The Treasury Department and IRS have finalized regulations regarding the deduction of up to $10,000 in personal car loan interest by individuals for tax years 2025 through 2028. This includes regulations on information returns required to be filed by a lender or other person engage in a trade or business who receives $600 or more of qualified interest during the calendar year. The final regulations adopt the proposed regulations published in January 2026 (NPRM REG-113515-25) with some changes in response to public comments.

The Treasury Department and IRS have finalized regulations regarding the deduction of up to $10,000 in personal car loan interest by individuals for tax years 2025 through 2028. This includes regulations on information returns required to be filed by a lender or other person engage in a trade or business who receives $600 or more of qualified interest during the calendar year. The final regulations adopt the proposed regulations published in January 2026 (NPRM REG-113515-25) with some changes in response to public comments.

Qualified Personal Vehicle Loan Interest

For tax years beginning in 2025 through 2028, a noncorporate taxpayer may claim a deduction of up to $10,000 for qualified personal vehicle loan interest (QPVLI) paid or accrued during the tax year on a specified passenger vehicle loan (SPVL) incurred by the taxpayer for the purchase of an applicable personal vehicle (APV) for personal use. Generally, interest includes an amount paid, received, or accrued as compensation for the use or forbearance of money under the debt instrument.

The final regulations clarify that QPVLI also includes prepaid interest in the form of points and deferred or capitalized interest. In addition, it may include origination-related or financing-related charges, prepayment penalties, late-payment charges, default-related charges, and similar fees, if characterized as an interest expense for federal income tax purposes.

Secured by First Lien

Interest is QPVLI only if it is paid or accrued on debt for the purchase of an APV for personal use that is secured by a first lien. The final regulations clarify that an SPVL is secured by a first lien with the first voluntary security interest recorded against the vehicle. Any involuntary liens are disregarded even if given temporary higher priority at a later date.

A vehicle also may be considered secured by a first lien even if the lien has not yet been perfected or recorded due to short-term delays arising under State or local law. It may also be considered secured by a first lien where the lien is removed in connection with the taxpayer no longer owning the vehicle, but the taxpayer continues to be liable for the loan (repossession or insurance payout).

Purchase of Applicable Passenger Vehicle

An SPVL is qualified only to the extent the debt is incurred for the purchase of a new vehicle and any other items or amounts customarily financed in the same purchase transaction (for example, vehicle service plans, extended warranties, sales taxes, and vehicle-related fees). Any portion of a loan for items or amounts not customarily financed in the purchase are not qualified.

The taxpayer must allocate the debt on a pro rata basis. Whether items are customarily financed and directly related to the purchase of the vehicle is determined on an industry-wide basis and not on the particular financing terms. The final rules, however, expand the list of examples of items customarily financed in an APV purchase. The final regulations also maintain that debt incurred for negative equity in a prior purchased vehicle is not incurred for the purchase of an APV.

The requirement that an APV must be a new vehicle under the loan documentation refers to the lender’s classification of the vehicle for purposes of its financing programs. The original use of the vehicle must commence with the taxpayer. However, original use does not commence with a dealer if the vehicle is held primarily for sale to customers in the ordinary course of its trade or business. Original does not commence with a lessee if the lessee purchases the vehicle during or at the end of the lease term.

Information Reporting

Any lender or other person who, in the course of that trade or business, receives from any individual interest aggregating $600 or more for any calendar year on an SPVL, must report the receipt of interest on Form 1098-VLI to the IRS and the payee. The final regulations affirm that lenders are required to include only interest received on an SPVL for the purchase of an APV, the first use of which begins with the payee. This is required by statute and may require the lender to collect information it currently does not collect. The lender must file Form 1098-VLI for each SPVL.

T.D. 10054

The Treasury Department and IRS have issued proposed regulations providing that a private school is not eligible for Federal income tax exemption under section 501(c)(3) if it considers race, color, or national or ethnic origin in any of its educational, admissions, scholarship, athletic, or other school-administered policies. Any such consideration, under the proposed regulation subsection, would be considered de facto racial discrimination. The proposed rules would apply to taxable years beginning after May 31, 2027.

The Treasury Department and IRS have issued proposed regulations providing that a private school is not eligible for Federal income tax exemption under section 501(c)(3) if it considers race, color, or national or ethnic origin in any of its educational, admissions, scholarship, athletic, or other school-administered policies. Any such consideration, under the proposed regulation subsection, would be considered de facto racial discrimination. The proposed rules would apply to taxable years beginning after May 31, 2027.

Racial Nondiscrimination

The proposed regulations would treat all race-based consideration in private education as contrary to a fundamental public policy, regardless of its purpose, including remedial or diversity-related objectives. This restriction does not inclulde policies or actions designed to eliminate prejudice or other forms of discrimination. The rules would cover private primary and secondary schools, colleges, professional or trade schools, and universities. The rules specifically do not include governmental units, any agency or instrumentality of a governmental unit, or any organization owned or operated by such an agency or instrumentality.

Application to Private Schools

To qualify for tax exemption, a private school could not consider race, color, or national or ethnic origin in:

• (1) Educational or admissions policies
• (2) Scholarship or loan programs
• (3) Athletic or other school-supported programs

The proposal would not prevent religious schools from maintaining religious missions or selecting students based solely on religious affiliation. If finalized, Rev. Proc. 75-50 would also be modified to remove provisions permitting certain race-based preferences for minority groups.

The proposed regulations would add §1.501(c)(3)-2 and apply to taxable years beginning after May 31, 2027.

Proposed Regulations, NPRM REG-119986-25

IR 2026-103

A Notice of Final Partnership Adjustment (FPA) issued by the IRS to a partnership was timely under Code Sec. 6235 because the partnership and IRS had agreed to extend the limitations period for making partnership adjustments. It was determined that the extended period under Code Sec. 6235(a)(1) controlled because the statute permits adjustments until the latest of the periods specified in Code Sec. 6235(a). Accordingly, the partnership’s motion for summary judgment was denied.

A Notice of Final Partnership Adjustment (FPA) issued by the IRS to a partnership was timely under Code Sec. 6235 because the partnership and IRS had agreed to extend the limitations period for making partnership adjustments. It was determined that the extended period under Code Sec. 6235(a)(1) controlled because the statute permits adjustments until the latest of the periods specified in Code Sec. 6235(a). Accordingly, the partnership’s motion for summary judgment was denied.

The partnership, which was subject to the centralized partnership audit (CPA) regime, challenged an FPA disallowing a charitable contribution deduction. The partnership argued that the FPA was issued outside the applicable limitations period because the 330-day period following the notice of proposed partnership adjustment had expired. However, the parties had previously executed an agreement extending the limitations period for partnership adjustments under Code Sec. 6235(b).

Further, it was concluded that the periods specified in Code Sec. 6235(a) were not sequential deadlines. The statutory phrase “later of” required use of the latest applicable period, and an agreed extension under Code Sec. 6235(b) extended the limitations period for making adjustments, including issuance of the FPA. Because the FPA was mailed before expiration of the agreed extended period, the FPA was timely.

Katanga Properties, LLC, 167 TC No. 10, Dec. 62,899

The Doug LaMalfa Federal Disaster Tax Relief Certainty Act has been signed into law by President Trump.

The Doug LaMalfa Federal Disaster Tax Relief Certainty Act has been signed into law by President Trump.

The law (H.R. 5366) allows victims of federally declared disasters to deduct qualified losses above $500 per disaster without itemizing and removes the 10 percent adjusted gross income threshold for those losses. A fact sheet on the bill can be found here.

Under the law, this treatment of personal casualty loss is available until Jan. 1, 2027.

It also excludes wildfire relief payments from taxable income regardless of when they are received, so long as the wildfire disaster declaration occurs after Dec. 31, 2014, and before Jan. 1, 2027.

President Trump signed the bill into law on Sept. 11, 2026.

The IRS has modified automatic accounting method change procedures for research or experimental expenditures and certain residential construction contracts. Rev. Proc. 2026-32 modifies sections 7 and 19 of Rev. Proc. 2025-23 to reflect changes made by the One, Big, Beautiful Bill Act (OBBBA).

The IRS has modified automatic accounting method change procedures for research or experimental expenditures and certain residential construction contracts. Rev. Proc. 2026-32 modifies sections 7 and 19 of Rev. Proc. 2025-23 to reflect changes made by the One, Big, Beautiful Bill Act (OBBBA).

For research expenditures, the procedure modifies accounting method changes under Code Secs. 174 and 174A. Code Sec. 174 continues to require capitalization and 15-year amortization for foreign research expenditures. Code Sec. 174A generally allows a current deduction for domestic research expenditures paid or incurred in tax years beginning after December 31, 2024.

The procedure also revises rules governing adjustments associated with accounting method changes. It coordinates certain Code Sec. 481 adjustments with the OBBBA transition method for recovering unamortized domestic research expenditures. It also extends through tax years beginning before 2028 waivers of certain eligibility restrictions for specified automatic changes.

Further, the IRS provides automatic accounting method changes for residential construction contracts affected by the OBBBA amendments to Code Sec. 460. Taxpayers may change from the percentage-of-completion method to an exempt contract method for qualifying contracts entered into in tax years beginning after July 4, 2025. Certain taxpayers may also change their treatment of costs under Code Sec. 263A.

The modified procedures generally apply to Form 3115, Application for Change in Accounting Method, filed after September 4, 2026. Special transition rules apply to certain previously filed Forms 3115.

Rev. Proc. 2026-32

The fate of many of the tax incentives taxpayers have grown accustomed to over recent years will likely remain up in the air until Congress and the Administration finally face off weeks before year-end 2012. While the results of Election Day will have bearing on the outcome, no crystal ball can predict how the ultimate short-term compromise will unfold. As a result, some year-end tax planning must be deferred and executed ”at the eleventh hour” only after Congress passes and the President signs what will likely result in a stopgap, temporary compromise for 2013. Tax rates for higher-bracket individuals and a long list of “extenders” provisions such as the child tax credit, the enhanced education credits and the optional deduction for state and local sales tax, hang in the balance. Real tax reform for 2014 and beyond, in any event, won’t be hammered out until 2013 is well underway.

The fate of many of the tax incentives taxpayers have grown accustomed to over recent years will likely remain up in the air until Congress and the Administration finally face off weeks before year-end 2012. While the results of Election Day will have bearing on the outcome, no crystal ball can predict how the ultimate short-term compromise will unfold. As a result, some year-end tax planning must be deferred and executed ”at the eleventh hour” only after Congress passes and the President signs what will likely result in a stopgap, temporary compromise for 2013. Tax rates for higher-bracket individuals and a long list of “extenders” provisions such as the child tax credit, the enhanced education credits and the optional deduction for state and local sales tax, hang in the balance. Real tax reform for 2014 and beyond, in any event, won’t be hammered out until 2013 is well underway.

Traditional Planning for Individuals

2012 year-end legislation clearly plays a major role in 2012 year-end tax planning for many taxpayer. Nevertheless, traditional year-end tax planning should not be overlooked in the meantime. In many cases, attention to traditional considerations, now, will prove more important to a majority of taxpayers’ bottom line. Here is a checklist of some traditional year-end planning considerations not to be overlooked:

• Changes in filing status: marriage, divorce, death of a spouse, or a change in head-of-household status during 2012 (or anticipated for 2013) will impact on your tax bracket and bottom line tax liability. Anticipate the additional expense or lower tax bill that a change in filing status may bring.
• Birth of a child, adoption, combined families through re-marriage, and even the ages of children in 2012 and 2013 can matter to year-end tax planning. Dependency exemptions in some instances depend upon the amount of support provided within the tax year. The ability to take advantage of the child tax credit, the child-care credit, the earned income credit, application of the kiddie tax, and the ability to be covered under a parent’s health insurance under the new health care law in part hinges upon how a “child” is defined within certain age limits (varying from under age 13, to under age 17, 19, 24 or 26, depending upon the provision).
• Retirement and semi-retirement is also a major event for tax purposes for which first-year “required minimum distributions” from retirement savings must be calculated and made. Also an important year-end consideration for the newly retired is facing what is typically an entirely new matrix of investment income considerations focused on “smoothing” the amount of income and deductions among several years to achieve maximum tax results.
• Timing the recognition of capital gains and losses is important, in particular to maximize offsetting short-term gains (that are tax at ordinary income rates) with short-term losses. Also especially relevant to 2012 year-end timing of capital gains and losses is the introduction of a 3.8 percent Medicare contributions tax that will be assessed on excess net investment income starting in 2013.
• Projecting available itemized deductions for 2012, then controlling whether a better tax result might take place by deferring or accelerating some of those deductions, is frequently important. Some taxpayers who are close to the amount of their standard deduction amount may want to load deductions into a single year, say 2013, so they have enough to itemize deductions for that year, while still be entitled to the maximum amount of their standard deduction into an adjacent year (2012 in our example). Other taxpayers need to be aware of alternative minimum tax (AMT) exposure in which many deductions become cut back or eliminated.
• Unusual expenses that may generate an atypical deduction or credit, such as emergency medical expenses, moving expenses, or unemployment and job-search expenses, may need special attention. In connection with medical expenses, and particularly relevant to 2012 year-end planning, is the increase in the floor on deductible medical expenses from 7.5 percent adjusted gross income (AGI) in 2012 to 10 percent AGI in 2013 (7.5 percent for those who reach 65 years of age by the close of the tax year).
• Gift giving, both charitable and for estate planning purposes, usually reaches a high point at year end and for good reason. In addition to better knowing what assets remain available for gifting (or what income needs offsetting with a charitable deduction), certain tax benefits cannot be accumulated but must be used or lost each year. For example, the $13,000 annual gift tax exclusion per recipient cannot be carried over and used in addition to the $14,000 gift tax exclusion that will be available in 2013. A gift of $13,000 on December 31, 2012 and a $14,000 gift on January 1, 2013, for example, amount to a $27,000 tax-free gift; while a $27,000 gift all on January 1, 2013 will subject $13,000 of that gift to potential gift tax. A charitable gift can frequently require the same timing finesse, for example, if donors find themselves in a higher tax bracket in a particular year or not being able to otherwise itemize deductions.

Traditional Planning for Businesses

Businesses also face some traditional strategic decisions that often can only be made at year-end:

• Capital purchases that qualify for accelerated depreciation, bonus depreciation or so-called Section 179 expensing should be timed to fall into the current or the upcoming year, as the overall profit and loss of a business dictates. “Placed in service” requirements in addition to timing the purchase of equipment also apply to maximizing tax benefits.
• Determination of whether a business is on the cash or accrual method of accounting for tax purposes is also critical to year-end business strategies. Businesses using the cash basis method of accounting recognize and report income when the business actually or constructively receives cash or its equivalent; for accrual-basis taxpayers, generally the right to receive income, rather than actual receipt, determines the year of inclusion of income.
• Compensation and shareholder or partner distributions from a business, and drawing the often fine line between the two, can make a considerable difference to a business owner’s overall tax liability for the year. Differences often hinge upon whether self-employment tax is paid, or whether a distribution is taxed as ordinary income or at the capital gains rate.
• Determining the difference between ordinary business activities and passive activities before implementing a year-end strategy also just makes good sense. Rental income or losses, and other passive activity gains and losses, must be netted separately from business gains and losses. Year-end timing for one does not necessarily help control your bottom-line tax cost on the other.

Please contact us if you have any questions about how traditional year-end planning might benefit your bottom line. Once Congress acts on year-end tax legislation this year, we also suggest that most taxpayers consider what steps may then be taken before the 2012 tax year closes to mitigate against any unfavorable new tax provisions.

The tax code provides for 50 percent first-year bonus depreciation for 2012. If property qualifies for bonus depreciation, the taxpayer can deduct 50 percent of the cost of the property in 2012. This can help a business bear the cost of investing in needed equipment, as well as facilitate cash flow and provide operating funds for the business. It is not too late to qualify for 50-percent bonus depreciation for 2012.

The tax code provides for 50 percent first-year bonus depreciation for 2012. If property qualifies for bonus depreciation, the taxpayer can deduct 50 percent of the cost of the property in 2012. This can help a business bear the cost of investing in needed equipment, as well as facilitate cash flow and provide operating funds for the business. It is not too late to qualify for 50-percent bonus depreciation for 2012.

In 2011, bonus depreciation was 100 percent. There have been proposals to reinstate 100 percent bonus depreciation for 2012, but they have not been acted on. For 2012, 50 percent bonus depreciation is available. It expires at the end of 2012 and is not available for 2013. (Note that certain longer production-period property and transportation property still qualifies for 100 percent bonus depreciation if it is acquired and placed in service during 2012.)

Qualified property must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less. Qualified property also includes computer software, water utility property, and qualified leasehold improvement property. The property generally has to be depreciable under MACRS; thus, intangible assets amortized over 15 years do not qualify for bonus depreciation.

There are other requirements for taking 50-percent bonus depreciation in 2012. The original use of the property must begin with the taxpayer. The property must be new, must be acquired before January 1, 2013 (title must pass), and must be placed in service before January 1, 2013. Being placed in service requires that the property be installed and ready for use in the business. The property must be in a condition or state of readiness to be used on a regular, ongoing basis. The property must be available for a specifically assigned function in the trade or business.

The original use is the first use to which the property is put. That, if a taxpayer purchases used property from another business, the property will not qualify for bonus depreciation. However, if the taxpayer makes additional expenditures to recondition or rebuild acquired property, these expenses can satisfy the original use requirement. A person who acquires new property for personal use and then converts it to business use is still considered the original user of the property.

The acquisition date rules require that there not be a written binding contract in effort before January 1, 2008 to acquire the property. Property can qualify if the taxpayer entered into a written binding contract for its acquisition after December 31, 2007 and before January 1, 2013. Self-manufactured property can qualify if the taxpayer begins manufacturing, constructing or producing the property before January 1, 2013. Property is deemed acquired when reduced to physical possession or control. Regardless of the manner of acquisition, the property must be placed in service before January 1, 2013.

If the business does not have profits in the current year, it can use the bonus depreciation deduction to create a net operating loss, which can then be carried back (or forward) to a profitable year and generate a refund. However, bonus depreciation is not mandatory. Taxpayers may choose to elect out of bonus depreciation, so that they can spread depreciation deductions more evenly over future years.

If you need further assistance in arranging any capital purchases for your business to qualify for bonus depreciation before it sunsets at the end of 2012, please contact this office.

In recent years, the IRS has been cracking down on abuses of the tax deduction for donations to charity and contributions of used vehicles have been especially scrutinized. The charitable contribution rules, however, are far from being easy to understand. Many taxpayers genuinely are confused by the rules and unintentionally value their contributions to charity at amounts higher than appropriate.

In recent years, the IRS has been cracking down on abuses of the tax deduction for donations to charity and contributions of used vehicles have been especially scrutinized. The charitable contribution rules, however, are far from being easy to understand. Many taxpayers genuinely are confused by the rules and unintentionally value their contributions to charity at amounts higher than appropriate.

Vehicle donations

According to the U.S. Department of Transportation (DOT), there are approximately 250 million registered passenger motor vehicles in the United States. The U.S. is the largest passenger vehicle market in the world.  Potentially, each one of these vehicles could be a charitable donation and that is why the IRS takes such a sharp look at contributions of used vehicles and claims for tax deductions. The possibility for abuse of the charitable contribution rules is large.

Bona fide charities

Before looking at the tax rules, there is an important starting point.  To claim a tax deduction, your contribution must be to a bona fide charitable organization. Only certain categories of exempt organizations are eligible to receive tax-deductible charitable contributions. 

Many charitable organizations are so-called “501(c)(3)” organizations (named after the section of the Tax Code that governs charities. The IRS maintains a list of qualified Code Sec. 501(c)(3) organizations. Not all charitable organizations are Code Sec. 501(c)(3)s. Churches, synagogues, temples, and mosques, for example, are not required to file for Code Sec. 501(c)(3) status. Special rules also apply to fraternal organizations, volunteer fire departments and veterans organizations. If you have any questions about a charitable organization, please contact our office.

Tax rules

In past years, many taxpayers would value the amount of their used vehicle donation based on information in a buyer’s guide. Today, the value of your used vehicle donation depends on what the charitable organization does with the vehicle.

In many cases, the charitable organization will sell your used vehicle. If the charity sells the vehicle, your tax deduction is limited to the gross proceeds that the charity receives from the sale. The charitable organization must certify that the vehicle was sold in an arm’s length transaction between unrelated parties and identify the date the vehicle was sold by the charity and the amount of the gross proceeds. 

There are exceptions to the rule that your tax deduction is limited to the gross proceeds that the charity receives from the sale of your used vehicle. You may be able to deduct the vehicle’s fair market value if the charity intends to make a significant intervening use of the vehicle, a material improvement to the vehicle, or give or sell the vehicle to a qualified needy individual. If you have any questions about what a charity intends to do with your vehicle, please contact our office.

Written acknowledgment

The charitable organization must give you a written acknowledgment of your used vehicle donation. The rules differ depending on the amount of your donation.  If you claim a deduction of more than $500 but not more than $5,000 for your vehicle donation, the written acknowledgment from the charity must:

• Identify the charity’s name, the date and location of the donation
• Describe the vehicle
• Include a statement as to whether the charity provided any goods or services in return for the car other than intangible religious benefits and, if so, a description and good faith estimate of the value of the goods and services
• Identify your name and taxpayer identification number
• Provide the vehicle identification number

The written acknowledgement generally must be provided to you within 30 days of the sale of the vehicle.  Alternatively, the charitable organization may in certain cases, provide you a completed Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, that contains the same information.

The written acknowledgment requirements for claiming a deduction under $500 or over $5,000 are similar to the ones described above but there are some differences. For example, if your deduction is expected to be more than $5,000 and not limited to the gross proceeds from the sale of your used vehicle, you must obtain a written appraisal of the vehicle. Our office can help guide you through the many steps of donating a vehicle valued at more than $5,000.

If you are planning to donate a used vehicle, please contact our office and we can discuss the tax rules in more detail.

In 2013, a new and unique tax will take effect—a 3.8 percent "unearned income Medicare contribution" tax as part of the structure in place to pay for health care reform. The tax will be imposed on the "net investment income" (NII) of individuals, estates, and trusts that exceeds specified thresholds. The tax will generally fall on passive income, but will also apply generally to capital gains from the disposition of property.

In 2013, a new and unique tax will take effect—a 3.8 percent "unearned income Medicare contribution" tax as part of the structure in place to pay for health care reform. The tax will be imposed on the "net investment income" (NII) of individuals, estates, and trusts that exceeds specified thresholds. The tax will generally fall on passive income, but will also apply generally to capital gains from the disposition of property.

Specified thresholds

For an individual, the tax will apply to the lesser of the taxpayer's NII, or the amount of "modified" adjusted gross income (AGI with foreign income added back) above a specified threshold, which is:

• $250,000 for married taxpayers filing jointly and a surviving spouse;
• $125,000 for married taxpayers filing separately;
• $200,000 for single and head of household taxpayers.

Examples. A single taxpayer has modified AGI of $220,000, including NII of $30,000. The tax applies to the lesser of $30,000 or ($220,000 minus $200,000), the specified threshold for single taxpayers. Thus, the tax applies to $20,000.

A single taxpayer has modified AGI of $150,000, including $60,000 of NII. Because the taxpayer's income is below the $200,000 threshold, the taxpayer does not owe the tax, despite having substantial NII.

For an estate or trust, the tax applies to the lesser of undistributed net income, or the excess of AGI over the dollar amount for the highest tax rate bracket for estates and trusts ($11,950 for 2013). Thus, the tax applies to a much lower amount for trusts and estates.

Application of tax

The tax applies to interest, dividends, annuities, royalties, and rents, and capital gains, unless derived from a trade or business. The tax also applies to income and gains from a passive trade or business.

Other items are excluded from NII and from the tax:  distributions from IRAs, pensions, 401(k) plans, tax-sheltered annuities, and eligible 457 plans, for example. Items that are totally excluded from gross income, such as  distributions from a Roth IRA and interest on tax-exempt bonds, are excluded both from NII and from modified AGI.

The tax does not apply to nonresident aliens, charitable trusts, or corporations.

Tax planning techniques

Taxpayers are concerned about having to pay the tax. One technique for avoiding the tax is to sell off capital gain property in 2012, before the tax applies. This can be particularly useful if the taxpayer is facing a large capital gain from the sale of a principal residence (after taking the $250,000/$500,000 exclusion from income). Older taxpayers who do not want to sell their property may want to consider holding on to appreciated property until death, when the property gets a fair market value basis without being subject to income tax.

The technique of "gain harvesting" may be even more attractive if tax rates increase on dividends, capital gains, and AGI in 2013, with the potential expiration of the Bush-era tax cuts. However, the status of these tax rates will not be determined until after the election, potentially in a lame-duck Congressional session. It is also possible that Congress will simply extend existing tax rates for another year and "punt" the decision until 2013, as tax reform discussions heat up.

Taxpayers may also want to change the source of their income. Investing in tax-exempt bonds will be more attractive, since the interest income does not enter into AGI or NII. Converting a 401(k) account or traditional IRA to a Roth IRA will accomplish the same purpose. Income from a Roth conversion is not net investment income, although the income will increase modified AGI, which may put other income in danger of being subject to the 3.8 percent tax. Increasing deductible or pre-tax contributions to existing retirement plans can also lower income and help the taxpayer stay below the applicable threshold.

Trusts and estates should make a point of distributing their income to their beneficiaries. A trust's NII will be taxed at a low threshold (less than $12,000), while the income received by a beneficiary is taxed only if the much higher $200,000/$250,000 thresholds are exceeded.

Uncertainty

There was some uncertainty about the tax taking effect because of litigation challenging the health care law providing the tax, but a June 2012 Supreme Court decision upheld the law. The application of the tax is also uncertain because the Republican leadership has vowed to pursue repeal of the health care law if the Republicans win the presidency and take control of both houses of Congress in the November 2012 elections. But this is speculative. In the meantime, the Supreme Court decision guarantees that the tax will take effect on January 1, 2013.

These can be difficult decisions. While economic considerations for managing assets and income are important, it also makes sense for a taxpayer to look at the tax impact if the certain asset sales or shifts in investment portfolios are otherwise being considered.

Whether or not the IRS will allow a deduction for year-end bonuses for services performed during that year depends not only on the timing of the payment, but also the events surrounding the payment. If your business is planning to provide year-end bonuses to employees, you may find the following tax tips useful in your planning.

Whether or not the IRS will allow a deduction for year-end bonuses for services performed during that year depends not only on the timing of the payment, but also the events surrounding the payment. If your business is planning to provide year-end bonuses to employees, you may find the following tax tips useful in your planning.

The "All Events" test

Code Sec. 461(a) provides that the amount of any deduction for employee bonuses must be taken for the proper tax year as determined under the method of accounting the taxpayer uses to compute taxable income. (The two most common methods are the cash method and the accrual method, the latter of which allows taxpayers to include income items when earned and claim deductions when expenses are incurred.)

Under the accrual method of accounting, the three-prong "All events" test is used to determine the tax year in which a liability-in this case the year-end employee bonuses—is incurred. The prongs are:

• Have all the events have occurred that establish the fact of the liability?
• Can the amount of the liability be determined with reasonable accuracy?
• Has economic performance occurred for the liability?

Approval and retention provisions

Some year-end bonus plans are structured with certain conditions attached to payment. For example, some bonus plans provide that payment cannot occur until formally approved. In such cases, the fact of the liability may not be established, and the employer may need to wait a year before being able to deduct the bonus amount.

Other plans specify that bonus payments cannot be made if an employee has left employment at year-end. In this case as well, questions arise as to whether liability for the bonuses has been fixed at the end of the year in which the employee's services were performed.

Deferred compensation

Generally, Code Sec. 404 states that, an employer may not deduct deferred compensation paid to an employee until the employee includes it in income. However, a bonus received within a 2 1/2-month period after the end of the tax year in which the employee has rendered its services is not considered deferred compensation. The employer should be able to claim a tax deduction for the bonus in the tax year during which the services were rendered provided that the liability meets the all events test. If the employee receives the deferred amount more than 2 1/2 months after the close of the employer's taxable year, the payment is presumed to have been made under a deferred compensation plan.

If you think you might be interested in structuring a year-end bonus plan specific to your business, please feel free to contact this office for an appointment.

As 2013 draws closer, news reports about “taxmageddon” and “taxpocalypse,” describing expiration of the Bush-era tax cuts, are proliferating. Many taxpayers are asking what they can do to prepare. The answer is to prepare early. September may seem too early to be discussing year-end tax planning, but the uncertainty over the Bush-era tax cuts, incentives for businesses, and much more, requires proactive strategizing. Ultimately, the fate of these tax incentives will be resolved; until then, taxpayers need to be flexible in their year-end tax planning.

As 2013 draws closer, news reports about “taxmageddon” and “taxpocalypse,” describing expiration of the Bush-era tax cuts, are proliferating. Many taxpayers are asking what they can do to prepare. The answer is to prepare early. September may seem too early to be discussing year-end tax planning, but the uncertainty over the Bush-era tax cuts, incentives for businesses, and much more, requires proactive strategizing. Ultimately, the fate of these tax incentives will be resolved; until then, taxpayers need to be flexible in their year-end tax planning.

Individuals

In less than three months, the individual income tax rates are scheduled without further action to automatically increase across-the-board, with the highest rate jumping from 35 percent to 39.6 percent. Additionally, the current tax-favorable capital gains and dividends tax rates are scheduled to expire. Higher income taxpayers will also be subject to revived limitations on itemized deductions and their personal exemptions. The child tax credit, one of the most popular incentives in the tax code, will be cut in half. Millions of taxpayers are predicted to be liable for the alternative minimum tax (AMT) because of expiration of the AMT “patch.” Countless other incentives for individuals will either disappear or be substantially reduced after 2012.

In July, the House and Senate passed competing bills to extend many of these expiring incentives one more year (through 2013). No further action is expected on these bills until after the November elections. However, they do signal a highly probable temporary solution to the fate of the Bush-era tax cuts. Regardless of which party wins the White House and Congress, the probability of a one-year extension of the Bush-era tax cuts appears high.

Along with expiration of the Bush-era tax cuts, the two percent payroll tax holiday for 2012 is scheduled to expire. For individuals with income at or above the Social Security wage base for 2012 ($110,100), the payroll tax holiday represented a $2,202 savings. Unlike the Bush-era tax cuts, an extension of the payroll tax holiday is unlikely.

Putting aside the Bush-era tax cuts and the payroll tax holiday for a moment, two new taxes are scheduled to take effect after 2012: an additional 0.9 percent Medicare tax on wages and self-employment income and a 3.8 percent Medicare contribution tax on unearned income. Both new taxes are targeted to individuals with incomes over $200,000 (families with incomes over $250,000). One important misconception about the 3.8 percent Medicare tax is that it is a direct real estate tax. Taxpayers that dispose of real estate may be exempt from the tax either because of income limitations or because of an exclusion provided for primary residence home sales. However, certain high-end homes may feel the sting of the 3.8 percent tax on some or all of the gain realized. Despite some rumblings in the GOP-controlled House, it is unlikely the new Medicare taxes will be repealed before 2013.

All these provisions can be seen as the perfect storm. Year-end tax planning takes on new urgency because of the uncertainty. Some variations on traditional year-end planning techniques may be valuable. Instead of shifting income into a future year, taxpayers may want to recognize income in 2012, when lower tax rates are available, rather than shift income to 2013. The same strategy may apply to recognizing income from capital gains and dividends. Another valuable year-end strategy is to “run the numbers” for regular tax liability and AMT liability. Taxpayers may want to explore if certain deductions should be more evenly divided between 2012 and 2013, and which deductions may qualify, or will not be as valuable, for AMT purposes. Additionally, keep in mind the new Medicare taxes and how they will impact investments and possibly home sales.

Estate tax planning is also in flux. Under current law, the maximum estate tax rate is 35 percent with an applicable exclusion amount of $5 million (indexed for inflation) for decedents dying before January 1, 2013. Unless Congress acts, the estate tax will revert to its less generous pre-2001 rates. Gift and generation-skipping transfer (GST) taxes also will revert to their pre-2001 rates.

Businesses

Businesses are also confronted with uncertainty in tax planning as 2012 ends. Special incentives, such as bonus depreciation, enhanced Code Sec. 179 expensing and a host of business tax extenders, may be unavailable after 2012.

Under current law, 50-percent bonus depreciation applies to qualified property acquired and placed in service after December 31, 2011 and before January 1, 2013 (January 1, 2014 for certain property). For tax years beginning in 2012, the Code Sec, 179 expensing dollar limitation is $139,000 and the investment ceiling is $560,000 for tax years beginning in 2012. After 2012, 50-percent bonus depreciation is scheduled to expire (except for certain property) and the Code Sec. 179 expensing dollar limitation will drop to $25,000 with a $200,000 investment ceiling.

Enhanced Code Sec. 179 expensing is a good candidate for extension after 2012, but at less generous amounts. In July, the Senate approved a Code Sec. 179 dollar amount of $250,000 and an $800,000 investment limitation for tax years beginning after December 31, 2012. The House approved a Code Sec. 179 dollar amount of $100,000 and a $400,000 investment limitation after 2012.

The list of expired business tax extenders is long. The expired incentives include the research tax credit, special expensing for film and television productions, the employer wage credit for military reservists, and many more. A host of related energy incentives have also expired and are awaiting renewal. Unlike past years, Congress is not expected to routinely extend all of the expired provisions. The more widely utilized incentives are likely to be extended; some lesser used incentives may not.

Businesses do have some good news in year-end planning. Temporary “repair” regulations issued in late 2011 include a valuable de minimis rule, which could enable taxpayers to expense otherwise capitalized tangible property. Qualified taxpayers may claim a current deduction for the cost of acquiring items of relatively low-cost property, including materials and supplies, if specific requirements are met. The aggregate cost which may be expensed annually under a taxpayer’s expensing policy is subject to a ceiling equal to the greater of 0.1 percent of gross receipts or two percent of total depreciation and amortization reported on the financial statement.

Businesses should also explore the Code Sec. 199 domestic production activities deduction. This deduction, unlike many other incentives, is permanent and will not expire after 2012. The deduction allows qualified taxpayers to deduct an amount equal to the lesser of a phased-in percentage of taxable income (adjusted gross income for individuals) or qualified production activities income. A taxpayer’s Code Sec. 199 deduction cannot exceed one-half (50 percent) of the W-2 wages paid by the taxpayer during the year.

Sequestration

The fate of the Bush-era tax cuts and the other incentives is linked to sequestration. The Budget Control Act of 2011 imposes across-the-board spending cuts starting in 2013. Many lawmakers want to postpone or repeal the spending cuts but savings must be recouped somehow. Several energy tax incentives, especially for oil and gas producers, have been viewed as likely candidates for elimination to offset repeal of the Budget Control Act.

Please contact our office if you have any questions about the incentives we discussed and how you can develop a year-end tax plan that responds to the current climate of uncertainty.

Some individuals must pay estimated taxes or face a penalty in the form of interest on the amount underpaid. Self-employed persons, retirees, and nonworking individuals most often must pay estimated taxes to avoid the penalty. But an employee may need to pay them if the amount of tax withheld from wages is insufficient to cover the tax owed on other income. The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners.

Some individuals must pay estimated taxes or face a penalty in the form of interest on the amount underpaid. Self-employed persons, retirees, and nonworking individuals most often must pay estimated taxes to avoid the penalty. But an employee may need to pay them if the amount of tax withheld from wages is insufficient to cover the tax owed on other income. The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners.

The trick with estimated taxes is to pay a sufficient amount of estimated tax to avoid a penalty but not to overpay. The IRS will refund the overpayment when you file your return, but it will not pay interest on it. In other words, by overpaying tax to the IRS, you are in essence choosing to give the government an interest-free loan rather than invest your money somewhere else and make a profit.

When do I make estimated tax payments?

Individual estimated tax payments are generally made in four installments accompanying a completed Form 1040-ES, Estimated Tax for Individuals. For the typical individual who uses a calendar tax year, payments generally are due on April 15, June 15, and September 15 of the tax year, and January 15 of the following year (or the following business day when it falls on a weekend or other holiday).

Am I required to make estimated tax payments?

Generally, you must pay estimated taxes in 2012 if (1) you expect to owe at least $1,000 in tax after subtracting tax withholding (if you have any) and (2) you expect your withholding and credits to be less than the smaller of 90 percent of your 2012 taxes or 100 percent of the tax on your 2011 return.  There are special rules for higher income individuals.

Usually, there is no penalty if your estimated tax payments plus other tax payments, such as wage withholding, equal either 100 percent of your prior year's tax liability or 90 percent of your current year's tax liability. However, if your adjusted gross income for your prior year exceeded $150,000, you must pay either 110 percent of the prior year tax or 90 percent of the current year tax to avoid the estimated tax penalty. For married filing separately, the higher payments apply at $75,000.

Estimated tax is not limited to income tax. In figuring your installments, you must also take into account other taxes such as the alternative minimum tax, penalties for early withdrawals from an IRA or other retirement plan, and self-employment tax, which is the equivalent of Social Security taxes for the self-employed.

Suppose I owe only a relatively small amount of tax?

There is no penalty if the tax underpayment for the year is less than $1,000. However, once an underpayment exceeds $1,000, the penalty applies to the full amount of the underpayment.

What if I realize I have miscalculated my tax before the year ends?

An employee may be able to avoid the penalty by getting the employer to increase withholding in an amount needed to cover the shortfall. The IRS will treat the withheld tax as being paid proportionately over the course of the year, even though a greater amount was withheld at year-end. The proportionate treatment could prevent penalties on installments paid earlier in the year.

What else can I do?

If you receive income unevenly over the course of the year, you may benefit from using the annualized income installment method of paying estimated tax. Under this method, your adjusted gross income, self-employment income and alternative minimum taxable income at the end of each quarterly tax payment period are projected forward for the entire year. Estimated tax is paid based on these annualized amounts if the payment is lower than the regular estimated payment. Any decrease in the amount of an estimated tax payment caused by using the annualized installment method must be added back to the next regular estimated tax payment.

Determining estimated taxes can be complicated, but the penalty can be avoided with proper attention. This office stands ready to assist you with this determination. Please contact us if we can help you determine whether you owe estimated taxes.