About 830,000 taxpayers are having their tax refunds held up due to the move away from paper checks and Democratic leadership on the House Ways and Means Committee is seeking information on what the IRS is doing to expedite the issuance of those refunds.

About 830,000 taxpayers are having their tax refunds held up due to the move away from paper checks and Democratic leadership on the House Ways and Means Committee is seeking information on what the IRS is doing to expedite the issuance of those refunds.

House Ways and Means Subcommittee on Worker and Family Support Ranking Member Danny Davis (D-Ill.) and Subcommittee on Oversight Ranking Member Terri Sewell (D-Ala.), in a March 9, 2026, letter to IRS Acting Commissioner Scott Bessent, noted that to date 530,000 notices have been sent to individual taxpayers who did not include bank account information on their tax returns and are planning to send another 300,000 notices this week.

“As a result of President Trump’s Executive Order 14247 mandating electronic payments of tax refunds, these taxpayers could face more than a 10-week delay (over 2.5 months) in receiving their refunds by paper check,” the letter states, adding a National Taxpayer Advocate citation stating that more than 10 million individual taxpayers received their refunds by check.

They continued: “Having reviewed the IRS notice and called the IRS phone lines, we learned that there is no simple process for these taxpayers to request an immediate release of their refund by paper check without waiting at least 10 weeks. Effectively, the President, unilaterally through his Executive Order, is causing undue hardship on millions of Americans by delaying their paper refunds for months. This delay is not mandated by the Internal Revenue Code.”

The ranking members ask Bessent a series of questions, including how IRS taxpayers without an online account can apply for a paper check and immediate release of funds; how many notices have been sent and are expected to be released; how many tax payers have exceptions have been successfully filed; and how many paper checks have been mailed to date.

The representatives asked for answers by March 23, 2026.

By Gregory Twachtman, Washington News Editor

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2026 and the lease inclusion amounts for business vehicles first leased in 2026.

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2026 and the lease inclusion amounts for business vehicles first leased in 2026.

Luxury Passenger Car Depreciation Caps

The luxury car depreciation caps for a passenger car placed in service in 2026 limit annual depreciation deductions to:

• $12,300 for the first year without bonus depreciation
• $20,300 for the first year with bonus depreciation
• $19,800 for the second year
• $11,900 for the third year
• $7,160 for the fourth through sixth year

Depreciation Caps for SUVs, Trucks and Vans

The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2026 are:

• $12,300 for the first year without bonus depreciation
• $20,300 for the first year with bonus depreciation
• $19,800 for the second year
• $11,900 for the third year
• $7,160 for the fourth through sixth year

Excess Depreciation on Luxury Vehicles

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

The annual cap for this excess depreciation is:

• $7,160 for passenger cars and
• $7,160 for SUVS, trucks, and vans.

Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans

If a vehicle is first leased in 2026, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:

• $62,000 for a passenger car, or
• $62,000 for an SUV, truck or van.

The 2026 lease inclusion tables provide the lease inclusion amounts for each year of the lease.

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

Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts

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

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

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

Rev. Proc. 2026-15

The IRS has released guidance on the withdrawal of an election to be an excepted trade or business for the Code Sec. 163(j) business interest limitation for the 2022, 2023, and 2024 tax year. The election is made by filing an amended income tax return, amended Form 1065, or administrative adjustment request (AAR) on or before October 15, 2026, or applicable statute of limitation. The withdrawal allows a taxpayer to make depreciation adjustments or a late election not to deduct the additional first-year depreciation (bonus depreciation) for certain property in light of recent legislative changes. 

The IRS has released guidance on the withdrawal of an election to be an excepted trade or business for the Code Sec. 163(j) business interest limitation for the 2022, 2023, and 2024 tax year. The election is made by filing an amended income tax return, amended Form 1065, or administrative adjustment request (AAR) on or before October 15, 2026, or applicable statute of limitation. The withdrawal allows a taxpayer to make depreciation adjustments or a late election not to deduct the additional first-year depreciation (bonus depreciation) for certain property in light of recent legislative changes. Guidance is also provided on the early election or revocation of a controlled foreign corporation (CFC) CFC group election.

Background

A taxpayer’s deduction of business interest expenses paid or incurred for the tax year is generally limited under section 163(j) to the taxpayer’s business interest income for that year and 30 percent of the taxpayer’s adjusted taxable income (ATI). The deduction limit does not apply to certain excepted businesses, including an electing real property trade or business, electing farming business, or regulated utility trade or business.

The election applies to the current tax year and all subsequent tax years. The election is irrevocable but may automatically terminate in certain circumstances. An electing real property trade or business or electing farming business that elects out of the section 163(j) limit must depreciate certain property using alternative depreciation system (ADS) and as a result cannot claim bonus depreciation for that property.

Election Withdrawal

An election to be an excepted trade or business for the section 163(j) business interest limit may be withdrawn for the 2022, 2023, and 2024 tax year. The withdrawal is made by attaching a statement to the taxpayer’s amended income tax return, amended Form 1065 , or administrative adjustment request (AAR) on or before October 15, 2026, or applicable statute of limitations per the IRS guidance.

A taxpayer that receives an amended Schedule K-1 as a result of an amended return or Form 1065 should similarly file an amended return, amended Form 1065, or AAR with a similar attached statement. If a taxpayer withdraws an election, the taxpayer will be treated as if the election had never been made.

Depreciation Adjustments

A taxpayer that is withdrawing an excepted trade or business interest election under section 163(j) must determine its depreciation deduction and basis for the property that is affected by the withdrawn election in accordance with Code Sec. 168. A taxpayer that makes the withdrawals may make a late election under Code Sec. 168(k)(7) to opt certain property out of bonus depreciation on the same amended Federal income tax return, amended Form 1065, or AAR filed for withdrawing the section 163(j) excepted trade or business election.

CFC Group Election

A taxpayer that is a designated U.S. person may revoke or make a CFC group election without regard to the 60-month limitation of § 1.163(j)-7(e)(5)(ii) for the first specified period of a specified group beginning after December 31, 2024. A taxpayer that chooses to revoke the election or make a new election must follow all procedures specified in the regulation other than the 60-month limit. In addition, the 60-month limitation applies to subsequent specified periods.

Rev. Proc. 2026-17

Internal Revenue Service CEO Frank Bisignano highlighted the early successes of the tax provisions in the One Big Beautiful Bill Act before the House Ways and Means Committee while defending or deflecting critical commentary from the panel’s Democratic representatives.

Internal Revenue Service CEO Frank Bisignano highlighted the early successes of the tax provisions in the One Big Beautiful Bill Act before the House Ways and Means Committee while defending or deflecting critical commentary from the panel’s Democratic representatives.

In his opening statement during the March 4, 2026, hearing, Bisignano noted that the tax benefit to individuals under these provisions is “estimated to be $220 billion,” noting key aspects like the no tax on tips, no tax on overtime, and the Trump accounts helping to pave the way to the benefits.

He also highlighted the growth of 43 percent in usage of online tools, which he said is coinciding with a decrease in demand for phone service.

“Our goal is for taxpayers is our transformational efforts to create a seamless customer experience where taxpayers can interact with the IRS with the same ease they expect from the private sector,” Bisignano told the committee.

Bisignano during the hearing framed AI simply as a tool in the technology toolbox and stated that he didn’t simply want to “modernize” IRS systems because all that does is lead to future obsolescence, but framed information technology upgrades as “transforming” the systems to be able to evolve with technology, which “will increase compliance and increase simplification.”

He was put on the defensive on the subject of audit rates, with questions suggesting that the agency is not doing its job in terms of auditing high income and other wealthy taxpayers, which will lead to a greater tax gap.

Bisignano tried to interject that there was a $2 billion settlement reached but was not given an opportunity to expand upon the circumstances around the recovery, as Rep. Mike Thompson (D-Ca.) noted that “fewer audits of wealthy tax cheats and more scrutiny of working families” doesn’t build “trust among the American taxpayers.”

In answering a separate question regarding audit rates, he pushed back on the increase or decrease in audit rates, testifying that there has never been a standard audit rate that has been proven to be the right number and it could be more or less than where things are at now.

Bisignano defended the cutting of the National Treasury Employees Union contract, stating that by statute, federal employees already have “greater benefits that any union in the world can provide for their people,” including pay, health, and other benefits that are guaranteed by law. “So they are losing nothing,” he said.

He also defended the elimination of the Direct File program, citing its lack of utilization and its costs to operate the program, while promoting Free File as “well-received” and a well-used and trusted program.

Bisignano avoided any discussion regarding the IRS turning over taxpayer information to the Department of Homeland Security without proper authorization, noting that litigation on this issue was still ongoing. He confirmed that so far, no one has been fired or disciplined for this unauthorized information transmission.

He also would not commit to opening any of the closed Taxpayer Assistance Centers, noting that the current centers were experiencing increased activity, although he did add that there were no plans to close any of the existing centers.

Adoption Credit Update

Bisignano told the committee that the IRS will be implementing a provision that for tax year 2025, carry forward amounts of the adoption credit for prior years are refundable up to $5,000 per qualifying child, “and the IRS is implementing this policy as expeditiously as possible without disrupting the current filing season.”

He said there is will be information on this published “very soon” and that taxpayers “should continue to claim the credit as directed by the current tax forms and instructions during the tax season, since the IRS is pursuing post-filing remedies to solve this issue.”

By Gregory Twachtman, Washington News Editor

The IRS has finalized regulations to include unmarked vehicles used by firefighters, members of rescue squads, or ambulance crews in the list of “qualified nonpersonal use vehicles” exempt from the IRC §274(d) substantiation requirements. The final rule adopts, with only minor, non-substantive changes, the text of the proposed regulations (NPRM REG-106595- 22) issued on December 3, 2024. The amendments ensure that specially equipped unmarked vehicles are subject to the same tax treatment as other emergency vehicles used by first responders.

The IRS has finalized regulations to include unmarked vehicles used by firefighters, members of rescue squads, or ambulance crews in the list of “qualified nonpersonal use vehicles” exempt from the IRC §274(d) substantiation requirements. The final rule adopts, with only minor, non-substantive changes, the text of the proposed regulations (NPRM REG-106595- 22) issued on December 3, 2024. The amendments ensure that specially equipped unmarked vehicles are subject to the same tax treatment as other emergency vehicles used by first responders.

Qualified Nonpersonal Use Vehicles

IRC §274(d) requires that taxpayers satisfy additional substantiation requirements when claiming certain business deductions including the business use of an automobile or other means of transportation. A qualified nonpersonal use vehicle is any vehicle that, by reason of its nature, is not likely to be used more than a de minimis amount for personal purposes. Reg. §1.274-5(k)(2)(ii) provides a list of such vehicles, which includes, in part: ambulances; clearly marked police, fire, public safety officer vehicles; and unmarked police vehicles.

Unmarked Emergency Vehicles

Recently, some municipalities have been providing unmarked vehicles to these first responders as a response to an increase in incidents of vandalism and harassment. These unmarked vehicles are typically equipped with special equipment such as lights and sirens, medical emergency equipment, communication radios, and personal protective equipment. Most fire and emergency response departments retain the title to these unmarked vehicles and have policies that limit the use of the vehicles for personal purposes.

The intent and use of these unmarked vehicles meet the definition of qualified nonpersonal vehicles provided in IRC §274(i). However, prior to the amendments, fire and emergency response departments had to substantiate the time the first responders spent using these unmarked vehicles for work related purposes. Personal use of these vehicles, no matter how minute, was required to be included in that employee’s income.

In addition to adding unmarked rescue to the list of qualified nonpersonal use vehicles provided in Reg. §1.274-5(k)(2)(ii), the amendments add Reg. §1.274-5(k)(7) which provides the definitions for “unmarked firefighter, rescue squad or ambulance crew vehicles”, “firefighter,” and “member of a rescue squad or ambulance crew.”

The amendments apply to tax years beginning on or after the date the final regulations are published in the Federal Register. However, taxpayers may rely on the guidance provided in the proposed regulations until that date.

T.D. 10043

Proposed regulations under Code Sec. 530A, providing guidance on making an election to open a Trump account, and under Code Sec. 6434, relating to the Trump account contribution pilot program, have been issued. Comments are requested and should be submitted via the Federal eRulemaking Portal (indicate IRS and REG-117270-25 for comments related to Code Sec. 530A or IRS and REG-117002-25 for comments related to Code Sec. 6434). The proposed regulations are proposed to apply on or after January 1, 2026.

Proposed regulations under Code Sec. 530A, providing guidance on making an election to open a Trump account, and under Code Sec. 6434, relating to the Trump account contribution pilot program, have been issued. Comments are requested and should be submitted via the Federal eRulemaking Portal (indicate IRS and REG-117270-25 for comments related to Code Sec. 530A or IRS and REG-117002-25 for comments related to Code Sec. 6434). The proposed regulations are proposed to apply on or after January 1, 2026.

Background

Code Sec. 530A, as added by the One Big Beautiful Bill Act (P.L. 119-21) provides for the creation of a Trump account for an eligible individual. A Trump account is subject to certain special rules that do not apply to other types of individual retirement accounts during the growth period, which is the period that begins when an initial Trump account is established and ends on December 31st of the year in which the account beneficiary of the initial Trump account reaches the age of 17. Proposed regulations on the special rules that apply during and after the growth period are reserved and will be proposed at a later date.

In addition, Code Sec. 6434 was added, which provides for a one-time $1,000 pilot program contribution to the Trump account of an eligible child with respect to whom an election is made. The qualifications to be an eligible child are less restrictive than those to be an eligible individual. Finally, Code Sec. 128 allows for employer contributions to a Trump account of an employee or a dependent of an employee. These contributions must be made in accordance with the rules of a Code Sec. 128(c) Trump account contribution program. Guidance on this section is expected to be released in the future.

General Requirements and Election to Open an Account

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

An election to open an account can be made by either an authorized individual or by the Secretary. If a pilot program contribution election is made at the same as the election to open the initial account, the authorized individual would be the individual authorized to make (and making) the pilot program contribution election. If a pilot contribution program election is not being made, Prop. Reg. §1.530A-1(c)(1)(i)(B) provides an ordering rule to determine who the authorized individual is. In order of priority, the authorized individual would be a legal guardian, parent, adult sibling, or grandparent of the eligible individual. The election to open an initial Trump account is made on or before December 31st of the calendar year in which the eligible individual attains age 18. The election is made on Form 4547 or through an electronic application or webpage made available by the Secretary.

Contribution Pilot Program

A pilot program election with respect to an eligible child must be made by a pilot program-electing individual so that the Secretary can make the $1,000 pilot program contribution into the Trump account of en eligible child. An eligible child is a pilot program-electing individual's anticipated qualifying child, as defined in Code Sec. 152(c), for the tax year of the pilot program-electing individual in which the pilot program election is made; is born in 2025, 2026, 2027, or 2028; is a U.S. citizen; has been issued a social security number; and with respect to which no prior pilot program election has been made by any individual and processed by the Secretary.

A pilot program election is made with respect to the eligible child's "special taxable year" (defined in Prop. Reg. §301.6434-1(c)(1)), instead of with respect to any calendar based tax year for the eligible child's federal income tax liability. Once an election is processed, the eligible child is treated as making a $1,000 payment against a federal income tax liability for the eligible child's special taxable year, resulting in a $1,000 overpayment. The overpayment is then refunded by the Secretary as a pilot program contribution to the eligible child's Trump account. The overpayment is not refunded unless the eligible child has an established Trump account.

An election may be made on the day that a child becomes eligible, and the last day to make the election is December 31st of the calendar year in which the eligible child attains age 17. In addition, only the first pilot program contribution election processed by the IRS will result in a $1,000 contribution to the eligible child's Trump account. The pilot program contribution election is made on Form 4547.

Proposed Regulations, NPRM REG-117270-25

Proposed Regulations, NPRM REG-117002-25

IR 2026-31

IR 2026-33

The IRS expects to delay the applicability date of proposed regulations on required minimum distributions (RMDs) until the distribution calendar year that would begin 6 months after the date the regulations are finalized. Specifically, the announcement relates to proposed amendments of Reg. §§1.401(a)(9)-4, 1.401(a)(9)-5, and 1.401(a)(9)-6, issued pursuant to NPRM REG–103529–23 .

The IRS expects to delay the applicability date of proposed regulations on required minimum distributions (RMDs) until the distribution calendar year that would begin 6 months after the date the regulations are finalized. Specifically, the announcement relates to proposed amendments of Reg. §§1.401(a)(9)-4, 1.401(a)(9)-5, and 1.401(a)(9)-6, issued pursuant to NPRM REG–103529–23 .

Background

Prior to this announcement, provisions under NPRM REG–103529–23 (2024) were proposed to apply for determining RMDs for calendar years beginning on or after January 1, 2025. This ensured the provisions would begin to apply at the same time as final regulations under T.D. 10001 (2024).

Following a request for comments, concerns included difficulty to implement many provisions of future final regulations in a timely manner if the January 1, 2025, applicability date were to be retained in future final regulations.

Future Final Regulations

The IRS expects future final regulations that would amend Reg. §§1.401(a)(9)-4, 1.401(a)(9)-5, and 1.401(a)(9)-6, issued pursuant to NPRM REG–103529–23, to apply to determine RMDs for the distribution calendar year that would begin no earlier than six months after the date that any future final regulations would be issued in the Federal Register. For periods before the applicability date of such future final regulations, taxpayers must continue to apply a reasonable, good-faith interpretation.

Announcement 2026-7

The IRS has issued a waiver for individuals who failed to meet the foreign earned income or deduction eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in certain foreign countries prevented them from fulfilling the requirements for the 2025 tax year. Qualified individuals may elect to exclude from gross income their foreign earned income and to exclude or deduct the housing cost amount.

The IRS has issued a waiver for individuals who failed to meet the foreign earned income or deduction eligibility requirements of Code Sec. 911(d)(1) because adverse conditions in certain foreign countries prevented them from fulfilling the requirements for the 2025 tax year. Qualified individuals may elect to exclude from gross income their foreign earned income and to exclude or deduct the housing cost amount.

Relief Provided

The IRS, in consultation with the Secretary of State, has determined that war, civil unrest, or similar adverse conditions precluded the normal conduct of business in the following countries, effective from the dates specified: (1) Haiti – January 1, 2025; (2) Ukraine – January 1, 2025; (3) Democratic Republic of the Congo – January 28, 2025; (4) South Sudan – March 7, 2025; (5) Iraq – June 11, 2025; (6) Lebanon – June 22, 2025; and (7) Mali – October 30, 2025. An individual who left any of these countries on or after the respective dates will be treated as a qualified individual for the period during which the individual was a bona fide resident of, or was present in, the country. To qualify for relief, an individual must establish that, but for these adverse conditions, they would have met the requirements of Code Sec. 911(d)(1). Additionally, the waiver does not apply to individuals who first established residency or were physically present in any of these countries after the respective dates listed above. Taxpayers seeking guidance on how to claim this exclusion or file an amended return should refer to the Foreign Earned Income Exclusion section at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion or contact a local IRS office.

Rev. Proc. 2026-16

Tax writers in Congress are set to begin debating and writing tax reform legislation. On September 27, the White House and GOP leaders in Congress released a framework for tax reform. The framework sets out broad principles for tax reform, leaving the details to the two tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee. How quickly lawmakers will write and pass tax legislation is unclear. What is clear is that tax reform is definitely one of the top issues on Congress’ Fall agenda.

Tax writers in Congress are set to begin debating and writing tax reform legislation. On September 27, the White House and GOP leaders in Congress released a framework for tax reform. The framework sets out broad principles for tax reform, leaving the details to the two tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee. How quickly lawmakers will write and pass tax legislation is unclear. What is clear is that tax reform is definitely one of the top issues on Congress’ Fall agenda.

Individuals

The GOP framework proposes consolidating the current seven individual tax rates into three: 12, 25 and 35 percent. However, the framework leaves open the possibility of an additional top rate “to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”

For individuals, the GOP framework also proposes to:

• Eliminate the alternative minimum tax
• Roughly double the standard deduction
• Repeal the federal estate tax
• Preserve the home mortgage interest deduction and the deduction for charitable contributions
• Eliminate most other itemized deductions
• Repeal the personal exemption for dependents
• Retain tax benefits that encourage work, higher education and retirement security

Family incentives

Family incentives have traditionally garnered bipartisan support in Congress and the GOP framework includes several. The child tax credit, for example, currently phases out when incomes reach certain levels. The GOP framework calls for increasing the income levels for the credit to unspecified amounts.   Another proposal would create a new non-refundable $500 credit for non-child dependents. The details would be left to the tax-writing committees.

Businesses

One pillar of the GOP framework is a corporate tax rate cut. The framework calls for a 20 percent corporate tax rate, down from the current 35 percent rate. Businesses that operate as passthroughs, such as S corporations, would have a maximum tax rate of 25 percent, subject to unspecified limitations to prevent abuses.

Other business proposals include:

• Enhanced expensing
• Limiting the deduction for net interest expenses by C corporations
• Eliminating the Code Sec. 199 deduction
• Preserving the research and development credit and tax preferences for low-income housing
• Reforming certain international taxation rules

Drafting legislation

After the GOP framework was released, the chairs of the tax writing committees said their committees would begin drafting legislation. The Ways and Means Committee is made up of 24 Republicans and 16 Democrats. Republicans also have a majority on the Senate Finance Committee but only by two votes (14 to 12). This narrow vote margin is likely to influence any tax bill out of the Senate Finance Committee. Our office will keep you posted of developments.

Extenders

A number of popular but temporary tax incentives have expired. Unless extended, these “extenders” will not be available to taxpayers when they file their 2017 returns in 2018. They include:

• Tax exclusion for canceled mortgage debt
• Mortgage insurance premium deductibility
• Higher education tuition deduction
• Special expensing rules for film, television, and theatrical productions
• Seven-year recovery period for motorsports entertainment complexes

Other tax bills

Several tax-related bills may be taken up by either the House or Senate, including:

• RESPECT Act, passed by the House and waiting for a vote in the Senate, would limit the IRS’s ability to seize assets related to structured transactions
• FY 2018 IRS budget bill, passed by the House and waiting for a vote in Senate, which would fund the IRS for FY 2018

Please contact our office if you have any questions about tax reform, the extenders or other tax bills.

Under a flexible spending arrangement (FSA), an amount is credited to an account that is used to reimburse an employee, generally, for health care or dependent care expenses. The employer must maintain the FSA. Amounts may be contributed to the account under an employee salary reduction agreement or through employer contributions.

Use-it or lose-it

The general rule is that no contribution or benefit from an FSA may be carried over to a subsequent plan year. Unused benefits or contributions remaining at the end of the plan year (or at the end of a grace period) are forfeited. This is known as the “use it or lose it” rule. The plan cannot pay the unused benefits back to the employee, and cannot carry over the unused benefits to the following calendar year.

Example. An employer maintains a cafeteria plan with a health FSA. The plan does not have a grace period. Arthur, an employee, contributes $250 a month to the FSA, or a total of $3,000 for the calendar year. At the end of the year (December 31), Arthur has incurred medical expenses of only $1,200 and makes claims for those expenses. He has $1,800 of unused benefits. Under the “use it or lose it” rule, Arthur forfeits the $1,800. 

Grace period

Because the “use it or lose it” rule seemed harsh, the IRS gave employers the option to provide a grace period at the end of the calendar year. The grace period may extend for 2½ months, but must not extend beyond the 15^th day of the third month following the end of the plan year. Medical expenses incurred during the grace period may be reimbursed using contributions from the previous year.

Example. Beulah contributes $3,000 to her health FSA for 2010. The FSA is on January 1 through December 31 calendar year.  On December 31, 2010, Beulah has $1,800 of unused contributions. Her employer provides a grace period through March 15, 2011. On January 20, 2011, Beulah incurs $1,500 of additional medical expenses. Because these expenses were incurred during the grace period, Beulah can be reimbursed the $1,500 from her 2010 contributions. On March 15, 2011, she has $300 of unused benefits from 2010 and forfeits this amount.

Exceptions

There are other exceptions to the prohibition against deferred compensation within the operation of an FSA. A cafeteria plan is permitted, but not required, to reimburse employees for orthodontia services before the services are provided, even if the services will be provided over a period of two years or longer. The employee must be required to pay in advance to receive the services. 

Another exception is provided for durable medical equipment that has a useful life extending beyond the health FSA’s period of coverage (the calendar year, plus any grace period). For example, a health FSA is permitted to reimburse the cost of a wheelchair for an employee.

If you have any questions on setting up an FSA, whether as an employer or an employee, and which benefits must be covered and which are optional, please do not hesitate to call this office.

Whether a parent who employs his or her child in a family business must withhold FICA and pay FUTA taxes will depend on the age of the teenager, the amount of income the teenager earns and the type of business.

FICA and FUTA taxes

A child under age 18 working for a parent is not subject to FICA so long as the parent's business is a sole proprietorship or a partnership in which each partner is a parent of the child (if there are additional partners, the taxes must be withheld). FUTA does not have to be paid until the child reaches age 21. These rules apply to a child's services in a trade or business.

If the child's services are for other than a trade or business, such as domestic work in the parent's private home, FICA and FUTA taxes do not apply until the child reaches 21.

The rules are also different if the child is employed by a corporation controlled by his or her parent. In this case, FICA and FUTA taxes must be paid.

Federal income taxes

Federal income taxes should be withheld, regardless of the age of the child, unless the child is subject to an exemption. Students are not automatically exempt, though. The teenager has to show that he or she expects no federal income tax liability for the current tax year and that the teenager had no income tax liability the prior tax year either. Additionally, the teenager cannot claim an exemption from withholding if he or she can be claimed as a dependent on another person's return, has more than $250 unearned income, and has income from both earned and unearned sources totaling more than $800.

Bona fide employee

Remember also, that whenever a parent employs his or her child, the child must be a bona fide employee, and the employer-employee relationship must be established or the IRS will not allow the business expense deduction for the child's wages or salary. To establish a standard employer-employee relationship, the parent should assign regular duties and hours to the child, and the pay must be reasonable with the industry norm for the work. Too generous pay will be disallowed by the IRS.

If you pay for domestic-type services in your home, you may be considered a "domestic employer" for purposes of employment taxes. As a domestic employer, you in turn may be required to report, withhold, and pay social security and Medicare taxes (FICA taxes), pay federal unemployment tax (FUTA), or both.

The tax on household employees is often referred to as "the nanny tax." However, the "nanny tax" isn't confined to nannies. It applies to any type of "domestic" or "household" help, including babysitters, cleaning people, housekeepers, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. Excluded from this category are self-employed workers who control what work is done and workers who are employed by a service company that charges you a fee.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What and when you need to pay

If you pay cash wages of $1,700 or more in 2009 to any one household employee, then you must withhold and pay social security and Medicare taxes (FICA taxes). The taxes are 15.3 percent of cash wages. Your employee's share is 7.65 percent (you can choose to pay it yourself and not withhold it). Your share is a matching 7.65 percent.

If you pay total cash wages of $1,000 or more in any calendar quarter of 2008 or 2009 to household employees, then you must pay federal unemployment tax. The tax is usually 0.8 percent of cash wages. Wages over $7,000 a year per employee are not taxed. You also may owe state unemployment tax.

The $1,700 threshold

If you pay the domestic employee less than $1,700 (an inflation adjusted amount applicable for 2009), in cash wages in 2009, or if you pay an individual under age 18, such as a babysitter, irrespective of amount, none of the wages you pay the employee are social security and Medicare wages and neither you nor your employee will owe social security or Medicare tax on those wages.You need not report anything to the IRS.

If you pay the $1,700 threshold amount or more to any single household employee (other than your spouse, your child under 21, parent, or employee who under 18 at any time during the year) then you must withhold and pay FICA taxes on that employee. Once the threshold amount is exceeded, the FICA tax applies to all wages, not only to the excess.

As a household employer, you must pay, at the time you file your personal tax return for the year (or through estimated tax payments, if applicable), the 7.65 percent "employer's share" of FICA tax on the wages of household help earning $1,700 or more. You also must remit the 7.65 percent "employee's share" of the FICA tax that you are required to withhold from your employee's wage payments. The total rate for the employer and nanny's share, therefore, comes to 15.3 percent.

Withholding and filing obligations

Most household employers who anticipate exceeding the $1,700 limit start withholding right away at the beginning of the year. Many household employers also simply absorb the employee's share rather than try to collect from the employee if the $1,700 threshold was initially not expected to be passed. Domestic employers with an employee earning $1,700 or more also must file Form W-3, Transmittal of Wage and Tax Statements, and provide Form W-2 to the employee.

Household employers report and pay employment taxes on cash wages paid to household employees on Form 1040, U.S. Individual Income Tax Return, Schedule H, Household Employment Taxes. These taxes are due April 15 with your regular annual individual income tax return. In addition, FUTA (unemployment) tax information is reported on Schedule H. If you paid a household worker more than $1,000 in any calendar quarter in the current or prior year, as an employer you must pay a 6.2 percent FUTA tax up to the first $7,000 of wages.

Household employers must use an employer identification number (EIN), rather than their social security number, when reporting these taxes, even when reporting them on the individual tax return. Sole proprietors and farmers can include employment taxes for household employees on their business returns. Schedule H is not to be used if the taxpayer chooses to pay the employment taxes of a household employee with business or farm employment taxes, on a quarterly basis.

Deciding who is an employee is not easy. If you have any further questions about how to comply with the tax laws in connection with household help, please feel free to call this office.

With all the different tax breaks for taxpayers with children - from the Earned Income Tax Credit (EITC) to the dependent care and child tax credits - you may be wondering who exactly is a "child" for purposes of these incentives. Is there a uniform definition in the Tax Code, or does the definition of a "child" vary according to each tax break?

Generally, a qualifying child for purposes of each tax break requires four tests to be met: relationship, age, residency, and citizenship. This article discusses the definition of "child" for purposes of the EITC, dependent care credit, child tax credit, and dependency exemption.

Child Tax Credit

The child tax credit provides eligible individuals to take an income tax credit of $1,000 for each qualifying child under the age of 17 at the end of the calendar year. The child tax credit is refundable for some taxpayers, but is phased-out for higher-income taxpayers. For purposes of the child tax credit, a qualifying "child" is a child who:

-- Is under the age of 17 at the close of the calendar year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person;

-- Lives with you for more than half of the tax year; and

-- Is a U.S. citizen, U.S. resident or U.S. national.

Child and Dependent Care Credit

Taxpayers who incur expenses to care for a child under the age of 13 (or for an incapacitated dependent or spouse) in order to work or look for work can claim the child and dependent care credit, which equals 20 percent to 35 percent of employment-related expenses. Both dollar and earned income limits on creditable expenses apply. For purposes of the child and dependent care credit, a qualifying "child" is generally a child who:

-- Is under the age of 13 when the care was provided;

-- Lives with you for more than half of the tax year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person; and

-- Did not provide more than half of his or her own support for the year.

Earned Income Tax Credit

Eligible lower-income taxpayers with earned income can qualify for the refundable Earned Income Tax Credit (EITC). The credit is phased in as earned income increases, and phased out after earned income exceeds the applicable ceiling. The ceilings and thresholds vary based on the number of the taxpayer's qualifying children. A qualifying "child" for purposes of the EITC is generally a child who:

-- Is under the age of 19, under the age of 24 if a full time-student, at the end of the year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person; and

-- Lived with you in the U.S. for more than half of the year.

Dependency Exemption

For purposes of the dependency exemption, a qualifying child is generally a child who:

-- Is under the age of 19, or under age 24 if a full-time student, at the end of the year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person;

-- Lived with you with you for more than half of a year; and

-- Did not provide more than half of his or her own support for the year.

If you have questions about any of these tax breaks, please call our office. We can help determine if you are eligible for these and other tax incentives related to your children.

The American Jobs Creation Act of 2004 (2004 Jobs Act) changed the rules for start-up expenses in both favorable and unfavorable ways. Start-up expenditures are amounts that would have been deductible as trade or business expenses, had they not been paid or incurred before the business began. Prior to the 2004 Jobs Act, a taxpayer had to file an election to amortize start-up expenditures over a period of not less than 60 months, no later than the due date for the tax year in which the trade or business begins.

Effective for amounts paid or incurred after October 22, 2004, the new law allows taxpayers to elect to deduct up to $5,000 of start-up expenditures in the tax year in which their trade or business begins. The $5,000 amount must be reduced (but not below zero) by the amount by which the start-up expenditures exceed $50,000. The remainder of any start-up expenditures, those that are not deductible in the year in which the trade or business begins, must be ratably amortized over the 180-month period (15 years) beginning with the month in which the active trade or business begins. Similar rules apply to organizational expenses incurred by corporations.

Partnerships may also elect to deduct up to $5,000 of their organizational expenditures, reduced by the amount by which such expenditures exceed $50,000, for the tax year in which the partnership begins business. The remainder of any organizational expenses can be deducted ratably over the 180-month period beginning with the month in which the partnership begins business.

The new provision benefits smaller businesses that have around $5,000 of start-up or organizational expenditures. Larger start-ups, however, will now be required to amortize most or all of these expenses over 15 years rather than the five-year period provided under the prior rules.

In certain cases, tax planning may be useful in defining a new line of business as the continuation of any existing business rather than the start of a new business. In other situations, getting an immediate $5,000 write off is the best possible scenario. If you are thinking of starting a new business or a new business undertaking, this office may be able to help you structure your start-up expenses in the best possible tax situation.

Most homeowners have found that over the past five to ten years, real estate -especially the home in which they live-- has proven to be a great investment. When the 1997 Tax Law passed, most homeowners assumed that the eventual sale of their home would be tax free. At that time, Congress exempted from tax at least $250,000 of gain on the sale of a principal residence; $500,000 if a joint return was filed. Now, those exemption amounts, which are not adjusted for inflation, don't seem too generous for many homeowners.

What can be done?

Keeping lots of receipts is one answer! Remember, it will be the gain on your home that is potentially taxable, not full sale price. Gain is equal to net sales price minus an amount equal to the price you paid for your house (including mortgage debt) plus the cost of any improvements made over the years. Bottom line: If your residence has gain that will otherwise be taxed, you will get around 30 percent back on the cost of the improvements (assume your tax bracket is about 30 percent when you sell), simply by keeping good records of those improvements.

The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments

How your home was acquired will need to be considered when determining its original cost basis.

Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.

Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you.

Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.

Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.

If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.

An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements cannot be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio. It doesn't need to be a big project, however, just relatively permanent. For example, putting in a skylight or a new kitchen sink qualifies.

Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs do not add to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.

Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:

• Insurance reimbursements for casualty losses.
• Deductible casualty losses that aren't covered by insurance.
• Payments received for easement or right-of-way granted.
• Deferred gain(s) on previous home sales before 1998.
• Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.

In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale).