The IRS has announced penalty relief for the 2025 tax year relating to new information reporting obligations introduced under the One, Big, Beautiful Bill Act (OBBBA). The relief applies to penalties imposed under Code Secs. 6721 and 6722 for failing to file or furnish complete and correct information returns and payee statements.

The IRS has announced penalty relief for the 2025 tax year relating to new information reporting obligations introduced under the One, Big, Beautiful Bill Act (OBBBA). The relief applies to penalties imposed under Code Secs. 6721 and 6722 for failing to file or furnish complete and correct information returns and payee statements.

The OBBBA introduced new deductions for qualified tips and qualified overtime compensation, applicable to tax years beginning after December 31, 2024. These provisions require employers and payors to separately report amounts designated as cash tips or overtime, and in some cases, the occupation of the recipient. However, recognizing that employers and payors may not yet have adequate systems, forms, or procedures to comply with the new rules, the IRS has designated 2025 as a transition period.

For 2025, the Service will not impose penalties if payors or employers fail to separately report these new data points, provided all other information on the return or payee statement is complete and accurate. This relief applies to information returns filed under Code Sec. 6041 and to Forms W-2 furnished to employees under Code Sec. 6051. The IRS emphasized that this transition relief is limited to the 2025 tax year only and that full compliance will be required beginning in 2026 when revised forms and updated electronic reporting systems are available.

Although not mandatory, the IRS encourages employers to voluntarily provide separate statements or digital records showing total tips, overtime pay, and occupation codes to help employees determine eligibility for new deductions under the OBBBA. Employers may use online portals, additional written statements, or Form W-2 box 14 for this purpose.

Notice 2025-62

IR-2025-110

The 2026 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2026 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2026 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2026 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The SECURE 2.0 Act (P.L. 117-328) made some retirement-related amounts adjustable for inflation. These amounts, as adjusted for 2026, include:

• The catch-up contribution amount for IRA owners who are 50 or older is increased from $1,000 to $1,100.
• The amount of qualified charitable distributions from IRAs that are not includible in gross income is increased from $108,000 to $111,000.
• The limit on one-time qualified charitable distributions made directly to a split-interest entity is increased from $54,000 to $55,000.
• The dollar limit on premiums paid for a qualifying longevity annuity contract (QLAC) remains $210,000.

Highlights of Changes for 2026

The contribution limit has increased from $23,500 to $24,500 for employees who take part in:

• 401 (k)
• 403 (b)
• most 457 plans, and
• the federal government’s Thrift Savings Plan

The annual limit on contributions to an IRA increased from $7,000 to $7,500.

The catch-up contribution limit for individuals aged 50 and over for employer retirement plans (such as 401(k), 403(b), and most 457 plans) has increased from $7,500 to $8,000.

The income ranges increased for determining eligibility to make deductible contributions to:

• IRAs,
• Roth IRAs, and
• to claim the Saver’s Credit.

Phase-Out Ranges

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or their spouse takes part in a retirement plan at work. The phase-out depends on the taxpayer’s filing status and income.

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $81,000 to $91,000, up from $79,000 to $89,000.
• For joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $129,000 to $149,000, up from $126,000 to $146,000.
• For an IRA contributor who is not covered by a workplace retirement plan but their spouse is, the phase-out range is $242,000 to $252,000, up from $236,000 to $246,000.
• For a married individual filing separately who is covered by a workplace plan, the phase-out range remains $0 to $10,000.

The phase-out ranges for Roth IRA contributions are:

• $153,000 to $168,000 for singles and heads of household,
• $242,000 to $252,000 for joint filers,
• $0 to $10,000 for married separate filers.

Finally, the income limits for the Saver’s Credit are:

• $80,500 for joint filers,
• $60,375 for heads of household,
• $40,250 for singles and married separate filers.

Notice 2025-67

IR-2025-111

The IRS released interim guidance and announced its intent to publish proposed regulations regarding the exclusion of interest on loans secured by rural or agricultural real property under Code Sec. 139L. Taxpayers may rely on the interim guidance in section 3 of the notice for loans made after July 4, 2025, and on or before the date that is 30 days after the publication of the forthcoming proposed regulations.

The IRS released interim guidance and announced its intent to publish proposed regulations regarding the exclusion of interest on loans secured by rural or agricultural real property under Code Sec. 139L. Taxpayers may rely on the interim guidance in section 3 of the notice for loans made after July 4, 2025, and on or before the date that is 30 days after the publication of the forthcoming proposed regulations.

Partial Exclusion of Interest

Code Sec 139L, as added by the One Big Beautiful Bill Act (P.L. 119-21), provides for a partial exclusion of interest for certain loans secured by rural or agricultural real property. The amount excluded is 25 percent of the interest received by a qualified lender on a qualified real estate loan. A qualified lender will include 75 percent of the interest received on a qualified real estate loan in gross income. A qualified lender is not required to be the original holder of the loan on the issue date of the loan in order to exclude the interest under Code Sec 139L.

Qualified Real Estate Loan

A qualified real estate loan is secured by qualified rural or agricultural property only if, at the time that the interest accrues, the qualified lender holds a valid and enforceable security interest with respect to the property under applicable law. Subject to a safe harbor provision, the amount of a loan that is a qualified real estate loan is limited to the fair market value of the qualified rural or agricultural property securing the loan, as of the issue date of the loan. If the amount of the loan is greater than the fair market value of the property securing the loan, determined as of the issue date of the loan, only the portion of the loan that does not exceed the fair market value is a qualified real estate loan.

The safe harbor allows a qualified lender to treat a loan as fully secured by qualified rural or agricultural property if the qualified lender holds a valid and enforceable security interest with respect to the qualified rural or agricultural property under applicable law and the fair market value of the property security the loan is at least 80 percent of the issue price of the loan on the issue date.

Fair market value can be determined using any commercially reasonable valuation method. Subject to certain limitations, the fair market value of any personal property used in the course of the activities conducted on the qualified rural or agricultural property (such as farm equipment or livestock) can be added to the fair market value of the rural or agricultural real estate. The addition to fair market value may be made if a qualified lender holds a valid and enforceable security interest with respect to such personal property under applicable law and the relevant loan must be secured to a substantial extent by rural or agricultural real estate.

Use of the Property

The presence of a residence on qualified rural or agricultural property or intermittent periods of nonuse for reasons described in Code Sec. 139L(c)(3) does not prevent the property from being qualified rural or agricultural property so long as the the property satisfies the substantial use requirement.

Request for Comments

The Treasury Department and the IRS are seeking comments on the notice in general and on the following specific issues:

• The extent to which the forthcoming proposed regulations address the meaning of certain terms;
• The extent to which the forthcoming proposed regulations address whether property is substantially used for the production of one or more agricultural products or in the trade or business of fishing or seafood processing;
• The extent to which the forthcoming proposed regulations address how the substantial use requirement applies to properties with mixed uses;
• The manner in which the forthcoming proposed regulations address changes involving qualified rural or agricultural property following the issuance of a qualified real estate loan;
• The manner in which the forthcoming proposed regulations address how a qualified lender determines whether the loan remains secured by qualified rural or agricultural property;
• The extent to which the forthcoming proposed regulations address how Code Sec. 139L applies in securitization structures; and
• The extent to which the forthcoming proposed regulations address Code Sec. 139L(d), regarding the application of Code Sec. 265 to any qualified real estate loan.

Written comments should be submitted, either electronically or by mail, by January 20, 2026.

Notice 2025-71

IR-2025-113

The IRShas provided a safe harbor for trusts that otherwise qualify as investment trusts under Reg. §301.7701-4(c) and as grantor trusts to stake their digital assets without jeopardizing their tax status as investment trusts and grantor trusts. The Service also provided a limited time period for an existing trust to amend its governing instrument (trust agreement) to adopt the requirements of the safe harbor.

The IRShas provided a safe harbor for trusts that otherwise qualify as investment trusts under Reg. §301.7701-4(c) and as grantor trusts to stake their digital assets without jeopardizing their tax status as investment trusts and grantor trusts. The Service also provided a limited time period for an existing trust to amend its governing instrument (trust agreement) to adopt the requirements of the safe harbor.

Background

Under “custodial staking,” a third party (custodian) takes custody of an owner’s digital assets and facilitates the staking of such digital assets on behalf of the owner. The arrangement between the custodian and the staking provider generally provides that an agreed-on portion of the staking rewards are allocated to the owner of the digital assets.

Business or commercial trusts are created by beneficiaries simply as a device to carry on a profit-making business that normally would have been carried on through a business organization classified as a corporation or partnership. An investment trust with a single class of ownership interests, representing undivided beneficial interests in the assets of the trust, is classified as a trust if there is no power under the trust agreement to vary the investments of the certificate holders.

Trust Arrangement

The revenue procedure applies to an arrangement formed as a trust that (i) would be treated as an investment trust, and as a grantor trust, if the trust agreement did not authorize staking and the trust’s digital assets were not staked, and (ii) with respect to a trust in existence before the date on which the trust agreement first authorizes staking and related activities in a manner that satisfies certain listed requirements, qualified as an investment trust, and as a grantor trust, immediately before that date. If the listed requirements (described below) are met, a trust's authorization in the trust agreement to stake its digital assets and the resulting staking of the trust's digital assets will, under the safe harbor, not prevent the trust from qualifying as an investment trust and as a grantor turst.

Requirements for Trust

The requirements for the safe harbor to apply are as follows:

• Interests in the trust must be traded on a national securities exchange and must comply with the SEC’s regulations and rules on staking activities.
• The trust must own only cash and units of a single type of digital asset under Code Sec. 6045(g)(3)(D).
• Transactions for the cash and units of digital asset must be carried out on a permissionless network that uses a proof-of-stake consensus mechanism to validate transactions.
• Trust’s digital assets must be held by a custodian acting on behalf of the trust at digital asset addresses controlled by the custodian.
• Only the custodian can effect a sale, transfer, or exercise the rights of ownership over said digital assets, including while those assets are staked.
• Staking of the trust's digital assets must protect and conserve trust property and mitigate the risk that another party could control a majority of the assets of that type and engage in transactions reducing the value of the trust’s digital assets.
• The trust’s activities relating to digital assets must be limited to (1) accepting deposits of the digital assets or cash in exchange for newly issued interests in the trust; (2) holding the digital assets and cash; (3) paying trust expenses and selling digital assets to pay trust expenses or redeem trust interests; (4) purchasing additional digital assets with cash contributed to the trust; (5) distributing digital assets or cash in redemption of trust interests; (6) selling digital assets for cash in connection with the trust's liquidation; and (7) directing the staking of the digital assets in a way that is consistent with national securities exchange requirements.
• The trust must direct the staking of its digital assets through custodians who facilitate the staking on the trust's behalf with one or more staking providers.
• The trust or its custodian must have no legal right to participate in or direct the activities of the staking provider.
• The trust's digital assets must generally be available to the staking provider to be staked.
• The trust's liquidity risk policies must be based solely on factors relating to national securities exchange requirements regarding redemption requests.
• The trust's digital assets must be indemnified from slashing due to the activities of staking providers.
• The only new assets the trust can receive as a result of staking are additional units of the single type of digital asset the trust holds.

Amendment to Trust

A trust may amend its trust agreement to authorize staking at any time during the nine-month period beginning on November 10, 2025. Such an amendment will not prevent a trust from being treated as a trust that qualifies as an investment trust under Reg. §301.7701-4(c) or as a grantor trust if the aforementioned requirements were satisfied.

Effective Date

This guidance is effective for tax years ending on or after November 10, 2025.

Rev. Proc. 2025-31

WASHINGTON – National Taxpayer Advocate Erin Collins told attendees at a recent conference that she wants to see the Taxpayer Advocate Service improve its communications with taxpayers and tax professionals.

WASHINGTON – National Taxpayer Advocate Erin Collins told attendees at a recent conference that she wants to see the Taxpayer Advocate Service improve its communications with taxpayers and tax professionals.

“What I would like to do is improve our responsiveness and communication with fill-in-the-blank, whether it be taxpayer or practitioner, because I think that is huge,” Collins told attendees November 18, 2025, at the American Institute of CPA’s National Tax Conference.

“I think a lot of my folks are working really hard to fix things, but they’re not necessarily communicating as fast and often as they should,” she continued. “So, I would like to see by year-end we’re in a position that that is a routine and not the exception.”

In tandem with that, Collins also told attendees she would like to see the IRS be quicker in terms of how it fixes issues. She pointed to the example of first-time abatement, something she called an “an amazing administrative relief for taxpayers” but one that is only available to those who know to ask for it.

She estimated that there are about one million taxpayers every year that are eligible to receive it and among those, most are lower income taxpayers.

The IRS, Collins noted, agreed a couple of years ago that this was a problem. “The challenge they had was how do they implement it through their systems?”

Collins was happy to report that those who qualify for first-time abatement will automatically be notified starting with the coming tax filing season, although she did not have any insight as to how the process would be implemented.

Patience

Collins also asked for patience from the taxpayer community in the wake of the recently-ended government shutdown, which has increased the TAS workload as TAS employees were not deemed essential and were furloughed during the shutdown.

She noted that TAS historically receives about 5,000 new cases a week and the shutdown meant the rank-and-file at TAS were not working. She said that the service did work to get some cases closed that didn’t require employee help.

“So, any of you who are coming in or have cases, please be patient,” Collins said. “Our guys are doing the best they can, but they do have, unfortunately, a backlog now coming in.”

By Gregory Twachtman, Washington News Editor

The IRS and Treasury have issued final regulations that implement the excise tax on stock repurchases by publicly traded corporations under Code Sec. 4501, introduced in the Inflation Reduction Act of 2022. Proposed regulations on the computation of the tax were previously issued on April 12, 2024 (NPRM REG-115710-22) and final regulations covering the procedural aspects of the tax were issued on July 3, 2024 (T.D. 10002). Following public comments and hearings, the proposed computation regulations were modified and are now issued as final, along with additional changes to the final procedural regulations. The rules apply to repurchases made after December 31, 2022.

The IRS and Treasury have issued final regulations that implement the excise tax on stock repurchases by publicly traded corporations under Code Sec. 4501, introduced in the Inflation Reduction Act of 2022. Proposed regulations on the computation of the tax were previously issued on April 12, 2024 (NPRM REG-115710-22) and final regulations covering the procedural aspects of the tax were issued on July 3, 2024 (T.D. 10002). Following public comments and hearings, the proposed computation regulations were modified and are now issued as final, along with additional changes to the final procedural regulations. The rules apply to repurchases made after December 31, 2022.

Overview of Code Sec. 4501

Code Sec. 4501 imposes a one percent excise tax on the fair market value of any stock repurchased by a “covered corporation”—defined as any domestic corporation whose stock is traded on an established securities market. The statute also covers acquisitions by “specified affiliates,” including majority-owned subsidiaries and partnerships. A “repurchase” includes redemptions under Code Sec. 317(b) and any transaction the Secretary determines to be economically similar. The amount subject to tax is reduced under a netting rule for stock issued by the corporation during the same tax year.

Scope and Definitions

The final regulations clarify the definition of stock, covering both common and preferred stock, with several exclusions. They exclude:

• Additional tier 1 capital not qualifying as common equity tier 1,
• Preferred stock under Code Sec. 1504(a)(4),
• Mandatorily redeemable stock or stock with enforceable put rights if issued prior to August 16, 2022,
• Certain instruments issued by Farm Credit System entities and savings and loan holding companies.

The IRS rejected requests to exclude all preferred stock or foreign regulatory capital instruments, limiting exceptions to U.S.-regulated issuers only.

Exempt Transactions and Carveouts

Several categories of transactions are excluded from the excise tax base. These include:

• Repurchases in connection with complete liquidations (under Code Secs. 331 and 332),
• Acquisitive reorganizations and mergers where the corporation ceases to be a covered corporation,
• Certain E and F reorganizations where no gain or loss is recognized and only qualifying property is exchanged,
• Split-offs under Code Sec. 355 are included unless the exchange is treated as a dividend,
• Reorganizations are excluded if shareholders receive only qualifying property under Code Sec. 354 or 355.

The IRS adopted a consideration-based test to determine whether the reorganization exception applies, disregarding whether shareholders actually recognized gain.

Application to Take-Private Transactions and M&A

The final rules clarify that leveraged buyouts, take-private deals, and restructurings that result in loss of public listing status are not considered repurchases for tax purposes. This reverses prior treatment under proposed rules, aligning with policy concerns that such deals are not akin to value-distribution schemes.

Similarly, cash-funded acquisitions and upstream mergers into parent companies are excluded where the repurchase is part of a broader ownership change plan.

Netting Rule and Timing Considerations

Under the netting rule, the amount subject to tax is reduced by the value of new stock issued during the tax year. This includes equity compensation to employees, even if unrelated to a repurchase program. The rule does not apply where a corporation is no longer a covered corporation at the time of issuance.

Stock is treated as repurchased on the trade date, and issuances are counted on the date the rights to stock are transferred. The IRS clarified that netting applies only to stock of the covered corporation and not to instruments issued by affiliates.

Foreign Corporations and Surrogates

The excise tax also applies to certain acquisitions by specified affiliates of:

• Applicable foreign corporations, i.e., foreign entities with publicly traded stock,
• Covered surrogate foreign corporations, as defined under Code Sec. 7874.

Where such affiliates acquire stock from third parties, the tax is applied as if the affiliate were a covered corporation, but limited only to shares issued by the affiliate to its own employees. These provisions prevent U.S.-parented multinational groups from circumventing the tax through offshore affiliates.

Exceptions Under Code Sec. 4501(e)

The six statutory exceptions remain intact:

• Reorganizations with no gain/loss under Code Sec. 368(a);
• Contributions to employer-sponsored retirement or ESOP plans;
• De minimis repurchases under $1 million per tax year;
• Dealer transactions in the ordinary course of business;
• Repurchases by RICs and REITs;
• Repurchases treated as dividends under the Code.

The IRS expanded the RIC/REIT exception to cover certain non-RIC mutual funds regulated under the Investment Company Act of 1940 if structured as open-end or interval funds.

Reporting and Administrative Requirements

Taxpayers must report repurchases on Form 720, Quarterly Federal Excise Tax Return. Recordkeeping, filing, and payment obligations are governed by Part 58, Subpart B of the regulations. The procedural rules also address:

• Applicable filing deadlines;
• Corrections for adjustments and refunds;
• Return preparer obligations under Code Secs. 6694 and 6695.

These provisions codify prior guidance issued in Notice 2023-2 and reflect technical feedback from tax professionals and stakeholders.

Applicability Dates

The final rules apply to:

• Stock repurchases occurring after December 31, 2022;
• Stock issuances during tax years ending after December 31, 2022;
• Procedural compliance starting with returns due after publication in the Federal Register.

Corporations may rely on Notice 2023-2 for transactions before April 12, 2024, and either the proposed or final regulations thereafter, provided consistency is maintained.

Takeaways

The final regulations narrow the excise tax’s reach to align with Congressional intent: discouraging opportunistic buybacks that return capital to shareholders outside traditional dividend mechanisms. By excluding structurally transformative M&A transactions, debt-like preferred stock, and regulated financial instruments, the IRS attempts to strike a balance between tax enforcement and market practice.

T.D. 10037

The Tax Code encourages charitable donations by businesses and industries. In fact, it is one tax incentive that President Bush has told his tax reform panel that he wants to preserve and strengthen. Taxpayers can make many different types of contributions, including inventory.

Amount of deduction

The amount of your deduction is generally the fair market value (FMV) of the contributed property, reduced by the amount of income you would have recognized if you had sold the property. FMV is the price the property would sell for on the open market. This rule effectively limits your deduction to your basis in the property.

Example. Elsa owns and operates a retail clothing store. She donates inventory that she normally sells in the ordinary course of her business to a charity. The inventory has a FMV of $1,000. It cost $400. If Elsa had sold the inventory, she would have recognized $600 income. Elsa's charitable contribution deduction is $400, her basis in the donated property.

The fair market value of your inventory may be less than its basis. In this case, only the fair market value may be deducted.

Example. Owen also owns and operates a retail clothing store. He follows Elsa's lead and donates inventory that he normally sells in the ordinary course of his business to the same charity. The inventory has a fair market value of $1,000. It cost $1,800. If Owen had sold the inventory, he would have recognized an $800 loss. In this case, the FMV of Owen's inventory is less than its basis. Owen's charitable contribution deduction is limited to $1,000, the FMV of the donated inventory. In this case, Owen is probably better off selling the inventory, recognizing the loss and then contributing $1,000 cash, which is fully deductible.

Costs and expenses

Any costs and expenses pertaining to contributed property incurred in prior tax years must be removed from inventory if they are properly reflected in opening inventory for the year of contribution. They are not part of the costs of good sold. Costs and expenses incurred in the year of contribution, which are properly reflected in the costs of goods sold for that year, are treated as part of the costs of goods sold for that year.

If you are thinking of donating inventory to a charitable organization, give our office a call. We'll help you maximize this valuable deduction.

Many people are surprised to learn that some "luxury" items can be deductible business expenses. Of course, moderation is key. Excessive spending is sure to attract the IRS's attention. As some recent high-profile court cases have shown, the government isn't timid in its crackdown on business owners using company funds for personal travel and entertainment.

First class travel

The IRS doesn't require that your business travel be the cheapest mode of transportation. If it did, businesspeople would be traveling across the country by bus instead of by plane. However, the expense as it is relative to the business purpose must be reasonable. Taking the Queen Mary II across the Atlantic to a business meeting in the U.K. could raise a red flag at the IRS.

As long as your business is turning a profit and is operated legitimately as a business and not a hobby, traveling first class generally is permissible. Even though a coach airline seat will get you to your business appointment just as quickly and an inexpensive hotel room is a place to sleep, the IRS generally won't try to reduce your deduction.

However, if your trip lacks a business purpose, the IRS will deny your travel-related deductions. Don't try to disguise a family vacation as a business trip. Many people are tempted; it's not worth the consequences, especially in today's environment where the IRS is aggressively looking for business abuses.

Conventions

Convention expenses are deductible if a sufficient relationship exists to your profession or business and the convention is in North America. No deduction is allowed for attending conventions or seminars about managing your personal investments.

Overseas conventions definitely get the IRS's attention. If you want to deduct the costs of attending a foreign convention, you have to show that the convention is directly related to your business and it is as reasonable to hold the convention outside North America as within North America.

Country clubs expenses

Country club dues are not deductible. In fact, no part of your dues for clubs organized for business, pleasure, recreation, or social purposes is deductible.

Some country club costs may be partially deductible if you can show a direct business purpose and you meet some tough written substantiation requirements. These include greens fees as well as food and beverage expenses. They may be deductible up to 50 percent.

Meals and entertainment

Younger colleagues don't remember when business meals were 100 percent deductible and deals were brokered at "three martini lunches." Meals haven't been 100 percent deductible for a long time and, like other entertainment expenses, the IRS combs them carefully for abuses.

Expenditures for meals, entertainment, amusement, and recreation are not deductible unless they are directly related to, or associated with, the active conduct of your business. The IRS also requires you to keep a written or electronic log, made at the time you make the expenditure, recording the time, place, amount and business purpose of each expense.

Even if you pass the two tests, only 50 percent of meal and entertainment expenses are deductible.  If you write-off business meals through your company and there is a proper reimbursement arrangement in place, you won't be charged with any imputed income for the half that is not deductible, but your company will be limited to a 50 percent write-off.

Owning a vacation home is a common dream that many people share...a special place to get away from the weekday routine, relax and maybe, after you retire, a new place to call home. When thinking about buying a vacation home, you should also think about what you will ultimately do with it. Will it one day be your principal residence? Will you sell it in five, 10 or 20 years? Will you rent it? Will you leave it to your children or other family members? These decisions have important tax consequences.

You'll want to think about:

Capital gains

The maximum long-term capital gains tax rate for 2009 is currently 15 percent taxpayers in the highest brackets. For taxpayers in the 10 and 15 percent brackets, the maximum long-term capital gains rate is zero through 2010. However, these lower rates expire at the end of 2010. The maximum rate is set to rise to 20 percent in 2011. Congress also eliminated a special holding period rule but, again, only through the end of 2011.

The process of computing capital gains because of all these changes is very complicated. Yet, "doing the math" up front in assessing the benefits of a vacation home as a long term investment as well as a source of personal enjoyment is recommended before committing to such a large purchase. Our office can help you make the correct computations.

Renting your vacation home

Renting your vacation home to help defray some or a good portion of your carrying costs, especially in the early years of ownership, can be a sound strategy. Be aware, however, that renting raises many complex tax questions. Special rules limit the deduction you can take. The rules are based on how long you rent the property. If you rent your vacation home for fewer than 15 days during the year, all deductions directly attributable to the rental are not allowed, but you don't have to report any rental income. If you rent your vacation home for more than 15 days, you must recognize the rental income while being allowed deductions only on certain items depending on your personal use of the property. The methodology is very complicated. We can help you pin down your deductions and plan the true cost of ownership, especially if you're planning to swing a vacation home purchase on plans to rent it out.

Home sale exclusion

One of the most generous federal tax breaks for homeowners is the home sale exclusion. If you're single, you can generally exclude up to $250,000 of gain from the sale of your principal residence ($500,000 for married joint filers). Generally, you have to have owned your home for at least two of the five years before the sale, but like all the tax rules, there are exceptions.

Congress modified the home sale exclusion for home sales occurring after December 31, 2008. Under the new law, gain from the sale of a principal residence home will no longer be excluded from gross income for periods that the home is not used as a principal residence. This is referred to as "non-qualifying use." The rule is intended to prevent use of the home sale exclusion of gain for appreciation attributable to periods after 2008 during which the residence was used as a vacation home, or as a rental property before being used as a principal residence. However, the new income inclusion rule is based only on periods of nonqualified use that start on or after January 1, 2009, good news for vacation homeowners who have already owned their properties for a number of years.

Buying a vacation home is a big investment. We can help you explore all these and other important tax consequences.

If you pay for domestic-type services in your home, you may be considered a "domestic employer" for purposes of employment taxes. As a domestic employer, you in turn may be required to report, withhold, and pay social security and Medicare taxes (FICA taxes), pay federal unemployment tax (FUTA), or both.

The tax on household employees is often referred to as "the nanny tax." However, the "nanny tax" isn't confined to nannies. It applies to any type of "domestic" or "household" help, including babysitters, cleaning people, housekeepers, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. Excluded from this category are self-employed workers who control what work is done and workers who are employed by a service company that charges you a fee.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What and when you need to pay

If you pay cash wages of $1,700 or more in 2009 to any one household employee, then you must withhold and pay social security and Medicare taxes (FICA taxes). The taxes are 15.3 percent of cash wages. Your employee's share is 7.65 percent (you can choose to pay it yourself and not withhold it). Your share is a matching 7.65 percent.

If you pay total cash wages of $1,000 or more in any calendar quarter of 2008 or 2009 to household employees, then you must pay federal unemployment tax. The tax is usually 0.8 percent of cash wages. Wages over $7,000 a year per employee are not taxed. You also may owe state unemployment tax.

The $1,700 threshold

If you pay the domestic employee less than $1,700 (an inflation adjusted amount applicable for 2009), in cash wages in 2009, or if you pay an individual under age 18, such as a babysitter, irrespective of amount, none of the wages you pay the employee are social security and Medicare wages and neither you nor your employee will owe social security or Medicare tax on those wages.You need not report anything to the IRS.

If you pay the $1,700 threshold amount or more to any single household employee (other than your spouse, your child under 21, parent, or employee who under 18 at any time during the year) then you must withhold and pay FICA taxes on that employee. Once the threshold amount is exceeded, the FICA tax applies to all wages, not only to the excess.

As a household employer, you must pay, at the time you file your personal tax return for the year (or through estimated tax payments, if applicable), the 7.65 percent "employer's share" of FICA tax on the wages of household help earning $1,700 or more. You also must remit the 7.65 percent "employee's share" of the FICA tax that you are required to withhold from your employee's wage payments. The total rate for the employer and nanny's share, therefore, comes to 15.3 percent.

Withholding and filing obligations

Most household employers who anticipate exceeding the $1,700 limit start withholding right away at the beginning of the year. Many household employers also simply absorb the employee's share rather than try to collect from the employee if the $1,700 threshold was initially not expected to be passed. Domestic employers with an employee earning $1,700 or more also must file Form W-3, Transmittal of Wage and Tax Statements, and provide Form W-2 to the employee.

Household employers report and pay employment taxes on cash wages paid to household employees on Form 1040, U.S. Individual Income Tax Return, Schedule H, Household Employment Taxes. These taxes are due April 15 with your regular annual individual income tax return. In addition, FUTA (unemployment) tax information is reported on Schedule H. If you paid a household worker more than $1,000 in any calendar quarter in the current or prior year, as an employer you must pay a 6.2 percent FUTA tax up to the first $7,000 of wages.

Household employers must use an employer identification number (EIN), rather than their social security number, when reporting these taxes, even when reporting them on the individual tax return. Sole proprietors and farmers can include employment taxes for household employees on their business returns. Schedule H is not to be used if the taxpayer chooses to pay the employment taxes of a household employee with business or farm employment taxes, on a quarterly basis.

Deciding who is an employee is not easy. If you have any further questions about how to comply with the tax laws in connection with household help, please feel free to call this office.

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.