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Click Here to Read the 2026 1040 Letter

Click Here to Read the 2026 1040 Letter

The White House is looking to lower the Internal Revenue Service budget by $1.4 billion in fiscal year 2027.

The White House is looking to lower the Internal Revenue Service budget by $1.4 billion in fiscal year 2027.

The budget request, released April 6, 2026, says the overall budget request for the agency will “streamline IRS operations utilizing technology improvements to help focus the IRS on providing high-quality customer service while ensuring the tax laws are fairly administered.”

The request highlighted two areas where it is currently saving money – ending the Direct File program and reducing staffing by 27 percent total – since January 2025.

The decrease accounts for most of the White House’s overall decreased budget request for the Department of the Treasury. The Trump Administration is an $11.5 billion budget for fiscal year 2027, a 12-percent decrease ($1.5 billion) from the budget enacted for fiscal year 2026.

The Office of the Inspector General would see a $4 million decrease to $44 million from the $48 million level in 2026, while the Treasury Inspector General for Tax Administration would see a decrease from $220 million to $206 million.

The IRS has issued final regulations for the "no tax on tips" deduction under Code Sec. 224, which was enacted as part of the the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). The final regulations adopt proposed regulations that were issued in September 2025 ( NPRM REG-110032-25), with modifications and clarifications in response to comments received.

The IRS has issued final regulations for the "no tax on tips" deduction under Code Sec. 224, which was enacted as part of the the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). The final regulations adopt proposed regulations that were issued in September 2025 ( NPRM REG-110032-25), with modifications and clarifications in response to comments received.

Background

Under Code Sec. 224, an eligible individual can claim an income tax deduction for qualified tips received in tax years 2025 through 2028. The deduction is limited to $25,000 per tax year, and starts to phase out when modified adjusted gross income is above $150,000 ($300,000 for joint filers). An employer must report qualified tips on an employee‘s Form W-2, or the employee must report the tips on Form 4137. A service recipient must report qualified tips on an information return furnished to a nonemployee payee (Form 1099-NEC, Form 1099-MISC, Form 1099-K).

A "qualified tip" is a cash tip received in an occupation that customarily and regularly received tips on or before December 31, 2024. An amount is not a qualified tip unless (1) the amount received is paid voluntarily without any consequence for nonpayment, is not the subject of negotiation, and is determined by the payor; (2) the trade or business in which the individual receives the amount is not a specified service trade or business under Code Sec. 199A(d)(2); and (3) other requirements established in regulations or other guidance are satisfied.

The proposed regulations provided eight broad categories of occupations that customarily and regularly received tips on or before December 31, 2024. For each occupation, the list provided a numeric Treasury Tipped Occupation Code (TTOC), an occupation title, a description of the types of services performed in the occupation, illustrative examples of specific occupations, and the related Standard Occupation Classification (SOC) system code(s) published by the Office of Management and Budget (OMB).

List of Occupations that Receive Tips

The final regulations made several modifications to the list of the occupations set forth in the proposed regulations. Three new occupations were added:

• "Visual Artists" and "Floral Designers" were added to the Personal Services category; and
• "Gas Pump Attendants" was added to the Transportation and Delivery category.

The final regulations also made changes and clarifications under several of the occupation categories, including:

• Beverage & Food Service – For the "Wait Staff" occupation, "banquet staff" has been added as an illustrative example, and the occupation's description has been modified to include catered events. The "Food Servers, Non-restaurant" occupation has been changed to "Food and Beverage Servers, Non-restaurant," to clarify that winery tasting room servers are covered by this category.
• Entertainment and Events – The preamble to the final regulations states that "table game supervisors" are covered by the "Gambling Dealers" occupation. The IRS also clarified that individuals dressed up as Santa Claus, as well as other characters or celebrities, are covered by the "Entertainers and Performers" occupation.
• Hospitality and Guest Services – "Doorman" has been added to the list of illustrative examples for the "Baggage Porters and Bellhops" occupation.
• Personal Services – To clarify that resident care is included in the "Personal Care and Service Workers" occupation, the description in the list provides that "work is performed in various settings depending on the needs of the care recipient and may include locations such as their home, place of work, out in the community, at a daytime nonresidential facility or a residential facility." The "Pet Caretakers" occupation has been renamed as the "Pet and Show Animal Caretakers" occupation, and "horse groomer" has been added to the list of illustrative examples.
• Personal Appearance and Wellness – The "Eyebrow Threading and Waxing Technicians" occupation has been renamed as the "Eyebrow and Eyelash Technicians" occupation, and additions were made to the description in the list to include eyelash technicians.
• Recreation and Instruction – The "Travel Guides" occupation now includes a parenthetical noting that both indoor and outdoor locations are covered.
• Transportation and Delivery - "App/platform based delivery person" has been added to the illustrative list in both the "Goods Delivery People" occupation and the "Taxi and Rideshare Drivers and Chauffeurs" occupation. Also, the phrase "over established routes or within an established territory" has been removed from the description of the "Goods Delivery People" occupation.

The final regulations clarify that apprentices and assistants qualify under the applicable TTOC occupation category if they perform the same services as those listed in the TTOC occupation description.

Chiropractors, accountants, tax preparers, concert merchandise sellers, and "low bono" legal service providers were not added to the occupations list, despite requests in the comments to add these to the list.

No occupations included on the occupations list in the proposed regulations were removed from the list in the final regulations.

Voluntary Tips

Regarding the requirement that qualified tips must be voluntary, it is clarified that the customer must have the option to reduce the tip amount to zero. Tip selection methods such as Point-of-Sale (POS) systems with a tip slider that goes to zero or an option for the customer to select "other" and input zero are voluntary. Examples in the final regulations have been modified to clarify that these methods are considered voluntary tipping practices.

Further, the final regulations state that situations where nonpayment of a tip is "without consequence" include situations where nonpayment of the tip does not have any impact on the scope or cost of the service. The final regulations also contain a new example where the tip is part of a contract that is entered into before the services are provided. The example concludes that the tip is a qualified tip because it is paid without consequence. If the customer had chosen to not pay the tip, then the scope or cost of the service would not have been affected.

The final regulations include two new examples to help clarify when payments to digital content creators are tips and when they are compensation. It is also clarified that tipping digital content creators through audience engagement mechanisms that result in superficial digital rewards, such as highlighted messages or other digital tokens of appreciation from the tip recipient that are negligible in value, do not disqualify an otherwise qualified tip.

Other Matters

The final regulations state that amounts received as a tip that are not separately reported to an individual on a statement furnished to the individual pursuant to Code Secs. 6041(d)(3), 6041A(e)(3), 6050W(f)(2), or 6051(a)(18), or reported by the taxpayer on Form 4137 (or successor) are not eligible for the tips deduction. (The preamble recognizes, however, that Notice 2025-69 provides transition rules for this for 2025.)

It is also clarified that "cash tips" include amounts paid in foreign currency. Rules are also provided for tips received by digital tipping systems.

Regarding abuse of the tips deduction, the final regulations replace the provision prohibiting ownership in or employment by a payor with a provision stating that an amount is not a qualified tip, and thus not eligible for the deduction if, based on all relevant facts and circumstances, the amount represents a recharacterization of wages or payments for goods or services for purposes of claiming the deduction.

Effective Date

The final regulations are effective on June 12, 2026, the date that is 60 days after publication in the Federal Register.

T.D. 10044

IR 2026-49

The IRS issued updated frequently asked questions (FAQs) addressing educational assistance programs under Code Sec. 127. The FAQs provide general guidance on eligibility, tax treatment of benefits, and recent legislative updates.

The IRS issued updated frequently asked questions (FAQs) addressing educational assistance programs under Code Sec. 127. The FAQs provide general guidance on eligibility, tax treatment of benefits, and recent legislative updates.

General Background

The FAQs explained that a Code Sec. 127 educational assistance program is a written employer plan that provides benefits exclusively to employees. The program must satisfy nondiscrimination requirements that prevent preferential treatment for highly compensated employees, shareholders or owners.

Exclusion Limits and Tax Treatment

The FAQs clarified that employees could exclude up to $5,250 per year in educational assistance benefits for the tax years at issue. The limit applied to combined benefits, including tuition and qualified education loan repayments. Amounts exceeding this limit were taxable and unused amounts could not be carried forward. Expenses covered under Code Sec. 127 could not be used for other credits or deductions.

Eligible and Non-Eligible Benefits

Eligible benefits included tuition, fees, books, supplies, equipment and payments of principal or interest on qualified education loans. These benefits could be provided for undergraduate or graduate courses and did not need to be job-related. However, meals, lodging, transportation and equipment that employees could retain were not eligible. Courses involving hobbies or sports were not eligible unless required for a degree or related to the employer’s business.

Eligibility and Other Provisions

The FAQs emphasized that benefits were limited to employees and included restrictions on owners and shareholders to ensure compliance with nondiscrimination rules. Other provisions, such as working condition fringe benefits, could allow additional exclusions depending on the facts.

FS-2026-10

IR 2026-55

The IRS has issued procedures for nominating population census tracts that would be designated as qualified opportunity zones (QOZs). The tracts would designated as QOZs effective on January 1, 2027. The guidance was directed at Chief Executive Officers (CEO) of States, territories of the United States and the District of Columbia. The procedures fell under Reg. §§1400Z-1 and Code Sec. 1400Z-2, as amended by the One, Big, Beautiful Bill Act (OBBBA) (P.L. 119-21).

The IRS has issued procedures for nominating population census tracts that would be designated as qualified opportunity zones (QOZs). The tracts would designated as QOZs effective on January 1, 2027. The guidance was directed at Chief Executive Officers (CEO) of States, territories of the United States and the District of Columbia. The procedures fell under Reg. §§1400Z-1 and Code Sec. 1400Z-2, as amended by the One, Big, Beautiful Bill Act (OBBBA) (P.L. 119-21).

Background

A QOZ is an economically distressed area in which select new investments could be eligible for preferential tax treatment. The OBBBA makes the QOZ tax incentive permanent. The first round of QOZ designations following the enactment of the OBBBA will take effect on January 1, 2027. New rounds would follow every 10 years. Additionally, the OBBBA added tax benefits specific to investments made into QOZs that are comprised entirely of a rural area.

Identities of LICs

The Treasury and IRS identified 25,332 population census tracts that are low-income communities (LIC) eligible for nomination as a 2027 QOZ. Out of said tracts, 8,334 tracts are comprised entirely of a rural area. Beginning July 1, 2026, and lasting a period of 90 days, subject to a single 30-day extension, State CEOs would begin nominating eligible census tracts to be designated as QOZs.

The number of population census tracts in a State that may be designated as QOZs may not exceed 25 percent of the number of LICs in the State. This limitation is determined based on the 2020-2024 American Community Survey (ACS) 5-Year and the 2020 Decennial Census of Island Areas (DECIA) data sets. The tracts were identified using said data sets.

Further, boundaries established for the 2020 decennial census are controlling. They would not be subject to change during the 2027 QOZ designation period.

Nomination Tool

The Treasury has been developing a nomination tool. This would be accessible online and available for the benefit of State CEOs that nominate census tracts for designation as 2027 QOZs.

The QOZ designation period will begin on January 1, 2027, and end on December 31, 2036. Any request to modify such a nomination after October 28, 2026, would be denied. Finally, nominations of tracts not mentioned in this document would be considered, provided they satisfy Code Sec. 1400Z-1(c)(1).

Effective Date

This revenue procedure is effective on April 6, 2026.

Rev. Proc. 2026-14

IR 2026-45

The IRS has provided a waiver of the addition to tax under Code Sec. 6654 for the underpayment of estimated income tax by qualifying farmers and fishermen.

The IRS has provided a waiver of the addition to tax under Code Sec. 6654 for the underpayment of estimated income tax by qualifying farmers and fishermen. Under Code Sec. 6654(i)(1), a qualifying farmer or fisherman has only one required installment payment (instead of four quarterly payments) due on January 15 of the year following the taxable year if at least two-thirds of the taxpayer’s total gross income was from farming or fishing in either the tax year or the preceding tax year. For a qualifying farmer or fisherman who does not make the required estimated tax installment payment by January 15 of the year following the tax year, Code Sec. 6654(i)(1)(D) provides that the taxpayer is not subject to an addition to tax for failing to pay estimated income tax if the taxpayer files the return for the tax year and pays the full amount of tax reported on the return by March 1 of the year following the tax year.

Difficulty in Electronic Filing of Form 8995

The IRS has noted that some qualifying farmers and fishermen were unable to electronically file Form 8995, Qualified Business Income Deduction Simplified Computation, which was required to be included in their 2025 tax returns. Due to this inability, farmers and fishermen may have had difficulty filing their 2025 tax returns electronically by the March 2, 2026 due date. Accordingly, the IRS has determined to waive certain penalties for qualifying farmers and fishermen due to these unusual circumstances.

Waiver of Underpayment of Estimated Income Tax

The IRS has waived the addition to tax under Code Sec. 6654 for failure to make an estimated tax payment for the 2025 tax year for any qualifying farmer or fisherman who files a 2025 tax return and pays in full any tax due on the return by April 15, 2026. The waiver will apply to any taxpayer who is a qualifying farmer or fisherman for the 2025 tax year and fulfills the conditions stated in the previous sentence. Further, the waiver will apply automatically to any taxpayer who qualifies for the waiver and does not report an addition to tax under Code Sec. 6654 on the 2025 tax return.

In addition, taxpayers who otherwise satisfy the criteria for relief under the IRS’ notice, but have already filed a return and reported an addition to tax, may request an abatement of the addition to tax by filing Form 843, Claim for Refund and Request for Abatement, in accordance with the prescribed instructions.

Notice 2026-24

State and local housing credit agencies that allocate low-income housing tax credits and states and other issuers of tax-exempt private activity bonds have been provided with a listing of the proper population figures.

State and local housing credit agencies that allocate low-income housing tax credits and states and other issuers of tax-exempt private activity bonds have been provided with a listing of the proper population figures to be used when calculating the 2026:

• calendar-year population-based component of the state housing credit ceiling under Code Sec. 42(h)(3)(C)(ii);
• calendar-year private activity bond volume cap under Code Sec. 146; and
• exempt facility bond volume limit under Code Sec. 142(k)(5).

These figures are derived from the estimates of the resident populations of the 50 states, the District of Columbia and Puerto Rico, which were released by the Bureau of the Census on January 27, 2026. The figures for the insular areas of American Samoa, Guam, the Northern Mariana Islands and the U.S. Virgin Islands are the 2025 midyear population figures in the U.S. Census Bureau’s International Database.

Notice 2026-22

Internal Revenue Service CEO Frank Bisignano promoted some of the highlights of the 2026 tax filing season before a congressional committee while deflecting questions about data leaks and other issues.

Internal Revenue Service CEO Frank Bisignano promoted some of the highlights of the 2026 tax filing season before a congressional committee while deflecting questions about data leaks and other issues.

Testifying April 15, 2026, during a Senate Finance Committee hearing, Bisignano used his opening statement to promote the highlights of the tax filing season, including:

• 134 million individual returns filed, with 98 percent filed electronically;
• 80 million refunds issued with 98 percent of funds sent electronically; and
• An average refund of more than $3,400 (up 11 percent from last year), with more than 90 percent received by taxpayers in less than 21 days.

He also stated that 53 million American have taken advantage of new tax breaks found in the One Big Beautiful Bill Act, including the No Tax On Tips (6 million filers), No Tax On Overtime (25 million filers), and No Tax On Car Loan Interest provision (1 million filers), as well as the deduction for seniors (30 million filers).

“When you look at all this, it’s the reason we talk about the historic refunds,” Bisignano testified.

These, along with the increase to the standard deduction and the child tax credit, along with the full expensing for capital investments being made permanent “prevented a tax increase of over $5 trillion on American families and small businesses,” Bisignano testified.

Bisignano defended the decision to end the Direct File program, noting that 2 million Americans have used a free file option, adding that “Direct File was a costly, unnecessary, and less popular duplicate of programs that already are in place.”

He continued: “Despite heavy promotion by the Biden Administration, Direct File was the by far the least used free filing option.”

When faced with questions regarding data breeches, including information given to ICE by Treasury and other data breeches, Bisignano refused to answer, stating that ongoing litigation was preventing him from commenting in the case of the information given to ICE, and that ongoing investigations in other data breeches precluded him from discussing them.

He also refused to express even a general opinion on the lawsuit filed by President Trump on the leaking of his tax information.

When challenged on the tax gap, Bisignano challenged assertions that it more than $1 trillion. Bisignano said the last published number was $650 billion and added that it was “big enough so we don’t have to debate the trillion.” He said the agency was working on a plan to address it but did not offer any specifics as to what the IRS had planned to close the tax gap. He did say the agency has increased the dollar amount of money recovered from compliance activities.

“Collections and enforcement is up 12 percent, and this is year to date,” he testified, adding that more than $2 billion has been collected in the top five audits.

By Gregory Twachtman, Washington News Editor

The Taxpayer Advocacy Panel (TAP) has released its 2025 Annual Report. The report highlighted accomplishments and ongoing efforts to (1) strengthen IRS delivery; (2) improve communications with taxpayers; (3) reduce taxpayer burden; and (4) support continued modernization of tax administration. The TAP project committees submitted 20 project referrals to the IRS, including 188 recommendations for improving IRS operations and enhancing taxpayer experience.

With the subprime mortgage mess wreaking havoc across the country, many homeowners who over-extended themselves with creative financing arrangements and exotic loan terms are now faced with some grim tax realities. Not only are they confronted with the overwhelming possibility of losing their homes either voluntarily through selling at a loss or involuntarily through foreclosure, but they must accept certain tax consequences for which they are totally unprepared.

Many homeowners - whether in connection with their principal residence or a vacation property - may not anticipate that foreclosure and a home sale that produces a loss can trigger significant and unexpected income tax liabilities, especially when the sale does not produce enough gain to pay off outstanding mortgage debt.

Selling at a loss

Homeowners may be unpleasantly surprised to learn that they can not write-off losses incurred from the sale of their home. When a homeowner is forced to sell their personal residence for less than the price they paid, the loss incurred on the sale is considered to be a non-deductible personal expense for federal income tax purposes. What's more, if the homeowner eventually buys another home that is sold down the road at a taxable profit, previous losses cannot be used to offset that gain.

Faced with such a situation, the technique of renting out the home, rather than selling it, might help some homeowner buy time until better times. If renting eventually stops making financial sense, the homeowner who sells at a loss might then succeed in establishing a deductible business loss from the business of renting property. However, only losses incurred after the property is converted may be deducted.

Debt forgiveness

Homeowners who sell their property when their mortgage debt exceeds the net sale price of the home (a so-called "short sale") may find that they owe taxes to the IRS. For example, assume you paid $500,000 for a home that you sell for a net sale price of $400,000, but you have a mortgage of $550,000 on the property. For tax purposes, you have incurred a $100,000 loss on the sale because the sale price is lower than your tax basis in the property ($400,000 sale price - $500,000 basis = $100,000 loss). Moreover, you still owe $150,000 to your mortgage lender since a mortgage note is a personal liability in addition to being an encumbrance on the house itself. If the lender refuses to discharge the remaining debt, you'll have to pay off the loan and there is no tax break or write-off for doing so.

On the other hand, if the mortgage lender forgives part or all of the remaining $150,000 debt, the amount discharged is considered taxable income. With few exceptions, discharged debt of all types is treated as income, taxable at ordinary rates just like a salary. It is irrelevant to the IRS that no tangible income was actually received on the sale of the home or forgiveness of debt by the lender. You will owe taxes on the amount of mortgage debt that the lender discharges. What's more, there is no offset from your $100,000 loss on the sale of the property; nor is this income covered by the $250,000 exclusion on taxable gain on the sale of a principal residence ($500,000 for joint filers).

A lender who discharges any part or all of a homeowner's debt must report the forgiven debt on Form 1099-C (Cancellation of Debt) to you and to the IRS. You must report the amount of discharged debt as income on your tax return in the year the mortgage debt is forgiven.

Foreclosure

Foreclosure also produces tax consequences that may be wholly unanticipated by the homeowner. Taxable gains and income from mortgage debt forgiveness also occur in foreclosure. Tax liability upon foreclosure depends on whether you have a nonrecourse or recourse loan. A recourse loan permits the lender to sue the borrower for any outstanding debt. When a foreclosure occurs on the property of a homeowner with a nonrecourse loan, however, the lender is only entitled to collect the amount that the home is sold for, and the borrower has no further liability.

Example. Your tax basis in your home is $400,000. You have a recourse loan and your mortgage debt totals $350,000. But at the time of foreclosure the fair market value of your home has decreased to $325,000. However, the lender forgives the remaining unpaid mortgage debt of $25,000 (usually because the lender sees that the former homeowner has little assets left, the remaining debt would be hard to collect, and an immediate write off gives the lender an immediate tax deduction). Tax law treats you as having received ordinary income from the cancellation of the debt in the amount of $25,000.

Alternatively, if you had a nonrecourse loan in the amount of $350,000 and your home sold at auction for $325,000, you would have no further liability to the lender since it cannot pursue you for the lost $25,000. Therefore, since your mortgage lender cannot legally pursue you for the remaining $25,000, there will be no debt for them to discharge. Such nonrecourse loans, however, are very rare in personal, non-business settings.

Moreover, if property is foreclosed and sold at auction for more than the home's tax basis, the sale produces taxable gain. In this case, however, the gain from a foreclosure sale of an individual's principal residence may be excluded to the extent of up to $250,000 ($500,000 for married homeowners filing jointly), depending on the length of homeownership. No exclusion, however, is given on vacation property that is not a principal residence.

Future relief for homeowners?

In mid-April, Reps. Robert E. Andrews (D-New Jersey) and Ron Lewis (R-Kentucky), introduced the Mortgage Cancellation Relief Act of 2007 (H.R. 1876), a bill that would assist many homeowners affected by the loss of their home through foreclosure or short sale. The legislation would exempt discharged debt on primary home mortgages from treatment as income subject to income taxation. Currently, the bill is before the House Ways and Means Committee.

If you would like more information on the tax consequences of foreclosure or the potential implications of taking a loss on the sale of your home or vacation property, please call our office and we can discuss your options for minimizing your tax liabilities.

These days, both individuals and businesses buy goods, services, even food on-line. Credit card payments and other bills are paid over the internet, from the comfort of one's home or office and without any trip to the mailbox or post office.

Now, what is probably your biggest "bill" can be paid on-line: your federal income taxes.

There are three online federal tax payment options available for both businesses and individuals: electronic funds withdrawal, credit card payments and the Electronic Federal Tax Payment System. If you are not doing so already, you should certainly consider the convenience -and safety-- of paying your tax bill online.  While all the options are now "mainstream" and have been used for at least several years, safe and convenient, each has its own benefits as well as possible drawbacks. The pros and cons of each payment option should be weighed in light of your needs and preferences.

Electronic Funds Withdrawal

Electronic funds withdrawal (or EFW) is available only to taxpayers who e-file their returns. EFW is available whether you e-file on your own, or with the help of a tax professional or software such as TurboTax. E-filing and e-paying through EFW eliminates the need to send in associated paper forms.

Through EFW, you schedule when a tax payment is to be directly withdrawn from your bank account. The EFW option allows you to e-file early and, at the same time, schedule a tax payment in the future. The ability to schedule payment for a specific day is an important feature since you decide when the payment is taken out of your account. You can even schedule a payment right up to your particular filing deadline.

The following are some of the tax liabilities you can pay with EFW:

• Individual income tax returns (Form 1040)
• Trust and estate income tax returns (Form 1041)
• Partnership income tax returns (Forms 1065 and 1065-B)
• Corporation income tax returns for Schedule K-1 (Forms 1120, 1120S, and 1120POL)
• Estimated tax for individuals (Form 1040)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax return (Form 944)
• Private foundation returns (Form 990-PF)
• Heavy highway vehicle use returns (Form 2290)
• Quarterly federal excise tax returns (Form 720)

For a return filed after the filing deadline, the payment is effective on the filing date. However, electronic funds withdrawals can not be initiated after the tax return or Form 1040 is filed with the IRS. Moreover, a scheduled payment can be canceled up until two days before the payment.

EFW does not allow you to make payments greater than the balance you owe on your return. Therefore, you can't pay any penalty or interest due through EFW and would need to choose another option for these types of payments. While a payment can be cancelled up to two business days before the scheduled payment date, once your e-filed return is accepted by the IRS, your scheduled payment date cannot be changed. Thus, if you need to change the date of the payment, you have to cancel the original payment transaction and chose another payment method. Importantly, if your financial institution can't process your payment, such as if there are insufficient funds, you are responsible for making the payment, including potential penalties and interest. Finally, while EFW is a free service provided by the Treasury, your financial institution most likely charges a "convenience fee."

Credit Card Payments

Do you have your card ready? The Treasury Department is now accepting American Express, Discover, MasterCard, and VISA.

Both businesses and individual taxpayers can make tax payments with a credit card, whether they file a paper return or e-file. A credit card payment can be made by phone, when e-filing with tax software or a professional tax preparer, or with an on-line service provider authorized by the IRS. Some tax software developers offer integrated e-file and e-pay options for taxpayers who e-file their return and want to use a credit card to pay a balance due.

However, there is a convenience fee charged by service providers. While fees vary by service provider, they are typically based on the amount of your tax payment or a flat fee per transaction. For example, you owe $2,500 in taxes and your service provider charges a 2.49% convenience fee. The total fee to the service provider will be $62.25. Generally, the minimum convenience fee is $1.00 and they can rise to as much as 3.93% of your payment.

The following are some tax payments that can be made with a credit card:

• Individual income tax returns (Form 1040)
• Estimated income taxes for individuals (Form 1040-ES)
• Unemployment taxes (Form 940)
• Quarterly employment taxes (Form 941)
• Employers annual federal tax returns (Form 944)
• Corporate income tax returns (Form 1120)
• S-corporation returns (Form 1120S)
• Extension for corporate returns (Form 7004)
• Income tax returns for private foundations (Form 990-PF)

However, as is the case is with the EFW option, if a service provider fails to forward your payment to the Treasury, you are responsible for the missed payment, including potential penalties and interest.

Electronic Federal Tax Payment System

EFTPS is a system that allows individuals and businesses to pay all their federal taxes electronically, including income, employment, estimated, and excise taxes. EFTPS is available to both individuals and businesses and, once enrolled, taxpayers can use the system to pay their taxes 24 hours a day, seven days a week, year round. Businesses can schedule payments 120 days in advance while individuals can schedule payments 365 days in advance. With EFTPS, you indicate the date on which funds are to be moved from your account to pay your taxes. You can also change or cancel a payment up to 2 business days in advance of the scheduled payment date.

EFTPS is an ideal payment option for taxpayers who make monthly installment agreement payments or quarterly 1040ES estimated payments. Businesses should also consider using EFTPS to make payments that their third-party provider is not making for them.

EFTPS is a free tax payment system provided by the Treasury Department that allows you to make all your tax payments on-line or by phone. You must enroll in EFTPS, however, but the process is simple.

We would be happy to discuss these payment options and which may best suit your individual or business needs. Please call our office learn more about your on-line federal tax payment options.

A taxpayer who may have misplaced or lost a copy of his tax return that was already filed with the IRS or whose copy may have been destroyed in a fire, flood, or other disaster may need information contained on that return in order to complete his or her return for the current year. In addition, an individual may be required by a governmental agency or other entity, such as a mortgage lender or the Small Business Administration, to supply a copy of his or a related party's tax return.

A taxpayer who may have misplaced or lost a copy of his tax return that was already filed with the IRS or whose copy may have been destroyed in a fire, flood, or other disaster may need information contained on that return in order to complete his or her return for the current year. In addition, an individual may be required by a governmental agency or other entity, such as a mortgage lender or the Small Business Administration, to supply a copy of his or a related party's tax return.

In such circumstances, you may obtain a copy of your tax return by filing Form 4506, Request for Copy or Transcript of Tax Form, along with the applicable fee, to the IRS Service Center where the return was filed. Also, tax account information based on the return may be obtained free of charge from IRS Taxpayer Service Offices. You may also request a transcript that will show most lines from the original return, including accompanying forms and schedules.

Fees

There is no charge to request a tax return transcript of the Form 1040 series filed during the current calendar year and the three preceding calendar years. For other requests, a fee of $23.00 per tax period requested must be paid in order to obtain copies of a return. Taxpayers seeking tax account information (such as adjusted gross income, amount of tax, or amount of refund) should contact their local IRS Taxpayer Service Office, which will provide the account information free of charge.

Timing of requests

A request for a copy of a return must be received by the IRS within 60 days following the date when it was signed and dated by the taxpayer. It may take up to 60 calendar days to get a copy of a tax form or Form W-2 information. If a return has been recently filed, the taxpayer must allow six weeks before requesting a copy of the return or other information. The IRS cautions that returns filed more than six years ago may not be available for making copies; tax account information, however, is generally available for these periods.

You may be able to save some time by going directly to your tax return preparer for the information. Although a return preparer may retain a copy of the taxpayer's return, however, there is no absolute requirement to do so. Preparers must retain for three years either a copy of each completed return and claim for refund or a list of the names and taxpayer identification numbers of taxpayers for whom returns or claims have been prepared.

The Electronic Federal Tax Payment System (EFTPS) allows individuals and businesses to make tax payments by telephone, personal computer or through the Internet.

The Electronic Federal Tax Payment System (EFTPS) allows individuals and businesses to make tax payments by telephone, personal computer or through the Internet.

Paperless

EFTPS is one of the most user-friendly programs developed by the IRS. EFTPS is totally paperless. Everything is done by telephone or computer. Because it's electronic, it's available 24 hours a day, seven days a week.

You make your tax payments electronically by:

• · Calling EFTPS; or

• · Using special computer software or the Internet.

Who can use EFTPS

EFTPS is available to businesses and individuals but businesses have more options.

Businesses: If your total deposits of federal taxes are more than $200,000 each year, you must use EFTPS. If not, you can still use EFTPS but you're not required to.

To calculate the $200,000 threshold, you have to include every federal tax your business pays, such as payroll, income, excise, social security, railroad retirement, and any other federal taxes.

The IRS wants businesses to use EFTPS and makes it difficult to stop using it. Once you meet the $200,000 threshold, you have to continue using EFTPS even if your annual tax deposits fall below $200,000 in the future.

Individuals: Individuals can also use EFTPS. Many of the individuals using EFTPS are making quarterly estimated tax payments but it's also available to people paying federal estate and gift taxes and installment payments.

How EFTPS works

There are two versions of EFTPS: direct and through a financial institution.

Direct: EFTPS-Direct is just what the name suggests. You access EFTPS directly - by telephone or computer - and make your tax payments. You tell EFTPS when you want to deposit your taxes and on that date EFTPS tells your bank to transfer the funds from your account to the IRS. At the same time, the IRS updates your payroll tax records to reflect the deposit.

Example. Your payroll taxes are due on the 15th. You have to contact EFTPS by 8PM at least one day before your tax due date. You either call EFTPS or log-on using special software or through the Internet. You enter your payment and EFTPS automatically debits your bank account and transfers the funds to the IRS on the date you indicate.

If you're a business, you can schedule your tax deposits up to 120 days before the due date. Individuals can schedule tax deposits up to 365 days before the due date.

Through a financial institution: You can also access EFTPS through a bank or credit union. Instead of contacting EFTPS directly and making your tax payments, your bank does it for you. Not all banks and credit unions participate in EFTPS so you have to check with your financial institution.

Only businesses can use EFTPS through a financial institution. If you're an individual and you want to use EFTPS, you have to use it directly. Also, while EFTPS-Direct is free, some financial institutions charge a fee for accessing EFTPS.

Getting started

To access EFTPS, you have to enroll. Your tax advisor can help you navigate the enrollment process and, once you're part of EFTPS, he or she can make the payments for you.

Making gifts is a useful, and often overlooked, tax strategy. However, when thinking about whether to make a gift, or gifts, to your children or other minors, the tax consequences must be evaluated very carefully. Many times, though, the tax consequences can be beneficial and lower your tax bill.

When thinking about whether to make a gift, or gifts, to your children or other minors, the tax consequences must be evaluated very carefully. Many times, though, the tax consequences can be beneficial and lower your tax bill.

Different strategies, whether used alone or in combination, can produce the most advantageous tax results for you and the recipients of your generosity. However, everyone's situation is unique so before you start making gifts, talk to a tax professional.

Basic considerations

-- Generally, a minor is any person under age 18.

-- Different tax rules apply to gifts to minors under age 19 and minors under age 14.

-- Unearned income exceeding $950 (the 2009 amount) of a minor who is under 19 years of age (and college students who are under 24 years of age) will generally be taxed at the highest marginal rate of his or her parents under the "kiddie tax" rules.

-- Income from property given to a minor who is 14 years old or older will be taxed at the minor's marginal income tax rate.

-- If a minor's gift is in trust, there is a 15 percent tax rate on the first $2,300 (the 2009 amount) each year that grows in the trust.

Estate tax

The tax on your estate is determined at the time of your death. Making gifts over your lifetime is often overlooked and undervalued as a means of reducing your estate tax. When you make gifts of money or property during your life the net result is a smaller estate and a smaller tax. Also, when you give a gift of property to a minor, which later increases in value, your estate will not be taxed on this increase in value.

Annual exclusion

In general, you can give away up to $13,000 in 2009 to anyone (including minors) during the year, tax-free. You and your spouse, together, can also give up to $26,000, tax-free, in 2009, to each donee.

UGMA/UTMA accounts

Under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), annual gifts can be made by individuals to a custodial account.

Tax-free gifts can be made under the UGMA. In 2009, each taxpayer can transfer up to $13,000--and each married couple can transfer up to $26,000--to a custodial account. Some of the earnings will receive tax exemption while some or all of the earnings will receive taxation at the minor's tax rate. One drawback to UGMA accounts, however, is that the gifts are irrevocable. Another drawback is that if a student applies for financial aid, UGMA accounts may be deemed assets of the student that are part of the student's contribution toward his or her educational expenses.

UGMA and UTMA accounts have another downside that many parents dislike. When the minor reaches 18 or 21 years of age (depending upon state law), the child can generally do whatever he or she wants with the custodial account money. (That's why some individuals prefer "Crummey" trusts, which are discussed below.)

UTMA accounts operate very similarly to UGMA accounts. However, UTMA accounts let individuals make property gifts to their children that are tax-free.

Trusts

If you use property that does not produce income (such as a life insurance policy) to fund a minor's trust, this can have bad tax consequences. The IRS could assert that the true value of the gift cannot be determined, causing unavailability of the annual exclusion.

With a "Crummey" trust, your gift can stay in trust for as long as you desire without giving up the annual exclusion. However, contributions to a "Crummey" trust do not qualify for the annual exclusion unless the beneficiary receives notification that the contributions were made and is given a limited time (usually 30 days) to withdraw the contribution.

It is understood that the beneficiary will not withdraw the money or property. However, such an understanding should not be written because the IRS will use any evidence to say that the beneficiary had no withdrawal power.

If you are planning to make some gifts to your children or other minors, contact the office for additional guidance so we can make sure you get the best tax breaks possible.

An employee stock ownership plan (ESOP) is a retirement plan option that offers even greater tax advantages than many other retirement plans. However, for the small business owner, ESOPs have another significant advantage: in the right situation, an ESOP can be an extraordinarily useful estate and business succession planning tool.

An employee stock ownership plan (ESOP) is a retirement plan option that offers even greater tax advantages than many other retirement plans. However, for the small business owner, ESOPs have another significant advantage: in the right situation, an ESOP can be an extraordinarily useful estate and business succession planning tool.

The Internal Revenue Code offers great benefits for tax-qualified retirement plans such as ESOPs. Employers can get a tax deduction for contributions made on employee's behalf to the plan, while employees do not have to pay immediate income tax on these contributions. An employee stock ownership plan (ESOP) is a very specialized type of qualified retirement plan that offers even greater tax advantages than many other retirement plans. However, for the small business owner, ESOPs have another significant advantage: in the right situation, an ESOP can be an extraordinarily useful estate and business succession planning tool.

Inadequate planning can be costly

Unfortunately, it is all too common for owners of closely held businesses to approach retirement age without having an adequate business succession plan in place that will allow them to comfortably retire and enjoy the fruits of their labor. In many cases, these businesses may be very successful but not readily marketable due to heavy dependence on the input from the business owners on an ongoing basis. In these situations, the owner may find it very difficult to sell the business for its full value and due to inadequate planning, may have to sell the business for a fraction of its worth at retirement.

ESOP to the rescue

If you are a business owner considering selling your business at retirement and are concerned about getting the full fair market value for your business, the answer may be right in front of you. In many cases, the most logical buyers for your business may be your key employees. These key employees are familiar with your business including customers, vendors, and processes as well as your long-term vision for the business. They have an excellent chance to continue fostering the success of your business after your departure.

However, in many circumstances, your employees will not have the cash to buy your business outright and therefore, the business must, in one way or another, provide them with the means to pay the purchase price. This is a situation when an ESOP can be used as an effective planning tool to "save the day" by providing a financially effective way to help fund the sale of your business to your key employees at full market value.

Tax benefits are many

There are numerous tax benefits that are available to you as an owner to sell your business to your employees through the use of an ESOP. These benefits allow you t

These benefits mean that by using an ESOP, you can sell your business tax-free and at full value (as determined by an appraiser) to your employees who are more able to pay because they can deduct the purchase price. These tax benefits provide a mechanism for you to receive maximum value for your business in cases where there may not be any other way to accomplish this.

Benefits that keep on giving

Providing business succession to key employees through an ESOP may not only give you adequate funds on which to retire, but also can leave your family with a portfolio of liquid investments in the form of the proceeds from the tax-free stock sale of your stock back to the ESOP, instead of a business that your family may have not know-how to run nor have any desire to run. Further, an ESOP can also help if you have one or more children that want to remain active in the business, while others want to receive an equal share of the your estate and do not want to be required to remain involved in the operation of the business.

Special notes for S Corps

Subchapter S corporations have been permitted to establish an ESOP for the last couple of years. If you are operating as an S corporation and are interested in establishing an ESOP, it is important to be aware of the differences between ESOPs that can be established for standard corporations and S corporations.

An ESOP is an extremely specialized type of profit sharing or stock bonus plan and must comply with all of the requirements for any other tax-qualified retirement plan that are imposed under the Internal Revenue Code and the supporting Treasury regulations. However, an ESOP is only slightly more complicated to establish than a profit sharing or 401(k) plan. For more information about how an ESOP can be used in your business succession plans, please contact the office to schedule a consultation.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break. The maximum amount of gain from the sale or exchange of a principal residence that may be excluded from income is generally $250,000 ($500,000 for joint filers).

Unfortunately, the $500,000/$250,000 exclusion has a few traps, including a "loophole" closer that reduces the homesale exclusion for periods of "nonqualifying use." Careful planning, however, can alleviate many of them. Here is a review of the more prominent problems that homeowners may experience with the homesale exclusion and some suggestions on how you might avoid them:

Reduced homesale exclusion. The Housing Assistance Tax Act of 2008 modifies the exclusion of gain from the sale of a principal residence, providing that gain from the sale of principal residence will no longer be excluded from income for periods that the home was not used as a principal residence. For example, if you used the residence as a vacation home prior to using it as a principal residence. These periods are referred to as "nonqualifying use." This income inclusion rule applies to home sales after December 31, 2008 and is based on nonqualified use periods beginning on or after January 1, 2009, under a generous transition rule. A specific formula is used to determine the amount of gain allocated to nonqualifying use periods.

Use and ownership. Moreover, in order to qualify for the $250,000/$500,000 exclusion, your home must be used and owned by you as your principal residence for at least 2 out of the last 5 years of ownership before sale. Moving into a new house early, or delaying the move, may cost you the right to exclude any and all gain on the home sale from tax.

Incapacitated taxpayers. If you become physically or mentally incapable of self-care, the rules provide that you are deemed to use a residence as a principal residence during the time in which you own the residence and reside in a licensed care facility (e.g., a nursing home), as long as at least a one-year period of use (under the regular rules) is already met. Moving in with an adult child, even if professional health care workers are hired, will not lower the use time period to one year since care is not in a "licensed care facility." In addition, some "assisted-living" arrangements may not qualify as well.

Pro-rata sales. Under an exception, a sale of a residence more frequently than once every two years is allowed, with a pro-rata allocation of the $500,000/$250,000 exclusion based on time, if the sale is by reason of a change in place of employment, health, or other unforeseen circumstances to be specified under pending IRS rules. Needless to say, it is very important that you make certain that you take steps to make sure that you qualify for this exception, because no tax break is otherwise allowed. For example, health in this circumstance does not require moving into a licensed care facility, but the extent of the health reason for moving must be substantiated.

Tax basis. Under the old rules, you were advised to keep receipts of any capital improvements made to your house so that the cost basis of your residence, for purposes of determining the amount of gain, may be computed properly. In a rapidly appreciating real estate market, you should continue to keep these receipts. Death or divorce may unexpectedly reduce the $500,000 exclusion of gain for joint returns to the $250,000 level reserved for single filers. Even if the $500,000 level is obtained, if you have held your home for years, you may find that the exclusion may fall short of covering all the gain realized unless receipts for improvements are added to provide for an increased basis when making this computation.

Some gain may be taxed. Even if you move into a new house that costs more than the selling price of the old home, a tax on gain will be due (usually 20%) to the extent the gain exceeds the $500,000/$250,000 exclusion. Under the old rules, no gain would have been due.

Home office deduction. The home office deduction may have a significant impact on your home sale exclusion. The gain on the portion of the home that has been written off for depreciation, utilities and other costs as an office at home may not be excluded upon the sale of the residence. One way around this trap is to cease home office use of the residence sufficiently before the sale to comply with the rule that all gain (except attributable to recaptured home office depreciation) is excluded to the extent the taxpayer has not used a home office for two out of the five years prior to sale.

Vacation homes. As mentioned, in order to qualify for the $250,000/$500,000 exclusion, the home must be used and owned by you or your spouse (in the case of a joint return) as your principal residence for at least 2 out of the last 5 years of ownership before sale. Because of this rule, some vacation homeowners who have seen their resort properties increase in value over the years are moving into these homes when they retire and living in them for the 2 years necessary before selling in order to take full advantage of the gain exclusion. For example, doing this on a vacation home that has increased $200,000 in value over the years can save you $40,000 in capital gains tax. However, keep in mind the reduced homesale exclusion for periods of nonqualifying use.

As you can see, there is more to the sale of residence gain exclusion than meets the eye. Before you make any decisions regarding buying or selling any real property, please consider contacting the office for additional information and guidance.

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

A. For most people, all interest paid on a home equity loan would be fully deductible as an itemized deduction on their personal tax returns. However, due to changes made to tax laws governing home mortgage interest deduction in 1987, there are limitations and special circumstances that must be considered when determining how much of your home mortgage interest expense is deductible.

Mortgages secured by your qualified home generally fall under one of three classifications for purposes of determining the home mortgage interest deduction: grandfathered debt, home acquisition debt, and home equity debt. Grandfathered debt is simply home mortgage debt taken out prior to October 14, 1987 (including subsequent refinancing of that debt). The other two types of mortgage debt are discussed below. A "qualified home" is your main or second home and, in addition to a house or condominium, can include any property with sleeping, cooking and toilet facilities (e.g., boat, trailer).

Home Acquisition Debt

Home acquisition debt is a mortgage (including a refinanced loan) taken out after October 13, 1987 that is secured by a qualified home and where the proceeds were used to buy, build, or substantially improve that qualified home. "Substantial improvements" are home improvements that add to the value of your home, prolong the useful life of your home, or adapt your home to new uses.

In general, interest expense on home acquisition debt of up to $1 million ($500,000 if married filing separately) is fully deductible. Keep in mind, though, that to the extent that the mortgage debt exceeds the cost of the home plus any substantial improvements, your mortgage interest will be limited. Mortgage interest expense on this excess debt may be deductible as home equity debt (see below).

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to build a new addition to your home, your mortgage interest would be fully deductible.

Home Equity Debt

Home equity debt is debt that is secured by your qualified home and that does not qualify as home acquisition debt. There are generally no limits on the use of the proceeds of this type of loan to retain interest deductibility.

The amount of mortgage debt that can be treated as home equity debt for purposes of the mortgage interest deduction is the smaller of a) $100,000 ($50,000 if married filing separately) or b) the total of each qualified home's fair market value (FMV) reduced by home acquisition debt & debt secured prior to October 14, 1987. Mortgage debt in excess of these limits would be treated as non-deductible personal interest.

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to pay off your credit cards (you really like to shop!), your mortgage interest deduction would be limited to the amount paid on only $100,000 of the home equity debt.

In addition to the above limitations, there are other circumstances that, if present, can affect your home equity debt interest expense deduction. Here are a few examples:

As illustrated above, determining your deduction for mortgage interest paid can be more complex than it appears. Before you obtain a home equity loan, please feel free to contact the office for advice on how it may affect your potential home mortgage interest deduction.

Q. My wife and I are both retired and are what you might call "social gamblers". We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

Q. My wife and I are both retired and are what you might call "social gamblers." We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

A. The technical answers to your questions are "yes" and "maybe," respectively. However, does it make much practical sense to report your $50 jackpot from the Sunday afternoon bingo game at the church? Probably not. In most circumstances, the taxpayer's cumulative gambling losses far exceed any winnings he may have had.

Here are the technical rules regarding reporting gambling winnings and losses:

Gambling winnings are taxable income and should be reported on your income tax return. In addition to cash winnings, you are required to report the fair market value (FMV) of all non-cash prizes you receive. For the most part, you are on the honor system when it comes to reporting small winnings to the IRS. Large payouts, on the other hand, will most likely be accompanied by IRS Form W-2G and a substantial amount will be deducted for withholding. Gambling winnings should be reported as "Other income" on the front page of Form 1040.

Gambling losses may only be included on your tax return if you itemize your deductions and then they are only deductible up to the amount of your gambling winnings. If you do itemize, those losses would be included as a miscellaneous itemized deduction not subject to the 2% of adjusted gross income (AGI) limit on Form 1040, Schedule A. However, keep in mind that if your AGI exceeds a certain amount, your total itemized deductions may be limited, reducing the likelihood of a direct offset of gambling income and losses.

Once you've tallied up your winnings and losses and reported them on your tax return, how do you substantiate your gambling income and deductions to the IRS? Here are some guidelines offered by the IRS that will help you in the event that your gambling claims are ever questioned:

Keep a log or a journal. The IRS suggests entering all of your gambling activities in a small diary or journal - you may want to consider one that can be carried with you when you frequent gambling establishments. Here is the information you should keep track of:

Retain documentation. As with any item of income or deduction claimed on your return, the IRS requires adequate documentation be kept to substantiate the amount claimed. Acceptable documentation to substantiate gambling winnings and losses can come in many different forms, depending on what type of activity you are engaging in. Examples include lottery tickets, canceled checks, wagering tickets, credit records, bank withdrawals and statements of actual winnings or payment slips provided by the gaming establishment.

Although it may seem difficult to keep track of your gambling activity at the time, it is obvious that keeping good records can benefit you if you ever "hit the jackpot". If you have any further questions on this matter, please contact the office for assistance.