Congress needs to do more to protect taxpayers in the wake of the Supreme Court’s decision in the Commissioner of the Internal Revenue Service v. Zuch, National Taxpayer Advocate stated in a recent blog post.

Congress needs to do more to protect taxpayers in the wake of the Supreme Court’s decision in the Commissioner of the Internal Revenue Service v. Zuch, National Taxpayer Advocate stated in a recent blog post.

NTA Erin Collins noted in the post that Congress in 1998 created the collection due process (CDP) “to give taxpayers a meaningful opportunity to contest proposed levies and Notices of Federal Tax Lien,” allowing them to request a hearing with appeals and possibly petition the tax court.

The Supreme Court decision, according to Collins, “adopted a narrow view of the Tax Court’s review in a CDP case, holding that the Tax Court’s jurisdiction under IRC Sec. 6330(d)(1) terminates once the lien or levy is no longer at issue.” She cited Justice Neil Gorsuch’s dissent noting that “under this approach, the IRS can cut off Tax Court review by choosing when and how to collect. He also noted that telling taxpayers to file a refund suit instead is often unrealistic, especially when strict refund claim deadlines have expired while CDP and Tax Court proceedings are still pending.”

Collins noted that the Supreme Court decision and an earlier Tax Court order “reveal serious gaps in the protections Congress intended CDP to provide. They make CDP and Tax Court an unreliable path to a merits-based solution. A taxpayer can do everything right: request a CDO hearing, raise issues with Appeals, and timely petition the Tax Court yet still never receive a final determination on what they owe if, for example, the IRS fully collects through offsets or accepts an OIC and then declares that a levy is no longer warranted.”

She added that “the fallback remedy of refund litigation may not grant a taxpayer full relief … which is an unrealistic option for many small businesses and individuals. … Zuch raises due process concerns when collection action is withdrawn. A taxpayer typically receives only one CDP hearing for a given tax period and type of collection action. If the IRS abandons collection after that hearing and later restarts collection on the same liabilities, the taxpayer may not get a second CDP hearing with Tax Court review, but only an IRS ‘equivalent hearing,’ which does not provide a right to Tax Court review.”

Collins noted that Congress has begun to take steps to remedy this with the House of Representatives’ introduction of the Taxpayer Due Process Enhancement Act (H.R. 6506), including clarifying and expanding Tax Court jurisdiction in CDP cases, ensuring that jurisdiction over a properly underlying liability challenges whether the collection is abandoned, protects refund rights, and prohibits the IRS from crediting the overpayment against other liabilities without taxpayer consent.

However, she is calling for more Congressional action to address the “one hearing” limitation.

“Congress should create an exception to the ‘one hearing’ limitation for cases when the IRS withdraws or abandons collection,” Collins stated in the blog. “If the IRS has effectively reset the collection episode by withdrawing or abandoning the prior levy or lien and later initiates the same collection action for the same tax period, taxpayers should be entitled to a new CDP hearing with the full protections of IRC Sec. 6330, including Tax Court review.”

She added that Congress “should also ensure that taxpayers are not permanently barred from CDP when the IRS withdraws and later restarts collection and the Tax Court has clear authority to grant meaningful relief when the IRS has already collected more than the correct amount.”

The IRS has provided interim guidance addressing the special 100 percent bonus depreciation allowance for qualified production property enacted by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). The interim guidance provides the definition of qualified production property, qualified production activities, and other related terms. It also establishes a safe harbor for property placed in service in 2025, provides instructions for the time and manner for electing the 100-percent depreciation allowance, and addresses recapture and certain special rules. Taxpayers may rely on the interim guidance until the Treasury Department issues proposed regulations.

The IRS has provided interim guidance addressing the special 100 percent bonus depreciation allowance for qualified production property enacted by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). The interim guidance provides the definition of qualified production property, qualified production activities, and other related terms. It also establishes a safe harbor for property placed in service in 2025, provides instructions for the time and manner for electing the 100-percent depreciation allowance, and addresses recapture and certain special rules. Taxpayers may rely on the interim guidance until the Treasury Department issues proposed regulations.

Background

OBBBA enacted Code Sec. 168(n), which allows taxpayers to elect to take a 100 percent bonus depreciation allowance for qualified production property constructed after January 19, 2025, and before January 1, 2029, and placed in service after July 4, 2025, and before January 1, 2031.

Qualified Production Property Defined

Qualified production property is generally defined as new MACRS nonresidential real property that is (or will be once placed in service) as an integral part of a qualified production activity. Qualified production property must be placed in service in the United States, or its territories. Each building, including its structural components, is a single unit of property and any improvement of structural component that the taxpayer later places in service is a separate unit of property. A special rule is available for integrated facilities. For purposes of determining whether used property is acquired after January 19, 2025, and before January 1, 2029, a taxpayer applies rules consistent with Reg. § 1.168(k)-2(b)(5).

Under the interim guidance satisfies the integral part requirement if the qualified production activity takes place within the physical space of the property. The guidance provides a de minimis rule that permits a taxpayer to elect to treat the entire property as qualified production property if 95 percent or more of the physical space of a property satisfies the integral part requirement.

Although leased property that is owned by the taxpayer and used by a lessee does not qualify, the guidance provides an exception for consolidated groups, commonly controlled pass-through entities, and certain sole proprietorships, partnerships, or corporations of which 50 percent or more is owned, directly or by attribution by the lessor.

Under the guidance, a taxpayer may use any reasonable method to allocate a property’s unadjusted depreciable basis between eligible property and ineligible property. Each allocation method must be applied consistently and reflect the property’s facts and circumstances. In the case of property that contains infrastructure that serves both eligible property and ineligible property, a taxpayer may allocate the basis of such property between eligible property and ineligible property using any reasonable method.

Qualified Production Activity Defined

Generally, a qualified production activity means the manufacturing, production, or refining of a qualified product. The guidance provides specific definitions of production, qualified product, manufacturing, refining, agricultural production, chemical production, and substantial transformation of the property comprising a qualified product.

Under the guidance, a related business activity will not fail to be a qualified production activity if the related activity occurs within the same property. Such activities include: oversight and management of activities, material selection of vendors or materials related to the qualified product, developing product design and other intellectual property used in conducting a manufacturing, production, or refining activity that results in a substantial transformation of the property comprising the qualified product.

Safe Harbor for Qualified Production Property Placed in Service in 2025

For property placed in service after July 4, 2025, and on or before December 31, 2025, a taxpayer’s trade or business activity will be treated as a qualified production activity if the principal business activity code that the taxpayer, or the relevant trade or business of the taxpayer, used on its most recently filed Federal income tax return filed before February 19, 2026, is listed under sectors 31, 32, or 33, or under subsectors 111 or 112, that appear in the North American Industry Classification System (NAICS), United States, 2022, published by the Office of Management and Budget (OMB), Executive Office of the President. In addition, the activity must result in, or is otherwise essential to, the substantial transformation of the property comprising a qualified product.

Recapture

Recapture of the 100-percent bonus depreciation taken on qualified production property if a change in use occurs within 10 years after qualified production property is placed in service. Under the guidance a change in use occurs if the qualified production property ceases to satisfy the integral part requirement. A change in use has not occurred if a taxpayer begins to use qualified production property in a different qualified production activity. Property that has been placed in service but is temporarily idle does not cease to satisfy the integral part requirement.

Making the Election

A taxpayer may elect to treat property as qualified production property by attaching a statement to its Federal income tax return for the taxable year in which the eligible property is placed in service. The statement must include the following information: the name and taxpayer identification number of the taxpayer making the election; the street address, city, state, zip code, and a description of the property; the unadjusted depreciable basis of the property; the dollar amount of the unadjusted depreciable basis of eligible property the taxpayer is designating as qualified production property. Separate instructions are available for taxpayers applying the de minimis rule. A election may be revoked only by filing a request for a private letter ruling and obtaining the written consent of the IRS.

Request for Comments

The IRS requests comments on the interim guidance provided in Notice 2026-16. Comments must be submitted by the date, and in the form and manner, specified in Section 10.02 of Notice 2026-16.

Notice 2026-16

IR 2026-25

The Treasury Department and the IRS have extended the deadline for amending individual retirement arrangements (IRAs), SEP arrangements, and SIMPLE IRA plans to comply with the SECURE 2.0 Act of 2022. The new deadline is December 31, 2027. The extension does not apply to qualified plans such as 401(k) and 403(b) plans.

The Treasury Department and the IRS have extended the deadline for amending individual retirement arrangements (IRAs), SEP arrangements, and SIMPLE IRA plans to comply with the SECURE 2.0 Act of 2022. The new deadline is December 31, 2027. The extension does not apply to qualified plans such as 401(k) and 403(b) plans.

Under section 501 of the SECURE 2.0 Act (P.L. 117-328), retirement plans and contracts had until the end of the first plan year beginning on or after January 1, 2025, or by a later date prescribed by the Secretary, to adopt plan amendments reflecting changes made by the SECURE Act, the SECURE 2.0 Act, the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020. In the absence of model language from the IRS, IRA custodians have requested more time to ensure proper amendments. Notice 2026-9 gives stakeholders until the end of 2027 to complete the necessary changes.

The extension applies to governing instruments of IRAs under Code Sec. 408(a) and (h), annuity contracts under Code Sec. 408(b), SEP arrangements under Code Sec. 408(k), and SIMPLE IRA plans under Code Sec. 408(p). Further, the IRS is developing model language to be used by IRA trustees, custodians, and issuers to amend an IRA for compliance with the legislation.

Notice 2026-9

The IRS issued answers to frequently asked questions (FAQs) about the implementation of Executive Order 14247, Modernizing Payments to and from America’s Bank Account. The order described advancing the transition to fully electronic federal payments both to and from the IRS. The purposes of said order were to (1) defend against financial fraud and improper payments; (2) increase efficiency; (3) reduce costs; and (4) enhance the security of federal transactions.

The IRS issued answers to frequently asked questions (FAQs) about the implementation of Executive Order 14247, Modernizing Payments to and from America’s Bank Account. The order described advancing the transition to fully electronic federal payments both to and from the IRS. The purposes of said order were to (1) defend against financial fraud and improper payments; (2) increase efficiency; (3) reduce costs; and (4) enhance the security of federal transactions.

The FAQs discussed included:

Tax Refunds and Tax Filing

The IRS stopped issuing paper refund checks for individual taxpayers after September 30, 2025. The Service would publish all guidance for filing 2025 tax returns before opening the 2026 tax filing season.

Further, direct deposit into a bank account would remain the primary method for issuing refunds. Alternative electronic payment methods, mobile apps and prepaid debit cards, would also be available. Limited exceptions to the paper check phase-out would also be established.

Alternative to Providing Direct Deposit Information

It is not mandatory for taxpayers to provide electronic payment information. However, if no exception applies, their refunds could take longer to process.

Sunset of Enrollment to EFTPS

Effective October 17, 2025, individual taxpayers are no longer able to create new enrollments via EFTPS.gov. Individual taxpayers not enrolled in the Electronic Federal Tax Payment System (EFTPS).gov by October 17, 2025 can instead create an IRS Online Account for Individual taxpayers or use the IRS Direct Pay guest path.

FS-2026-2

IR 2026-13

The IRS has encouraged all taxpayers to create an IRS Individual Online Account to access tax account information securely and help protect against identity theft. It emphasized that this digital resource is available to anyone who can verify their identity. Thus, the IRS highlighted how taxpayers have used the account with the same convenience as online banking to view adjusted gross income, check refund statuses, and request identity protection PINs.

The IRS has encouraged all taxpayers to create an IRS Individual Online Account to access tax account information securely and help protect against identity theft. It emphasized that this digital resource is available to anyone who can verify their identity. Thus, the IRS highlighted how taxpayers have used the account with the same convenience as online banking to view adjusted gross income, check refund statuses, and request identity protection PINs.

Further, the IRS supported collaboration between taxpayers and tax professionals through the use of digital authorizations. When taxpayers utilize Individual Online Accounts, they are able to approve power of attorney and tax information authorization requests entirely online. This digital process has allowed tax professionals to use their own Tax Pro Accounts to complete authorized actions on their clients’ behalf more efficiently. Tax professionals have supported this effort by encouraging clients to receive and view over 200 digital notices.

Additionally, the IRS expanded the account’s capabilities in early 2025 to allow taxpayers to view and download certain tax documents. It has made forms such as the W-2, 1095-A, and various 1099s available for the 2023, 2024, and 2025 tax years. These documents provide essential information return data reported by employers and financial institutions to help taxpayers file their returns. Consequently, the IRS advised individuals to visit IRS.gov to learn more about accessing records and managing payment plans.

IR 2026-21

The 2025 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2025 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The IRS has released the annual inflation adjustments for 2025 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

One month after the presidential election, taxpayers are learning more about President-elect Donald Trump’s tax proposals for his administration. Although exact details, including legislative language, are likely months away, taxpayers have a snapshot of the president-elect’s tax proposals for individuals and businesses.

One month after the presidential election, taxpayers are learning more about President-elect Donald Trump’s tax proposals for his administration. Although exact details, including legislative language, are likely months away, taxpayers have a snapshot of the president-elect’s tax proposals for individuals and businesses.

Note. At the time this article was prepared, the primary descriptions of President-elect Trump’s tax proposals are on his campaign and transition websites. The materials on these websites are not the same as legislation, which would amend the Tax Code. Rather, they discuss the President-elect’s tax proposals in very general and broad language.

Tax reform

Tax reform has been a regular topic in recent years. While numerous tax reform proposals were unveiled during the Obama administration, an overhaul of the Tax Code remained elusive. President Obama released a tax reform framework that called for a reduction in the corporate tax rate in exchange for the elimination of some energy tax preferences and other unspecified business tax preferences. Former House Ways and Means Chair Dave Camp, R-Mich., made a detailed tax reform proposal several years ago. Many members of Congress have also introduced tax reform bills. The election of Trump, along with GOP majorities in the House and Senate, is expected to give momentum to tax reform in 2017.

Proposals

During the campaign, President-elect Trump described a number of tax reform proposals, including (not an exhaustive list):

• Reduce the number of individual income tax rates from seven to three with rates at 12, 25 and 33 percent
• Eliminate the alternative minimum tax (AMT) for individuals and businesses
• Create new Dependent CARE Savings accounts
• Provide “spending rebates” for lower-income taxpayers for childcare expenses through the earned income tax credit (EITC)
• Increase standard deduction to $15,000 for single individuals and $30,000 for married couples filing a joint return
• Enhance Code Sec. 179 small business expensing
• Reduce the top corporate tax rate to 15 percent
• Tax carried interest as ordinary income
• Eliminate head of household filing status
• Cap itemized deductions for higher-income taxpayers

Affordable Care Act

The Affordable Care Act (ACA) includes a number of taxes, such as the excise tax on medical devices and the excise tax on high-dollar health insurance plans (often called the “Cadillac plan” tax), the net investment income (NII) tax, and the additional Medicare tax. The ACA also created new health-related tax incentives, including the Code Sec. 36B premium assistance tax credit and the Code Sec. 45R small employer health insurance tax credit.

During the campaign, President-elect Trump proposed to repeal the ACA. Post-election, it appears that the president-elect is open to retaining some of the ACA. The president-elect has mentioned coverage for children under age 26 as one provision of the ACA that he views favorably.

Congress

The 115^th Congress will convene in January. Republicans have majorities in the House and Senate. Being the majority means that Republicans will chair the tax writing committees in the 115^th Congress: the House Ways and Means Committee and the Senate Finance Committee.

Looking to 2017, tax reform legislation will likely have its start in the House Ways and Means Committee. In the House, Republicans have already unveiled a tax reform blueprint. There are similarities between the House GOP blueprint and President-elect Trump’s tax proposals. For example, both call for reducing the federal income tax rates for individuals along with lowering the corporate tax rate.

Please contact our office if you have any questions about these or any other tax proposals. Our office will keep you posted of developments.

Virtual currency – with ‘bitcoin” the most popular – is a mystery for many people but an everyday currency for others. As virtual currency grows in popularity, questions arise about its taxation. So far, the IRS continues to treat virtual currency as property and not as currency. This means that general tax principles that apply to property transactions apply to transactions using virtual currency.

Virtual currency – with ‘bitcoin” the most popular – is a mystery for many people but an everyday currency for others. As virtual currency grows in popularity, questions arise about its taxation. So far, the IRS continues to treat virtual currency as property and not as currency. This means that general tax principles that apply to property transactions apply to transactions using virtual currency.

Virtual currency

Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account or a store of value. Many types of virtual currencies have been created recently for use in lieu of currency issued by a government to purchase goods and services in the real economy. Bitcoin is one example.

A 2015 federal government report described how virtual currency is generally obtained. An individual can exchange conventional money for virtual currency as a fee on an online exchange. An individual can obtain virtual currency in exchange for the sale of goods or services. An individual can also acquire virtual currency by serving as “miner.” This approach requires significant computer processing power.

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. While virtual currency may operate like “real” money, it does not have legal tender status in the U.S.

IRS guidance

In Notice 2014-21, the IRS announced that it will treat virtual currency as property. The IRS explained that transactions using virtual currency must be reported in U.S. dollars for U.S. tax purposes. Taxpayers must determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied, the IRS explained.

More guidance coming?

The Treasury Inspector General for Tax Administration (TIGTA) asked the IRS to review its approach to virtual currency in November 2016. The IRS has established a virtual currency task force but TIGTA reported that the IRS could better coordinate some of its intra-agency activities. TIGTA also found that while employers and businesses are required to report taxable virtual currency transactions, current third-party information reporting documents did not provide the IRS with any means to ascertain whether the taxable transaction amounts being reported were specifically related to virtual currencies.

TIGTA recommended that the IRS provide updated virtual currency guidance. TIGTA also recommended that the IRS revise third-party information reporting documents to identify the amounts of virtual currencies used in taxable transactions. The IRS agreed with the recommendations but did not identify when more guidance may be issued. Based upon Bitcoin’s growing popularity and its space in the news as speculation as to its value continues, many tax professionals are expecting the IRS to weigh in soon. Our office will keep you posted on developments.

An early glimpse at the income tax picture for 2017 is now available. The new information includes estimated ranges for each 2017 tax bracket as well as projections for a growing number of inflation-sensitive tax figures, such as the tax rate brackets, personal exemption and the standard deduction. Projections – made available by Wolters Kluwer Tax & Accounting US – are based on the relevant inflation data recently released by the U.S. Department of Labor. The IRS is expected to release the official figures by early November. Here are a few of the more widely-applicable projected amounts: 

An early glimpse at the income tax picture for 2017 is now available. The new information includes estimated ranges for each 2017 tax bracket as well as projections for a growing number of inflation-sensitive tax figures, such as the tax rate brackets, personal exemption and the standard deduction. Projections – made available by Wolters Kluwer Tax & Accounting US – are based on the relevant inflation data recently released by the U.S. Department of Labor. The IRS is expected to release the official figures by early November. Here are a few of the more widely-applicable projected amounts:

Tax Brackets

For 2017, for married taxpayers filing jointly and surviving spouses, the maximum taxable income for the:

• 10-percent bracket is $18,650, (up from $18,550 for 2016);
• 15-percent tax bracket, $75,900 (up from $75,300 for 2016);
• 25-percent tax bracket, $153,100 (up from $151,900 for 2016);
• 28-percent tax bracket, $233,350 (up from $231,450 for 2016);
• 33-percent tax bracket, $416,700 (up from $413,350 for 2016);
• 35-percent tax bracket, $470,700 (up from $466,950 for 2016); and
• 6 percent for all taxable income above that 35-percent bracket’s maximum income level.

For heads of household, the maximum taxable income for the:

• 10-percent bracket is $13,350 (up from $13,250 for 2016);
• 15-percent tax bracket, $50,800 (up from $50,400 for 2016);
• 25-percent tax bracket, $131,201 (up from $130,150 for 2016);
• 28-percent tax bracket, $212,500 (up from $210,800 for 2016);
• 33-percent tax bracket, $416,700 (up from $413,350 for 2016);
• 35-percent tax bracket, $446,700 (up from $441,000 for 2016);
• 6 percent for all taxable income above that 35-percent bracket’s maximum income level.

For unmarried, single filers who are not heads of household or surviving spouses, the maximum taxable income for the:

• 10-percent bracket is $9,325 (up from $9,275 for 2016);
• 15-percent tax bracket, $37,950 (up from $37,650 for 2016);
• 25-percent tax bracket, $91,900 (up from $91,150 for 2016);
• 28-percent tax bracket, $191,650 (up from $190,150 for 2016);
• 33-percent tax bracket, $416,700 (up from $413,350 for 2016);
• 35-percent tax bracket, $418,400 (up from $415,050 for 2016); and
• 6 percent for all taxable income above that 35-percent bracket’s maximum income level.

For married taxpayers filing separately, the maximum taxable income for the:

• 10-percent bracket is $9,325 (up from $9,275 for 2016);
• 15-percent tax bracket, $37,950 (up from $37,650 for 2016);
• 25-percent tax bracket, $76,550 (up from $75,950 for 2016);
• 28-percent tax bracket, $116,675 (up from $115,725 for 2016);
• 33-percent tax bracket, $208,350 (up from $206,675 for 2016);
• 35-percent tax bracket, $235,350 (up from $233,475 for 2016); and
• 6 percent for all taxable income above that 35-percent bracket’s maximum income level.

Standard Deduction

The 2017 standard deduction will rise $50, to $6,350 for single taxpayers. For married joint filers, the standard deduction will rise $100, to $12,700. For heads of household, the standard deduction will rise to $9,350, up from $9,300 for 2016. The additional standard deduction for blind and aged married taxpayers will remain at $1,250. For unmarried taxpayers who are blind or aged, the amount of the additional standard deduction will also remain the same ($1,550).

For 2017 the so-called "kiddie" deduction used on the returns of children claimed as dependents on their parents’ returns remains $1,050 or $350 plus the individual’s earned income.

Personal Exemptions

The personal exemption will be $4,050 for 2017, the same as for 2016. The phaseout of the personal exemption for higher-income taxpayers will begin after taxpayers pass the same income thresholds set forth for the limitation on itemized deductions.

Limitation on Itemized Deductions

For higher-income taxpayers who itemize their deductions, the limitation on itemized deductions will be imposed as follows:

• For married couples filing joint returns or surviving spouses, the income threshold will begin to phase out at income over $313,800, up from $311,300 for 2016.
• For heads of household, the beginning threshold will be $287,650 in 2016, up from $285,350 for 2016.
• For single taxpayers, the beginning threshold will be $261,500, up from $259,400 for 2016.
• For married taxpayers filing separate returns, the 2016 threshold will be $156,900, up from $155,650 for 2016.

Estate and Gift Tax

Gift Tax. The 2017 gift tax annual exemption will remain the same as for 2016, at $14,000.

Estate Tax. The estate and gift tax applicable exclusion will increase from $5,450,000 in 2016 to $5,490,000 in 2017.

Gifts to Noncitizen Spouses. The first $149,000 of gifts made in 2017 to a spouse who is not a U.S. citizen will not be included in taxable gifts, up $1,000 from $148,000 for 2016.

AMT Exemptions

The American Taxpayer Relief Act of 2012 provided for the annual inflation adjustment of the exemption from alternative minimum tax (AMT) income. Previously, this inflation adjustment had to be enacted by Congress each year. For 2017, the AMT exemption for married joint filers and surviving spouses is projected to be $84,500 (up from $83,800 for 2016). For heads of household and unmarried single filers, the exemption will be $54,300 (up from $53,900 for 2016). For married separate filers, the exemption will be $42,250 (up from $41,900 for 2016).

On June 26, the U.S. Supreme Court held that Section 3 of the federal Defense of Marriage Act (DOMA) is unconstitutional (E.S. Windsor, SCt., June 26, 2013). Immediately after the decision, President Obama directed all federal agencies, including the IRS, to revise their regulations to reflect the Court's order. How the IRS will revise its tax regulations - and when - remains to be seen; but in the meantime, the Court's decision opens a number of planning tax opportunities for same-sex couples.

On June 26, the U.S. Supreme Court held that Section 3 of the federal Defense of Marriage Act (DOMA) is unconstitutional (E.S. Windsor, SCt., June 26, 2013).  Immediately after the decision, President Obama directed all federal agencies, including the IRS, to revise their regulations to reflect the Court's order.  How the IRS will revise its tax regulations - and when - remains to be seen; but in the meantime, the Court's decision opens a number of planning tax opportunities for same-sex couples.

Background

The Supreme Court agreed in 2012 to hear an appeal of a federal estate tax case.  Due to DOMA, the surviving spouse of a same-sex married couple was ineligible for the federal unlimited marital deduction under Code Sec. 2056(a). The survivor sued for a refund of estate taxes. A federal district court and the Second Circuit Court of Appeals found unconstitutional Section 3 of DOMA, which defines marriage for federal purposes as only a legal union between one man and one woman as husband and wife.

Supreme Court's decision

In a 5 to 4 decision, the Supreme Court held that Section 3 of DOMA is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment.  Writing for the five-justice majority, Justice Anthony Kennedy said that "DOMA rejects the long-established precept that the incidents, benefits, and obligations of marriage are uniform for all married couples within each State, though they may vary, subject to constitutional guarantees, from one State to the next."  Kennedy explained that "by creating two contradictory marriage regimes within the same State, DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law, thus diminishing the stability and predictability of basic personal relations the State has found it proper to acknowledge and protect."

Chief Justice John Roberts, who would have upheld DOMA, cautioned that "the Supreme Court did not decide if states could continue to utilize the traditional definition of marriage." Roberts noted that the majority held that the decision and its holding "are confined to those lawful marriages-referring to same-sex marriages that a State has already recognized."

Tax planning

The Supreme Court's decision impacts countless provisions in the Tax Code, covering all life events, such as marriage, employment, retirement and death.  The affect on the Tax Code cannot be overstated. It is expected that the IRS will move quickly to clarify how the decision impacts many of the more far-reaching provisions, such as filing status and employee benefits. Other provisions, especially the complex estate and gift tax provisions, will likely require more time from the IRS to issue guidance.

For federal tax purposes, only married individuals can file their returns as married filing jointly or married filing separately. Because of DOMA, the IRS limited these married filing statuses to opposite-sex married couples. The IRS is expected to issue guidance. Same-sex couples who filed separate returns may want to explore the benefits of filing amended returns (as married filing jointly), if applicable. Our office will keep you posted of developments.

Among the other provisions in the Tax Code affected by the Supreme Court's decision are:

• Adoption benefits
• Child tax credit
• Education tax credits and deductions
• Estate tax marital deduction
• Estate tax portability between spouses
• Gifts made by spouses
• Retirement plans

Looking ahead

Will the federal government look to where the same-sex couple was married (state of celebration) or where the same-sex couple reside (state of residence) for purposes of federal benefits? The Supreme Court did not rule on Section 2 of DOMA, which provides that no state is required to recognize a same-sex marriage performed in another state. At the time of the Supreme Court's decision, 12 states and the District of Columbia recognize same-sex marriage. 

In some cases, the rules for marital status are determined by federal regulations, which can be changed without action by Congress. In other cases, the rules are set by statute, which would require Congressional action. Sometimes, a federal agency follows one rule for some purposes but another rule for other purposes. Generally, the IRS has used place of domicile for determining marital status. Our office will keep you posted of developments.

If you have any questions about the Supreme Court's decision and its impact on tax planning, please contact our office.

For many individuals, volunteering for a charitable organization is a very emotionally rewarding experience. In some cases, your volunteer activities may also qualify for certain federal tax breaks. Although individuals cannot deduct the value of their labor on behalf of a charitable organization, they may be eligible for other tax-related benefits.

For many individuals, volunteering for a charitable organization is a very emotionally rewarding experience. In some cases, your volunteer activities may also qualify for certain federal tax breaks. Although individuals cannot deduct the value of their labor on behalf of a charitable organization, they may be eligible for other tax-related benefits.

Before claiming any charity-related tax benefit, whether for a donation or volunteer activity, you must determine if the charity is a "qualified organization."  Under the tax rules, most charitable organizations, other than churches, must apply to the IRS to become a qualified organization. If you are uncertain about an organization's status as a qualified organization, you can ask the charity. The IRS has a toll-free number (1-877-829-5500) for questions from taxpayers about charities and also maintains an online tool at www.irs.gov/charities.

Time or services

An individual may spend 10, 20, 30 or more hours a week volunteering for a charitable organization. Precisely because the individual is a volunteer, he or she receives no remuneration for his or her time or services and cannot deduct the value of his or her time or services spent on activities for the charitable organization. Unpaid volunteer work is not tax deductible.

Vehicle expenses

Vehicle expenses associated with volunteer activity should not be overlooked.  For example, many individuals use their personal vehicles to transport others to medical treatment or to deliver food to shut-ins. Taxpayers can deduct as a charitable contribution qualified unreimbursed out-of-pocket expenses, such as the cost of gas and oil, directly related to the use of their vehicle in giving services to a charitable organization. However, certain expenses, such as registration fees, or the costs of tires or insurance, are not deductible.  Alternatively, taxpayers can use a standard mileage rate of 14 cents per mile to calculate the amount of their contribution. Do not confuse the charitable mileage rate, which is set by statute, with business mileage rate (56.5 cents per mile for 2013), which generally changes from year to year. Parking fees and tolls are deductible whether the taxpayer uses the actual expense method or the standard mileage rate.

Uniforms

Some volunteers are required to wear a uniform, such as a jacket that identifies the wearer as a volunteer for the charitable organization, while engaged in activity for the charity. In this case, the tax rules generally allow taxpayers to deduct the cost and upkeep of uniforms that are not suitable for everyday use and that the taxpayer must wear while performing donated services for a charitable organization.

Hosting a foreign student

Qualifying expenses for a foreign student who lives in the taxpayer's home as part of a program of the organization to provide educational opportunities for the student may be deductible. The student must not be a relative, such as a child or stepchild, or dependent of the taxpayer and also must be a full-time student in secondary school or any lower grade at a school in the U.S. Among the expenses that may be deductible are the costs of food and certain transportation spent on behalf of the student. The cost of lodging is not deductible. If you are planning to host a foreign-exchange student, please contact our office and we can explore the possible tax benefits.

Travel

Volunteers may be asked to travel on behalf of the charitable organization, for example, to attend a convention or meeting. Generally, qualified unreimbursed expenses may be deductible subject to complicated rules. Very broadly speaking, there must not be a significant element of personal pleasure, recreation, or vacation in the travel. Special rules apply if the charitable organization pays a daily travel allowance to the volunteer. There are also special rules for attendance at a church meeting or convention and the capacity in which the volunteer attends the church meeting or convention. If you plan to travel as part of your volunteer activity for a charitable organization, please contact our office and we can review your plans in greater detail.

If you have any questions, please contact our office.

Vacation homes offer owners tax breaks similar-but not identical-to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income. This combination of current income and tax breaks, combined with the potential for long-term appreciation, can make a second home an attractive investment.

Vacation homes offer owners tax breaks similar-but not identical-to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income. This combination of current income and tax breaks, combined with the potential for long-term appreciation, can make a second home an attractive investment.

Homeowners can deduct mortgage interest they pay on up to $1 million of "acquisition indebtedness" incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.

Vacation homeowners don't need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motorhome so long as it includes sleeping, cooking, and toilet facilities.

Gains from selling a vacation home are generally taxed as short-term or long-term capital gains.  While gain on the sale of a principal residence can be excludable, gain on the sale of a vacation home is not. Recent rules limit the amount of prior gain on a vacation residence that can be sheltered if a vacation home is converted into a primary residence.

Vacation home rentals. Many vacation home owners rent vacation homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.

• Income from rentals totaling not more than 14 days per year is nontaxable.
• Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E (Form 1040), Supplemental Income and Loss. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
• Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true "rental" property if certain rules are followed.

If you are considering the purchase of a vacation home, our offices can help compute your true, "after-tax" cost of ownership in determining whether such a purchase makes sense.

The government continues to push out guidance under the Patient Protection and Affordable Care Act (PPACA). Several major provisions of the law take effect January 1, 2014, including the employer mandate, the individual mandate, the premium assistance tax credit, and the operation of health insurance exchanges. The three agencies responsible for administering PPACA - the IRS, the Department of Labor (DOL), and the Department of Health and Human Services (HHS) - are under pressure to provide needed guidance, and they are responding with regulations, notices, and frequently asked questions.

The government continues to push out guidance under the Patient Protection and Affordable Care Act (PPACA). Several major provisions of the law take effect January 1, 2014, including the employer mandate, the individual mandate, the premium assistance tax credit, and the operation of health insurance exchanges. The three agencies responsible for administering PPACA - the IRS, the Department of Labor (DOL), and the Department of Health and Human Services (HHS) - are under pressure to provide needed guidance, and they are responding with regulations, notices, and frequently asked questions.

The health law provisions interact. Individuals are supposed to carry health insurance or pay a tax. Employers are supposed to offer coverage or pay a tax. The exchanges will provide information about the availability of different health care plans and will certify individuals eligible for the premium assistance tax credit. Individuals who cannot obtain affordable coverage may purchase insurance through an exchange and may be entitled to a premium assistance tax credit.

Exchanges

The DOL, in a technical release, provided temporary guidance to employers about their obligation to notify their employees of the availability of health insurance through an exchange and of the potential to qualify for the premium assistance tax credit if they purchase insurance through an exchange. Exchanges will begin operating January 1, 2014 and will provide open enrollment for their coverage beginning October 1, 2013. DOL provided model notices for employers to send out beginning October 1, 2013. Notices must be issued to all employees, whether or not the employer offers insurance and whether or not the employee enrolls in the employer's insurance.

Employer mandate

As part of the regulatory process, the IRS recently held a hearing on proposed regulations regarding the employer mandate, which imposes a penalty on employers who fail to provide adequate health insurance coverage in certain circumstances. The employer mandate takes effect January 1, 2014. Twenty different groups testified on relevant issues, including: the definition of a large employer subject to the penalty, the definition of a full-time employee who must be offered coverage, and the determination whether the coverage is affordable.

Minimum value

The IRS issued proposed regulations to clarify the minimum value requirement for employer-provided health insurance. The regulations provide additional guidance on how to determine whether an individual is eligible for the premium assistance tax credit. Taxpayers will not be eligible for the credit if they are eligible for other "minimum essential (health insurance) coverage" (MEC). MEC includes employer-sponsored coverage that is affordable and that provides minimum value. Employer coverage fails to provide minimum value if the employer pays less than 60 percent of the cost of plan benefits. Taxpayers may rely on the proposed regulations for years ending before January 1, 2015.

Medical loss ratio (MLR)

The IRS issued proposed regulations on MLRs. Insurance companies must provide premium rebates to their customers if they fail to spend at least 80 percent (85 percent for large companies) of their premiums directly on health care, as opposed to executive salaries and other expenses. The provision took effect in 2012; and the first round of MLR rebates was distributed in 2012. The IRS issued several notices to implement the program; the proposed regulation would apply to tax years beginning after December 31, 2013.

Annual limits on benefits

PPACA generally prohibits group health plans and health insurance issuers that offer group or individual health insurance from imposing annual or lifetime limits on the value of essential health benefits. Although some limits are allowed for plan years beginning before January 1, 2014, HHS regulations provide that HHS may waive the limits if they would cause a significant decrease in benefits or significant increase in premiums. IRS, DOL, and HHS issued frequently asked questions (FAQs) to clarify that plan or issuer receiving a waiver may not extend the waiver to a different plan or policy year.

Summary of benefits and coverage

PPACA generally requires insurers, employers and other health care plan providers to give a Summary of Benefits and Coverage (SBC) to participants and other affected individuals. In recent FAQs, the three government agencies advised that an updated SBC template and a sample SBC are available on the DOL's website. These documents can be used for coverage beginning in 2014. The agencies also extended certain enforcement relief. The agencies issued final regulations in 2012, and indicated that providers can continue to use coverage examples in current guidance, without adding new examples to their SBC.

Employer reporting

The Treasury Inspector General for Tax Administration (TIGTA) issued a recent report on some of the new information reporting requirements that PPACA has imposed on employers. For example, health insurance providers must report information for each individual who receives coverage. Large employers must report details about the coverage offered to employees and their dependents, including the premiums and the employer's share of costs. Employers must also report the cost of coverage to employees on their Forms W-2. The IRS will use these reports to administer PPACA's requirements.

PPACA is a complicated law. Many of its most important provisions take effect in 2014. The IRS and other responsible federal agencies continue to issue guidance and to take comments on the administration of the law.

If you have any questions about PPACA and what strategies you or your business might adopt, please contact our office.

Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? If so, take another look at your tax return from this past year. It is quite possible that by making a few changes, you could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term future. Trying to implement this type of plan may seem difficult at first. However, just by looking at your tax return, you can start the critical planning that can lead you to broader goals of financial independence and a comfortable retirement.

Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? If so, take another look at your tax return from this past year. It is quite possible that by making a few changes, you could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term future. Trying to implement this type of plan may seem difficult at first. However, just by looking at your tax return, you can start the critical planning that can lead you to broader goals of financial independence and a comfortable retirement.

Federal withholding

If you received a large tax refund, it might be time for you to adjust the amount of tax the federal government withholds from your paycheck. Although next year your refund check may not be as large, you will have the advantage of seeing a larger sum deposited directly into your pocket every month. To adjust your withholding, fill out and sign a Form W-4, and submit it to your employer. You would want to do this in cases where your adjustments to income, exemptions, and deductions remain relatively steady from year-to-year, and where the government consistently is required to give you a large refund.

If you do not change your withholding allowances, the government essentially is holding your money for a year without paying any interest on it. You may lose some potential investment opportunity or, at the very least, the ability to increase your monthly discretionary income. On the other hand, many taxpayers prefer to receive the large refund check after tax filing season because it is a no-hassle way to ensure large savings at the end of the year.

Conversely, many taxpayers may want to change their withholding allowances because they owe the government a significant amount of money at the end of the year. Taxpayers who expect to owe at least $1,000 in tax for the 2013 tax year, after subtracting withholding and any refundable credits, and who also expect their 2013 withholding and credits to be significantly less than the projected tax owed for 2013, may need to file estimated taxes. Failure to do so could result in penalties. Alternatively, taxpayers should consider making quarterly estimated tax payments, especially if they anticipate a significant amount of investment gains for the year or other income unrelated to wage compensation.

State withholding

Some people are entirely exempt from state tax, but it is withheld from their paychecks nevertheless. At the end of each year, they may include the amount of their state taxes in their itemized deductions, but then receive a refund which they have to declare as income in the next year. This problem particularly applies to active duty military families, many of whom are posted in states other than their state of residency. Military families can check with their state income tax authority to see if there is an appropriate form that can be completed and filed, which would exempt them from withholding. A higher adjusted gross income (AGI), even if it is subsequently reduced by itemized deductions, can erode other adjustments to income, such as a deduction for student loans, IRA contributions, higher education expenses, and more because of certain AGI caps on these benefits.

Tax rates and adjusted gross income

As you may have heard, Congress allowed the Bush-era tax cuts to expire for higher-income earners. That means joint filers with more than $450,000 of adjusted gross income ($400,000 for single individuals) are now in the 39.6-percent tax bracket. Taxpayers at this level of income or above are also subject to a higher long-term capital gains tax rate: 20 percent, up from 15 percent paid by other taxpayers.

In addition, for tax years beginning in 2013, the 33-percent tax bracket for individual taxpayers ends at $398,350 for married individuals filing joint returns, heads of households, and single individuals. If you were hovering near the bottom of the 35-percent bracket for the 2012 tax year, then you might want to see if you can readjust your income so that you fall within the 33-percent category.

Higher-income taxpayers also have two new taxes to worry about for 2013 and beyond. Joint-filing taxpayers with modified adjusted gross income of $250,000 ($200,000 for single filers) are also subject to the 3.8-percent surtax on net investment income and a .9-percent Additional Medicare Tax. Look at your adjusted gross income for last year. Does it approach these figures? Is it on the edge of the income brackets? Will stock market increases this year put you over the top of those income thresholds? If so, it may be time to find ways to reduce your income for 2013.

Investments

At some point in your efforts over the years to accumulate a savings nest egg, you will need to consider diversification, the process of putting your money in the right kind of investment vehicles to satisfy your personal risk strategy and achieve your goals. Looking at your tax return will help you decide whether the investments you now have are the right ones for you. For example, if you are in a high tax bracket and need to diversify away from common stocks, investing in tax-exempt bonds might help, especially if you have state income taxes to worry about, too.

Reviewing the Schedule D and Form 8949, which cover Capital Gains and Losses from last year's return and from the past three or four years, can be an eye-opener for many. Did you hold stocks long enough to be entitled to the long-term capital gains rate? Did you try to balance short-term gains with short-term losses? Are you bouncing from one investment trend to another without a long-term investment plan that achieves long-term needs? Are your mutual funds "tax smart"? Become familiar with different types of banking institutions and their products. Find out about CDs, money-market funds, government securities, mutual funds, index funds, and sector funds and how they interrelate with the determination of your tax liability each year. You may want to put that knowledge to work in your investment strategy.

Medical costs

Should you be taking advantage of the medical expense deduction? Many people assume that with the 10 percent adjusted gross income floor on medical expenses now imposed for tax years starting in 2013 (7.5 percent for seniors) that it doesn't pay for them to keep track of expenses to test whether they are entitled to itemize. But with the premiums for certain long-term care insurance contracts now counted as a medical expense, some individuals are discovering that along with other health insurance premiums, deductibles and timing of elective treatments, the medical tax deduction may be theirs for the taking.

Retirement planning

Don't forget to protect for eventualities. Are you maximizing the amount that Uncle Sam allows you to save tax-free for retirement? A look at your W-2 for the year, and at the retirement contribution deductions allowed in determining adjusted gross income should tell you a lot. Should your spouse set up his or her own retirement fund, too? Are you over-invested in tax-deferred retirement plans? If so, you may lose a significant amount of your nest egg to tax after retirement.  

When you are reviewing last year's tax return, it may help to review some of what you've learned from it. This could foster an important conversation with your tax advisor about how to establish or modify your plan for your financial future. If you would like to review last year's completed tax return with future planning in mind, please feel free to give us a call and set up a time when we can meet and discuss this matter.

Questions over the operation of the new 3.8 percent Medicare tax on net investment income (the NII Tax) continue to be placed on the IRS's doorstep as it tries to better explain the operation of the new tax.  Proposed "reliance regulations" issued at the end in 2012 (NPRM REG-130507-11) "are insufficient in many respects," tax experts complain, as the IRS struggles to turn its earlier guidance into final rules.

Questions over the operation of the new 3.8 percent Medicare tax on net investment income (the NII Tax) continue to be placed on the IRS's doorstep as it tries to better explain the operation of the new tax.  Proposed "reliance regulations" issued at the end in 2012 (NPRM REG-130507-11) "are insufficient in many respects," tax experts complain, as the IRS struggles to turn its earlier guidance into final rules.

A public hearing on the existing regulations, held at IRS headquarters in Washington, D.C., in early April 2013, only confirmed how the application of the NII Tax to certain categories of income—particularly income arising from "passive activities"—is challenging even the experts. Nevertheless, taxpayers are not getting a reprieve from the immediate application of this new tax.  The 3.8 percent Medicare surtax on net investment income (NII) became effective January 1, 2013. Current confusion over exactly how the 3.8 percent operates can impact on tax strategies that should be put into motion in 2013. Any misinterpretation can also bear on 2013 estimated tax that may be due to cover any 3.8 percent NII Tax liability.

NII Tax Thresholds

For tax years beginning after December 31, 2012, the NII surtax on individuals equals 3.8 percent of the lesser of: net investment income for the tax year, or the excess, if any, of:

• the individual's modified adjusted gross income (MAGI) for the tax year, over
• the threshold amount.

The threshold amount in turn is equal to:

• $250,000 in the case of a taxpayer making a joint return or a surviving spouse,
• $125,000 in the case of a married taxpayer filing a separate return, and
• $200,000 in any other case.

Trusts and estates are also subject to the NII surtax, to the extent of the lesser of: (i) undistributed net investment income, or (ii) the excess of adjusted gross income over the dollar amount at which the highest tax bracket begins (which, for 2013, is $11,950).

Net Investment Income

The primary confusion over application of the 3.8 percent NII Tax revolves around finding a precise definition of "net investment income" as enacted by Congress. To appreciate the complexity of the task, just look at the applicable Internal Revenue Code provision. Code Sec. 1411(c)(1) defines net investment income as the sum of:

• Category (i) income: Gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in Code Sec. 1411(c)(2);
• Category (ii) income: Other gross income derived from a trade or business described in Code Sec. 1411(c)(2); and
• Category (iii) income: Net gain attributable to the disposition of property, other than property held in a trade or business not described in Code Sec. 1411(c)(2); over

Deductions properly allocable to such gross income or net gain.

A Code Sec. 1411(c)(2) trade or business includes a passive activity under Code Sec. 469 with respect to the taxpayer or trading in financial instruments or commodities.

Comment.  Code Sec 1411 effectively creates a new tax and a new tax base, on top of the income tax, alternative minimum tax, self-employment tax and payroll taxes. Nevertheless the Preamble to the proposed regs states that, except as otherwise provided, the income tax rules should apply to Code Sec. 1411 unless good cause otherwise exists. Practitioners have asked the IRS that the final regulations give greater reassurance of this general rule.

Complexity

The IRS has stated that the principal purpose of Code Sec. 1411 is "to impose a tax on unearned income or investments of certain individuals, estates, and trusts." Unfortunately, Code Sec. 1411 is not so direct and simple, with its three categories of income (that is, (i), (ii) and (iii), above), complicating matters, albeit in an effort to close every door to those who try to "game the system."

Application of the 3.8 percent NII Tax to capital gains and dividends from a personal stock portfolio is clear under this rule of thumb. But clarity breaks down when a "trade or business" is thrown into the mix and the concept of "passive activity" is added to it.

If gain or other income is the result of an active business activity, it generally escapes NII Tax. However, when the "active" business is a passive activity (for example, a rental business), it may be deemed to generate income that is subject to the NII Tax. Furthermore, when a passive activity is not merely incidental to a business however otherwise active that business should be, the NII Tax also becomes an issue. 

Passive Activity

Any revised or additional rules from the IRS on the application of the NII Tax on passive activities should be made more user friendly to the broad middle range of taxpayers and their advisors, one expert at the hearing recommended.  The IRS should err on the side of explaining things clearly and simply, even at the expense of not covering every possible nuance of interpretation.

At the same time, however, other experts are asking for more detail, at least in the way of clarification. For example, the IRS has stated that passive activity for NII Tax purposes should be applied within a narrower scope than the passive activity loss rules under Code 469.  Those Code Sec. 469 rules restrict "passive losses" from reducing income that is not "passive income."  Experts want the IRS to explain exactly what they mean by a "narrower scope."

Self-Rental Activities/Grouping

The self-rental recharacterization rule under Code Sec. 469 affects taxpayers who rent property to a trade or business in which they materially participate. Concern has been expressed over the possibility of interpreting net investment income under Code Sec. 1411 to include rental income from a self-rental activity grouped with a trade or business activity in which the taxpayer materially participates.

The material participation and trade or business requirements should be tested on the grouped activity as a whole rather than on a component basis, one expert in particular stressed at the hearing. If that test is passed, he argued, the trade or business income and rental income from the grouped activity should be excluded from the reach of the NII Tax. For example, the owners of self-rental properties should not have that rent considered as separate from their overall business activity and subject to the net investment tax simply because properties are held in a separate LLC to avoid tort liability.

Regrouping deadline

The proposed regulations permit businesses subject to the NII Tax to elect to regroup their activities for passive-loss purposes in 2013 or 2014. This regrouping election allows taxpayers with a fresh start to accommodate the new NII surtax. Without permitting regroupings, taxpayers would be bound by their original grouping decisions, some of which may have been made as many as 20 years ago, only for purpose of Code Sec. 469 passive loss rules and not the NII Tax. Some small business representatives are also concerned that, because of the complexity of the rules, the final regulations should extend the deadline for a regrouping election through 2015.

Application of the net investment income tax is particularly difficult to get a handle on in a variety of situations.  Unfortunately, however, at 3.8 percent, it is costly enough not to be ignored. 

If you have any questions about how the NII Tax may apply to your business, rental operations, or overall investment strategy, please do not hesitate to call our office.