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Treasury and the IRS intend to issue proposed regulations under sections 897(d) and (e) to modify the rules under §§1.897-5T and 1.897-6T, Notice 89-85, 1989-31 I.R.B. 9, and Notice 2006-46, 2...
The IRS has reminded employers that they may continue to offer student loan repayment assistance through educational assistance programs until the end of the tax year at issue, December 31, 2025. Unde...
The IRS Whistleblower Office emphasized the role whistleblowers continue to play in supporting the nation’s tax administration ahead of National Whistleblower Appreciation Day on July 30. The IRS ha...
The 2025 interest rates to be used in computing the special use value of farm real property for which an election is made under Code Sec. 2032A were issued by the IRS.In the ruling, the IRS lists th...
A taxpayer that provided construction management services to owners of self-storage facilities was properly assessed Washington retail sales tax and retailing business and occupation (B&O) tax, be...
As we approach the end of 2024, it’s important to review your tax strategies to reduce your liability. Check your withholding and estimated payments to ensure they cover your tax obligations and avoid penalties. Consider bunching itemized deductions, such as charitable donations or medical expenses, to maximize your deductions this year. If you plan to sell investments, offset gains with losses and take advantage of long-term capital gains rates. Charitable giving, including through Qualified Charitable Distributions (QCDs) or appreciated assets, can also help reduce taxable income. For Washington residents, be aware of the capital gains tax and potential changes to the Business & Occupation (B&O) Tax. Contact us for personalized advice to optimize your tax situation before year-end.
To Our Clients and Friends:
The end of the tax year is almost upon us, so it’s a good time to think about things you can do to reduce your 2024 federal taxes. We know there will be a new President and Congress, so there’s no guarantee we won’t see a retroactive tax law change affecting 2024,but that would take an actual act of Congress. So, for now, we can only assume that the law currently in effect for 2024 will remain in place. If there are any developments that affect 2024, we certainly will let you know. With that said, here are some things to think about doing before the end of the year.
Check Your Tax Withholding and Estimated Payments
If the Federal Income Tax(FIT) withheld from your paychecks plus any estimated tax payments for 2024aren’t at least equal to (1)your 2023 tax liability [110% of that amount if your 2023 AGI was more than$150,000 ($75,000 if you file MFS)] or, if less (2) 90% of your 2024 tax liability, you will be subject to an underpayment penalty for 2024. Making an estimated tax payment reduces any underpayment from the time the payment is made. But FIT withheld from wages is considered paid ratably over the year. So, if it turns out you had unexpected income or gains early this year and haven’t made sufficient estimated tax payments to avoid the penalty, you can increase your withholding for the rest of the year to reduce or eliminate your underpayment from earlier quarters. We can help you project your 2024 tax and adjust your withholding to eliminate (to the extent possible) an underpayment penalty. We can also help you see what your remaining 2024 tax bill next April will look like.
Consider Bunching Itemized Deductions
Each year, you can deduct the greater of your itemized deductions (mortgage interest, charitable contributions, medical expenses, and taxes) or the standard deduction. The 2024standard deduction is $14,600 for singles and married individuals filing separately (MFS), $29,200 for married couples filing jointly (MFJ), and $21,900for Heads of Household (HOH). If your total itemized deductions for 2024 will be close to your standard deduction, consider “bunching” your itemized deductions, so they exceed your standard deduction every other year. Paying enough itemized deductions in 2024 to exceed your standard deduction will lower this year’s tax bill. Next year, you can always claim the standard deduction, which will be increased for inflation.
For example, if you file a joint return and your itemized deductions are steady at around $28,000 per year, you will end up claiming the standard deduction in both 2024 and 2025. But, if you can bunch expenditures so that you have itemized deductions of $32,000 in2024 and $24,000 in 2025, you could itemize in 2024 and get a $32,000 deduction versus a $29,200 standard deduction. In 2025, your itemized deductions would be below the standard deduction (which adjusted for inflation will be at least$29,200). So, for 2025, you would claim the standard deduction. If you manage to exceed the standard deduction every other year, you’ll be better off than if you just settle for the standard deduction each year.
You can get itemized deductions into 2024 by making your house payment due in January 2025 in 2024. But there’s a limit on the amount of mortgage interest you can deduct. Generally, you can only deduct interest expense on up to $375,000 ($750,000 if MFJ) of a mortgage loan used to acquire your home. More generous rules apply to mortgages(and home equity debt) incurred before 12/15/2017.
Timing your charitable contributions is another simple way to get your itemized deductions into the year you want them.
To a certain extent, you can also choose the year you pay state and local income and property taxes. Taxes that are due in early 2025 (such as fourth quarter estimated income tax payments in many states) can be paid in 2024. Likewise, property tax bills are often sent out before year-end but not due until the following year. However, note that the deduction for state and local taxes is limited to $10,000 ($5,000if you file MFS). So, if your state and local tax bill is close to or over that limit, prepaying taxes may not affect your total itemized deductions.
Warning: Prepaying state and local taxes can be a bad idea if you owe Alternative Minimum Tax (AMT) for 2024, since those taxes aren’t deductible under the AMT rules. If you are subject to AMT in 2024 and think you won’t be in 2025, it’s better to pay the taxes in 2025, when you have a chance of deducting them.
Finally, consider accelerating elective medical procedures, dental work, and vision care into 2024. For 2024,medical expenses can be claimed as an itemized deduction to the extent they exceed 7.5% of your Adjusted Gross Income (AGI).
Planning Tip: If Congress does nothing, the standard deduction will fall dramatically in 2026 and the cap on the deduction for state and local taxes will disappear. This is even more reason to bunch itemized deductions into2024, defer them in 2025 and take the standard deduction, and bunch again in2026. Even if Congress extends the larger standard deduction and the cap on state and local taxes past 2025, this strategy results in accelerating deductions into 2024 and maximizing deductions versus taking the standard deduction in both 2024 and 2025. If the provisions do expire, you will have deferred itemized deductions into 2026, where they are likely to produce a much larger tax benefit than if you had taken them in 2025.
Take a Look at Your Investment Portfolio
It’s a good idea to look at your investment portfolio with an eye to selling before year-end to save taxes. Note that selling investments to generate a tax gain or loss doesn’t apply to investments held in a retirement account [such as a 401(k)] or IRA, where the gains and losses are not currently taxed.
If you are looking to sell appreciated securities, it’s usually best to wait until they have been held for over 12 months, so they will generate a long-term, versus short-term, capital gain. The maximum long-term capital gain tax rate is 20%, but for many individuals, a 15% rate applies. The 3.8% Net Investment Income Tax (NIIT) can also apply at higher income levels. Even so, the highest tax rate on long-term capital gains (23.8%) is still far less than the 37% maximum tax rate on ordinary income and short-term capital gains. And, to the extent you have capital losses that were recognized earlier this year or capital loss carryovers from earlier years, those losses can offset any capital gains if you decide to sell stocks at a gain this year.
You should also consider selling stocks that are worth less than your tax basis in them (typically, the amount you paid for them). Taking the resulting capital losses this year will shelter capital gains, including short-term capital gains, resulting from other sales this year. But consider the wash sale rules. If you sell a stock at a loss and within the 30-day period before or the 30-day period after the sale date, you acquire substantially identical securities, the loss is suspended until you sell the identical securities.
If you sell enough loss stock that capital losses exceed your capital gains, the resulting net capital loss for the year can be used to shelter up to $3,000 ($1,500 if MFS) of 2024ordinary income from salaries, self-employment income, interest, etc. Any excess net capital loss from this year is carried forward to next year and beyond. Having a capital loss carryover into next year and beyond could be a tax advantage. The carryover can be used to shelter both short-term and long-term gains. This can give you some investing flexibility in future years because you won’t have to hold appreciated securities for over a year to get a lower tax rate on any gains you trigger by selling, to the extent those gains will be sheltered by the capital loss carryforward.
Planning Tip: Nontax considerations must be considered when deciding to sell or hold a security. If you have stock that has fallen in value, but you think will recover, you might want to keep it rather than trigger the capital loss. If, after considering all factors, you decide to take some capital gains and/or losses to minimize your 2024 taxes, make sure your investment portfolio is still allocated to the types of investments you want based on your investment objectives. You may have to rebalance your portfolio. When you do, be sure to consider investment assets held in taxable brokerage accounts as well as those held in tax-advantaged accounts, such as IRAs and 401(k) plans.
Make Your Charitable Giving Plans
You can reduce your 2024 taxable income by making charitable donations (assuming your itemized deductions exceed your standard deduction). If you don’t have a charity or charities that you are comfortable making large donations to, you can contribute to a donor-advised fund (also known as charitable gift funds or philanthropic funds) instead. This is a public charity or community foundation that uses the assets to establish a separate fund to receive grant requests from charities seeking distributions from the advised fund. Donors can suggest (but not dictate) which grant requests should be honored. You claim the charitable tax deduction in the year you contribute to the donor-advised fund but retain the ability to recommend which charities will benefit for several years.
Another tax-advantaged way to support your charitable causes is to donate appreciated assets that were held for over a year. If you give such assets to a public charity, you can deduct the donated asset’s fair market value and avoid the tax you would have paid had you sold the asset and donated the cash to the charity. Charitable gifts of appreciated property to a private nonoperating foundation are generally only deductible to the extent of your basis in the asset. But qualified appreciated stock (generally, publicly traded stock) donated to a private nonoperating foundation can qualify for a deduction equal to its fair market value.
If you are age 70½ or older, consider a direct transfer from your IRA to a qualified charity [known as a Qualified Charitable Distribution (QCD)]. While you can’t claim a charitable donation for the amount transferred to the charity, the QCD does count toward your Required Minimum Distribution (RMD). If you don’t itemize, that’s clearly better than taking a fully taxable RMD and then donating the amount to charity with no corresponding deduction. Even if you do itemize and would be able to deduct the full amount transferred to the charity, the QCD does not increase your Adjusted Gross Income (AGI), while a RMD would. Keeping your AGI low can decrease the amount of your taxable Social Security benefits and minimize the phaseout of other favorable tax provisions based on AGI.
Caution :If you are over age 70½ and still working in 2024, you can contribute to a traditional IRA. But, if you’re considering a QCD for 2024 (or a later year),making a deductible IRA contribution for years you are age 70½ or older will affect your ability to exclude future QCDs from your income.
Planning Tip: To get a QCD completed by year-end, you should initiate the transfer before December 31. Talk to your IRA custodian, but making the transfer no later than December is probably a good idea.
Convert Traditional IRAs into Roth Accounts
Because you must pay tax on the conversion as if the traditional IRA had been distributed to you, converting makes the most sense when you expect to be in the same or higher tax bracket during your retirement years. If that turns out to be true, the current tax cost from a conversion this year could be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account’s post-conversion earnings. In effect, a Roth IRA can insure part or all of your retirement savings against future tax rate increases.
Planning Tip: If the conversion triggers a lot of income, it could push you into a higher tax bracket than expected. One way to avoid that is to convert smaller portions of the traditional IRA over several years. Of course, that delays getting funds into the Roth IRA where they can be potentially earning tax-free income. There is no one answer here. But keep in mind that you do not have to convert a traditional IRA into a Roth all at once. We can help you project future taxable income and the effect of converting various amounts of your traditional IRA into a Roth IRA.
Spend any Remaining Funds in Your Flexible Spending Accounts
If you participate in in an employer-sponsored medical or dependent care flexible spending plan, be sure to look at your plan closely. Generally, funds not spent before the plan’s year-end are forfeited (the use-it-or-lose-it rule). There are a few exceptions. Employers can allow their employees to carry over up to $640 from their 2024 medical FSA into their 2025 account. Alternatively, FSA plans can offer a grace period (up to 2 ½ months after the plan’s year-end) during which employees can incur new claims and expenses and be reimbursed. Plans can (but don’t have to) have either a carryover or a grace period, but not both.
FSAs can also have a run-out period (a specific period after the end of the plan year during which participants can submit claims for eligible expenses incurred during the plan year). The run-out period can be in addition to a carryover or a grace period. The runout period differs from a grace period because a runout period only extends the time for submitting claims. A grace period, in effect, extends the plan year so that expenses incurred during the grace period are treated as incurred before the plan year-end. It's important to know how your FSA(s) work so that you can make sure you don’t lose any funds. If there is no grace period, be sure you incur qualified expenses before year-end and submit eligible claims by their due date.
Take Advantage of the Annual Gift Tax Exclusion
The basic estate, gift, and generation skipping transfer tax exclusion is scheduled to fall from $13.61million ($27.22 million for married couples) in 2024 to $5 million ($10 million for married couples) in 2026. The 2026 amounts will be adjusted for inflation, but the bottom line is that, absent any tax law changes, the 2026 exclusion will be substantially less than 2024 exclusion. So, many estates that will escape taxation before 2026 will be subject to estate tax after 2025. If you think your estate may be taxable, annual exclusion gifts (perhaps to children or grandchildren) are an easy way to reduce your taxable estate. The annual gift exclusion allows for tax-free gifts that don’t count toward your lifetime exclusion amount. For 2024, you can make annual exclusion gifts up to $18,000 per donee, with no limit on the number of donees.
In addition to potentially reducing your taxable estate, gifting income-producing assets to children (or other loved ones) can shift the income from those assets to someone in a lower tax bracket. But, if you give assets to someone who is under age 24, the Kiddie Tax rules could cause some of the investment income from those assets to be taxed at your higher marginal federal income tax rate.
If you gift investment assets, avoid gifting assets worth less than what you paid for them. The donee’s basis for recognizing a loss is the lower of your basis or the property’s FMV at the date of the gift. So, in many cases, the loss that occurred while you held the asset may go unrecognized. Instead, you should sell the securities, take the resulting tax loss, and then give the cash to your intended donee.
Remember, estate planning involves more than avoiding the Federal estate tax. Sound estate planning ensures that your assets go where you want them, considering your desires, family members’ needs, and charitable giving, among other things. Please contact us if you would like to discuss your estate plan.
Washington State Income Tax?
Washington State doesn’t have an income tax, right? Well, technically no but we do have a capital gains tax. Washington State instituted a capital gains tax starting in 2022. The State supreme court ruled that this is an “excise” tax, not an income tax and therefore allowable under Washington States constitution even thou every other state AND the IRS considers capital gains to be income. Long-term capital gains over $262,000 will be subject to a 7% tax in 2024. Gains on real estate transactions are NOT subject to this tax at this time. Due to the failure of the recent initiative to overturn this tax, it is our opinion that the Washington legislature will dramatically increase the reach of this tax first by lowering the threshold and second by adding real estate to the list of investment subject to this tax. In the first year of the capital gains tax(2022) there was a proposal to reduce the threshold to $15,000 so it wouldn’t be surprising if we end up there in 2025.
Another Washington State Tax?
The Department of Revenue issued a ruling a few years ago that has the potential to shake up the tax situation here at home. This ruling, just recently affirmed last month by the WA State Supreme Court (The Antio case),now says that investment income should be subject to our Business and Occupation Tax (B&O). In the past, investment income has been exempt from this tax. We don’t yet fully understand the implication of this ruling and how far its reach will be. It’s possible that individuals will be required to file B&O returns every year to report their investment income and pay an additional tax. Stay tuned. We are following this very closely.
Conclusion
This letter only covers some of the year-end tax planning ideas that could reduce your 2024 tax bill. Please contact us if you have questions about any of the strategies described here or for more tax-saving ideas. We would love to help you develop a year-end tax planning strategy that delivers results.
The IRS has announced that, under the phased implementation of the One Big Beautiful Bill Act (OBBBA), there will be no changes to individual information returns or federal income tax withholding tables for the tax year at issue.
The IRS has announced that, under the phased implementation of the One Big Beautiful Bill Act (OBBBA), there will be no changes to individual information returns or federal income tax withholding tables for the tax year at issue. Specifically, Form W-2, existing Forms 1099, Form 941 and other payroll return forms will remain unchanged for 2025. Employers and payroll providers are instructed to continue using current reporting and withholding procedures. This decision is intended to avoid disruptions during the upcoming filing season and to give the IRS, businesses and tax professionals sufficient time to implement OBBBA-related changes effectively.
In addition to this, IRS is developing new guidance and updated forms, including changes to the reporting of tips and overtime pay for TY 2026. The IRS will coordinate closely with stakeholders to ensure a smooth transition. Additional information will be issued to help individual taxpayers and reporting entities claim benefits under OBBBA when filing returns.
The IRS issued frequently asked questions (FAQs) relating to several energy credits and deductions that are expiring under the One, Big, Beautiful Bill Act (OBBB) and their termination dates. The FAQs also provided clarification on the energy efficient home improvement credit, the residential clean energy credit, among others.
The IRS issued frequently asked questions (FAQs) relating to several energy credits and deductions that are expiring under the One, Big, Beautiful Bill Act (OBBB) and their termination dates. The FAQs also provided clarification on the energy efficient home improvement credit, the residential clean energy credit, among others.
Energy Efficient Home Improvement Credit
The credit will not be allowed for any property placed in service after December 31, 2025.
Residential Clean Energy Credit
The credit will not be allowed for any expenditures made after December 31, 2025. Due to the accelerated termination of the Code Sec. 25C credit, periodic written reports, including reporting for property placed in service before January 1, 2026, are no longer required.
A manufacturer is still required to register with the IRS to become a qualified manufacturer for its specified property to be eligible for the credit.
Clean Vehicle Program
New user registration for the Clean Vehicle Credit program through the Energy Credits Online portal will close on September 30, 2025. The portal will remain open beyond September 30, 2025, for limited usage by previously registered users to submit time-of-sale reports and updates to such reports.
Acquiring Date
A vehicle is “acquired” as of the date a written binding contract is entered into and a payment has been made. Acquisition alone does not immediately entitle a taxpayer to a credit. If a taxpayer acquires a vehicle and makes a payment on or before September 30, 2025, the taxpayer will be entitled to claim the credit when they place the vehicle in service, even if the vehicle is placed in service after September 30, 2025.
The IRS has provided guidance regarding what is considered “beginning of constructions” for purposes of the termination of the Code Sec. 45Y clean electricity production credit and the Code Sec. 48E clean electricity investment credit. The One Big Beautiful Bill (OBBB) Act (P.L. 119-21) terminated the Code Secs. 45Y and 48E credits for applicable wind and solar facilities placed in service after December 31, 2027.
The IRS has provided guidance regarding what is considered “beginning of constructions” for purposes of the termination of the Code Sec. 45Y clean electricity production credit and the Code Sec. 48E clean electricity investment credit. The One Big Beautiful Bill (OBBB) Act (P.L. 119-21) terminated the Code Secs. 45Y and 48E credits for applicable wind and solar facilities placed in service after December 31, 2027. The termination applies to facilities the construction of which begins after July 4, 2026. On July 7, 2025, the president issue Executive Order 14315, Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources, 90 F.R. 30821, which directed the Treasury Department to take actions necessary to enforce these termination provisions within 45 days of enactment of the OBBB Act.
Physical Work Test
In order to begin construction, taxpayers must satisfy a “Physical Work Test,” which requires the performance of physical work of a significant nature. This is a fact based test that focuses on the nature of the work, not the cost. The notice addresses both on-site and off-site activities. It also provides specific lists of activities that are to be considered work of a physical nature for both solar and wind facilities. Preliminary activities or work that is either in existing inventory or is normally held in inventory are not considered physical work of a significant nature.
Continuity Requirement
The Physical Work Test also requires that a taxpayer maintain a continuous program of construction on the applicable wind or solar facility, the Continuity Requirement. To satisfy the Continuity Requirement, the taxpayer must maintain a continuous program of construction, meaning continuous physical work of a significant nature. However, the notice provides a list of allowable “excusable disruptions,” including delays related to permitting, weather, and acquiring equipment, among others.
The guidance also provides a safe harbor for the Continuity Requirement. Under the safe harbor, the Continuity Requirement will be met if a taxpayer places an applicable wind or solar facility in service by the end of a calendar year that is no more than four calendar years after the calendar year during which construction of the applicable wind or solar facility began. Thus, if construction begins on an applicable wind or solar facility on October 1, 2025, the applicable wind or solar facility must be placed in service before January 1, 2030, for the safe harbor to apply.
Five Percent Safe Harbor for Low Output Solar Facilities
A safe harbor is available for a low output solar facility, which is defined as an applicable solar facility that has maximum net output of not greater than 1.5 megawatt. A low output solar facility may also establish that construction has begun before July 5, 2026, by satisfying the Five Percent Safe Harbor (as described in section 2.02(2)(ii) of Notice 2022-61).
Additional Guidance
The notice provides additional guidance regarding: construction produced for the taxpayer by another party under a binding written contract; the definition of a qualified facility; the definition of property integral to the applicable wind or solar facility; the application of the 80/20 rule to retrofitted applicable wind or solar facilities under Reg. §§ 1.45Y-4(d) and 1.48E-4(c); and the transfer of an applicable wind or solar facility.
Effective Date
Notice 2025-42 is effective for applicable wind and solar facilities for which the construction begins after September 1, 2025.
The Treasury Inspector General for Tax Administration suggested the way the Internal Revenue Service reports level of service (ability to reach an operator when requested) and wait times does not necessarily reflect the actual times taxpayers are waiting to reach a representative at the agency.
The Treasury Inspector General for Tax Administration suggested the way the Internal Revenue Service reports level of service (ability to reach an operator when requested) and wait times does not necessarily reflect the actual times taxpayers are waiting to reach a representative at the agency.
"For the 2024 Filing Season, the IRS reported an LOS of 88 percent and wait times averaging 3 minutes," TIGTA stated in an August 14, 2025, report. "However, the reported LOS and average wait times only included calls made to 33 Accounts Management (AM) telephone lines during the filing season."
TIGTA stated that the agency separately tracks Enterprise LOS, a broader measure of of the taxpayer experience which includes 27 telephone lines from other IRS business units in addition to the 33 AM telephone lines.
"The IRS does not widely report an Enterprise-wide wait time- as the reported average wait time computation includes only the 33 AM telephone lines," the report states. "According to IRS data, the average wait times for the other telephone lines were much longer than 3 minutes, averaging 17 to 19 minutes during the 2024 Filing Season."
TIGTA recommended that the IRS adjust its reporting to include Enterprise LOS in addition to AM LOS and provide averages across all telephone lines.
"The IRS disagreed with both recommendations stating that the LOS metric does not provide information to determine taxpayer experience when calling, and including wait times for telephone lines outside the main helpline would be confusing to the public," the Treasury watchdog reported. "We maintain that whether a taxpayer can reach an assistor is part of the taxpayer experience and providing average wait times across all telephone lines for the entire fiscal year demonstrates transparency."
The Treasury watchdog also noted that the National Taxpayer Advocate has stated the AM LOS is "materially misleading" and should be replaced as a benchmark.
TIGTA also warned that the reduction in workforce at the IRS could hurt recent improvements to LOS and wait times, noting that the agency will lose about 23 percent of its customer service representative employees by the end of September 2025.
"The staffing impact on the remainder of Calendar Year 2025 and the 2026 Filing Season are unknown, but we will be monitoring these issues."
It also noted that the IRS is working on a new metric – First Call/Contact Resolution – to measure the percentage of calls that resolve the customer’s issue without a need to transfer, escalate, pause, or return the customer’s initial phone call. TIGTA reported that analysis of FY 2024 data revealed that 33 percent of taxpayer calls were transferred unresolved at least once.
By Gregory Twachtman, Washington News Editor
The Financial Crimes Enforcement Network (FinCEN) has granted exemptive relief to covered investment advisers from the requirements the final regulations in FinCEN Final Rule RIN 1506-AB58 (also called the "IA AML Rule"), which were set to become effective January 1, 2026. This order exempts covered investment advisers from all requirements of these regulations until January 1, 2028.
The Financial Crimes Enforcement Network (FinCEN) has granted exemptive relief to covered investment advisers from the requirements the final regulations in FinCEN Final Rule RIN 1506-AB58 (also called the "IA AML Rule"), which were set to become effective January 1, 2026. This order exempts covered investment advisers from all requirements of these regulations until January 1, 2028.
The regulations require investment advisers (defined in 31 CFR §1010.100(nnn)) to establish minimum standards for anti-money laundering/countering the financing of terrorism (AML/CFT) programs, report suspicious activity to FinCEN, and keep relevant records, among other requirements.
FinCEN has determined that the regulations should be reviewed to ensure that they strike an appropriate balance between cost and benefit. The review will allow FinCEN to ensure the regulations are consistent with the Trump administration's deregulatory agenda and are effectively tailored to the investment adviser sector's diverse business models and risk profiles, while still adequately protecting the U.S. financial system and guarding against money laundering, terrorist financing, and other illicit finance risks. Covered investment advisers are exempt from the obligations of the regulations while the review takes place.
FinCEN intends to issue a notice of proposed rulemaking (NPRM) to propose a new effective date for these regulations no earlier than January 1, 2028.
This exemptive relief is effective from August 5, 2025, until January 1, 2028.
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, created the new Section 199A QBI deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, under current law the QBI deduction will sunset after 2025. In addition to the QBI deduction’s impermanence, its complexity and ambiguous statutory language have created many questions for taxpayers and practitioners.
The IRS first released much-anticipated proposed regulations for the new QBI deduction, REG-107892-18, on August 8, 2018. The proposed regulations were published in the Federal Register on August 16, 2018. The IRS released the final regulations and notice of additional proposed rulemaking on January 18, 2019, followed by a revised version of the final regulations on February 1, 2019. Additionally, Rev. Proc. 2019-11 was issued concurrently to provide further guidance on the definition of wages. Also, a proposed revenue procedure, Notice 2019-7, was issued concurrently to provide a safe harbor under which certain rental real estate enterprises may be treated as a trade or business for purposes of Section 199A.
Wolters Kluwer recently interviewed Tom West, a principal in the passthroughs group of the Washington National Tax practice of KPMG LLP, about the Section 199A QBI deduction regulations. Notably, West formerly served as tax legislative counsel at the U.S. Department of the Treasury’s Office of Tax Policy. This article represents the views of the author only and does not necessarily represent the views or professional advice of KPMG LLP.
Wolters Kluwer: What is your general overview of the revised, final regulations for the Section 199A Qualified Business Income (QBI) or "pass-through" deduction?
Tom West: I think it is admirable that Treasury and IRS were able to publish these final regulations so quickly and address so many of the comments and questions that the proposed regulations generated. I think they realized how important this particular package was to so many taxpayers for the 2018 filing season and, while questions obviously remain, having these rules out in time to inform decisions for this year’s tax returns is helpful. In particular, the liberalized aggregation rules and the additional examples regarding certain specified service trades or businesses (SSTBs) are the most consequential in my mind.
Wolters Kluwer: What should taxpayers and practitioners keep in mind in consideration of relying on either the proposed or final regulations for the 2018 tax year?
Tom West: I have to imagine that when choosing between the two, for most taxpayers the final regulations will ultimately provide the better result. The ability to aggregate at the entity level, which was only provided in the final regulations, may be a key consideration for those taxpayers with more complicated or tiered structures. That said, I do think taxpayers need to be careful in their aggregation modeling because you are going to be stuck with your aggregation once you’ve filed. It may be that some taxpayers wait on getting locked into a particular aggregation and continue to study the new rules—and even wait on additional guidance that may be coming. However, it may be important to note that the final regulations provide that if an individual fails to aggregate, the individual may not aggregate trades or businesses on an amended return—other than for the 2018 tax year.
Wolters Kluwer: How is the removal of the proposed 80 percent rule regarding specified service trades or businesses (SSTBs) from the final regulations likely to impact certain taxpayers?
Tom West: First of all, I think the removal of this rule is a demonstration of two important dynamics. One, the critical importance of the engagement of taxpayers in the comment process, and, two, the government’s willingness to listen and adapt in their rule-making. I don’t know if there are particular industries or taxpayers who will be impacted, but I do know that the change is a very logical and appropriate one, and logic doesn’t always prevail in these processes, so I’m happy to give the regulators credit when it does.
Wolters Kluwer: Which industries may have been helped or hindered by the final regulations with respect to SSTB rules?
Tom West: I’m not sure specific industries were helped, but the biggest positive in terms of the SSTB final rules is the carryover from the proposed regulations of the treatment of the skill or reputation provision. Had Treasury and the IRS gone in a different direction, there was a risk of that provision swallowing the rest of the 199A regime—not to mention how much more subjective the already sometimes difficult SSTB determinations would have become.
Wolters Kluwer: Are there any lingering, unanswered questions among taxpayers or practitioners that particularly stand out when determining what constitutes SSTB income?
Tom West: I think many taxpayers who have both SSTB and non-SSTB activities were hoping for more clarity, either in rules or examples, on how to acceptably segregate business lines or on when (or if) certain activities are inextricably tied together. There are also still lingering questions regarding when a trade or business is an SSTB—particularly in the field of health.
Wolters Kluwer: Were there any surprises in the final regulations?
Tom West: I don’t know if I’m surprised, knowing the concerns that led them to the decisions they made, but the fact that Treasury and IRS held the line on some of the SSTB-related rules is notable. I’m thinking specifically of the so-called "cliff" effect of the de minimis rule and the fact that owners of certain kinds of SSTB businesses, e.g., sports teams, are not allowed to benefit from the Section 199A deduction.
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, created the new Section 199A QBI deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, under current law the QBI deduction will sunset after 2025. In addition to the QBI deduction’s impermanence, its complexity and ambiguous statutory language have created many questions for taxpayers and practitioners.
The IRS first released much-anticipated proposed regulations for the new QBI deduction, REG-107892-18, on August 8, 2018. The proposed regulations were published in the Federal Register on August 16, 2018. The IRS released the final regulations and notice of additional proposed rulemaking on January 18, 2019, followed by a revised version of the final regulations on February 1, 2019. Additionally, Rev. Proc. 2019-11, I.R.B. 2019-9, 742, was issued concurrently to provide further guidance on the definition of wages. Also, a proposed Revenue Procedure, Notice 2019-7, I.R.B. 2019-9, 740, was issued, concurrently providing a safe harbor under which certain rental real estate enterprises may be treated as a trade or business for purposes of Section 199A.
Wolters Kluwer recently interviewed Tom West, a principal in the passthroughs group of the Washington National Tax practice of KPMG LLP, about the Section 199A QBI deduction regulations. Notably, West formerly served as tax legislative counsel at the U.S. Department of the Treasury’s Office of Tax Policy. This article represents the views of the author only and does not necessarily represent the views or professional advice of KPMG LLP.
Wolters Kluwer: Neither the proposed nor final regulations for Section 199A give guidance as to when rental real estate activity constitutes a Section 162 trade or business. How might the application of the safe harbor provided for in IRS Notice 2019-7 offer taxpayers clarity? And how might failure to qualify for the safe harbor impact the determination of whether the rental activity is a trade or business under Section 199A?
Tom West: The safe harbor is helpful but it appears to be intended for relatively smaller taxpayers who may have had questions about their activities rising to the level of a trade or business. I don’t think falling outside of the safe harbor is dispositive—especially in light of the recent policy statement from Treasury regarding sub-regulatory guidance.
Wolters Kluwer: Can you speak to the some of the complexity that may be involved in tax planning with respect to achieving the right balance between adequate W-2 wages and QBI?
Tom West: Other than for small taxpayers, there is only a benefit under Section 199A if the limitations are met. It does not do any good to have QBI but then have insufficient W-2 wages and qualified property to meet the limitations. So when taxpayers are evaluating what constitutes a qualified trade or business (or whether to aggregate qualified trades or businesses) they will need to determine the amount of W-2 wages with respect to each QTB. Aligning the W-2 wages with the QTB will be important—but the salary expense will also result in a reduction in the amount of QBI and therefore the amount of any Section 199A benefit—so modeling becomes critical. Consideration should also be given to any collateral consequences—for instance the impact of the alignment on allocation and apportionment for state taxes.
Wolters Kluwer: According to a March 18, 2019, Treasury Inspector General for Tax Administration (TIGTA) report, Reference Number: 2019-44-022, IRS management indicated that the timeline related to the issuance of Section 199A guidance did not provide enough time for the IRS to develop a QBI deduction tax form. Although the IRS did create a worksheet, do you have a prediction on what key elements may be included on the new form once released?
Tom West: I do think that worksheets could be developed that would facilitate the reporting of Section 199A information—particularly through tiered structures—so as to ease the reporting burden and enhance compliance.
Wolters Kluwer: The IRS has estimated that nearly 23.7 million taxpayers may be eligible to claim the Section 199A deduction and that more than 22.2 million (94 percent) of those eligible taxpayers will not require a complex calculation for the deduction. What notable differences do you expect there are between "complex" and the majority of calculations?
Tom West: For taxpayers under the Section 199A income thresholds ($157.5K single, $315K joint), the deduction is very easy to calculate and claim. Those taxpayers don’t need to worry about being in an SSTB, how much wages they paid, or the basis of their property. Once those taxpayers hit those income thresholds though, even in the phase-out range, things very quickly get complex—and that’s as a consequence of the statute; it is not something that the regulators can change.
Wolters Kluwer: Do you anticipate the IRS will issue further guidance on the Section 199A deduction?
Tom West: I do. As I said at the top, I think part of the government’s motivation in finalizing these regulations so quickly was providing guidance to taxpayers ahead of the tax-filing season. And while for the majority of taxpayers who are below the 199A cap there is probably now sufficient guidance, I think there are still a lot of questions for those with more complex situations. Given the number of taxpayers who are eligible for this deduction, and the importance of Section 199A as the big benefit to non-corporate businesses in what the Administration views as a signature legislative achievement, I have to believe that the government will be responsive to taxpayers’ requests for additional help on this provision. However, given that the provision is due to sunset, it will be important that any guidance is forthcoming in fairly short order to be of any usefulness to taxpayers.
Wolters Kluwer: At this time, do you have any recommendations for taxpayers and practitioners moving forward?
Tom West: As people are going through their tax filings this year, I’d keep a list of issues, questions, and areas where additional guidance would be helpful. It often happens that problems with new legislation or regulations don’t reveal themselves until taxpayers have to put pencil to paper and track their real-world numbers through returns. We’ll all have that experience this year and, with those lists of issues and questions in hand, there may be an opportunity to approach the IRS and Treasury in the hopes of getting resolution going forward. Keeping that list could also help identify areas for tax planning and perhaps ease the complexity of filing for 2019.
The IRS released the optional standard mileage rates for 2019. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:
The IRS released the optional standard mileage rates for 2019. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:
- business,
- medical, and
- charitable purposes.
Some members of the military may also use these rates to compute their moving expense deductions.
2019 Standard Mileage Rates
The standard mileage rates for 2019 are:
- 58 cents per mile for business uses;
- 20 cents per mile for medical uses; and
- 14 cents per mile for charitable uses.
Taxpayers may use these rates, instead of their actual expenses, to calculate their deductions for business, medical or charitable use of their own vehicles.
FAVR Allowance for 2019
For purposes of the fixed and variable rate (FAVR) allowance, the maximum standard automobile cost for vehicles places in service after 2018 is:
- $50,400 for passenger automobiles, and
- $50,400 for trucks and vans.
Employers can use a FAVR allowance to reimburse employees who use their own vehicles for the employer’s business.
2019 Mileage Rate for Moving Expenses
The standard mileage rate for the moving expense deduction is 20 cents per mile. To claim this deduction, the taxpayer must be:
- a member of the Armed Forces of the United States,
- on active military duty, and
- moving under an military order and incident to a permanent change of station.
The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for all other taxpayers until 2026.
Unreimbursed Employee Travel Expenses
For most taxpayers, the Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee travel expenses. However, certain taxpayers may still claim an above-the-line deduction for these expenses. These taxpayers include:
- members of a reserve component of the U.S. Armed Forces,
- state or local government officials paid on a fee basis, and
- performing artists with relatively low incomes.
Notice 2018-3, I.R.B. 2018-2, 285, as modified by Notice 2018-42, I.R.B. 2018-24, 750, is superseded.
The IRS has provided interim guidance for the 2019 calendar year on income tax withholding from wages and withholding from retirement and annuity distributions. In general, certain 2018 withholding rules provided in Notice 2018-14, I.R.B. 2018-7, 353, will remain in effect for the 2019 calendar year, with one exception.
The IRS has provided interim guidance for the 2019 calendar year on income tax withholding from wages and withholding from retirement and annuity distributions. In general, certain 2018 withholding rules provided in Notice 2018-14, I.R.B. 2018-7, 353, will remain in effect for the 2019 calendar year, with one exception.
The IRS and the Treasury Department intend to develop income tax withholding regulations to reflect changes made by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), as well as other changes in the Code since the regulations were last amended, and certain miscellaneous changes consistent with current procedures.
Withholding Allowances
The IRS delayed the release of the 2018 Form W-4, Employee’s Withholding Allowance Certificate, in order to reflect changes made by the TCJA, such as changes in itemized deductions available, increases in the child tax credit, the new credit for other dependents, and the suspension of personal exemption deductions. Notice 2018-14 provided relief for employers and employees affected by the delay.
In June, the IRS released a draft 2019 Form W-4 and instructions, which incorporated changes that were meant to improve the accuracy of income tax withholding and make the withholding system more transparent. However, in response to stakeholders’ comments, the IRS later announced that the redesigned Form W-4 would be postponed until 2020. The IRS intends to release a 2019 Form W-4 before the end of 2018 that makes minimal changes to the 2018 Form W-4.
The 2019 Form W-4 and the computational procedures in IRS Publication 15 (Circular E), Employer’s Tax Guide, will continue to use the term "withholding allowances" and related terminology to incorporate the withholding allowance factors specified in Code Sec. 3402(f) and the additional allowance items in Code Sec. 3402(m). Until further guidance is issued, references to a "withholding exemption" in the Code Sec. 3402 regulations and guidance will be applied as if they were referring to a withholding allowance.
Changes in Status
The guidance provides that if an employee experiences a change of status on or before April 30, 2019, that reduces the number of withholding allowances to which he or she is entitled, and if that change is solely due to the changes made by the TCJA, the employee generally must furnish a new Form W-4 to the employer by May 10, 2019. However, if an employee no longer reasonably expects to be entitled to a claimed number of allowances due to a change in personal circumstances that is not solely related to TCJA changes, the employee must furnish his or her employer a new Form W-4 within 10 days after the change. Similarly, if an employee claims married filing status on Form W-4 but divorces his or her spouse, the employee must furnish the employer a new Form W-4 within 10 days after the change.
Failure to Furnish
The IRS and the Treasury Department intend to withdraw the regulations under Code Sec. 3401(e), and modify other regulations, so that an employee who fails to furnish a Form W-4 will be treated as "single" but entitled to the number of withholding allowances determined under computational procedures provided in IRS Publication 15. Until further guidance is issued, however, employees who fail to furnish a Form W-4 will be treated as single with zero withholding allowances.
Additional Allowances
Until further guidance is issued, a taxpayer may include his or her estimated Code Sec. 199A passthrough deduction in determining whether he or she can claim the additional withholding allowance under Code Sec. 3402(m) on Form W-4.
Alternative Procedure
The IRS and the Treasury Department intend to update the withholding regulations to explicitly allow employees to determine their Form W-4 entries by using the IRS withholding calculator ( www.irs.gov/W4App) or IRS Publication 505, Tax Withholding and Estimated Tax, instead of having to complete certain schedules included with the Form W-4. However, the regulations are expected to provide that an employee cannot use the withholding calculator if the calculator’s instructions state that it should not be used due to his or her individual tax situation. The employee will need to use Publication 505 instead.
Alternative Methods
The IRS and the Treasury Department intend to eliminate the combined income tax withholding and employee FICA tax withholding tables under Reg. §31.3402(h)(4)-1(b), due to this alternative procedure’s unintended complexity and burden.
Lock-In Letters
The IRS may issue a "lock-in letter" to an employer, which sets the maximum number of withholding allowances an employee may claim. If the employer no longer employs the employee, the employer must send a written response to the IRS office designated in the lock-in letter that the employee is not employed by the employer. The IRS and the Treasury Department intend to eliminate the written response requirement. Pending further guidance, employers should not send a written response to the IRS under Reg. §31.3402(f)(2)-1(g)(2)(iv).
Pension, Annuity Payments
The payor of certain periodic payments for pensions, annuities, and other deferred income generally must withhold tax from the payments as if they were wages, unless the individual payee elects not to have withholding apply. Before 2018, if a withholding certificate was not furnished to the payor, the withholding rate was determined by treating the payee as a married individual claiming three withholding exemptions. The TCJA amended this rule so that the rate "shall be determined under rules prescribed by the Secretary." The IRS has determined that, for 2019, withholding on periodic payments when no withholding certificate is in effect continues to be based on treating the payee as a married individual claiming three withholding allowances.
Comments Requested
The IRS and the Treasury Department request comments on both the interim guidance and the guidance that should be provided in regulations. Comments must be received by January 25, 2019. Comments should be submitted to: CC:PA:LPD:PR (Notice 2018-92), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2018-92), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C., 20224. Alternatively, taxpayers may submit comments electronically to Notice.comments@irscounsel.treas.gov (include "Notice 2018-92" in the subject line of any electronic submission).
Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271
Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271
President Donald Trump has signed bipartisan legislation, which expands a religious exemption for the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate. The exemption is effective for taxable years beginning after December 31, 2018.
Religious Exemption
SUPPORT for Patients and Communities Act ( HR 6) amends Code Sec. 5000A(d)(2)(a) to expand the religious conscience exemption for the ACA individual mandate. Individual taxpayers who rely solely on a religious method of healing for whom the acceptance of medical health services would be inconsistent with their religious beliefs are exempt from the ACA mandate to maintain health insurance or pay a penalty.
Tax Reform
Additionally, last year’s tax reform legislation essentially repeals the ACA’s individual mandate. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) repeals the ACA’s shared responsibility payment for individuals failing to maintain minimum essential coverage effective January 1, 2019.