Form 56- Notice Concerning Fiduciary Relationship

Form 1040-Final Individual Income Tax Return and the State Tax Return

Form 706-United States Estate (and Generatino-Skipping Transfer) Tax Return 

TAX FILINGS FOR ESTATES AND TRUSTS

FORM 56 – NOTICE CONCERNING FIDUCIARY RELATIONSHIP

This form is filed with the IRS to notify the Service that you are acting as the representative for the estate or trust. It is important to file this form as soon as possible so that the Service sends any tax notices or other correspondence to the correct address.  By filing this form, you notify the IRS that you are the responsible party for filing and paying taxes for the estate or trust.

FORM 1040 – FINAL INDIVIDUAL INCOME TAX RETURN AND THE STATE TAX RETURN

The decedent’s final individual tax returns, Form 1040 and state return.  The executor, administrator, or trustee is responsible for filing this form. It includes all income, deductions, credits, and withholdings from January 1 to through the date of death. As of the date of death, the decedent’s tax filing ends.

FORM 706 – UNITED STATES ESTATE (and GENERATION-SKIPPING TRANSFER) TAX RETURN

This return reports all the assets and liabilities of the decedent as of the date of death or an alternate valuation date. It is a snapshot of a moment in time.  It does not report income and it is not an income tax return.

The assets are reported at the fair market value as of the date of death. The executor of the estate must obtain documents to prove the date of death values of the decedent’s assets. These documents would include bank statements, CD certificates, broker statements, IRA and/or 401k statements, annuity statements, etc. dated as of the date of death or very close to it. The estate must also include life insurance proceeds on policies owned by the decedent and payable on his/her death. It will include income earned but not yet received by the decedent such as a paycheck, a bonus, and award, etc.

There will be a need for appraisals of the value of certain assets if the decedent owned any of the following:

• real estate
• a closely held business
• partnership interests
• jewelry
• art, antiques, and collectibles

The return is required if the net value is in excess of $5.43 million in 2015.  This amount is referred to as the exemption amount. This amount is estate-tax free. It is adjusted annually for inflation.

The return may be required if the surviving spouse elects to carry over her/his deceased spouse’s unused exemption amount (the DSUE).  In general, we advise a spouse to file the Form 706 to make this election if the couple’s entire estate is valued at $4 million or more at the date of the first spouse’s death.

The Form 706 is due exactly 9 months after the date of death. For example, if the date of death is February 7, the Form 706 is due by November 7. An extension may be available for the filing for 6 months.  The extension is for filing, not paying. The estate tax is due by the original filing date.

FORM 1041 – US INCOME TAX RETURN FOR ESTATES AND TRUSTS and THE STATE RETURN

Income earned or received and deductions incurred after the date of death are reported on this return. For example, if the date of the decedent’s date of death is May 6, there could be a final decedent’s return for the period January 1 through May 6 reporting income and deductions during that period. The estate or trust would file a Form 1041 reporting income and deductions for the period May 7 through December 31.  It is important to keep track of income and deductions during these two periods of time.

FORM 709 – UNITED STATES GIFT (and GENERATION-SKIPPING TRANSFER) TAX RETURN

• Every individual may gift (give a gift) up to $14,000 per gift recipient in 2015 without incurring a gift tax.
• Gifts are never taxable to the recipient.
• Gifts may be taxable to the giver. 
• You may give or bequest up to the Exclusion Amount, $5.43 million in 2015, during your lifetime or at your death.
• All gifts and the net estate value are totaled on the Form 706.
• Annually, any gifts in excess of $14,000 are reported on the Form 709.
• The Form 709 is due by 4/15 each year. The due date can be extended to 10/15.

What is Propositon 60 & 90, 58 & 193 re transfer of base year property tax values

 FAQ’s REGARDING THE TRANSFER OF THE PROPERTY TAX BASE

 What is Proposition 60?

Prop. 60 was a constitutional amendment approved by the voters of California in 1986. It allows the transfer of an existing Proposition 13 base year value from a former residence to a replacement residence, if certain conditions are met. This benefit is open to homeowners who are at least 55-years old and are able to meet all qualifying conditions, (see below).

 What is Proposition 90?

Proposition 90 has the same provisions and qualifications as Proposition 60.  The difference is that it allows base year transfers from one county to another county in California.  The only counties that have adopted an ordinance to allow values from other counties are:

o    Alameda

o    El Dorado

o    Los Angeles

o    Orange

o    Riverside

o    San Bernardino

o    San Diego

o    San Mateo

o    Santa Clara

o    Ventura

This list can change at any time.  Please contact the local assessor to see if the value of your original property can be transferred to a replacement in that county.

How do I qualify for these property tax benefits?

1. Proposition 60 - Both the original property (former residence) and its replacement must be located in the same county.
2. Proposition 90 - The original property is located in a different county from replacement, (see Proposition 90 information above).
3. As of the date of transfer of the original property, the seller or a spouse living with the seller must be at least 55 years old.
4. The original property must have been eligible for the Homeowners' Exemption or entitled to the Disabled Veterans' Exemption.
5. The replacement dwelling must be of equal or lesser value than the original property.
6. The replacement dwelling must have been purchased or newly constructed on or after 11/06/86.
7. Without exception, the replacement dwelling must be purchased or newly constructed within two years (before or after) of the sale of the original property.
8. The original property must be subject to reappraisal at its current fair market value as the result of its transfer, in accordance with Sections 110.1 or 5803 of the Revenue and Taxation Code.
9. Without exception, a Claim for Relief must be filed within three years of the date a replacement dwelling is purchased or new construction of a replacement dwelling is completed to receive the full relief. A claim filed after the three year time period will receive a prospective relief only.

Is it true that only one claimant, out of several co-owners of a replacement dwelling, need be at least 55 as of the date of sale of an original property?

Yes, but the claimant must be an owner of record. Either the claimant or his/her spouse must also have been an occupant of the original property and at least 55 years old on the date of sale.

Can a taxpayer apply for and receive the benefit of Prop. 60/90 more than once?

 No, this is a one-time benefit. You are not eligible if you have been previously granted this benefit.

What is meant by "equal or lesser value" than the original dwelling?

In general, "equal or lesser value" means:
 
100 % of the market value of an original property if a replacement dwelling is purchased before the original property is sold.

105 % of the market value of an original property if a replacement dwelling is purchased within one year after the sale of the original property.

110 % of the market value of an original property if a replacement dwelling is purchased within the second year after the sale of the original property.

Is the "equal or lesser value" test a simple comparison of the sales price of the original property and the purchase price or cost of new construction of the replacement dwelling?

 No. The comparison must be made using the full market value of the original property and the full market value of the replacement dwelling as of its date of purchase or completion of new construction. This is important because sales prices are not always the same as market value. The Assessor must determine the market value for each property, which may differ from sales price.

If the current full cash value of my replacement dwelling slightly exceeds the full market value of my original property, can I still receive a partial benefit?

No. Unless the replacement dwelling satisfies the "equal or lesser value" test, no benefit is available.

May I give my original property to my child and still receive the Prop. 60/90 benefit when I purchase a replacement property?

No. The law provides that an original property must be sold for consideration and subject to reappraisal at full market value at the time of sale. Original property transferred to a child or disposed of by gift or devise does not qualify.  See the FAQ’s below re Propositions 58 and 193.

Can I qualify for the benefits of Prop. 60/90 when I sell my original property (owned by me alone) and purchase a replacement dwelling with several co-owners? What if I own only a 10 percent interest in the replacement dwelling?

Yes. The base year value of your original property can be transferred to your replacement dwelling, as long as you are otherwise qualified.  You may receive the benefits of Prop. 60 regardless of how many co-owners of record there are on the replacement dwelling.  In this situation, the total market value of the original property is compared to the total market value of the replacement property regardless of the fact that the qualified principal claimant may only own 10 percent of both original and replacement dwelling properties.  

You and your spouse, as the claimants, will use your "one time only" benefit.  An owner of record of the replacement property who is not the claimant's spouse is not considered a claimant, and a claim filed for the property will not constitute use of the one-time-only exclusion by the co-owner even though that person may benefit from the property tax relief.

Can two otherwise qualified taxpayers who have recently sold their separately owned original properties combine their claim for Prop. 60/90 benefit when they buy a single replacement dwelling together?

No. they can only receive the benefit if one or the other, not both together, qualifies by comparing his or her original property to the jointly purchased replacement dwelling. The implementing legislation specifically disallows combining a claim, whether or not the co-owners of the replacement dwelling are married.

May I, as a former co-owner of an original property, receive partial benefit on my replacement dwelling, along with other co-owners who purchase separate replacement dwellings?

No. The law provides that only one co-owner of an original property that is, or was, qualified for the Homeowners' Exemption may receive the benefit in a situation like this where all co-owners purchase separate replacement dwellings. The co-owners must determine, between themselves, which one should receive the benefit. Only in the case of a multiple-residential original property, where several co-owners qualify for separate Homeowners' Exemptions, may portions of the factored base year value of that property be transferred to several qualified replacement dwellings.

What if I am the co-owner of a property with more than one residential unit?

 A portion of the original property may qualify for the Homeowners' Exemption for you. The base year value of that portion can be transferred to your replacement dwelling. The other portion(s) of the original property may qualify for a separate Homeowners' Exemption(s). The base year value(s) of that other portion(s) can be transferred to another replacement dwelling(s).

Does a person qualify for the Prop. 60/90 benefit when he/she sells an original property, then buys a replacement dwelling within two years, but no longer qualifies for a Homeowners' Exemption on the original property that sold nearly two years before?

Yes. The statute requires that the original property be eligible for the Homeowners' Exemption at the time of sale. It is eligible if the claimant owns and occupies the property as his or her principal residence at the time of sale.

Can I receive Prop 60. benefits if my original property is outside Orange County but my replacement dwelling is inside Orange County?

No. Both properties must be within Orange County. 

Can I receive Prop. 60 benefits if my original property is inside Orange County but my replacement dwelling is in another county in California?

You may qualify under Prop. 90. Call the county Assessor's Office where the replacement dwelling is located and ask if that county allows transfers of base year values between counties.

If the transfer of my base year value to the replacement dwelling results in a supplemental assessment that is a refund, do I still have to pay the existing annual roll tax bill on the replacement property or will that bill be adjusted to reflect the new, lower value?

Unfortunately, you must pay the existing annual roll tax bill on your replacement property. That bill cannot be adjusted or canceled to reflect the Prop. 60 benefit. Additionally, you must pay that bill before any refund resulting from the Prop. 60 benefit will be sent to you.

However, after the existing bill has been paid, you will later receive a refund that will reflect the Prop. 60 benefit. In other words, when the entire process is complete, you will not have overpaid any taxes,.

May parents transfer the family home to their children without a property tax reassessment?

YES.  Proposition 58 allows parents to transfer by gift, bequest, or sale their principal residence to their child(ren) and there will be no property tax reassessment. There is no limit on the value of the principal residence.  The parents must have a Homeowner’s or Disabled Veterans Exemption on the home.

May parents transfer other property to their children without a property tax assessment?

Yes. Each parent may transfer up to a total of $1 million of other property to their children without a property tax assessment. 

May grandparents transfer property to their grandchildren without a property tax assessment?

Proposition 193 expanded the benefits of family transfers of real property to grandparents.  They may transfer the property to a grandchild(ren) without a tax reassessment if the middle generation had already died.

How do the transferor and transferee obtain the relief of Propositions 58 and 193?

In order to obtain such relief, a Claim for Reassessment Exclusion for Transfer form must be signed by  both the property owner or deceased owner’s estate and by the person to whom title is being transferred.  The Claim must be filed within three years of the date of the transfer of the real property.  It is filed with the county Assessor.

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.

IR-2025-82

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.

FS-2025-5

IR-2025-86

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.

Notice 2025-42

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.

FinCEN Exemptive Relief Order

All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year.  President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year.  At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.

All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year.  President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year.  At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.

Taxes and spending

Almost immediately after President Obama won re-election, Democrats and Republicans scrambled to stake out their positions over the fiscal cliff.  Unless the White House and the GOP reach an agreement, the Bush-era tax cuts will expire for all taxpayers after 2012 and across-the-board spending cuts will take effect.  Many popular but temporary tax incentives, known as tax extenders, expired after 2011, with many more scheduled to expire after 2012.  The alternative minimum tax (AMT), intended many years ago to apply to wealthy taxpayers, is on track to encroach on more middle income taxpayers because it is not indexed for inflation.  Also, the employee-side payroll tax cut is scheduled to expire after 2012.

Since winning a second term, President Obama has repeated that the Bush-era tax cuts should expire for higher income individuals after 2012.  The top two tax rates would rise to 36 percent and 39.6 percent after 2012. All of the remaining rates would be extended.  Tax rates on capital gains and dividends would also increase for higher income individuals. On the campaign trail, President Obama described higher income taxpayers as individuals with incomes above $200,000 and families with incomes above $250,000. 

President Obama has talked about trimming $4 trillion from the federal budget deficit.  Approximately $1.6 trillion would come from increased taxes on higher income individuals.  To achieve a target of $1.6 trillion in tax revenue, the Bush-era tax cuts could not be extended for higher income individuals.  Other incentives for higher income individuals would likely be curtailed or possibly eliminated under the President’s plan. These include the personal exemption phaseout (PEP) and the Pease limitation on itemized deductions. President Obama may also re-propose his “Buffett Rule,” which, the President has explained, would ensure that individuals making over $1 million a year pay a minimum effective tax rate of at least 30 percent.

The GOP, its majority reduced in the House after the November elections, has offered few details about its plans to avoid the fiscal cliff.  House Speaker John Boehner, R-Ohio, has indicated that the GOP may be open to raising revenue by closing tax loopholes and capping certain unspecified deductions for higher income individuals.  Revenue could also be raised by limiting or abolishing business tax deductions and credits.  Among the business tax incentives most often hinted at for elimination are ones for oil and gas producers. President Obama, however, has said that he will not support a deficit reduction plan that relies on closing undefined tax loopholes.

Possible scenarios

Looking ahead, several scenarios may play out before year-end.  President Obama and the GOP could agree on a tax and deficit reduction package that meets or comes close to the President’s targets.  President Obama and the GOP may agree to extend the Bush-era tax cuts and delay the spending cuts for three or six months to give everyone more time to negotiate a long-term deal.  On the other hand, both sides could fail to reach any agreement before year-end and the Bush-era tax cuts would expire as scheduled.  The spending cuts also would kick-in as scheduled.

Filing season

Whenever Congress changes the tax laws, the IRS has to reprogram its return processing systems.  Tax laws passed late in 2012 have the potential to delay the start of the 2013 filing season depending on how long it takes the IRS to reprogram its systems.

IRS officials have told Congress that they are preparing for late tax legislation, especially legislation on the AMT.  In past years, Congress has routinely “patched” the AMT to shield middle income taxpayers from its reach.  The IRS appears to be anticipating that Congress will patch the AMT for 2012.  If Congress does not, the IRS has warned that the start of the 2013 filing season could be delayed for as many as 60 million taxpayers.

The IRS also must reprogram its processing systems for the tax extenders.  These tax law changes generally do not require the level of reprogramming the AMT patch requires.  The IRS has predicted that any year-end extension of the extenders will be manageable.

Please contact our office if you have any questions about the tax and spending negotiations underway in Washington.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

Additional tax on higher-income earners

There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.

The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).

Passthrough treatment

For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.

Withholding rules

Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.

Planning techniques

One planning device to minimize the tax  would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.

Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.

If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.

Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.

Generally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.

To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.

Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.

The IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.

If a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.

Recently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.

If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.

More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.

Your most important responsibility is depositing all of your payroll taxes on time. Before you do that, however, you have to know:

• Who are your taxable workers?
• What payroll taxes apply?
• What compensation is taxable?
• When are your payroll taxes due?
• What payroll and other returns should you file?

 Taxable workers

The first step is to determine who is a taxable worker. If you hire only independent contractors, they, and not you, are responsible for paying federal payroll taxes.

It's more likely that you hire employees.  In that case, you are responsible for withholding federal income tax and Social Security and Medicare taxes. You are also responsible for federal unemployment (FUTA) taxes along with any state taxes.

There are some exceptions to who is an employee for payroll taxes but they are few. The most common are real estate agents and direct sellers.

If you have any questions about the status of your workers, give our office a call. Misclassifying workers is a common mistake. If you treat an employee as an independent contractor, and your treatment is wrong, you will be liable for federal income tax and Social Security and Medicare taxes. They add up very quickly.

What taxes apply

Once you've determined that your workers are taxable employees, you have to determine what federal payroll taxes apply. Most employers must withhold federal income tax and Social Security and Medicare taxes. You are also liable for federal unemployment taxes (FUTA) but these are not withheld from an employee's pay. Only you pay FUTA taxes.

You have to withhold at the correct rate. Form W-4, which your employee fills out, tells you how much federal income tax to withhold for an employee. The Social Security, Medicare and FUTA tax rates are set by statute.

Failing to withhold at the correct rate is a surprisingly common mistake. Sometimes, an employee completes a new W-4 but the employer forgets to adjust his or her withholding. It's a good idea to review the W-4s of all your employees and make sure they are current.

Compensation

Almost every type of compensation, and not just wages, is taxable. The IRS wants its share of tips, bonuses, employee stock options, severance pay, and many other forms of compensation. This includes non-cash or in-kind compensation.

There are exceptions. Health insurance plans generally are not subject to federal payroll taxes. Per diem payments and other allowances, if they do not exceed rates set by the government, are generally not taxable as wages. Some fringe benefits are not taxable, such as employee discounts, an occasional taxi ride when an employee must work overtime and inexpensive holiday gifts.

Determining what compensation is taxable and what is not is often difficult. The complex tax rules are easy to misinterpret and you may be failing to withhold taxes on taxable compensation. It's a mistake that can be avoided with our help.

Deposit schedule

Most small employers deposit payroll taxes monthly. Large and mid-size businesses make semi-weekly deposits. Very small employers may make annual deposits.

Your deposit schedule is based on the total tax liability that you reported during a four-quarter "lookback" period. The lookback period begins July 1 and ends June 30. If you reported $50,000 or less of taxes for the lookback period, you make monthly deposits. If you reported more than $50,000, you make semi-weekly deposits.

Determining the lookback period is tricky. If the IRS finds that your lookback period is wrong, you could be heavily penalized for not making timely deposits. Your deposit schedule can also change and you have to know what can trigger a change.

Forms

If you withhold federal payroll taxes, you must file Form 941 quarterly. Of course, there are exceptions. The most important one is for very small employers. They file their returns annually instead of quarterly.

The IRS encourages employers to file Form 941 electronically. Depending on how large your business is, you may have no choice but to file electronically. A common mistake is filing more than one Form 941 quarterly. This only causes unnecessary delays.

Penalties are costly

Often, a small business just doesn't have the cash on hand to make a timely deposit. The owner thinks that he or she will double-up the next time and make things right. More often than not, that doesn't happen and the unpaid liability snowballs.

The penalties for failing to withhold or deposit federal income tax and Social Security and Medicare taxes are severe and they can be personal. If your business cannot pay the unpaid taxes, the IRS will go after you personally.

You may be using a payroll agent to pay your taxes. Keep in mind that you are still liable for those taxes if your agent doesn't pay them. Reliance on a payroll service, or anyone else, does not excuse your failure to pay.

Reporting obligations

Your payroll tax obligations also do not end with filing tax returns and depositing payments. You have reporting obligations to your employees and, in some cases, to your independent contractors.

Staying out of trouble with the IRS

Even if you believe you understand and are compliant with the federal payroll tax rules, give our office a call. The rules are riddled with exceptions that we haven't even touched on in this brief article. We'll take a look at your operations and make sure you are 100 percent compliant. It's worth avoiding any costly mistakes down the road.