The IRS has outlined key provisions of the One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025, that introduce new deductions beginning in tax year 2025. The deductions apply through 2028 and cover qualified tips, overtime pay, car loan interest, and a special allowance for seniors.

The IRS has outlined key provisions of the One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025, that introduce new deductions beginning in tax year 2025. The deductions apply through 2028 and cover qualified tips, overtime pay, car loan interest, and a special allowance for seniors.

Under the “No Tax on Tips” provision, employees and self-employed individuals may deduct up to $25,000 in voluntary cash or charged tips received in IRS-designated tip-based occupations. Tips must be reported on Form W-2, Form 1099 or directly on Form 4137. The deduction phases out above $150,000 in modified adjusted gross income ($300,000 for joint filers). Self-employed individuals engaged in a Specified Service Trade or Business under Code Sec. 199A and employees of SSTBs are ineligible.

The “No Tax on Overtime” provision permits workers to deduct the premium portion of overtime pay required under the Fair Labor Standards Act. The deduction is capped at $12,500 ($25,000 for joint filers), with a similar income-based phaseout.

The “No Tax on Car Loan Interest” rule allows individuals to deduct up to $10,000 in interest on loans used to purchase new, personal-use vehicles assembled in the U.S. Qualifying loans must originate after December 31, 2024, and be secured by the vehicle. Used and leased vehicles do not qualify. The deduction phases out for income above $100,000 ($200,000 for joint filers).

Finally, taxpayers aged 65 or older can claim a new $6,000 deduction per person in addition to the current senior standard deduction. The deduction phases out above $75,000 ($150,000 for joint filers).

All deductions are available to itemizing and non-itemizing taxpayers. Transition relief for tax year 2025 will be provided.

FS-2025-3

Funding uncertainty and a constantly changing tax law environment are presenting challenges to the Internal Revenue Service as it works to meet legislative and executive mandates to improve the taxpayer experience.

Funding uncertainty and a constantly changing tax law environment are presenting challenges to the Internal Revenue Service as it works to meet legislative and executive mandates to improve the taxpayer experience.

A July Government Accountability Office report highlighted three specific challenges that the agency is facing as it works to improve the taxpayer experience.

GAO noted that "uncertainty about stable multiyear funding hinders efforts to modernize IRS computer systems and offer digital services to quickly resolve taxpayer issues. "

IRS had been using the supplemental funding provided by the Inflation Reduction Act to help address these issues, but those fundings have been a constant target for Republicans in Congress as well as the current Trump Administration, despite regular calls for stable and adequate funding.

The second challenge GAO reported was that "complicated and changing tax laws limit IRS’s ability to offer timely guidance to taxpayers," the report states, though agency officials said it had plans in place to ensure the guidance flowing from the IRS is provided in a manner that is accurate, up-to-date, and available in a user-friendly format.

Staffing was highlighted as the third challenge.

GAO reported that "being unable to hire enough staff trained to help taxpayers can undercut the ability to optimally improve taxpayer experiences. IRS officials said IRS had efforts to boost hiring and training as well as improved systems to enable staff to improve taxpayer experiences."

However, in March 2025, "IRS officials said it was unclear how reductions to the IRA funding and to its staffing will affect these efforts to address the challenges," GAO reported.

The government watchdog also noted that IRS has not established key practices to:

• Define taxpayer experience goals related to service improvements;

• Generate new evidence from measures, analytical tools, and dashboards to track progress with the taxpayer experience goals;

• Involve external stakeholders to help assess the affects of its service improvements on the taxpayer experience; and

• Promote accountability for achieving the taxpayer experience goals.

"IRS officials said establishing an evidence-based approach using these and other key practices has been delayed," GAO reports. "The IRS offices that had been coordinating IRA and taxpayer experience initiatives were disbanded in March 2025 and April 2025, respectively, according to IRS officials."

GAO recommends that the agency "fully establish an evidence-based approach to determine the effects of service improvements on the taxpayer experience."

By Gregory Twachtman, Washington News Editor

Audits on high-income individuals and partnerships have increased in recent years as audits on large corporations have decreased in response to the Internal Revenue Service’s focus on the former group, the Treasury Inspector General For Tax Administration found.

Audits on high-income individuals and partnerships have increased in recent years as audits on large corporations have decreased in response to the Internal Revenue Service’s focus on the former group, the Treasury Inspector General For Tax Administration found.

In a report on trends in compliance activities through fiscal year 2023 dated July 10, 2025, examination starts for partnerships increased 63 percent from FY 2020 (4,106 starts) to FY 2023 (6,709 starts), while examination starts decreased 18 percent in the same time frame from 1,700 to 1,400.

For individuals, the overall combined number of examinations open and closed from FY 2020 through 2023 decreased from 466,921 to 400,446. For individuals with income tax returns of $400,000 or less, the percentage of examinations opened and closed dropped from 94.8 percent to 91.2 percent (442,856 to 365,229) while the percentage of examinations opened and closed for individual income tax returns more than $400,000 increased from 5.2 percent to 8.8 percent (24,065 to 35,217).

"The IRS planned to increase enforcement activities to help ensure tax compliance among high-income and high-wealth individuals," TIGTA reported, adding that it planned to use the supplemental funding provided by the Inflation Reduction Act and that the IRS as of May 2024, the agency plans to audit twice the number of individual returns with more than $400,000 in FY 2024 compared to FY 2023.

However, whether the IRS will be able to meet any compliance goals for both individuals as well as partnerships and corporations is questionable, with agency’s "ability to move forward with hiring efforts in these complex audit areas of corporations, partnerships and high-income individuals is uncertain considering the decreased enforcement funding and recent government staffing cuts."

To that end, the agency’s Field Collection, Campus Collection, and Examination staff is already on a downward trend.

TIGTA reported that the staff decreased from 18,472 employees in FY 2020 to 17,475 in 2023 due to attrition. The Collection staff slightly increased from 7,246 to 7,371 and the Examination staff decreased from 11,226 to 10,104.

"The status of the IRS’s IRA plan, other IRA transformational initiatives, along with the IRS’s hiring plans is uncertain, at best," TIGTA reported. "Although the IRS made substantial progress with hiring 4,048 revenue officers and revenue agents in FY 2024, the recissions of IRA funding, the hiring freeze, early retirement incentives, and future reductions in force present a challenge to improving taxpayer service and enforcing the nation’s tax laws."

The report also noted that in FY 2023, $10.1 billion in enforcement revenue was collected by the Automated Collection System. Field Collection collected a total of $5.9 billion.

In a separate report dated July 10, 2025, TIGTA reported the IRS planned to increase examinations across individuals, partnerships and businesses reporting total positive income of more than $400,000 in FY 2024. The average starts from FY 2019-2023 was 29,466 and the IRS planned to increase that to 70,812. At the same time, the number of returns with a total positive income reported of less and $400,000 is planned to decrease from an average of 452,051 from FY 2019-2023 to 354,792 in FY 2024. But it is not clear whether the agency will be able to meet these targets even though it was on track to meet these goals.

The agency "has not defined key terminology or aspects of its methodology for compliance to meet with these goals as outlined in the 2022 Treasury Directive that higher income earners would be targeted for audit," TIGTA reported. "The IRS stated that the FY 2024 plan was created with the assumptions available at the time. Any subsequent decisions about these issues could affect the effectiveness of future examination plans in meeting compliance requirements."

TIGTA did not make any recommendations in either report and the IRS did not make any comments on them.

By Gregory Twachtman, Washington News Editor

The IRS has released guidance clarifying the withholding and reporting obligations for employers and plan administrators when a retirement plan distribution check is uncashed and later reissued.

The IRS has released guidance clarifying the withholding and reporting obligations for employers and plan administrators when a retirement plan distribution check is uncashed and later reissued.

In the scenario addressed, a plan administrator issued an $800 designated distribution to a former employee, withheld the correct amount of federal income tax under Code Sec. 3405, and sent the remaining balance by check. When that check went uncashed and was subsequently voided, a second check was mailed. Because the original withholding amount was correct and fully remitted, the IRS has concluded that no refund or adjustment is available under Code Secs. 6413 or 6414, as there was no overpayment involved.

For the second check, the IRS has stated that no further withholding is required if the amount reissued is equal to or less than the original distribution. However, if the new amount exceeds the prior distribution—due, for example, to accumulated earnings—the excess portion is treated as a separate designated distribution subject to new withholding under Code Sec. 3405.

With respect to reporting obligations, the IRS noted that Code Sec. 6047(d) requires a Form 1099-R to be filed for designated distributions of $10 or more. For the first check, the $800 distribution must be reported for the applicable year, with the full amount listed in Boxes 1 and 2a, and the tax withheld in Box 4. No additional reporting is required for the second check if the amount is equal to or less than the original. However, if the second check includes an excess of $10 or more, that additional amount must be reported on a separate Form 1099-R for the year in which the second distribution occurs.

Rev. Rul. 2025-15

The Treasury Department and the IRS have withdrawn proposed rules addressing the treatment of built-in income, gain, deduction, and loss taken into account by a loss corporation after an ownership change under Code Sec. 382(h). The withdrawal, effective July 2, 2025, follows public criticism on the proposed regulations’ approach.

The Treasury Department and the IRS have withdrawn proposed rules addressing the treatment of built-in income, gain, deduction, and loss taken into account by a loss corporation after an ownership change under Code Sec. 382(h). The withdrawal, effective July 2, 2025, follows public criticism on the proposed regulations’ approach.

The proposed rules were Reg. §1.382-1, proposed on September 10, 2019 (84 FR 47455), and Reg. §§1.382-1, 1.382-2 and 1.382-7, proposed on January 14, 2020 (85 FR 2061). The proposed regulations would have adopted as mandatory, with certain modifications, (a) the safe harbor net unrealized built-in gain (NUBIG) and net unrealized built-in loss (NUBIL) computation provided in Notice 2003-65, 2003-40 I.R.B. 747, based on the principles of Code Sec. 1374, and (b) the “1374 approach,” (as described in Notice 2003-65) for the identification of recognized built-in gain and recognized built-in loss. The IRS considered that the 1374 approach would make it easier for taxpayers to calculate built-in gains and built-in losses and comply with Code Sec. 382(h).

The IRS received critical comments from practitioners on the proposed rules, leading the agency to conclude that further study is needed before issuing any new proposed regulations.

The proposed regulations are withdrawn. Taxpayers may continue to rely on Notice 2003-65 for applying Code Sec. 382(h) to an ownership change before the effective date of any temporary or final regulations under Code Sec. 382(h).

Proposed Regulations, NPRM REG-125710-18

The Treasury and IRS removed this final rule from the Code of Federal Regulations (CFR) that involved gross proceeds reporting by brokers for effectuating digital asset sales.

The Treasury and IRS removed this final rule from the Code of Federal Regulations (CFR) that involved gross proceeds reporting by brokers for effectuating digital asset sales. The agencies reverted the relevant text of the CFR back to the text that was in effect immediately prior to the effective date of this final rule.

Congress passed a joint resolution disapproving the final rule titled “Gross Proceeds Reporting by Brokers that Regularly Provide Services Effectuating Digital Asset Sales.” The Treasury Department and the IRS were not soliciting comments on this action, nor delaying the effective date.

Effective Date

This final rule is effective on July 11, 2025.

T.D. 10021

A more then 25 percent reduction in the Internal Revenue Service workforce will likely present some significant challenges on the heels of a 2025 tax season described as a "measured success," according to the Office of the National Taxpayer Advocate.

A more then 25 percent reduction in the Internal Revenue Service workforce will likely present some significant challenges on the heels of a 2025 tax season described as a "measured success," according to the Office of the National Taxpayer Advocate.

In the "Fiscal Year 2026 Objectives Report to Congress," National Taxpayer Advocate Erin Collins noted that the 2025 filing season marked the IRS’ "third consecutive year of delivering a generally successful filing season, and by some measures, it was the smoothest yet. Most taxpayers filed their returns and paid their taxes or received their refunds without any delays or intervention from the IRS."

The report highlights that more than 95 percent of individual returns were filed electronically and more than 60 percent of taxpayers received refunds, "the majority within standard processing timeframes."

Despite having a successful season, the agency has reduced its workforce by more than 25 percent since the federal government under President Trump began cutting the federal workforce.

In analyzing what agency functions are affected by this workforce reduction, the report states that "many functions are more visible to taxpayers and directly impact service delivery, while other functions play vital supporting roles in providing taxpayer service and delivering on the IRS’s mission."

Collins in the report when on to encourage Congress ignore requests to cut the IRS budget and ensure the agency is properly staffed and financed.

"The Administration’s budget proposal envisions a 20 percent reduction in appropriated IRS funding next year and an overall reduction of 37 percent after taking into account after taking into account the decrease in supplemental funding from the Inflation Reduction Act. A reduction of that magnitude is likely to impact taxpayers and potentially the revenue collected."

The issues of the workforce reduction could be compounded by the expected permanent extension of the Tax Cuts and Jobs Act.

Collins stated that most of the changes related to the extension won’t take effect until January 1, 2026, "but several provisions impacting tens of millions of taxpayers will likely be effective during the 2025. This suggests additional complexity with taxpayers file their 2025 tax returns during the 2026 filing season and more complexity the following year. In addition, the reduction of more than 25 percent in the IRS workforce has the potential to reduce taxpayer services."

The report also echoed ongoing calls it has made in the past, as well as calls by other stakeholders, to continue to improve its information technology modernization strategy. Collins notes that in recent years, "the agency has made notable strides in modernizing its systems. … If this momentum continues, the IRS will be well positioned to deliver high quality service, enhance the taxpayer experience, and perhaps improve tax compliance at a reduced cost."

She highlighted the improvements that were made possible through the supplemental funding from the Inflation Reduction Act, but added that the Trump Administration has paused indefinitely or cancelled projects and replaced them with nine distinct modernization "’vertical,’ which are technology projects designed to meet specified technology demands."

"While these initiatives are promising, the IRS must provide clear and detailed communication to Congress and the public regarding the objectives, scope, business value, milestones, projected timelines, costs, and anticipated impacts of these nine vertical projects on taxpayer service," the report stated. "Without such transparency, there is a real risk these initiatives could stall or deviate from their intended outcomes."

Collins also made a case for sustained funding for IT improvements, recalling a 2023 blog post where she highlighted that large U.S. banks "spend between $10 billion and $14 billion a year on technology, often more than half on new technology systems. Yet in fiscal year (FY) 2022, Congress appropriated just $275 million for the IRS’s Business Systems Modernization (BSM) account. That’s less than five percent of what the largest banks are spending on new technology each year, and the IRS services far more people and entities than any bank."

By Gregory Twachtman, Washington News Editor

IR-2025-71

The Internal Revenue Service Electronic Tax Administration Advisory Committee (ETAAC) released its 2025 annual report during a public meeting in Washington, D.C., outlining 14 recommendations—ten directed to the IRS and four to Congress. 

The Internal Revenue Service Electronic Tax Administration Advisory Committee (ETAAC) released its 2025 annual report during a public meeting in Washington, D.C., outlining 14 recommendations—ten directed to the IRS and four to Congress. ETAAC operates under the Federal Advisory Committee Act and collaborates with the Security Summit, a joint initiative established in 2015 by the IRS, state tax agencies and the tax industry to address identity theft and cybercrime.

ETAAC recommended that the IRS update tax return forms to strengthen security and reduce fraud and identity theft. It also advised the agency to revise Modernized e-File reject codes and explanations, expand information sharing with state and industry partners, and continue transitioning taxpayers toward fully digital interactions.

Congress was urged to support tax simplification aligned with policy objectives, grant the IRS authority to regulate non-credentialed tax return preparers, ensure stable funding for taxpayer services and operations, and prioritize sustained technology modernization. For more information, visit the Electronic Tax Administration Advisory Committee (ETAAC) page.

IR-2025-72

The IRS has released the annual inflation adjustments for 2021 for the income tax rate tables, and for over 50 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

The IRS has released the annual inflation adjustments for 2021 for the income tax rate tables, and for over 50 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2021 Income Tax Brackets
For 2021, the highest income tax bracket of 37 percent applies when taxable income hits:

• $628,300 for married individuals filing jointly and surviving spouses,
• $523,600 for single individuals and heads of households,
• $314,150 for married individuals filing separately, and
• $13,050 for estates and trusts.

2021 Standard Deduction
The standard deduction for 2021 is:

• $25,100 for married individuals filing jointly and surviving spouses,
• $18,800 for heads of households, and
• $12,550 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,100 or
• the sum of $350 plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,350 for married taxpayers and surviving spouses, or
• $1,700 for other taxpayers.

AMT Exemption for 2021
The alternative minimum tax (AMT) exemption for 2021 is:

• $114,600 for married individuals filing jointly and surviving spouses,
• $73,600 for single individuals and heads of households,
• $57,300 for married individuals filing separately, and
• $25,700 for estates and trusts.

The exemption amounts begin to phase out when alternative minimum taxable income (AMTI) exceeds:

• $1,047,200 for married individuals filing jointly and surviving spouses,
• $523,600 for single individuals, heads of households, and married individuals filing separately, and
• $85,650 for estates and trusts.

Expensing Section 179 Property in 2021
For tax years beginning in 2021, taxpayers can expense up to $1,050,000 in Code Sec. 179 property. However, this dollar limit is reduced when the Section 179 property placed in service during the year exceeds $2,620,000.

Estate and Gift Tax Adjustments for 2021
The following inflation adjustments apply to federal estate and gift taxes in 2021:

• the gift tax exclusion is $15,000 per donee, or $159,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $11,700,000; and
• the maximum reduction for real property under the special valuation method is $1,190,000.

2021 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2021 is $108,700.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• lifetime learning credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date
These inflation adjustments generally apply to tax years beginning in 2021, so they affect most returns that will be filed in 2022. However, some specified figures apply to transactions or events in calendar year 2021.

The IRS has released the 2021 cost-of-living adjustments (COLAs) for pension plan dollar limitations and other retirement-related provisions.

The IRS has released the 2021 cost-of-living adjustments (COLAs) for pension plan dollar limitations and other retirement-related provisions.

Key Unchanged Amounts
The 2021 contribution limit remains unchanged at $19,500 for employees who take part in:

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

The catch-up contribution limit for employees aged 50 and over who participate in these plans also remains unchanged at $6,500.

The limitation for SIMPLE retirement accounts is unchanged at $13,500.

For individual retirement arrangements (IRAs), the limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment, and so remains $1,000.

IRAs and Roth IRAs
The income ranges for determining eligibility to make deductible contributions to traditional IRAs and to contribute to Roth IRAs have increased for 2021.

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

• For single taxpayers covered by a workplace retirement plan, the 2021 phase-out range is $66,000 to $76,000, up from $65,000 to $75,000 for 2020.
• For married couples filing jointly, when the spouse making the contribution takes part in a workplace retirement plan, the 2021 phase-out range is $105,000 to $125,000, up from $104,000 to $124,000 for 2020.
• For an IRA contributor who is not covered by a workplace retirement plan but who is married to someone who is covered, the 2021 phase out range is between $198,000 and $208,000, up from $196,000 and $206,000 for 2020.
• For a married individual who is covered by a workplace plan and is filing a separate return, the phase-out range is not subject to an annual COLA and remains $0 to $10,000.

The 2021 income phase-out ranges for Roth IRA contributions are:

• $125,000 to $140,000 for singles and heads of household (up from $124,000 to $139,000 in 2020),
• $198,000 to $208,000 for married filing jointly (up from $196,000 to $206,000 in 2020), and
• $0 to $10,000 for married filing separately.

Saver’s Credit
The income limit for low- and moderate-income workers to claim the Saver's Credit under Code Sec. 25B has also increased for 2021:

• $66,000 for married couples filing jointly (up from $65,000 in 2020),
• $49,500 for heads of household (up from $48,750 in 2020), and
• $33,000 for singles and married filing separately (up from $32,500 in 2020).

The IRS has provided guidance to taxpayers that want to apply either Reg. §1.168(k)-2 and Reg. §1.1502-68, or want to rely on proposed regulations under NPRM REG-106808-19.

The IRS has provided guidance to taxpayers that want to apply either Reg. §1.168(k)-2 and Reg. §1.1502-68, or want to rely on proposed regulations under NPRM REG-106808-19, for:

• certain depreciable property acquired and placed in service after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021;
• certain plants planted or grafted after September 27, 2017, by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021; and
• components acquired or self-constructed after September 27, 2017, of certain larger self-constructed property and placed in service by the taxpayer during its tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021.

Rev. Proc. 2020-25, 2020-19 I.R.B. 785, and Rev. Proc. 2019-43, 2019-48 I.R.B. 1107, are modified.

Change in Accounting Method
The guidance applies to taxpayers who are changing their method of accounting for depreciable property that includes:

• components described in Reg. §1.168(k)-2(c) or NPRM REG-106808-19 where the component election has already been made; and
• specified plants for which the Code Sec. 168(k)(5) election has been made and that are planted, or grafted to a plant that was previously planted, after September 27, 2017, during the taxpayer’s 2017, 2018, 2019, or 2020 tax year.

This guidance does not apply to property or a plant:

• that is impacted by a late election, or withdrawn election under Code Sec. 163(j)(7) after November 16, 2020, pursuant to Rev. Proc. 2020-22;
• for which the taxpayer is changing from deducting the cost or other basis of such property as an expense to capitalizing and depreciating the cost or other basis, or vice versa; or
• that the taxpayer does not own at the beginning of the year of change, with some exceptions.

In addition, this guidance cannot be used to make a late election, or revoke an election, under Code Sec. 168, Code Sec. 179, or Reg. §1.1502-68.

Taxpayers have a choice of applying the 2020 final regulations under T.D. 9916, the previous final regulations under T.D. 9874, or both the final regulations under NPRM REG-106808-19. However, once a taxpayer applies Reg. §1.168(k)-2 and Reg. §1.1502-68, the taxpayer must apply Reg. §1.168(k)-2 and Reg. §1.1502-68 to all subsequent tax years.

Automatic Extensions of Time
Applicable taxpayers may make a late Code Sec. 168(k)(5) election, a late Code Sec. 168(k)(7) election, a late Code Sec. 168(k)(10) election, a late component election, a late designated transaction election, or a late proposed component election, by filing either:

• an amended Form 1065 for the placed-in-service year of the property, or for the planting year of the specified plant, as applicable, on or before December 31, 2021; or
• a Form 3115 with the taxpayer’s timely filed original Federal income tax return or Form 1065 for the taxpayer’s first or second tax year succeeding the tax year in which the taxpayer placed in service the property or the planting year of the specified plant, or, if later, the taxpayer’s timely filed original Federal income tax return or Form 1065 that is filed on or after November 6, 2020, and on or before December 31, 2021.

Effective Date
This guidance is effective on November 6, 2020.

For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.

2021 Wage Cap
The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent Social Security tax, also known as Old Age, Survivors, And Disability Insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2021, the wage base is $142,800. Thus, OASDI tax applies only to the taxpayer’s first $142,800 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $142,800.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2021
For workers who earn $142,800 or more in 2021:

• an employee will pay a total of $8,853.60 in social security tax ($142,800 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $17,707.20 in social security tax ($142,800 x 12.4 percent).

Additional Medicare Tax
Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the Additional Medicare tax.

Benefits Increase for 2021
Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2019 by 1.3 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

Tax reform discussions continue on Capitol Hill with legislation expected to be released very soon. GOP lawmakers in the House and Senate appear to be aiming for a comprehensive overhaul of the Tax Code. President Trump and Republicans in Congress have set out an ambitious schedule of passing a tax reform bill before year-end. 

Tax reform discussions continue on Capitol Hill with legislation expected to be released very soon. GOP lawmakers in the House and Senate appear to be aiming for a comprehensive overhaul of the Tax Code. President Trump and Republicans in Congress have set out an ambitious schedule of passing a tax reform bill before year-end. 

Tax reform

Although the specifics are not yet known, a GOP tax bill is expected to lower the individual and corporate tax rates and eliminate many tax credits and deductions. The corporate tax rate could be lowered to 20 percent (or in the 20s), the individual tax rates are expected to cap at 35 percent (although a higher rate may be retained), and the list of eliminated credits and deductions is likely to be lengthy. There is also talk of a lower rate for pass-through businesses.

The current Tax Code contains hundreds of credits and deductions, targeted to individuals, businesses and taxpayers of all types. These tax preferences touch on almost every activity. In past years, proposals to repeal tax preferences have met stiff resistance from the taxpayers they benefit.

The Trump Administration and Republicans in Congress appear to support keeping the home mortgage deduction and the charitable contribution deduction for individuals. The research credit is one business incentive that also appears to have support from the White House. Almost every other tax preference could be a candidate for repeal.

The GOP tax bill could also repeal the alternative minimum tax (AMT) and the federal estate tax. The federal gift tax, however, does not appear to be on the chopping block.

Without bill language, it is nearly impossible to envision the components of a GOP tax bill. Left unanswered, at least for now, are some important questions. Will the GOP tax bill be retroactive to January 1, 2017? Will the GOP tax bill expire after 10 years, as some tax bills have in the past? Our office will monitor developments and keep you posted.

Filing season

At this time, it is unclear if any tax law changes would be retroactive to January 1, 2017. If they are, the IRS may have to delay the start of the 2018 filing season. The filing season typically starts in mid-January. The IRS programs its return processing systems for existing tax laws. If the tax laws change, the IRS needs to revise its processing systems and that takes time. Our office will keep you posted.

More tax legislation

While the details of a GOP tax bill take shape, some stand-alone tax bills have been introduced in Congress. They include bills that:

• Exempt more taxpayers from the Affordable Care Act’s individual shared responsibility requirement
• Permit non-itemizers to take above-the-line deductions for charitable contributions.
• Delay the Affordable Care Act’s health insurance provider fee.
• Make taxpayers in Puerto Rico eligible for the earned income tax credit (EITC).
• Create a tax credit for renewable chemicals.
• Treat Native American nations the same as states for certain federal tax purposes.
• Create “Move America” bonds for infrastructure improvements.
• Expand tax-free distributions from IRAs for charitable purposes.

Lawmakers have a short window between now and year-end to pass any tax bills. Please contact our office if you have any questions about tax legislation.

Holiday gifts made to customers are generally deductible as ordinary and necessary business expenses as long as the taxpayer can demonstrate that such gifts maintain or improve customer goodwill. Such gifts must bear a direct relationship to the taxpayer's business and must be made with a reasonable expectation of a financial return commensurate with the amount of the gift. However, the $25 annual limitation per recipient on deductibility is applicable to holiday gifts, unless a statutory exceptions applies.

Holiday gifts made to customers are generally deductible as ordinary and necessary business expenses as long as the taxpayer can demonstrate that such gifts maintain or improve customer goodwill. Such gifts must bear a direct relationship to the taxpayer's business and must be made with a reasonable expectation of a financial return commensurate with the amount of the gift. However, the $25 annual limitation per recipient on deductibility is applicable to holiday gifts, unless a statutory exceptions applies.

Holiday turkeys and other holiday distributions of nominal value made by an employer to employees to promote goodwill are treated as tax-free gifts to those employees instead of taxable compensation. If the employer gives cash, gift certificates or similar items of readily convertible cash value, however, the value of those gifts is considered additional compensation regardless of the amount.  But if holiday gift certificates given by an employer to its employees are redeemable only for merchandise and were not convertible to cash, they may be considered tax-free gifts.

Employers can give items worth a "nominal amount" without fear that the IRS will tax the employee. Gifts of items worth more, or a gift of any amount of cash, risks the IRS taking the view that the gift belongs in the employee's gross income. What constitutes a nominal amount is not crystal clear, but keeping a gift under $25 is erring on the safe side. It also assures a situation in which the employer can deduct the expense of the gift while not having it taxable to the employee.

IRS Chief Counsel, in generic legal advice (AM-2017-003), recently described when a qualified employer may take into account the payroll tax credit for increasing research activities. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) created the payroll credit aimed at start-ups with little or no income tax liabilities. This tax break allows taxpayers to get the cash benefit of the payroll tax credit sooner as they reduce their payroll tax liability as payroll payments are made, instead of having to wait until the end of the quarter to receive the credit.

IRS Chief Counsel, in generic legal advice (AM-2017-003), recently described when a qualified employer may take into account the payroll tax credit for increasing research activities. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) created the payroll credit aimed at start-ups with little or no income tax liabilities. This tax break allows taxpayers to get the cash benefit of the payroll tax credit sooner as they reduce their payroll tax liability as payroll payments are made, instead of having to wait until the end of the quarter to receive the credit.

Background

A qualified business during a tax year may elect to apply a portion of its research credit against the 6.2 percent payroll tax imposed on the employer’s wage payments to employees. This payroll credit for research expenditures is limited to the lesser of: (a) the research credit for the tax year; (b) $250,000; or (c) the amount of the business credit for the tax year, including the research credit that may be carried forward to the tax year immediately after the election year.

Schedule B. Chief Counsel explained that if an employer is a semiweekly schedule depositor, it must complete Schedule B (Form 941), Report of Tax Liability for Semiweekly Schedule Depositors, and attach it to Form 941. Schedule B is also referred to as Record of Federal Tax Liability (ROFTL) for semiweekly schedule depositors. The IRS uses this information to determine if the employer made its federal employment tax deposits on time. Current Instructions for Schedule B describe the payroll tax credit.

Payroll credit

Employers, Chief Counsel explained, know the maximum amount of payroll tax credit potentially available for a quarter at the beginning of the quarter. This is because the return reflecting the payroll tax credit election on Form 6765, Credit for Increasing Research Activities, must have been filed before the quarter begins in which the employer can claim credit. However, the amount of the credit that is allowed for the quarter is limited to the employer Social Security tax on wages paid to the employer's employees during the quarter.

Therefore, as the employer makes payments of wages from the beginning of the quarter for which the payroll tax credit is taken, the employer can take the payroll tax credit into account for purposes of the Schedule B and for purposes of deposit liability on the Form 941 or other employment tax return, provided the employer later files Form 8974, "Qualified Small Business Payroll Tax Credit for Increasing Research Activities," Chief Counsel explained.

Further, the payroll tax credit should be taken against deposit liabilities and reflected on Schedule B as the employer incurs liability for employer Social Security tax on wages paid in the quarter to which it applies, beginning with the first payment of wages in the quarter. "It would be counter to the purpose of the payroll tax credit to allow it as a credit only when the employer files its Form 941 for the quarter claiming the credit and not as the employer is paying wages during the quarter subject to employer Social Security tax," Chief Counsel stated.

Deadline opportunity: The IRS also recently announced that it would allow start-up companies to make the payroll tax credit election on an amended return for the 2016 tax year, but as long as the amended return is filed by December 31, 2017.