2024 Foreign Housing Expense Amounts Released, Notice 2024-31 KPMG TaxNewsFlash - United StatesMarch 20, 2024The IRS today released Notice 2024-31 [PDF 156 KB] providing the adjustments to the limitation on housing expenses, under section 911, for specifi...
No Further Funding Cuts For IRS In FY24 Other than a planned repurposing of Inflation Reduction Act supplemental funding, the Internal Revenue Service saw no other cuts as the President signed off on the resolution to keep the federa...
Taxpayers received about $659 million in refunds during fiscal year 2023, representing a 2.7 percent increase in the amount of refunded to taxpayers in the previous fiscal year.
Taxpayers received about $659 million inrefundsduring fiscal year2023, representing a 2.7 percent increase in the amount of refunded to taxpayers in the previous fiscal year.
Therefundswere on nearly $4.7 trillion in gross revenues collected by theInternal Revenue Service, which represents about 96 percent of the funding that supports federal government operations, the agencyreportedin its annualData Bookfor fiscal year2023, which was released April 18, 2024. This is down from more than $4.9 trillion in gross tax revenues inFY2022.
Business income taxes declined in2023to nearly $457 billion inFY2023from nearly $476 billion in the previous fiscal year. Individual and estate and trust income taxes declined to nearly $2.6 trillion from just over $2.9 trillion. Employment taxes, estate and trust taxes, and excise and gift taxes all grew fiscal year-over-year.
More than 271.4 million tax returns and other forms were processed duringFY2023, theIRSreported. Of those, 163.1 million were individual tax returns. Thereportdescribes the2023filing season as"successful".
Paid prepared filed more than 84 million individual tax returns electronically, and taxpayers file nearly 2.9 million returns using theIRSFree File program, the agencyreported.
The Taxpayer Advocate Servicereportedit resolved 219,251 cases inFY2023. The top five case types included:
Processing amended returns (36,171)
Pre-refundwage verification hold (26,052)
Decedent accountrefunds(12,695)
Identity theft (11,915)
Earned Income Tax Credit (10,507)
On the compliance side, theIRSreportedthat for all returns from tax years 2013 through 2021, it examined 0.44 percent of individual returns filed and 0.74 percent of corporate returns filed. Additionally, the agency examined 8.7 percent of taxpayers filing individual returnsreportingtotal positive income of $10 million or more. Isolating tax year 2019 (the most recent year outside the statute of limitations period), the examination rate was 11.0 percent.
InFY2023, theIRSsaid it"closed 582,944 tax return audits, resulting in $31.9 billion in recommended additional tax."Additionally, the agency “completed 2,584 criminal investigations” across three areas:
1,052 illegal-source financial crimes cases
979 legal-source tax crime cases
553 narcotics-related financial crimes cases
On the collections side, theIRSinFY2024 collected more than $104.1 billion in unpaid assessments on returns filed with additional tax due, netting about $68.3 billion after credit transfers. It also assessed more than $25.6 billion in additional taxes for returns not filed timely and collected nearly $2.8 billion with delinquent returns.
The IRS announced that final regulations related to required minimum distributions (RMDs) under Code Sec. 401(a)(9) will apply no earlier than the 2025 distribution calendar year. In addition, the IRS has provided transitionrelief for 2024 for certain distributions made to designated beneficiaries under the 10-year rule. The transitionreliefextends similar relief granted in 2021, 2022, and 2023.
TheIRSannounced that final regulations related torequired minimum distributions(RMDs) underCode Sec. 401(a)(9)will apply no earlier than the 2025 distribution calendar year. In addition, theIRShas providedtransitionrelieffor2024for certain distributions made to designated beneficiaries under the 10-year rule. Thetransitionreliefextendssimilarreliefgranted in 2021, 2022, and 2023.
SECURE Act Changes
The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) (P.L. 116-94) changed theRMDrules for employees and IRA owners who died after December 31, 2019. UnderCode Sec. 401(a)(9)(H)(i), if an employee in a defined contribution plan or IRA owner has a designated beneficiary, the 5-year distribution period has been lengthened to 10 years, and the 10-year rule applies regardless of whether the employee dies before the required beginning date. Proposed regulations would interpret the 10-year rule to require the beneficiary of an employee who died after his required beginning date to continue to take an annualRMDbeginning in the first calendar year after the employee’s death. This aspect of the 10-year rule differs from the 5-year rule, which required noRMDuntil the end of the 5-year period. Thus, theIRSprovidedtransitionrelieffor 2021, 2022, and 2023.
Guidance for SpecifiedRMDsfor2024
Under thetransitionguidance, a defined contribution plan will not be treated as having failed to satisfyCode Sec. 401(a)(9)for failing to make anRMDin2024that would have been required under the proposed regulations. Thereliefalso applies to an individual who would have been liable for an excise tax underCode Sec. 4974. The guidance applies to any distribution that, under the interpretation included in the proposed regulations, would be required to be made underCode Sec. 401(a)(9)in2024under a defined contribution plan or IRA that is subject to the rules ofCode Sec. 401(a)(9)(H)for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:
a designated beneficiary of an employee or IRA owner under the plan if the employee or IRA owner died in 2020, 2021, 2022 or 2023, and on or after the employee’s (or IRA owner’s) required beginning date and the designated beneficiary is not using the lifetime or life expectancy payments exception underCode Sec. 401(a)(9)(B)(iii); or
a beneficiary of an eligible designated beneficiary if the eligible designated beneficiary died in 2020, 2021, 2022, or 2023, and that eligible designated beneficiary was using the lifetime or life expectancy payments exception underCode Sec. 401(a)(9)(B)(iii).
Applicability Date of Final Regulations
TheIRShas announced that final regulations regardingRMDsunderCode Sec. 401(a)(9)and related provisions are anticipated to apply for determiningRMDsfor calendar years beginning on or after January 1, 2025.
The IRS, in connection with other agencies, have issued finalrules amending the definition of "short term, limited duration insurance" (STLDI), and adding a notice requirement to fixed indemnity excepted benefits coverage, in an effort to better distinguish the two from comprehensive coverage.
The IRS, in connection with other agencies, have issuedfinalrulesamending thedefinitionof"short term, limited duration insurance"(STLDI), and adding a notice requirement to fixed indemnity excepted benefits coverage, in an effort to better distinguish the two from comprehensive coverage.
Comprehensive coverage is health insurance which is subject to certain federal consumer protections. BothSTLDIand fixed indemnity excepted benefits coverage generally provide limited benefits at lower premiums than comprehensive coverage, and enrollment is typically available at any time rather than being restricted to open and special enrollment periods. However, the government is concerned about the financial and health risks that consumers face if they use either form of coverage as a substitute for comprehensive coverage, particularly as a long-term substitute. Consumers who do not understand key differences betweenSTLDI, fixed indemnity excepted benefits coverage, and comprehensive coverage may unknowingly take on significant financial and health risks if they purchaseSTLDIor fixed indemnity excepted benefits coverage under the misunderstanding that such products provide comprehensive coverage.
TheDefinitionofSTLDI
STLDIis a type of health insurance coverage sold by health insurance issuers that is primarily designed to fill temporary gaps in coverage that may occur when an individual is transitioning from one plan or coverage to another (for example, due to application of a waiting period for employer coverage). BecauseSTLDIfalls outside of"individual health insurance coverage,"it is generally exempt from the Federal individual market consumer protections and requirements for comprehensive coverage. This can be an issue because individuals who enroll inSTLDIare often not aware that they will not be guaranteed these key consumer protections.
Under thedefinitionin thefinalrules,STLDIis health insurance coverage provided pursuant to a policy, certificate, or contract of insurance that has an expiration date specified in the policy, certificate, or contract of insurance that is no more than three months after the original effective date of the policy, certificate, or contract of insurance, and taking into account any renewals or extensions, has a duration no longer than four months in total. For purposes of thisdefinition, a renewal or extension includes the term of a newSTLDIpolicy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance.
STLDIissuers must display a notice on the first page (in either paper or electronic form, including on a website) of the policy, certificate, or contract of insurance, and in any marketing, application, and enrollment materials (including reenrollment materials) provided to individuals at or before the time an individual has the opportunity to enroll or reenroll in the coverage, in at least 14-point font. A sample notice has been provided by the agencies.
Fixed Indemnity Insurance
Federal consumer protections and requirements for comprehensive coverage do not apply to any individual coverage or any group health plan in relation to its provision of certain types of benefits, known as"excepted benefits."Like other forms of excepted benefits, fixed indemnity excepted benefits coverage does not provide comprehensive coverage. Rather, its primary purpose is to provide income replacement benefits. Benefits under this type of coverage are paid in a fixed cash amount following the occurrence of a health-related event, such as a period of hospitalization or illness. In addition, benefits are provided at a pre-determined level regardless of any health care costs incurred by a covered individual with respect to the health-related event. Although a benefit payment may equal all or a portion of the cost of care related to an event, it is not necessarily designed to do so, and the benefit payment is made without regard to the amount of health care costs incurred.
In an effort to give consumers an informed choice, thefinalrulesadopt the requirement of a consumer notice that must be provided when offering fixed indemnity excepted benefits coverage in the group market and update the existing notice for such coverage offered in the individual market. Thefinalruledoes not address any other provision of the 2023 proposedrules(NPRM REG-120730-21) relating to fixed indemnity excepted benefits coverage.
Effective Date
Thefinalrulesapply to newSTLDIpolicies sold or issued on or after September 1, 2024. For fixed indemnity coverage, plans and issuers will be required to comply with the notice provisions for plan years (in the individual market, coverage periods) beginning on or after January 1, 2025.
The Tax Court has ruled against the IRS's denial of a conservation easementdeduction by declaring a Treasury regulation to be invalid under the enactment requirements of the Administrative Procedure Act (APA).
TheTax Courthas ruled against the IRS's denial of aconservation easementdeductionby declaring a Treasuryregulationto beinvalidunder the enactment requirements of the Administrative Procedure Act (APA).
AnLLCconveyed aconservation easementof land to a foundation that was properly registered with the county clerk. The deed conveyed the easement in perpetuity, allowing for extinguishment only in cases where the conservation purposes became impossible to accomplish or if the property were to be condemned by the local government through eminent domain. TheLLCthen timely filed Form 1065,U.S. Return of Partnership Income,claiming a $14.8 milliondeductionunderCode Sec. 170(h)for conveyance of the easement, and included with the return Form 8283,Noncash Charitable Contributions.
The IRS disallowed thedeductionstating the conservation purpose of the easement was not"protected in perpetuity"as required byCode Sec. 170(h)(5)(A)and, specifically, by operation ofReg. § 1.170A-14(g)(6)(ii). TheLLCcontended thatReg. § 1.170A-14(g)(6)(ii)is procedurallyinvalidunder the APA and that the deed therefore need not comply with its requirements.
TheTax Courtdecided to reverse its prior position regarding the validity of thisregulationinOakbrook Land Holdings,LLC,(154TC180,Dec. 61,663; aff’d, CA-6, 2022-1 USTC ¶50,128). Despite the fact the Sixth Circuit affirmed this earlier opinion, the Eleventh Circuit had reversed theTax Courton the same issue. This case is situated in the Tenth Circuit, which had not ruled on this issue.
TheTax Courtagreed with theLLC’s argument thatReg. § 1.170A14(g)(6)(ii) isinvalidbecause the concerns expressed in significant comments filed during the rulemaking process were inadequately responded to by the Treasury Department in the finalregulation’s"basis and purpose"statement, in violation of the APA’s procedural requirements.
Four judges dissented, arguing there is no substantial basis for reversing their opinion of only four years prior, and that invalidating aregulationfor failing to include a statement of basis and purpose should not occur when the basis and purpose are"obvious."
For purposes of the energy investment credit, the IRS released 2024application and allocation procedures for the environmental justice solar and wind capacity limitation under the low-incomecommunitiesbonus credit program. Many of the procedures reiterate the rules in Reg. §1.48(e)-1 and Rev. Proc. 2023-27, but some special rules are also provided.
For purposes of theenergy investment credit, theIRSreleased2024applicationand allocation procedures for the environmental justice solar and wind capacity limitation under thelow-incomecommunitiesbonuscredit program. Many of the procedures reiterate the rules inReg. §1.48(e)-1andRev. Proc. 2023-27, but some special rules are also provided.
TheIRSwill publicly announce the opening and closing dates for the2024Program yearapplicationperiod on the Department of Energy (DOE) landing page for the Program (Program Homepage) athttps://www.energy.gov/justice/low-income-communities-bonus-credit-program. DOE will not accept newapplicationsubmissions for the2024Program year after 11:59 PM ET on the date theapplicationperiod closes. The owner of the solar or wind facility is the person who mustapplyfor an allocation and is the recipient of any awarded allocation.
An applicant mustapplyfor an allocation of Capacity Limitation through DOE online Program portal system (Portal) athttps://eco.energy.gov/ejbonus/s/. Applicants must register in the Portal before they can begin theapplicationprocess; and they must create a login.gov account before accessing the Portal. The Program Homepage includes an Applicant User Guide.
Identifying Category and Sub-Reservation
In addition to the other information detailed below, theapplicationmust identify the relevant facility category:
-- Category 1: Project Located in aLow-IncomeCommunity(and theapplicationmust also specify whether the facility is a behind the meter (BTM) or front of the meter (FTM) facility),
-- Category 2: Project Located on Indian Land,
-- Category 3: QualifiedLow-IncomeResidential Building Project, or
An applicant may submit only oneapplicationfor the2024program year. Thus, if an applicant wishes to change its chosen category (or its Category 1 sub-reservation), it must withdraw its firstapplicationand submit a second one. Otherwise, anyapplicationsubmitted after the firstapplicationis treated as a duplicateapplication.
ApplicationContents
Theapplicationmust contain all required information, documentation, and attestations submitted under penalties of perjury by a person who has personal knowledge of the relevant facts. That person must also be legally authorized to bind the applicant entity for federal income tax purposes, to communicate with DOE about theapplication, and to receive notifications, letters, and other communications from DOE and theIRS.
The guidancedetailsthe required information regarding the applicant and the facility, as well as the required documentation. The guidance also describes the information that must be submitted if an applicant wants to be considered under the additional ownership criteria or the additional geographic criteria. The DOE may require additional information in its publicly available written procedures.
DOE Review and Selection
DOE will reviewapplicationsand provide a recommendation to theIRS. If the DOE identifies an error in theapplication, such as missing or incorrect information or documentation, it will notify the applicant through the Portal. The applicant will have 12 business days to correct the information; otherwise, DOE will treat theapplicationas withdrawn.
Once theapplicationperiod opens for the2024Program year, allapplicationssubmitted during the first 30 days are treated as submitted at the same time. DOE will publicly announce on the Program Homepage the opening and closing dates of this 30-day period. Ifapplicationsduring this period exhaust the available allocation for a category, DOE will conduct an allocation lottery. After the 30-day period, DOE will reviewapplicationsin the order they are submitted until the available capacity in the identified category is allocated.
Receiving an Allocation and Claiming theBonusCredit
After theIRSreceives the DOE recommendation, it will award an allocation or reject theapplication. TheIRSwill send final decision letters through the Portal, which will identify the amount of any allocation awarded. However, an allocation is not a final determination that the facility is eligible for thebonuscredit.
The owner of a facility that receives an allocation must use the Portal to report the date the facility is placed in service. The guidancedetailsthe additional information the owner must provide with the notification. After the facility is placed in service, and the owner submits the additional documentation and attestations, the owner is notified that it may claim thebonuscredit.
After theIRSawards all the Capacity Limitation within each facility category, or the2024Program year is closed, DOE will stop reviewingapplications. At the end of the2024Program year, no further action will be taken onapplicationsthat were not awarded an allocation. DOE will publicly announce on the Program Homepage when the2024Program year closes.
Effect on Other Documents
Rev. Proc. 2023-27, I.R.B. 2023-35, 655, is superseded solely with respect to the2024program year.
The IRS has provided a limited waiver of the addition to tax under Code Sec. 6655 for underpayments of estimated income taxrelated to application of the corporate alternative minimum tax (CAMT), as amended by the Inflation Reduction Act (P.L. 117-169).
TheIRShas provided a limitedwaiverof theaddition to taxunderCode Sec. 6655forunderpaymentsofestimated income taxrelatedto application of thecorporate alternative minimum tax(CAMT), as amended by the Inflation Reduction Act (P.L. 117-169).
The Inflation Reduction Act added a newcorporate AMTunderCode Sec. 55, beginning after December 31, 2022, based on acorporation's adjusted financial statement income.Code Sec. 6655generally requirescorporationsto payestimated income taxesquarterly, with anaddition to taxfor failure to make sufficient and timely payments. The quarterlyestimated tax paymentsmust add up to 100 percent of the income tax due.
Estimated Taxes
TheIRSwaivedtheaddition to taxunderCode Sec. 6655that is attributable to acorporation’sCAMTliability for the installment ofestimated taxthat is due on or before April 15, 2024, or May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024). Accordingly, a corporate taxpayer’s required installment ofestimated taxthat is due on or before April 15, 2024, or on or before May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024), need not include amounts attributable to itsCAMTliability underCode Sec. 55to prevent the imposition of anaddition to taxunderCode Sec. 6655. However, if acorporationfails to pay itsCAMTliability, other Code sections may apply. For instance,additions to taxunderCode Sec. 6651could be imposed.
Instructions to Form 2220
The instructions to Form 2220,UnderpaymentofEstimated TaxbyCorporations, will be modified to clarify that noaddition to taxwill be imposed underCode Sec. 6655based on acorporation’s failure to makeestimated tax paymentsof itsCAMTliability for any coveredCAMTyear. Taxpayers may exclude such amounts when calculating the amount of its required annual payment on Form 2220. Affected taxpayers must still file Form 2220 with their income tax return, even if they owe noestimated taxpenalty.
Applicability Date
Thewaiverof theaddition to taximposed byCode Sec. 6655applies to the installment ofestimated taxthat is due on or before April 15, 2024, or on or before May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024).
The IRS has issued proposedregulations that would provideguidance on the application of the new excise tax on repurchases of corporate stock made after December 31, 2022 (NPRMREG-115710-22). Another set of proposed rules would provideguidance on the procedure and administration for the excise tax (NPRMREG-118499-23).
The IRS has issuedproposedregulationsthat wouldprovideguidanceon the application of the newexcise taxonrepurchasesof corporatestockmade after December 31, 2022 (NPRMREG-115710-22). Another set ofproposedrules wouldprovideguidanceon the procedure and administration for theexcise tax(NPRMREG-118499-23).
Code Sec. 4501 and IRSGuidance
Beginning in 2023,Code Sec. 4501subjects a covered corporation to anexcise taxequal to one percent of the fair market value of itsstockthat is repurchased by the corporation during the tax year. Acovered corporationfor this purpose is any domestic corporation thestockof which is traded on an establishedsecuritiesmarket.
Repurchaseincludesstockredemptions and economically similar transactions as determined by the IRS. The amount of repurchase subject to the tax is reduced by the value of newstockissued to the public or employees during the year. Repurchase of the covered corporation’sstockby its specified affiliate (a more-than-50-percent owned domestic subsidiary or partnership) also subjects the covered corporation to theexcise tax.
Theexcise taxdoes not apply if the total amount ofstockrepurchasesduring the year is less than $1 million and in certain other situations.
Notice 2023-2, 2023-3 I.R.B. 374, provides initialguidanceregarding the application of theexcise tax. It describes rules expected to be provided in forthcomingproposedregulationsfor determining the amount ofstockrepurchaseexcise taxowed, along with anticipated rules for reporting and paying any liability for the tax.
ProposedOperative Rules under Code Sec. 4501 (NPRMREG-115710-22)
Theproposedregulationswouldprovidegeneral rules regarding the application and computation of thestockrepurchaseexcise tax, the statutory exceptions, and the application ofCode Sec. 4501(d). Specifically, theproposedregulationswouldprovideguidanceaddressing the following:
Certain issues related to the effective date and transition relief, including:
repurchasesbefore January 1, 2023, are not taken into account for purposes of applying the de minimis exception;
in the case of a covered corporation that has a tax year that both begins before January 1, 2023, and ends after December 31, 2022, that covered corporation may apply the netting rule to reduce the fair market value of the covered corporation’srepurchasesduring that tax year by the fair market value of all issuances of itsstockduring the entirety of that tax year;
contributions to an employer-sponsored retirement plan during the 2022 portion of a tax year beginning before January 1, 2023, and ending after December 31, 2022, should be taken into account for purposes ofCode Sec. 4501(e)(2);
the date of repurchase for a regular-way sale ofstockon an establishedsecuritiesmarket is the trade date.
Definition ofstockand the application of theexcise taxto various types ofstock, options, and financial instruments. Theproposedregulationsgenerally would maintain the definition of"stock"fromNotice 2023-2, but would exclude"additional tier 1 preferredstock"; therefore, unless the limited-scope exception regarding additional tier 1 preferredstockapplies, thestockrepurchaseexcise taxwould apply to preferredstockin the same manner as to commonstock.
Rules for valuation ofstock. Generally, theproposedregulationswould adopt the valuation approach ofNotice 2023-2that the fair market value ofstockrepurchased or issued is the market price of thestockon the date thestockis repurchased or issued, respectively.
Rules for timing of issuances andrepurchases. The approach thatstockgenerally should be treated as repurchased when tax ownership of thestocktransfers to the covered corporation or to the specified affiliate (as appropriate) would generally be retained.
Rules regarding becoming or ceasing to be a covered corporation and determining specified affiliate status.
Rules regardingCode Sec. 301distributions, and complete and partial liquidations.
Treatment of taxable transactions, including LBOs and other taxable"take private"transactions.
Application of the statutory exceptions, including repurchase as part of a reorganization, contributions to employer-sponsored retirement plans, the de minimis exception,repurchasesby dealers insecurities,repurchasesby RICs and REITs, and the dividend exception.
Application of the netting rule (the adjustment forstockissued by a covered corporation, includingstockissued or provided to employees of a covered corporation or its specified affiliate).
Considerations for mergers and acquisitions with post-closing price adjustments and troubled companies.
Theproposedregulations, other than theproposedregulationsunderCode Sec. 4501(d), would generally apply torepurchasesofstockof a covered corporation occurring after December 31, 2022, and during tax years ending after December 31, 2022, and to issuances and provisions ofstockof a covered corporation occurring during tax years ending after December 31, 2022. However, certain rules that were not described in Notice 2023-2 would apply torepurchases, issuances, or provisions ofstockof a covered corporation occurring after April 12, 2024, and during tax years ending after April 12, 2024.
Except as described below, so long as a covered corporation consistently follows the provisions of theproposedregulations, the covered corporation may rely on theseproposedregulationswith respect to (1)repurchasesofstockof the covered corporation occurring after December 31, 2022, and on or before the date of publication of finalregulationsin the Federal Register, and (2) issuances and provisions ofstockof the covered corporation occurring during tax years ending after December 31, 2022, and on or before the date of publication of finalregulationsin the Federal Register.
In addition, so long as a covered corporation consistently follows the provisions of Notice 2023-2 corresponding to the rules in theproposedregulations, the covered corporation may choose to rely on Notice 2023-2 with respect to (1)repurchasesofstockof a covered corporation occurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions ofstockof a covered corporation occurring during taxable years ending after December 31, 2022, and on or before April 12, 2024.
A covered corporation that relies on the provisions of Notice 2023-2 corresponding to theproposedrules with respect to (1)repurchasesoccurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions ofstockof a covered corporation occurring during tax years ending after December 31, 2022, and on or before April 12, 2024, may also choose to rely on the provisions of theproposedregulationswith respect to (1)repurchasesoccurring after April 12, 2024, and on or before the date of publication of finalregulationsin the Federal Register, and (2) issuances and provisions ofstockof a covered corporation occurring after April 12, 2024, and on or before the date of publication of finalregulationsin the Federal Register.
Special applicability dates are provided for theproposedrules underCode Sec. 4501(d).
Rules Regarding Procedure and Administration (NPRMREG-118499-23)
The IRS has alsoproposedregulationswithguidanceon the manner and method of reporting and paying thestockrepurchaseexcise tax. Theseproposedregulationsproviderequirements for return and recordkeeping, the time and place for filing the return and paying the tax, and tax return preparers.
Consistent with Notice 2023-2, theproposedregulationsadd rules on procedure and administration inproposedsubpart B of theproposedStockRepurchaseExcise TaxRegulations(26 CFR part 58) underCode Secs. 6001,6011,6060,6061,6065,6071,6091,6107,6109,6151,6694,6695, and6696.
In addition to requiring theexcise taxto be reported on IRS Form 720, Quarterly FederalExcise TaxReturn, theproposedregulationsinclude items relevant to tax forms other than Form 720 (such as Form 1120, U.S. Corporation Income Tax Return, and Form 1065, U.S. Return of Partnership Income) to assist in identifying transactions subject to the tax.
Applicability Date ofProposedProcedural Rules
ProposedReg. §58.6001-1would be applicable torepurchases, adjustments, or exceptions required to be shown in anystockrepurchaseexcise taxreturn required to be filed after the date of publication of finalregulationsin the Federal Register.
The rest of theproposedregulationswould be applicable tostockrepurchaseexcise taxreturns and claims for refund required to be filed after the date of publication of finalregulationsin the Federal Register.
Effect on Other Documents
Notice 2023-2, 2023-3 I.R.B. 374, is obsoleted forrepurchases, issuances, and provisions ofstockof a covered corporation occurring after April 12, 2024.
Requests for Comments
Written or electronic comments and requests for a public hearing with respect to theproposedoperative rules must be received by the date that is 60 days after April 12, 2024, the date of publication in the Federal Register. Comments and requests for a public hearing on theproposedprocedural rules must be received by the date that is 30 days after publication in the Federal Register.
In 2013, a new and unique tax will take effect—a 3.8 percent "unearned income Medicare contribution" tax as part of the structure in place to pay for health care reform. The tax will be imposed on the "net investment income" (NII) of individuals, estates, and trusts that exceeds specified thresholds. The tax will generally fall on passive income, but will also apply generally to capital gains from the disposition of property.
In 2013, a new and unique tax will take effect—a 3.8 percent "unearned income Medicare contribution" tax as part of the structure in place to pay for health care reform. The tax will be imposed on the "net investment income" (NII) of individuals, estates, and trusts that exceeds specified thresholds. The tax will generally fall on passive income, but will also apply generally to capital gains from the disposition of property.
Specified thresholds
For an individual, the tax will apply to the lesser of the taxpayer's NII, or the amount of "modified" adjusted gross income (AGI with foreign income added back) above a specified threshold, which is:
$250,000 for married taxpayers filing jointly and a surviving spouse;
$125,000 for married taxpayers filing separately;
$200,000 for single and head of household taxpayers.
Examples. A single taxpayer has modified AGI of $220,000, including NII of $30,000. The tax applies to the lesser of $30,000 or ($220,000 minus $200,000), the specified threshold for single taxpayers. Thus, the tax applies to $20,000.
A single taxpayer has modified AGI of $150,000, including $60,000 of NII. Because the taxpayer's income is below the $200,000 threshold, the taxpayer does not owe the tax, despite having substantial NII.
For an estate or trust, the tax applies to the lesser of undistributed net income, or the excess of AGI over the dollar amount for the highest tax rate bracket for estates and trusts ($11,950 for 2013). Thus, the tax applies to a much lower amount for trusts and estates.
Application of tax
The tax applies to interest, dividends, annuities, royalties, and rents, and capital gains, unless derived from a trade or business. The tax also applies to income and gains from a passive trade or business.
Other items are excluded from NII and from the tax: distributions from IRAs, pensions, 401(k) plans, tax-sheltered annuities, and eligible 457 plans, for example. Items that are totally excluded from gross income, such as distributions from a Roth IRA and interest on tax-exempt bonds, are excluded both from NII and from modified AGI.
The tax does not apply to nonresident aliens, charitable trusts, or corporations.
Tax planning techniques
Taxpayers are concerned about having to pay the tax. One technique for avoiding the tax is to sell off capital gain property in 2012, before the tax applies. This can be particularly useful if the taxpayer is facing a large capital gain from the sale of a principal residence (after taking the $250,000/$500,000 exclusion from income). Older taxpayers who do not want to sell their property may want to consider holding on to appreciated property until death, when the property gets a fair market value basis without being subject to income tax.
The technique of "gain harvesting" may be even more attractive if tax rates increase on dividends, capital gains, and AGI in 2013, with the potential expiration of the Bush-era tax cuts. However, the status of these tax rates will not be determined until after the election, potentially in a lame-duck Congressional session. It is also possible that Congress will simply extend existing tax rates for another year and "punt" the decision until 2013, as tax reform discussions heat up.
Taxpayers may also want to change the source of their income. Investing in tax-exempt bonds will be more attractive, since the interest income does not enter into AGI or NII. Converting a 401(k) account or traditional IRA to a Roth IRA will accomplish the same purpose. Income from a Roth conversion is not net investment income, although the income will increase modified AGI, which may put other income in danger of being subject to the 3.8 percent tax. Increasing deductible or pre-tax contributions to existing retirement plans can also lower income and help the taxpayer stay below the applicable threshold.
Trusts and estates should make a point of distributing their income to their beneficiaries. A trust's NII will be taxed at a low threshold (less than $12,000), while the income received by a beneficiary is taxed only if the much higher $200,000/$250,000 thresholds are exceeded.
Uncertainty
There was some uncertainty about the tax taking effect because of litigation challenging the health care law providing the tax, but a June 2012 Supreme Court decision upheld the law. The application of the tax is also uncertain because the Republican leadership has vowed to pursue repeal of the health care law if the Republicans win the presidency and take control of both houses of Congress in the November 2012 elections. But this is speculative. In the meantime, the Supreme Court decision guarantees that the tax will take effect on January 1, 2013.
These can be difficult decisions. While economic considerations for managing assets and income are important, it also makes sense for a taxpayer to look at the tax impact if the certain asset sales or shifts in investment portfolios are otherwise being considered.
The Tax Code provides that the IRS generally may not select an individual, partnership, or corporate tax return for audit after a period of three years has expired, dating from the tax return's filing date or due date, whichever is later. For example, if a taxpayer filed his 2011 Form 1040 on February 10, 2012, and the due date for the filing of returns that year was April 17, 2012, then the statute of limitations period ends on April 17, 2015, and not February 10, 2015. On the other hand, if the taxpayer filed his tax return late, on November 10, 2012, and had not obtained an extension of time to file, the statute of limitations period would run from November 10, 2012.
The Tax Code provides that the IRS generally may not select an individual, partnership, or corporate tax return for audit after a period of three years has expired, dating from the tax return's filing date or due date, whichever is later. For example, if a taxpayer filed his 2011 Form 1040 on February 10, 2012, and the due date for the filing of returns that year was April 17, 2012, then the statute of limitations period ends on April 17, 2015, and not February 10, 2015. On the other hand, if the taxpayer filed his tax return late, on November 10, 2012, and had not obtained an extension of time to file, the statute of limitations period would run from November 10, 2012.
If a taxpayer receives an extension of time to file the return (for example, an automatic six-month extension until October 15), however, the return is considered filed on the actual date of filing rather than the extension date. On the other hand, filing an amended tax return, such as a Form 1040X, however, would generally have no effect on the three-year period if it does not increase tax liability. For example, if the taxpayer filed his tax return on April 17, 2012, subsequently discovered a missing item of deduction, and filed an amended return on May 15, 2012 that did not increase his tax liability, the three-year state of limitations period will still run from April 17, 2012 to April 17, 2015.
For more information on the statute of limitations on tax assessments and any exceptions, please contact our office.
A remainder interest is the interest you receive in property when a grantor transfers property to a third person for a specified length of time with the provision that you receive full possessory rights at the end of that period. The remainder is "vested" if there are no other requirements you must satisfy in order to receive possession at the end of that period, such as surviving to the end of the term. This intervening period may be for a given number of years, or it may be for the life of the third person. Most often, this situation arises with real estate, although other types of property may be transferred in this fashion as well, such as income-producing property held in trust. The holder of a remainder interest may wish to sell that interest at some point, whether before or after the right to possession has inured.
A remainder interest is the interest you receive in property when a grantor transfers property to a third person for a specified length of time with the provision that you receive full possessory rights at the end of that period. The remainder is "vested" if there are no other requirements you must satisfy in order to receive possession at the end of that period, such as surviving to the end of the term. This intervening period may be for a given number of years, or it may be for the life of the third person. Most often, this situation arises with real estate, although other types of property may be transferred in this fashion as well, such as income-producing property held in trust. The holder of a remainder interest may wish to sell that interest at some point, whether before or after the right to possession has inured.
To determine the amount of gain or loss on the sale of an interest in property, you must first need to know the basis in that property. Generally, the basis of property is either the transferor's basis, if the transferor made a gift of the property while still living, or the fair market value at the time of the transfer if it was a testamentary gift. However, the value of a remainder interest is not the full value of the property, because someone else has an intervening right to its use.
The value of the remainder interest is equal to the undivided value of the property minus the value of the intervening interest. The value of this interest depends on applicable interest rates and the duration of the interest. In the case of a life estate, the duration depends on the age of the recipient and is determined with reference to mortality tables published in the Treasury regulations. The applicable interest rate is specified in Code Sec. 7520 as being 120 percent of the applicable federal rate (AFR) for that month, rounded to the nearest 0.2 percent. You may find these tables at the IRS web site.
IRS Pub. 1457 is known as Actuarial Values Book Aleph and contains tables that express the values of life estates, term interests and remainders. In this publication, you will need to select the appropriate section based on whether the interest is a term for years or a life estate. In each section is a series of tables based on interest rates ranging from 2.2 to 22.2 percent. Find the age of the life estate holder or duration of the term in the first column of the table. Next to it, under the column for remainder interests, is a decimal representation of the fractional interest represented by the remainder. Multiply this decimal by the basis of the property and you have the basis of the remainder interest.
Examples: Bob's grandfather died in March of 2009 and left a house valued at $100,000 to his mother for life, with the remainder interest to Bob. Bob's mother is 65 years old. The Sec. 7520 rate for that month is 2.4 percent, and the fractional value of the remainder is .67881. The value of Bob's interest in the house is $67,881.
This is a simple question, but the question does not have a simple answer. Generally speaking the answer is no, closing costs are not deductible when refinancing. However, the answer depends on what you mean by "closing costs" and what is done with the money obtained in the refinancing.
This is a simple question, but the question does not have a simple answer. Generally speaking the answer is no, closing costs are not deductible when refinancing. However, the answer depends on what you mean by "closing costs" and what is done with the money obtained in the refinancing.
Costs added to basis. Certain expenses paid in connection with the purchase or refinancing of a home, regardless of when paid, are capital expenses that must be added to the basis of the residence. These include attorney's fees, abstract fees, surveys, title insurance and recording or mortgage fees. Adding these costs to basis will lower any capital gain tax that you pay when you eventually sell your home. If your gain is sheltered anyway by the home sale exclusion of $250,000 ($500,000 for couples filing jointly) on the eventual sale of a principal residence, any previous addition to basis, while doing no harm, will also do no good.
Costs neither deductible nor added to basis. Other costs are neither deductible nor added to basis. These costs include fire insurance premiums, FHA mortgage insurance premiums and VA funding fees, settlement fees and closing costs.
Interest expense.Taxpayers may deduct qualified residence interest, however. "Qualified residence interest" is interest that is paid or accrued during the tax year on acquisition or home equity indebtedness with respect to a qualifying residence.
Points. Points are charges paid by a borrower to obtain a home mortgage. Other names used for deductible points are loan origination fees, loan discounts, discount points and maximum loan charges. While a fairly broad rule permits the deduction of home mortgage interest, the rule governing the deduction of points is narrower and has a number of restrictions. Points paid to refinance a mortgage on a principal residence, like other pre-paid interest that represents a charge for the use of money, are generally not deductible in the year paid and must be amortized over the life of the mortgage. However, if the borrower uses part of the refinanced mortgage proceeds to improve his or her principal residence, the points attributable to the improvement are deductible in the year paid.
Prepayment penalties. In cases where a creditor accepts prepayment of a secured debt, such as a mortgage debt on a home, but imposes a prepayment penalty, the prepayment penalty is deductible as interest.
Applicable forms. To deduct home mortgage interest and points, you must file Form 1040 and itemize deductions on Schedule A; the deduction is not permitted on Form 1040EZ.