Contributions to Trump accounts will be treated as completed gifts that are not future interests in property and the gift tax annual exclusion amount will apply under a safe harbor for certain donors making contributions to Trump accounts created under Code Sec. 530A.

Contributions to Trump accounts will be treated as completed gifts that are not future interests in property and the gift tax annual exclusion amount will apply under a safe harbor for certain donors making contributions to Trump accounts created under Code Sec. 530A.

Pursuant to the rules of Code Sec. 530A, distributions from Trump accounts are limited during the growth period, which is the period ending on January 1 of the year in which the account beneficiary attains age 18. During the growth period, annual contributions are limited to $5,000 per year, as adjusted for inflation after 2027. Gifts of future interests in property are not eligible for the annual gift tax exclusion and must be reported on a federal gift tax return.

The safe harbor applies for a particular year if the following requirements of section 4.02 are met:

• The taxpayer is an individual;
• The only taxable gifts made by the taxpayer during the calendar year are cash contributions to one or more Trump accounts, each made before the calendar year in which the account beneficiary attains age 18;
• The taxpayer's total gifts during the calendar year to each individual who is an account beneficiary, including contributions to that individual beneficiary's Trump account, do not exceed the Code Sec. 2503(b) annual exclusion;
• Such contributions to Trump accounts during the calendar year do not generate for that year either a gift or generation-skipping transfer (GST) tax liability after application of the taxpayer's remaining applicable credit amount against the gift tax or remaining GST exemption; and
• Disregarding the Trump account contributions described in section 4.02(2) of the revenue procedure, a gift tax return is not required to be filed, and no gift tax return is otherwise filed for that calendar year by or on behalf of the taxpayer for any other purposes.

If these requirements are satisfied, each Trump account contribution made by the taxpayer during the calendar year will be treated as a completed gift to the account beneficiary that is not a future interest in property and to which the annual exclusion applies for purposes of gift and GST tax reporting. As a result, taxpayers within the scope of the safe harbor will not be required to file a gift tax return reporting the such contributions.

Rev. Proc. 2026-25

IR 2026-80

The IRS has issued final regulations identifying certain Charitable Remainder Annuity Trust (CRAT) transactions and substantially similar transactions as listed transactions subject to the reportable transaction disclosure rules. The regulations require participants and material advisors to disclose these transactions to the IRS while clarifying that charitable organizations whose only interest is as charitable remaindermen are not treated as participants or parties to prohibited tax shelter transactions. The regulations are effective July 9, 2026.

The IRS has issued final regulations identifying certain Charitable Remainder Annuity Trust (CRAT) transactions and substantially similar transactions as listed transactions subject to the reportable transaction disclosure rules. The regulations require participants and material advisors to disclose these transactions to the IRS while clarifying that charitable organizations whose only interest is as charitable remaindermen are not treated as participants or parties to prohibited tax shelter transactions. The regulations are effective July 9, 2026.

Under Code Secs. 6011 and 6707A, the IRS may identify transactions with tax avoidance potential as listed transactions. The final regulations add Reg. §1.6011-15, identifying transactions in which appreciated property is contributed to a purported CRAT, sold by the trust, and the sale proceeds are used to purchase an annuity, with the beneficiary improperly treating the annuity payments under Code Sec. 72 instead of applying the distribution ordering rules of Code Sec. 664(b).

Although participants and material advisors remain subject to the applicable disclosure requirements, organizations described in Code Sec. 170(c) that merely receive the charitable remainder interest are excluded from participant status and are not treated as parties to prohibited tax shelter transactions under Code Sec. 4965 solely because of that interest. The IRS finalized the regulations without substantive changes from the proposed regulations issued in 2024.

T.D. 10051

IR 2026-82

A portion of litigation settlement proceeds consisting of attorney’s fees and costs was includible in the gross income of two individuals (taxpayers). Said portion was not deductible under Code Sec. 62(a)(20). The Fair Credit Reporting Act’s (FCRA) (P.L. 91-508) fee-shifting provisions were inapplicable in this case.

A portion of litigation settlement proceeds consisting of attorney’s fees and costs was includible in the gross income of two individuals (taxpayers). Said portion was not deductible under Code Sec. 62(a)(20). The Fair Credit Reporting Act’s (FCRA) (P.L. 91-508) fee-shifting provisions were inapplicable in this case.

Background

The taxpayers sued multiple credit reporting agencies under FCRA provisions. They eventually settled with each agency. In all relevant Forms 1099–MISC the settlement amounts were reflected without the attorney’s fees and costs.

Civil Rights Interpretation for FCRA Claims Denied

The taxpayers’ FCRA claims of unlawful discrimination did not fall under Code Sec. 62(e)(18)(i). Said claims were based on fair and accurate credit reporting and not consumer privacy. Particularly, the taxpayers’ concerns did not fall under “highly sensitive” and “intimate personal information” categories.

J.W. Eiler, 167 T.C. No. 3, Dec. 62,865

The IRS has reminded taxpayers that major life events can affect tax filing requirements, eligibility for tax benefits and the amount of tax withheld from paychecks. The agency explained that changes such as marriage, the birth or adoption of a child, divorce or the death of a loved one may require updates to tax information and a review of filing status.

The IRS has reminded taxpayers that major life events can affect tax filing requirements, eligibility for tax benefits and the amount of tax withheld from paychecks. The agency explained that changes such as marriage, the birth or adoption of a child, divorce or the death of a loved one may require updates to tax information and a review of filing status. A name change following marriage should be reported to the Social Security Administration so the updated name matches Social Security records. An address change should be reported to the IRS by filing Form 8822, Change of Address, and employers, financial institutions and the U.S. Postal Service should also be notified. Marriage may also require submission of a new Form W-4, Employee's Withholding Certificate, to ensure the correct amount of tax is withheld.

Additionally, the IRS noted that the birth or adoption of a child may make a taxpayer eligible for valuable tax benefits, including the Child Tax Credit, Adoption Credit and Child and Dependent Care Credit, if applicable requirements are satisfied. Divorce or the death of a spouse may also affect filing status, tax withholding and eligibility for certain tax benefits. The IRS encouraged prompt updates to tax records, careful evaluation of changes affecting tax obligations and use of available IRS resources to better understand the tax consequences of major life events. Early action can help avoid filing issues, support accurate tax reporting, maximize available tax benefits and improve preparation for the next tax filing season.

IRS Tax Tip 2026-55

The Internal Revenue Service received and processed less returns during 2026, according to the Treasury Inspector General for Tax Administration.

The Internal Revenue Service received and processed less returns during 2026, according to the Treasury Inspector General for Tax Administration.

In a recently released report, TIGTA stated that from March 1, 2025, through February 28, 2026, the IRS received 51.5 million tax returns, down from 52. 4 million in the previous year, though it did see a significant drop in paper returns received from 1.2 million in 2025 to 618,000 in 2026. Of the returns received in 2026, the agency processed 50.9 million returns, down from 51.8 million.

From the beginning of the 2026 tax filing season to the end of February 2026, TIGTA reported that the inventory backlog in key tax return processing programs increased from 1.9 million to 2.4 million. Additionally, nearly 75 percent of the amended return inventory is over-aged during the 2026 tax filing season.

“Generally, inventories increase during the filing season as the IRS balances efforts to answer phone calls and reduce inventories,” TIGTA stated in the report. “However, with the reduction in staff, increases in key inventories could become a concern.”

The number of refunds dipped to 36.5 million from 36.9 million, although there was a $360 increase in the average refund from $3,382 in 2025 to $3,742.

TIGTA also reported that the IRS did not meet its hiring goals for the 2026 tax filing season. The agency had been approved to hire 1,900 employees for submission processing (these workers process original and amended returns and resolve tax return errors) but only onboarded 800 individuals. Likewise, it was approved to hire 3,500 account management employees (handlers of taxpayer contacts through telephone and mail and process adjustments) but brought 2,300 on board.

Submission processing management said it would be onboarding new hires throughout the tax season, while account management leadership had no plans to hire new employees and would only be onboarding those who previously received offers but had delays in the hiring process.

In a positive from the 2026 season, TIGTA reported that the new and modified “e-file business rules associated with the child tax Credit, state and local tax deduction, and adoption credit are working as intended.”

Taxpayer Assistance Centers offered incorrect tax guidance during nearly half of unannounced visits by Treasury Inspector General for Tax Administration staff.

Taxpayer Assistance Centers offered incorrect tax guidance during nearly half of unannounced visits by Treasury Inspector General for Tax Administration staff.

According to a recent TIGTA report, during the 2025 tax filing season, the Treasury watchdog made 91 unannounced visits to TACs nationwide at various time (regular and extended hours), at the 61 visits where TIGTA staff did receive assistance, “TAC employees did not provide the correct tax law guidance during 28 of those visits (46 percent).”

TAC employees were presented with questions across one of the three areas – injured spouse, selling your main home, and American Opportunity Tax Credit. The report notes that for questions related to tax law topics, “TAC employees must use the Interactive Tax Law Assistant ITLA) tool to respond to taxpayers. The ITLA tool asks a series of questions, then generates accurate and complete responses based on the taxpayer’s situation. The tool is designed for TAC employees and is intended to improve operational performance in the areas of quality, efficiency, customers satisfaction, and employee satisfaction.”

TIGTA noted that during the 2025 filing season, “managers counseled several TAC employees for not using the ITLA tool during taxpayer interactions. During our site visits, we also observed that TAC employees did not always the ITLA tool to answer our tax law questions.”

Additionally, of those 91 visits, TIGTA “did not receive full assistance during 30 of our 91 visits due to incomplete or inaccurate responses to tax law questions, denial of entry by security or unexpected TAC closures.”

The small business health insurance tax credit, created by the health care reform package, rewards employers that offer health insurance to their employees with a tax break. The credit is targeted to small employers; generally employers with 25 or fewer employees. In May 2010, the IRS issued Notice 2010-44, which describes the steps employers take to determine eligibility for the credit and how to calculate the credit.

Initial steps

1. Determine the employees taken into account for purposes of the credit.

Generally, any employee who performs services for you during the tax year is taken into account in determining your full-time employees (FTEs), average wages, and premiums paid. However partners and certain business owners are excluded. Additionally, family members of these owners and partners are also not taken into account as employees.

Example. A partnership employs five individuals, including one of the partners, Elise, and her spouse, Ron. For purposes of the credit, Elise and Ron are not taken into account as employees in determining the number of FTEs for purposes of the credit.

2. Determine the number of hours of service performed by those employees.

An employee's hours of service include (1) each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer during the employer's tax year; and (2) each hour for which an employee is paid, or entitled to payment, by the employer on account of vacation, holiday, illness, and similar events. The IRS allows you to use one of three alternative methods to calculate hours of service: (1) actual hours of service; (2) days-worked equivalency; or (3) weeks-worked equivalency.

Example. Priscilla is an employee of ABC Co. ABC's payroll records show that Priscilla worked 2,000 hours and was paid for an additional 80 hours on account of vacation, holiday and illness in 2010. Priscilla performed 2,080 hours of service.

3. Calculate the number of full-time equivalent (FTE) employees.

Employers use a formula to calculate the number of FTEs. Total hours of service credited during the year to qualified employees (but not more than 2,080 hours for any employee) are divided by 2,080. The result, if not a whole number, is then rounded to the next lowest whole number.

Example. An employer pays five employees wages for 2,080 hours each, pays three employees wages for 1,040 hours each, and pays one employee wages for 2,300 hours. The employer's FTEs would be calculated as follows:

(1) Total hours of service not exceeding 2,080 per employee is the sum of:

(a) 10,400 hours of service for the five employees paid for 2,080 hours each (5 x 2,080);

(b) 3,120 hours of service for the three employees paid for 1,040 hours each (3 x 1,040); and

(c) 2,080 hours of service for the one employee paid for 2,300 hours (the lesser of 2,300 and 2,080).

The sum of (a), (b) and (c) equals 15,600 hours of service.

(2) The hours of service -- 15,600 -- are divided by 2,080, which equals 7.5. That number is rounded to the next lowest whole number, which is seven. The employer has seven FTEs.

4. Determine the average annual wages paid per FTE.

Employers also use a formula to determine average annual wages paid for a tax year. The amount of total wages paid to qualified employees is divided by the number of the employer's FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000).

Example. XYZ Co. has 10 FTEs and pays average annual wages of $224,000 for the 2010 tax year. The amount of XYZ's average annual wages is $224,000 divided by 10, which equals $22,400. When rounded down to the nearest $1,000, is $22,000.

5. Determine the amount of premiums paid by the employer.

Only premiums paid by the employer for health insurance coverage are counted in calculating the credit. If an employer pays only a portion of the premiums for the coverage provided to employees (with employees paying the rest), only the portion paid by the employer is taken into account.

However, an employer's premium payments are not taken into account for purposes of the credit unless the payments are for health insurance coverage under a qualifying arrangement. Generally, this is an arrangement under which the employer pays premiums for each employee enrolled in health insurance coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.

Additionally, the amount of an employer's premium payments taken into account in calculating the credit is limited to the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the state (or an area within the state) in which the employer offers coverage were substituted for the actual premium.

Example. MNO Co. offers a health insurance plan with single and family coverage to its nine FTEs with average annual wages of $23,000 per FTE. Four employees are enrolled in single coverage and five are enrolled in family coverage.

MNO pays 50 percent of the premiums for all employees enrolled in single coverage and 50 percent of the premiums for all employees enrolled in family coverage. The premiums are $4,000 a year for single coverage and $10,000 a year for family coverage. The average premium for the small group market in employer's State is $5,000 for single coverage and $12,000 for family coverage.

MNO's premium payments for each FTE ($2,000 for single coverage and $5,000 for family coverage) do not exceed 50 percent of the average premium for the small group market in employer's state ($2,500 for single coverage and $6,000 for family coverage).

The amount of premiums paid by the employer for purposes of computing the credit equals $33,000 ((4 x $2,000) + (5 x $5,000) = $33,000).

Calculating the credit

After determining eligibility for the credit, employers calculate the amount of their credit. The maximum credit is 35 percent for employers with 10 or fewer FTEs paying average annual wages of not more than $25,000. The maximum credit for a tax-exempt employer is 25 percent. The maximum 35 percent and 25 percent credits are available for 2010 through 2013. The maximum amounts rise for 2014 and 2015, but at that time the credit is linked to an employer's participation in a state insurance exchange.

The credit is subject to phase-out. The credit is reduced by 6.667 percent for each FTE in excess of 10 employees and by four percent for each $1,000 that average annual compensation paid to an employee exceeds $25,000.

The following examples illustrate calculation of the credit:

Small for-profit employer

PRS Co. employs nine FTEs with average annual wages of $23,000 per FTE for the 2010 tax year. PRS pays $72,000 in health insurance premiums for those employees (which does not exceed the average premium for the small group market in the employer's state) and otherwise meets the requirements for the credit. PRS's credit for 2010 is $25,200 (35 percent x $72,000).

Small tax-exempt employer

TUV employs 10 FTES with average annual wages of $21,000 per FTE for the 2010 tax year. TUV pays $80,000 in health insurance premiums for its employees (which does not exceed the average premium for the small group market in the employer's state) and otherwise meets the requirements for the credit. The total amount of the employer's income tax and Medicare tax withholding plus the employer's share of the Medicare tax equals $30,000 in 2010.

The credit is calculated as follows: (1) The initial amount of the credit is determined before any reduction: (25 percent x $80,000) = $20,000; (2) The employer's withholding and Medicare taxes are $30,000; (3) the total 2010 tax credit equals $20,000 (the lesser of $20,000 and $30,000).

We've covered a lot of material. Please contact our office if you have any questions about the small employer health insurance tax credit.

The health care reform package (the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010) imposes a new 3.8 percent Medicare contribution tax on the investment income of higher-income individuals. Although the tax does not take effect until 2013, it is not too soon to examine methods to lessen the impact of the tax.

Net investment income

"Net investment income" includes interest, dividends, annuities, royalties and rents and other gross income attributable to a passive activity. Gains from the sale of property not used in an active business and income from the investment of working capital are also treated as investment income. Further, an individual's capital gains income will be subject to the tax. This includes gain from the sale of a principal residence, unless the gain is excluded from income under Code Sec. 121, and gains from the sale of a vacation home. However, contemplated sales made before 2013 would avoid the tax.

The tax applies to estates and trusts, on the lesser of undistributed net income or the excess of the trust/estate adjusted gross income (AGI) over the threshold amount ($11,200) for the highest tax bracket for trusts and estates, and to investment income they distribute.

However, the tax will not apply to nontaxable income, such as tax-exempt interest or veterans' benefits.

Deductions

Net investment income is gross income or net gain, reduced by deductions that are "properly allocable" to the income or gain. This is a key term that the Treasury Department expects to address in guidance, and which we will update on developments. For passively-managed real property, allocable expenses will still include depreciation and operating expenses. Indirect expenses such as tax preparation fees may also qualify.

For capital gain property, this formula puts a premium on keeping tabs on amounts that increase your property's basis. It also focuses on investment expenses that may reduce net gains: interest on loans to purchase investments, investment counsel and advice, and fees to collect income. Other costs, such as brokers' fees, may increase basis or reduce the amount realized from an investment. As such, taxpayers may want to consider avoiding installment sales with net capital gains (and interest) running past 2012.

Thresholds

The tax applies to the lesser of net investment income or modified AGI above $200,000 for individuals and heads of household, $250,000 for joint filers and surviving spouses, and $125,000 for married filing separately. MAGI is your AGI increased by any foreign earned income otherwise excluded under Code Sec. 911; MAGI is the same as AGI for someone who does not work overseas.

Example. Jim, a single individual, has modified AGI of $220,000 and net investment income of $40,000. The tax applies to the lesser of (i) net investment income ($40,000) or (ii) modified AGI ($220,000) over the threshold amount for an individual ($200,000), or $20,000. The tax is 3.8 percent of $20,000, or $760. In this case, the tax is not applied to the entire $40,000 of investment income.

Exceptions to the tax

Certain items and taxpayers are not subject to the 3.8 percent Medicare tax. A significant exception applies to distributions from qualified plans, 401(k) plans, tax-sheltered annuities, individual retirement accounts (IRAs), and eligible 457 plans. There is no exception for distributions from nonqualified deferred compensation plans subject to Code Sec. 409A. However, distributions from these plans (including amounts deemed as interest) are generally treated as compensation, not as investment income.

The exception for distributions from retirement plans suggests that potentially taxable investors may want to shift wages and investments to retirement plans such as 401(k) plans, 403(b) annuities, and IRAs, or to 409A deferred compensation plans. Increasing contributions will reduce income and may help you stay below the applicable thresholds. Small business owners may want to set up retirement plans, especially 401(k) plans, if they have not yet established a plan, and should consider increasing their contributions to existing plans.

Another exception is provided for income ordinarily derived from a trade or business that is not a passive activity under Code Sec. 469, such as a sole proprietorship. Investment income from an active trade or business is also excluded. However, SECA (Self-Employment Contributions Act) tax will still apply to proprietors and partners. Income from trading in financial instruments and commodities is also subject to the tax.

The additional 3.8 percent Medicare tax does not apply to income from the sale of an interest in a partnership or S corporation, to the extent that gain of the entity's property would be from an active trade or business. The tax also does not apply to business entities (such as corporations and limited liability companies), nonresident aliens (NRAs), charitable trusts that are tax-exempt, and charitable remainder trusts that are nontaxable under Code Sec. 664.

Income tax rates

In addition to the tax on investment income, certain other tax increases proposed by the Obama administration may take effect in 2011. The top two marginal income tax rates on individuals would rise from 33 and 35 percent to 36 and 39.6 percent, respectively. The maximum tax rate on long-term capital gains would increase from 15 percent to 20 percent. Moreover, dividends, which are currently capped at the 15 percent long-term capital gain rate, would be taxed as ordinary income. Thus, the cumulative rate on capital gains would increase to 23.8 percent in 2013, and the rate on dividends would jump to as much as 43.4 percent. Moreover, the thresholds are not indexed for inflation, so more taxpayers may be affected as time elapses.

Please contact our office if you would like to discuss the tax consequences to your investments of the new 3.8 percent Medicare tax on investment income.

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

Shared responsibility

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

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

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

Individual responsibility

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

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

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

Amount of penalty

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

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

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

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

Health insurance tax credits

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

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

Adult children

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

Guidance

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

On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act. The $18 billion HIRE Act is expected to be the first of several "jobs" bills out of Congress in 2010. The new law encourages companies to hire unemployed workers and also retain existing workers by providing two key tax incentives: payroll tax relief and a worker retention tax credit. Employers can take a tax credit of up to $1,000 for the year if they hire an unemployed worker and retain the new worker for at least one year.

Payroll tax forgiveness

The Federal Insurance Contributions Act (FICA) is made up of two taxes: Old-Age, Survivors and Disability Insurance (OASDI) (Social Security) and hospital insurance (HI)(Medicare). Employers pay OASDI tax equal to 6.2 percent of an employee's taxable wages up to $106,800. The HIRE Act temporarily lifts the employer's 6.2 percent OASDI tax.

The covered employee must be on the employer's payroll after February 3, 2010 and before January 1, 2011. However, payroll tax forgiveness applies only to wages paid to covered employees after March 18, 2010 and before January 1, 2011.

Example #1. Ann is hired as a full-time employee working 40 hours each week by ABC Co. Ann's hire date is January 31, 2010. On March 19, ABC Co. hires Nate as a full-time employee working 40 hours each week. On April 30, ABC Co. hires Cai as a full-time employee working 40 hours each week. Ann is not a covered employee for purposes of the HIRE Act because she began employment with ABC Co. before February 3, 2010. Cai and Nate are covered employees under the HIRE Act because their start dates are after February 3, 2010 and they are on the company's payroll after March 18, 2010.

The HIRE Act requires that employees certify they had not been employed for more than 40 hours during the 60-day period ending on the date their employment with the qualified employer began. The IRS is developing a form that employers can use to obtain the certification from covered employees.

Example #2. In example #1, Cai and Nate were covered employees under the HIRE Act because their start dates with ABC Co. were after February 3, 2010 and they were on the payroll after March 18, 2010. Before coming to work for ABC Co., Cai was employed full-time (40 hours per week) by XYZ Co. between November 1, 2002 and April 29, 2010 (one day before her date of hire by ABC Co.). Consequently, Cai cannot certify that she had not been employed for more than 40 hours during the 60-day period ending on the date of her employment with ABC Co.

A covered employee must not replace another employee of the employer, with some exceptions. The exceptions cover employees who voluntarily quit and employees who are fired for cause. Additionally, the covered employee must not be related to the employer or own a certain share of the employer's business. Some employees, for example household employees, are expressly excluded from the HIRE Act.

Retained worker tax credit

As part of the general business credit, the HIRE Act allows employers to claim a worker retention credit. For each qualified employee, the employer's general business credit is increased by the lesser of $1,000 or 6.2 percent of the retained worker's wages paid during a 52-week consecutive period.

The covered employee must be on the employer's payroll after March 18 and continue in employment for at least 52 consecutive weeks. Additionally, the covered employee's wages during the last 26 weeks of the 52 consecutive week period must equal at least 80 percent of the wages paid during the first 26 weeks of that period.

Example #3. In example #1, Nate was a covered employee under the HIRE Act because his start date with ABC Co. was after February 3, 2010. Additionally, Nate qualified his employer for payroll tax forgiveness because he was on the company's payroll after March 18, 2010. At the close of business on September 24, 2010, Nate resigns from ABC Co. Consequently, ABC Co. may claim payroll tax forgiveness for Nate for the period between March 19, 2010 and September 24, 2010 but ABC Co. cannot claim the retained worker tax credit because Nate did not remain employed with the company for at least 52 consecutive weeks.

Employers will need to maintain careful records with respect to each new employee hired in order to show that the new worker qualifies the employer for the credit. It is presumed that the IRS will begin crafting a form to be used by employers in order to claim the credit.

Please contact our office if you have any questions about the HIRE Act. The business incentives are temporary, so don't delay.

Health care reform is now law and many employers are asking how does it affect my business and my employees? The first thing to keep in mind is that reform is gradual. The health care reforms and tax provisions in the new health care reform package play out over time, with some taking effect this year or next year but others not until 2014 and beyond. However, the health care package imposes significant new responsibilities and taxes on employers and individuals so it is not too early to start preparing.

Two new laws

Health care reform is actually made up of two new laws. The first is the Patient Protection and Affordable Care Act of 2010, signed by President Obama on March 23. The second is the Health Care and Education Reconciliation Act of 2010, signed by the president on March 26. The Patient Protection Act, which reflects the Senate's original health care reform bill, provides the overall framework for reform. The Reconciliation Act was drafted in the House to make changes to the Patient Protection Act, especially in the area of cost-sharing and in some of the revenue raisers.

Employer responsibility

The final health care package, unlike earlier versions, does not include an employer mandate. However, any employer with more than 50 full-time employees that does not offer health insurance and has at least one full-time employee receiving a premium assistance tax credit or cost-sharing will pay a per-employee penalty. An employer with more than 50 full-time employees that offers coverage that the government deems unaffordable or fails to meet minimum standards and has at least one full-time employee receiving a premium assistance tax credit or cost-sharing also will pay a per-employee penalty. Small employers with less than 50 employees will not be penalized in any case. The penalty rules apply starting in 2014.

Small employers that provide health insurance coverage are eligible for a new tax credit. A sliding scale tax credit is available immediately in 2010 for qualified small employers. The IRS is expected to make guidance for the new credit a priority. If your small business offers or is thinking of offering health insurance to your workers, the credit could generate significant cost-savings. Please contact our office and we can discuss the details of the credit in depth.

Individual responsibility

Unlike employers, individuals have a mandate under the health care reform package. Beginning in 2014, most individuals will be responsible for maintaining health insurance coverage for themselves and their dependents. If they do not have minimum essential coverage, they will be liable for a penalty.

The health care package excludes many individuals from the mandatory coverage requirement. Any individual or family who currently has coverage can retain that coverage under a "grandfather" provision. Individuals with incomes below the federal filing threshold, religious objectors, individuals covered by Medicaid and Medicare and others are also exempt.

The health care package provides a premium assistance tax credit and cost-sharing to help make coverage more affordable. The premium assistance tax credit is calculated on a sliding scale based on the individual's income in relation to the federal poverty level. Cost-sharing reduces the cost of coverage for qualified individuals. The premium assistance tax credit and cost-sharing generally will be available after 2013.

High-dollar plans

One of the principal revenue raisers to fund health care reform is a new excise tax on high-dollar health insurance plans. The health care reform package imposes an excise tax of 40 percent on insurance companies or plan administrators for any health insurance plan with an annual premium in excess of $10,200 for individuals and $27,500 for families. The excise tax applies to the amount in excess of the $10,200/$27,500 levels. The thresholds are higher for individuals in high-risk occupations and individuals over age 55. The excise tax will not kick in until 2018.

Medicare additional tax and surtax

Changes to the hospital insurance (HI)(Medicare) tax also fund health care reform. These changes impact higher-income individuals and families.

The health care reform package increases the Medicare tax by 0.9 percent for individuals who receive wages in excess of $200,000 (the threshold increases to $250,000 for married couples who file a joint federal income tax return). Additionally, the new law imposes a 3.8 percent surtax (called the Unearned Income Medicare Contribution) on investment income for individuals with adjusted gross incomes above $200,000 ($250,000 for married couples filing jointly). Investment income includes income from interest and dividends.

The additional Medicare tax on wages and the additional Medicare contribution on investment income take effect in 2013, so taxpayers have some time to prepare. Please contact our office for more details about how these tax changes may impact you.

Flexible spending arrangements

Flexible spending arrangements (FSAs) are a very popular way to save and pay for health care expenses. One of the most attractive features is the ability to use FSA dollars for over-the-counter medications. The health care reform package ends that feature after 2010.

In 2011 and subsequent years, FSA dollars can only be used to pay for prescription medications (with some limited exceptions). In 2013, the health care reform package limits the amount of contributions to health FSAs to $2,500 per year. The $2,500 amount will be indexed for inflation after 2013.

More provisions

The health care reform package als

• Increases the AGI threshold for claiming the itemized deduction for medical expenses for regular tax purposes to 10 percent after 2012 with a delayed effective date for seniors;
• Extends dependent coverage up to age 26;
• Expands Medicaid eligibility;
• Requires states to establish insurance exchanges to help individuals and small employers obtain coverage;
• Increases the additional tax on distributions from health savings accounts (HSAs) not used for qualified medical expenses;
• Eliminates the employer deduction for Medicare Part D;
• Imposes annual fees on pharmaceutical manufacturers and health insurance providers;
• Imposes an excise tax on medical device manufacturers;
• Requires more corporate information reporting;
• Imposes new requirements on non-profit hospitals;
• Accelerates some corporate estimated income taxes in 2014;
• Imposes an excise tax on indoor tanning services;
• Codifies the economic substance doctrine; and
• Modifies the biofuel credit.

In the coming months and years, the IRS and other federal agencies will issue many new rules and regulations to implement health care reform. Our office will keep you posted of developments, and, as always, please contact us if you have any questions.

As 2010 unfolds, small businesses are confronted with tax challenges and opportunities on many fronts. Lackluster consumer spending, combined with tight credit, has many small businesses in a holding pattern. Congress may respond with a new tax credit to encourage hiring. Small businesses are also faced with uncertainty over many temporary provisions in the federal Tax Code. Many of these incentives have expired. At the same time, small businesses are uncertain how health care reform, the fate of the federal estate tax and proposed retirement savings initiatives may impact them.

Hiring and retention tax credit

To encourage businesses to hire more workers, the Senate has passed a hiring and retention tax credit (Hiring Incentives to Restore Employment Act). The credit exempts employers from paying the 6.2 percent Social Security tax for qualified new hires up to the Social Security wage base of $106,800. The new hire must have been unemployed for at least 60 days and added to the employer's payroll before January 1, 2011. Employers would also be eligible for an additional $1,000 tax credit for each new hire that they keep on the payroll for at least 52 consecutive weeks.

The House has not scheduled a vote on the Senate's hiring and retention credit and it is unclear if it will. The House approved a jobs bill late last year (Jobs for Main Street Act, H.R. 2847), which does not include a hiring and retention credit.

Extenders

Businesses may be surprised that some of the tax breaks they took in 2009 are not available in 2010. That's because many of these popular business tax incentives are temporary and they expired at the end of 2009. They include the research tax credit, 15-year recovery periods for qualified leasehold improvement, restaurant, and retail improvement property, enhanced corporate contributions to qualified organizations, special incentives for producers of alternative energy, and others.

In December 2009, the House approved legislation extending these temporary business incentives through December 31, 2010 (Tax Extenders Act of 2009, H.R. 4213). The Senate, however, has yet to act on the House bill or vote on its own version of an extenders package. Traditionally, the extenders have been renewed but this year there is a chance that renewal may be later rather than sooner. High unemployment numbers have Congress focused on job creation. A growing number of lawmakers view many of the extenders as having little if any impact on immediate job creation in the private sector.

Expensing/bonus depreciation

Under a temporary provision expiring at the end of 2009, taxpayers could expense up to $250,000 in annual investment expenditures for qualified property. The maximum amount that could be expensed for property placed in service in 2009 was reduced by the amount that the qualified property exceeded $800,000. The Obama administration has proposed extending enhanced Code Sec. 179 expensing, with the $250,000/$800,000 threshold, through December 31, 2010. The Senate approved an extension in its jobs bill and the House approved an extension last year but the chambers have yet to approve the extension in a common bill that they can send to the White House for the president's signature.

Another expired pending incentive is bonus depreciation. Under a temporary provision, an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of the property was provided for qualified property acquired and placed in service before January 1, 2010. The Obama administration has proposed extending bonus depreciation through December 31, 2010. The House approved an extension last year but the Senate has not. There is growing sentiment among some senators that the extension of bonus depreciation into 2010 would be an expensive "budget buster" not worth the price tag.

Health care reform

Health care reform, which dominated the news in recent months, has been on the back burner as lawmakers have switched their attention to jobs. However, health care reform remains a priority of the Obama administration. Some form of a reform package may be enacted in 2010 and it could impose new mandates on employers.

The House health care reform bill (Affordable Health Care for America Act, H.R. 3962) would require employers to satisfy certain minimum coverage requirements. Otherwise, the employer would be liable for an additional payroll tax. Small employers, generally businesses with annual payrolls below $500,000, would be exempt. The Senate health care reform bill (Patient Protection and Affordable Care Act, H.R. 3590) does not require employers of any size to provide health insurance coverage.

Estate tax

Many small business owners are reviewing their estate plans after the federal estate tax expired January 1, 2010. Effective for decedents dying on and after January 1, 2010 and on or before December 31, 2010 the federal estate tax is replaced with a carryover basis regime. Generally, the income tax basis of property acquired from a decedent is carried over from the decedent. Executors may partially increase the basis of property by up to $1.3 million ($3 million in the case of property passing to a surviving spouse).

The House passed a bill late last year extending the 2009 estate tax into 2010 (Permanent Estate Tax Relief Bill of 2009, H.R. 4154). However, the Senate has not acted on the House bill. Democratic leaders have said the Senate will vote on an extension but have not laid out a timetable. If you have not reviewed your estate plans in light of the expiration of the federal estate tax, please contact our office.

Retirement plans

The Obama administration proposes requiring employers that do not currently offer a retirement plan to offer their employees automatic enrollment in an individual retirement account (IRA). Small businesses (generally employers with 10 or fewer employees) would be exempt from the proposed requirement. The administration's proposal would be effective for tax years beginning after January 1, 2011. Qualified employers would be eligible for a temporary tax credit of $25 for each employee up to a total credit of $250 per year for a maximum of two years.

At the same time, the administration proposes to enhance the existing tax incentive for small employers that establish a retirement plan. Under current law, employers with 100 or fewer employees that adopt a new qualified retirement plan are entitled to a temporary tax credit equal to 50 percent of their expenses to establish and administer the plan. The credit is limited to $500 per year for three years. The administration has asked Congress to double the tax credit to $1,000 per year for three years. The administration's proposal would be effective for tax years beginning after January 1, 2011.

Employment tax audits

In addition to trying to cope with the changing tax laws, small businesses should be aware that the IRS has identified their group as a target for vigorous tax audits. Recent surveys have confirmed for the IRS that the small business environment presents easy opportunities for some "bad apples" to cheat on their taxes. Armed with those statistics as justification, the IRS is now aggressively looking to small businesses to help close "the tax gap," the difference between what taxpayers owe and what is actually collected. One initial area of concern involves employment taxes.

The IRS recently launched a special study of employment tax compliance. The IRS will randomly audit 2,000 taxpayers, including small businesses, each year for the next three years. Employers selected for the study will receive notices from the IRS. According to the IRS, these examinations will be comprehensive, will look at all aspects of employment tax compliance, and will be used to form more effective criteria for auditing many more small businesses.

If you have any questions about the tax opportunities and challenges we have discussed, please contact our office.

People are buzzing about Roth Individual Retirement Accounts (IRAs). Unlike traditional IRAs, "qualified" distributions from a Roth IRA are tax-free, provided they are held for five years and are made after age 59 1/2, death or disability. You can establish a Roth IRA just as you would a traditional IRA. You can also convert assets in a traditional IRA to a Roth IRA.

Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert their traditional IRA (provided they were not married taxpayers filing separate returns). Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status.

Comment: While you can only contribute a maximum of $5,000 to a Roth IRA for 2010 (plus a $1,000 catch-up contribution if you are over age 50), you can convert an unlimited amount from a traditional IRA.

Conversion is treated as a taxable distribution of assets from the traditional IRA to the IRA holder, although it is not subject to the 10 percent tax on early distributions. While paying taxes on conversion is undesirable, the advantages of holding assets in a Roth IRA usually outweigh this disadvantage, especially if you will not be retiring soon. Furthermore, if you convert assets in 2010, you have the option of including them in income in 2011 and 2012 (50 percent each year) instead of 2010.

Comment: Generally, this income-splitting would be advantageous to any taxpayer who does not expect a sharp increase in income in 2011 or 2012. A wildcard factor is that the lower income tax rates that have been in effect since 2001 will expire after 2010 and could increase in 2011.

There are four ways to convert a traditional IRA to a Roth IRA:

• A rollover - you receive a distribution from a traditional IRA and roll it over to a Roth IRA within 60 days;
• Trustee-to-trustee transfer - you direct the trustee of the traditional IRA to transfer an amount to the trustee of a Roth IRA;
• Same-trustee transfer - the trustee of the traditional IRA transfers assets to a Roth IRA maintained by the same trustee; or
• Redesignation - you designate a traditional IRA as a Roth IRA, instead of opening a new Roth account.

Comment: The account holder does not have to convert all of the assets in the traditional IRA.

Another advantage of converting assets from a traditional IRA to a Roth IRA is that you can change your mind and put the assets back into the traditional IRA. This is known as a recharacterization. You have until the due date, with extensions, for the return filed for the year of conversion. Thus, if you convert assets in 2010, you have until mid-October in 2011 to undo the conversion.

This ability to recharacterize the conversion allows you to use hindsight to check whether your assets declined in value after the conversion. Since you are paying taxes on the amount converted, a decline in asset value means that you paid taxes on phantom income that no longer exists. However, if you convert assets into multiple Roth IRAs, you can choose to recharacterize the assets in a Roth IRA that decreased in value, while maintaining the conversion for a Roth IRA's assets that appreciated in value.

The use of a Roth IRA can be a savvy investment, but whether to convert assets is not an easy decision. If you would like to explore your options, please contact this office.