments, the Treasury and IRS also request comments on the desirability and effect of applying the rules in specific areas and the guidance need.

Comments should be submitted 90 days after the Notice requesting comments is published in the Internal Revenue Bulletin, with consideration for comments submitted after that date that do not delay the guidance. Comments may be submitted electronically via the Federal eRulemaking Portal www.regulations.com or or by mail to: Internal Revenue Service, CC:PA:01:PR (Notice 2025-6, Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044.

Proposed Sourcing Rules for Cloud Transactions

Gross income from a cloud transaction is sourced as services. Under the Code, gross income from the performance of services is sourced to the place where the service is performed.

To determine the place of performance, the proposed regulations would take into account the location of the employees and assets, including both tangible and intangible assets, that contribute to the provision of cloud transactions. The sourcing rules would apply on a taxpayer-by-taxpayer basis.

The place of performance of a cloud transactions is established through a formula composed of a fraction that has three parts-the intangible property factor, the personnel factor, and the tangible property factor. The factors make up the denominator of the fraction. The numerator is the sum of each portion of each factor that is from sources within the United States. The gross income from a cloud transaction multiplied by the fraction is the U.S. source portion of the gross income.

T.D. 10022

Proposed Regulations, NPRM REG-107420-24

Notice 2025-6

The IRS has released final regulations implementing the clean hydrogen production credit under Code Sec. 45V, as well as the election to treat a clean hydrogen production facility as energy property for purposes of the energy investment credit under Code Sec. 48. The regulations generally apply to tax years beginning after December 26, 2023.

The IRS issued updates to frequently asked questions (FAQs) about the Energy Efficient Home Improvement Credit (Code Sec. 25C) and the Residential Clean Energy Property Credit (Code Sec. 25D). The former credit applies to qualifying property placed in service on or after January 1, 2023, and before January 1, 2033. The updates pertained to FS-2024-15. More information is available here.

The IRS issued updates to frequently asked questions (FAQs) about the Energy Efficient Home Improvement Credit (Code Sec. 25C) and the Residential Clean Energy Property Credit (Code Sec. 25D). The former credit applies to qualifying property placed in service on or after January 1, 2023, and before January 1, 2033. The updates pertained to FS-2024-15. More information is available here.

Energy Efficient Home Improvement Credit

The credit is limited to $2,000 per taxpayer per taxable year in the aggregate for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves or boilers.

Thus, a taxpayer could claim a total credit of $3,200 if they had sufficient expenditures in property categories (or a home energy audit) subject to the $1,200 limitation and in property categories subject to the $2,000 limitation.

Additionally, a taxpayer can claim the credit only for qualifying expenditures incurred for an existing home, or for an addition to or renovation of an existing home, but not for a newly constructed home.

Residential Clean Energy Property Credit

One of the FAQs mentions that this credit is a nonrefundable personal tax credit. A taxpayer claiming a nonrefundable credit can only use it to decrease or eliminate tax liability.

The credit is generally limited to 30 percent of qualified expenditures made for property placed in service between 2022 and 2032. However, the credit allowed for qualified fuel cell property expenditures is 30 percent of the expenditures, up to a maximum credit of $500 for each half kilowatt of capacity of the qualified fuel cell property.

FS-2025-1

IR-2025-17

The IRS has provided updated guidance on the implementation of section 530 of the Revenue Act of 1978 (P.L. 95-600), as amended, regarding controversies involving whether individuals are "employees" for employment tax purposes. Section 530 (which is not an Internal Revenue Code section) provides relief for employers who are involved in worker classification status disputes with the IRS and face large employment tax assessments as a result of the IRS’s proposed reclassifications of workers.

The IRS has provided updated guidance on the implementation of section 530 of the Revenue Act of 1978 (P.L. 95-600), as amended, regarding controversies involving whether individuals are "employees" for employment tax purposes. Section 530 (which is not an Internal Revenue Code section) provides relief for employers who are involved in worker classification status disputes with the IRS and face large employment tax assessments as a result of the IRS’s proposed reclassifications of workers.

Section 530 Safe Harbor

Section 530 provides that an employer will not be liable for federal employment taxes regarding an individual or class of workers if certain statutory requirements are met. Section 530 relief applies only if the taxpayer did not treat the individual as an employee for federal employment tax purposes for the period at issue, and meets each of the following requirements for that period:

• the taxpayer filed all required federal tax returns, including information returns, on a basis that is consistent with the taxpayer’s treatment of the individual as not being an employee (reporting consistency requirement);
• the taxpayer did not treat the individual or any individual holding a substantially similar position as an employee (substantive consistency requirement); and
• the taxpayer had a reasonable basis for not treating the individual as an employee (reasonable basis requirement).

Rev. Proc. 85-18, 1985-1 CB 518, provided instructions for implementing section 530 relating to the employment tax status of independent contractors and employees.

Updated Guidance

The updated guidance clarifies provisions in Rev. Proc. 85-18 regarding the definition of employee, the section 530 requirement for the filing of required returns, and the reasonable basis safe harbor rules. The updated guidance also includes new provisions that reflect certain statutory changes made to section 530 since 1986.

Among other things, the updated guidance amplifies guidelines in Rev. Proc. 85-18 which interpreted the word “treat” for purposes of determining whether a taxpayer did not treat an individual as an employee for section 530 purposes. Under the updated guidance, with respect to any individual, actions that indicate “treatment” of the individual as an employee for section 530 purposes include:

• withholding of income tax or FICA taxes from any payments made;
• filing of an original or amended employment tax return;
• filing or issuance of a Form W-2; and
• contracting with a third party to perform acts required of employers.

Provisions in Rev. Proc. 85-18 that explained how refunds, credits, abatements, and handling of claims applied to taxpayers who were under audit or otherwise involved in administrative or judicial processes with the IRS at the time of enactment of section 530 are no longer applicable and were not included in the updated guidance. Section 530 relief remains available at any stage in the administrative or judicial process if the requirements for relief are met.

Effect on Other Documents

Rev. Proc. 85-18, 1985-1 CB 518, is modified and superseded.

Rev. Proc. 2025-10

The IRS has issued final regulation identifying certain partnership related-party basis adjustment transactions as transactions of interest (TOI), a type of reportable transaction under Reg. §1.6011-4. Taxpayers that participate and material advisors to these transactions, and substantially similar transactions, are required to disclose as much to the IRS using Form 8886 and Form 8918, respectively, or be subject to penalties.

Regulations under Code Sec. 2801, which imposes a tax on covered gifts and covered bequests received by a citizen or resident of the United States from a covered expatriate, have been issued.

The IRS has issued a revenue ruling addressing the federal tax treatment of contributions and benefits under state-administered paid family and medical leave (PFML) programs. The ruling clarifies how these contributions and benefits are classified for income tax, employment tax, and reporting purposes, with distinctions drawn between employer and employee contributions.

The IRS has issued a revenue ruling addressing the federal tax treatment of contributions and benefits under state-administered paid family and medical leave (PFML) programs. The ruling clarifies how these contributions and benefits are classified for income tax, employment tax, and reporting purposes, with distinctions drawn between employer and employee contributions.

PFML Contributions

Mandatory contributions made by employers under PFML programs are classified as excise taxes deductible as ordinary and necessary business expenses under Code Sec. 164. These payments are deemed state-imposed obligations for the purpose of funding public programs and are not included in employees' gross income under Code Sec. 61. In contrast, mandatory contributions withheld from employees’ wages are treated as state income taxes under Code Sec. 164(a)(3). Employees may deduct these amounts on their federal tax returns if they itemize deductions, subject to the state and local tax (SALT) deduction cap under Code Sec. 164(b)(6).

The ruling further specifies the treatment of benefits paid under PFML programs. Family leave benefits, which provide wage replacement during caregiving periods, are included in the recipient’s gross income under Code Sec. 61 but are not considered wages for federal employment tax purposes under Code Sec. 3121. By comparison, medical leave benefits attributable to employee contributions are excluded from gross income under Code Sec. 104(a)(3). However, medical leave benefits attributable to employer contributions are partially taxable under Code Sec. 105 and are subject to FICA taxes.

The ruling also addresses scenarios where employers voluntarily cover portions of employees’ contributions, referred to as "employer pick-ups." Such pick-ups are treated as additional compensation, included in employees’ gross income under Code Sec. 61, and are subject to federal employment taxes. Employers, however, may deduct these payments as ordinary business expenses under Code Sec. 162.

To ensure compliance, the IRS requires states and employers to report benefits exceeding $600 annually under Code Sec. 6041 using Form 1099. Additionally, benefits subject to employment taxes must be reported on Form W-2.

The ruling modifies prior guidance and includes a transition period for 2025 to allow states and employers to adjust their systems to meet reporting and compliance requirements. This clarification provides a framework for managing the tax implications of PFML programs, ensuring consistent treatment across jurisdictions.

Effective Date

This revenue ruling is effective for payments made on or after January 1, 2025. However, transition relief is provided to the states, the District of Columbia, and employers from certain withholding, payment, and information reporting requirements for state-paid medical leave benefits paid made during calendar year 2025.

Effect on Other Guidance

Rev. Rul. 81-194, Rev. Rul. 81-193, Rev. Rul. 81-192, and Rev. Rul. 81-191 are amplified to include the holdings in this revenue ruling that are applicable to the facts in those rulings. Rev. Rul. 72-191, as modified by Rev. Rul. 81-192, is further modified.

Rev. Rul. 2025-4

IR-2025-16

National Taxpayer Advocate Erin Collins identified the lengthy processing and uncertainty regarding the employee retention credit as being among the ten most serious problems facing taxpayers.

National Taxpayer Advocate Erin Collins identified the lengthy processing and uncertainty regarding the employee retention credit as being among the ten most serious problems facing taxpayers.

"Although the [Internal Revenue Service] has processed several hundred thousand claims in recent months, it was still sitting on a backlog of about 1.2 million claims as of October 26, 2024," Collins noted in her just released 2024 Annual Report to Congress. "Many claims have been pending for more than a year, and with the imminent start of the 2025 filing season, the IRS will shift its focus and resources to administering the filing season, resulting in even longer ERC processing delays."

Collins is calling on the IRS to provide more specific information with claims denials, more transparency on the timing of claims processing, and allowing taxpayers to submit documentation and seek an appeal before disallowing a claim that was not subject to an audit.

In addition to ERC processing, Collins identified delays in processing of tax returns as another serious problem taxpayers are facing, including delays associated with the more than 10 million paper 1040 returns and more than 75 million paper-filed returns and forms overall each year, as well as issues surrounding rejections of e-filed returns, most of which are valid returns. These delays end up delaying refunds and can be particularly hard on low-income filers who are receiving the Earned Income Tax Credit.

"We recommend the IRS continue to prioritize automating its tax processing systems, including by scanning all paper-filed tax returns in time for the 2026 filing season and processing amended tax returns automatically," the report states.

Another processing issue identified in the report deals with delays in processing and refunds for victims of identity theft.

Collins reported that the delays in addressing identity theft issues grew to 22 months in fiscal year 2024, affecting nearly 500,000 taxpayers.

"The IRS has advised us that it has begun to prioritize resolution of cases involving refunds over balance-due returns rather than following its traditional ‘first in, first out’ approach," the report states. "This is somewhat good news, but I strongly encourage the IRS to fix this problem once and for all during the coming year."

Other issues in the top 10 include:

• Taxpayer service is often not timely or adequate;
• The prevalence of tax-related scams;
• Employment recruitment, hiring, training, and retention challenges are hindering transformational change within the industry;
• The dependence on paper forms and manual document review in processing Individual Taxpayer Identification Numbers is causing delays and potential security risks;
• Limited taxpayer financial and tax literacy;
• The IRS’s administration of civil tax penalties is often unfair, inconsistently deters improper behavior, fails to promote efficient administration, and thus discourages tax compliance; and
• Changes to the IRS’s criminal voluntary disclosure practice requirements may be reducing voluntary compliance and negatively impacting the tax gap.

Collins also called on Congress to ensure the IRS receives adequate funding specifically for taxpayer services and technology upgrades, noting that many improvements that are highlighted in the report were made possible by the Inflation Reduction Act, which provided supplemental funding to the agency.

"Much of the funding has generated controversy – namely, the funding allocated for enforcement," the report notes. "But some of the funding has received strong bipartisan support – namely, the funding allocated for taxpayer services and technology modernization."

She reported that telephone service has improved dramatically, correspondence processing has improved dramatically, and in-person has become more accessible following the IRA funding, as well as technology improvements including increased scanning and processing of paper-filed tax returns electronically; increases in electronic correspondence; expansion of secure messaging; the ability to submit forms from mobile phones; and increases in both chatbot and voicebot technology.

"I want to highlight this distinction so that if Congress decides to cut IRA funding, it does not inadvertently throw the baby out with the bathwater," she reports.

By Gregory Twachtman, Washington News Editor

IR-2025-4

Three years ago, Congress enhanced small business expensing to encourage businesses to purchase equipment and other assets and help lift the economy out of a slow-down. This valuable tax break was set to expire after 2007. Congress has now extended it two more years as part of the recently enacted Tax Increase Prevention and Reconciliation Act. Taxpayers who fully qualify for the expensing deduction get what amounts to a significant up-front reduction in the out-of-pocket cost of business equipment.

Indexed for inflation

In lieu of depreciation, taxpayers can elect to deduct up to $100,000 of the cost of qualifying property placed in service for the tax year. The $100,000 amount is reduced, but not below zero, by the amount by which the cost of the qualifying property exceeds $400,000.

The $100,000 and $400,000 limitations are indexed for inflation. For 2006, they are $108,000 and $430,000 respectively.

Expensing election

If you want to take advantage of the small business expensing election, you must do so on your original tax return, on Form 4562 (Depreciation and Amortization) or on an amended return filed before the due date for your original return including any extensions. If you don't claim it, you cannot change your mind later by filing an amended tax return after the due date.

Tangible personal property

The property that you purchase must be tangible personal property that is actively used in your business and for which a depreciation deduction would be allowed. The property must be newly purchased new or used property rather than property that you previously owned but recently converted to business use. If you have any questions about the type of property you are purchasing, give our office a call and we'll help you determine if it qualifies for enhanced expensing.

Generally, land improvements, such as buildings, paved parking lots and fences do not qualify for expensing. However, property contained in or attached to a building that is not a structural component, such as refrigerators, testing equipment and signs, does qualify.

Property acquired by gift or inheritance does not qualify. Property you acquired from related persons, such as your spouse, child, parent, or other ancestor, or another business with common ownership also does not qualify.

There are special provisions for applying the expensing rules to partnerships and S corporations, controlled groups of corporations, married couples, and sport utility vehicles.  We can explain these provisions in more detail if you call our office.

Recapture

Qualifying property must be used more than 50 percent for business. If use falls below 50 percent, you may have to recapture (give back) part of the tax benefit you previously claimed.

The two-year extension opens the door to some important strategic tax planning opportunities. Our office can help you plan purchases so you get the maximum tax benefit. Give us a call today.

Starting in 2010, the $100,000 adjusted gross income cap for converting a traditional IRA into a Roth IRA is eliminated. All other rules continue to apply, which means that the amount converted to a Roth IRA still will be taxed as income at the individual's marginal tax rate. One exception for 2010 only: you will have a choice of recognizing the conversion income in 2010 or averaging it over 2011 and 2012.

The Tax Increase Prevention and Reconciliation Act of 2005 eliminated the $100,000 adjusted gross income (AGI) ceiling for converting a traditional IRA into a Roth IRA. While this provision does not apply until 2010, now may be a good time to make plans to maximize this opportunity.

The Roth IRA has benefits that are especially useful to high-income taxpayers, yet as a group they have been denied those advantages up until now. Currently, you are allowed to convert a traditional IRA to a Roth IRA only if your AGI does not exceed $100,000. A married taxpayer filing a separate return is prohibited from making a conversion. The amount converted is treated as distributed from the traditional IRA and, as a consequence, is included in the taxpayer's income, but the 10-percent additional tax for early withdrawals does not apply.

Significant benefits

While recognizing income sooner rather than later is usually not smart tax planning, in the case of this new opportunity to convert a traditional IRA to a Roth IRA, the math encourages it. The difference is twofold:

1. All future earnings on the account are tax free; and
2. The account can continue to grow tax free longer than a traditional IRA without being forced to be distributed gradually after reaching age 70 ½.

These can work out to be huge advantages, especially valuable to individuals with a degree of accumulated wealth who probably won't need the money in the Roth IRA account to live on during retirement.

Example. Mary's AGI in 2010 is $200,000 and she has traditional IRA balances that will have grown to $300,000. Assuming a marginal federal and local income tax of about 40 percent on the $300,000 balance, the $180,000 remaining in the account can grow tax free thereafter, with distributions tax free. Further assume that Mary is 45 years of age with a 90 year life expectancy and money conservatively doubles every 15 years. She will die with an account of $1.44 million, income tax free to her heirs. If the Roth IRA is bequeathed to someone in a younger generation with a long life expectancy, even factoring in eventual required minimum distributions, the amount that can continue to accumulate tax free in the Roth IRA can be staggering, eventually likely to reach over $10 million.

Planning strategies

Now is not too early to start planning to take advantage of the Roth IRA conversion opportunity starting in 2010. While planning to maximize the conversion will become more detailed as 2010 approaches and your assets and income for that year are more measurable, there are certain steps you can start taking now to maximize your savings.

Start a nondeductible IRA

The income limits on both kinds of IRAs have prevented higher income taxpayers from making deductible contributions to traditional IRAs or any contributions to Roth IRAs. They could always make nondeductible contributions to a traditional IRA, but such contributions have a limited pay-off (no current deduction, tax on account income is deferred rather than eliminated, required minimum distributions).

While a taxpayer could avoid these problems by making nondeductible contributions to a traditional IRA and then converting it to a Roth IRA, this option was not available for upper income taxpayers who would have the most to benefit from such a conversion. With the elimination of the income limit for tax years after December 31, 2009, higher income taxpayers can begin now to make nondeductible contributions to a traditional IRA and then convert them to a Roth IRA in 2010. In all likelihood, there will be little to tax on the converted amount.

What's more, taxpayers with $100,000-plus AGIs should consider continue making nondeductible IRA contributions in the future and roll them over into a Roth IRA periodically. As a result, the elimination of the income limit for converting to a Roth IRA also effectively eliminates the income limit for contributing to a Roth IRA.

Example. John and Mary are a married couple with $300,000 in income. They are not eligible to contribute to a Roth IRA because their AGI exceeds the $160,000 Roth IRA eligibility limit. Beginning in 2006, the couple makes the maximum allowed nondeductible IRA contribution ($8,000 in 2006 and 2007, and $10,000 in 2008, 2009, and 2010). In 2010, their account is worth $60,000, with $46,000 of that amount representing nondeductible contributions that are not taxed upon conversion. The couple rolls over the $60,000 in their traditional IRA into a Roth IRA. They must include $14,000 in income (the amount representing their deductible contributions), which they can recognize either in 2010, or ratably in 2011 and 2012.

Assuming they have sufficient earned income each year thereafter (until reaching age 70 1/2), John and Mary can continue to make the maximum nondeductible contributions to a traditional IRA and quickly roll over these funds into their Roth IRA, thereby avoiding significant taxable growth in the assets that would have to be recognized upon distribution from a traditional IRA.

Rollover 401(k) accounts

Contributions to a Section 401(k) plans cannot be rolled over directly into a Roth IRA. The lifting of the $100,000 AGI limit does not change this rule. However, they often can be rolled over into a traditional IRA and then, after 2009, converted into a Roth IRA.

Not everyone can just pull his or her balance out of a 401(k) plan. A plan amendment must permit it or, more likely, those who are changing jobs or are otherwise leaving employment can choose to roll over the balance into an IRA rather than elect to continue to have it managed in the 401(k) plan.

For money now being contributed to 401(k) plans by employees, an even better option would be for those contributions to be made to a Roth 401(k) plan. Starting in 2006, as long as the employer plan allows for it, Roth 401(k) accounts may receive employee contributions.

Gather those old IRA accounts

Many taxpayers opened IRA accounts when they were first starting out in the work world and their incomes were low enough to contribute. Over the years, many have seen those account balances grow. These accounts now may be converted into Roth IRAs starting in 2010, regardless of income.

Paying the tax

In spite of all the advantages of a Roth IRA, a conversion is advisable only if the taxpayer can readily pay the tax generated in the year of the conversion. If the tax is paid out of a distribution from the converted IRA, that amount is also taxed; and if the distribution counts as an early withdrawal, it is also subject to an additional 10-percent penalty. For those planning to convert who may not already have the funds available, saving now in a regular bank or brokerage account to cover the amount of the tax in 2010 can return an unusually high yield if it enables a Roth IRA conversion in 2010 that might not otherwise take place.

Careful planning is key

Transferring funds between retirement accounts can carry a high price tag if it is done incorrectly. For those who plan carefully, however, converting from a traditional IRA to a Roth IRA can yield very substantial after-tax rates of return. Please feel free to call our offices if you have any questions about how the 2010 conversion opportunity should fit into your overall tax and wealth-building strategy.

No. Generally, payments that qualify as alimony are included in the recipient's gross income and are deducted from the payor's gross income. However, not all payments between spouses qualify as alimony.

Divorce or separation agreement

Payments do not qualify as alimony unless they are made under a written divorce or separation instrument. Any payment that exceeds the amount provided in the agreement, that is made before they are required by the agreement or that is made after they are no longer required by an agreement will not be considered alimony and will not be deductible as such.

The current rules apply to payments made under a post-1984 divorce or separation agreement. Covered under these rules are divorce or separation agreements executed after December 31, 1984, instruments executed before 1985 if a decree executed after December 31, 1984 changes the terms of the pre-1985 instrument, or pre-1985 instruments which are not treated as executed after December 31, 1984 but which have been modified after that date to expressly provide that the post-1984 rules are to apply.

Under the current rules, a divorce or separation agreement is defined as a divorce or separate maintenance decree or a written instrument incident to that decree, a written separation agreement, or a decree that is not a divorce decree or a separate maintenance decree but that requires a spouse to make payments for the support or maintenance of the other spouse.

Strict requirements

To be deductible, alimony payments must meet all the strict statutory requirements. First, the payment must be in cash or an equivalent and must be received by or on behalf of a spouse under a divorce or separation agreement.

Additionally, the agreement must not designate the payment as not includable in gross income and not allowable as a deduction under Code Sec. 215, the spouses who are legally separated under a decree of divorce or separate maintenance cannot be members of the same household when the payment is made, there must be no liability to make any payment after the death of the payee spouse, and spouses must not file joint returns with each other.

Lastly, the payment must not be fixed as child support. Payments that do not meet these requirements will not be considered alimony and cannot be deducted.

Different rules apply to payments made under pre-1985 divorce or separation agreements. However, a pre-1985 agreement can be expressly modified to provide that the rules for post-1984 agreements will apply to subsequent payments.

Ordinarily, you can deduct the fair market value (FMV) of property contributed to charity. The FMV is the price in an arm's-length transaction between a willing buyer and seller.  If the property's value is less than the price you paid for it, your deduction is limited to FMV.  In some cases, you must submit an appraisal with your tax return.

Record-keeping requirements vary for noncash contributions, depending on the amount of the deduction. Similar items should be combined to determine the amount of the contribution:

• If the claimed deduction is less than $250, the charitable recipient must give you a receipt that identifies the recipient, the date of the contribution, and provides a detailed description of the property. You should keep a written record with a description of the property, its FMV, and how you determined the FMV, including a copy of any appraisals. 
  
  
• If the property's value is between $250 and $500, the requirements are similar. In addition, the recipient must give you a written acknowledgment that describes and values any goods or services provided to you. 
  
  
• If the value is between $500 and $5,000, your records must describe how the property was obtained, the date it was obtained or created, and the basis of the property.
  
  

• If the value is between $5,000 and $500,000, you must obtain a qualified appraisal by a qualified appraiser, retain that appraisal in your records, and attach to your income tax return a completed Form 8283, Section B.

• If you donate property and claim a deduction of more than $500,000, or donated art and deducted $20,000 or more, you must submit a "qualified appraisal" with your tax return.

If total noncash contributions exceed $500, you must fill out Section A of Form 8283, Noncash Charitable Contributions. If the contributions exceed $5,000, you must fill out Section B of the form. Publicly-traded securities must be listed on Section A, even if the value exceeds $5,000.

Form 8283 indicates that an appraisal generally must be submitted for amounts described in Section B. The IRS will deny the deduction if there is no appraisal, unless the failure to get an appraisal was due to reasonable cause and not willful neglect. If the IRS asks you to file Form 8283, the taxpayer will have 90 days to submit a completed form.

For property over $5,000, the appraiser and the charitable recipient must sign Form 8283. The form advises the recipient to file Form 8282, Donee Information Return, with the IRS and to give a copy to the donor if the property is sold within two years. This is not required if the item (or group of similar items) has a value of $500 or less, or if the property is transferred for a charitable purpose.

You must obtain a "qualified appraisal" no earlier than 60 days before you contributed the property and before the due date of your return, including extensions. If you first report the contribution on an amended return, you must obtain an appraisal before you filed the amended return.

The appraisal must describe the property in detail so that it can be identified; give its condition; provide the date of contribution; describe any restrictions on the use of the property; and identify the appraiser. The appraisal also must provide the appraiser's qualifications; the date the property was valued; the FMV on the date of contribution; and the valuation method for determining value, including any comparable sales used.

A separate appraisal and a separate Form 8283 are required for each item or group of similar items. Only one appraisal is required for a group of similar items contributed in the same year. If similar items are contributed to more than one recipient and the items' value exceeds $5,000, a separate Form 8283 must be filed for each recipient.

Here's an example:

You donate $2,000 of books to College A, $2,500 of books to College B, and $1,000 of books to a public library. A separate Form 8283 must be submitted for each recipient.

Generally, a family member or a party who sold the property to the donor cannot be the appraiser.  An appraiser who is regularly used by the donor or recipient must have performed the majority of his or her appraisals for other persons. Form 8283 requires that the appraiser either publicize his (or her) services or else perform appraisals on a regular basis. The appraisal fee cannot be based on a percentage of the appraised property value or of the deduction allowed by the IRS.

Fees that you pay for an appraisal are a miscellaneous itemized deduction and cannot be included in the charitable deduction.

Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.

Generally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.

To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.

Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.

The IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.

If a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.

Recently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.

If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.

No, parking tickets are not deductible. Internal Revenue Code Sec. 162 (a) provides that no deduction is allowed for fines or penalties paid to a government (U.S. or foreign, federal or local). While many delivery businesses consider parking tickets as a cost of doing business and more akin to an occasional "rental" payment for a place to park, a parking ticket is a fine and, as such, it is not deductible. By definition, parking tickets are civil penalties imposed by state or local law. The Tax Court decided that parking tickets are not business deductions way back in 1975 in a case dealing with a taxpayer that was trying to deduct as a business expense some parking tickets, among other things. The court allowed the other deductions but did not allow the parking tickets, citing Code Sec. 162.

The AMT is difficult to apply and the exact computation is very complex. If you owed AMT last year and no unusual deduction or windfall had come your way that year, you're sufficiently at risk this year to apply a detailed set of computations to any AMT assessment. Ballpark estimates just won't work.

If you did not owe AMT last year, you still may be at risk. The IRS estimates that half million more individuals will be subject to the AMT in 2006 because of rising deductions and exemptions. If Congress doesn't extend the same AMT exclusion amount given in 2005, an estimated 3 million more taxpayers will pay AMT.

For a system that was intended originally to target only the very rich, the AMT now hits many middle to upper-middle class taxpayers as well. Obviously something has to be done, and will be, eventually, through proposed tax reform measures. In the meantime, expect AMT to be around for at least another year.

Basic calculations. Whether you will be liable for the AMT depends on your combination of income, adjustments and preferences. After all the computations, if your AMT liability exceeds your income tax liability, you will be liable for the AMT. Here are the basic steps to take to determine in evaluating whether you will owe the AMT:

• Step #1: Calculate your regular taxable income. If your regular tax were to be determined by reference to an amount other than taxable income, that amount would need to be determined and used in the next steps.
  
• Step #2: Calculate your alternative minimum taxable income (AMTI) by increasing or reducing your regular taxable income (or other relevant amount) by applying the AMT adjustments or preferences. These include business depreciation adjustments and preferences, loss, timing and personal itemized deductions adjustments, and tax-exempt or excluded income preferences. This is the step with potentially many sub-computations in determining increases and reductions in tax liability.
  
• Step #3:  If your AMTI exceeds the applicable AMT exemption amount, pay AMT on the excess.

While no single factor will automatically trigger the AMT, the cumulative result of several targeted tax benefits considered in Step #2, above, can be fatal. Common items that can cause an "ordinary" taxpayer to be subject to AMT are:

• All personal exemptions (especially of concern to large families);
• Itemized deductions for state and local income taxes and real estate taxes;
• Itemized deductions on home equity loan interest (except on loans used for improvements);
• Miscellaneous Itemized Deductions;
• Accelerated depreciation;
• Income from incentive stock options; and
• Changes in some passive activity loss deductions.

You've waited until the last minute to fill out your income tax return. Instead of owing more taxes to the IRS, as you feared, you discover that you're entitled to a big refund. You breathe a sigh of relief.

What's wrong with this picture?

You're parking your money with the IRS; in effect, you have made an interest-free loan to the U.S. government. Wouldn't you rather have the money yourself, sooner?

It's true that you can't anticipate every facet of your tax return. You may have last-minute medical expenses. You may decide to increase your end-of-the year charitable giving. You may decide to sell off that investment that's a money-loser. Last-minute actions like these will all reduce your tax liability.

Over-Withheld?

But if you're getting a sizeable refund, you may want to reduce your income tax withholding this year. You should consider reducing your withholding in the following circumstances: 

• You got a big refund and your tax items will be about the same.
• Your income will remain the same but your adjustments, deductions and credits will increase significantly.
• You got a refund and you will qualify for one or more tax credits this year that you did not qualify for last year.

Any of the following common situations during a tax year also can lead to over-withholding:

• You and your spouse both withhold at the individual rate, when one of you could withhold at the lower married rate.
• You had child care expenses.
• You bought a home with a higher mortgage.
• You worked part-time but withheld at the higher annual rate as if you were working full-time.
• You bought a hybrid automobile and can claim a deduction or credit.

The unpredictable

Of course, a larger-than-expected refund also can be the result of uncovering "hidden treasures" at tax preparation time -- unexpected deductions and other tax benefits that will lower the amount of income taxes that you thought you would have to pay. That's terrific; tax return time often does result in "finding" deductions and opportunities for post-year end tax planning as you pour over receipts and other paperwork. However, to what degree could many of these "hidden treasures" be discovered earlier and your tax withholding and estimated tax payments lowered earlier as a result?

Personal and financial factors also might change your tax liability: lifestyle changes, wage income, decreased income not subject to withholding; increased adjustments to income, and increased itemized deductions or tax credits.

Taking action!

If your circumstances change, or you want to make any changes to your withholding allowances, give your employer a new Form W-4. If you're starting a new job and are having trouble determining your withholding amount, you should still submit Form W-4. Otherwise, the employer must withhold at the highest rate.

Please contact this office if you need assistance in determining the right balance of wage withholding and estimated tax payments needed to cover your tax liability while not giving Uncle Sam an interest free loan. Remember, when you get a tax refund you are getting back money that you did not have to pay into the tax system in the first place.