NEW YORK—The Internal Revenue Service needs to find ways to better communicate how it is handling technology modernization and transformation, including in areas such as the use of artificial intelligence in its processes, agency Office of Internal Consulting Chief Joseph Zeigler said.

NEW YORK—The Internal Revenue Service needs to find ways to better communicate how it is handling technology modernization and transformation, including in areas such as the use of artificial intelligence in its processes, agency Office of Internal Consulting Chief Joseph Zeigler said.

Speaking during a plenary session August 18, 2026, at the IRS Nationwide Tax Forum, Zeigler said it is his “hope that the IRS is going to a better job of telling this story” about how the agency is using technology to help improve its operations and make lives easier for taxpayers and the tax professionals who assist them.

As an example, Zeigler specifically highlighted some of the work the agency is doing with AI.

“When we talk about AI, AI is not meant to replace bodies or people and computers doing the work and there is no human input,” he said. Rather it is about how the IRS “can give our employees tools and resources [and] technology to make them better, more efficient” and improve the quality of their work. “All of those things is what I believe that AI and technology were meant for.”

He continued: “It’s taking our world-class employees and putting them on steroids, giving them the ability to come to the right answer sooner.”

And at the end is the ultimate goal of making the taxpayer experience that much better and more in line with what they expect from their customer interactions with the private sector.

“If we can come to an answer that right the first time, and we can come to it quick, and we can report it to the taxpayer [and say] here’s what’s going on,” he said. “All those things are at our fingertips.”

The IRS issued guidance in the form of sample forms and proposed rollover procedures to simplify, standardize, and expedite the completion of direct rollovers to or from a retirement plan. The guidance is designed to comply with Section 324 of the SECURE 2.0 Act (P.L. 117-328). Use of the sample forms and proposed rollover procedures is optional.

The IRS issued guidance in the form of sample forms and proposed rollover procedures to simplify, standardize, and expedite the completion of direct rollovers to or from a retirement plan. The guidance is designed to comply with Section 324 of the SECURE 2.0 Act (P.L. 117-328). Use of the sample forms and proposed rollover procedures is optional.

The IRS indicates that these sample forms are not inftended to be used for rollovers and transfers between IRAs. According to reports made by the Government Accountability Office and the IRS's conversations with IRA stakeholders, IRA-to-IRA transfers are already completed through an electronic transfer system that is considered uniform and efficient.

The guidance includes:

• (1) a proposed rollover procedure;
• (2) the participant's rollover request form;
• (3) the receiving plan's request to the distributing plan;
• (4) the distributing plan's rollover certification; and
• (5) the receiving plan's rollover acceptance.

The IRS is considering additional guidance to facilitate rollovers. Guidance under consideration includes: (1) eliminating the safe harbor that allows plans to send paper checks to participants to complete a direct rollover; (2) requiring administrators and trustees to complete rollovers via electronic transfers or paper checks sent directly to the receiving plan; and (3) providing for new safe harbors based on the use of sample forms.

Notice 2026-49

IR 2026-91

The IRS and Treasury have announced their intension to propose regulations relevant to Code Sec. 6433 and the SECURE 2.0 Act of 2022 (P.L. 117-328). For tax years beginning after December 31, 2026, Code Sec. 6433 allows certain low- and moderate-income individual taxpayers who have made qualified retirement savings contributions to receive matching contributions of up to $1,000 as saver’s match contributions.

The IRS and Treasury have announced their intension to propose regulations relevant to Code Sec. 6433 and the SECURE 2.0 Act of 2022 (P.L. 117-328). For tax years beginning after December 31, 2026, Code Sec. 6433 allows certain low- and moderate-income individual taxpayers who have made qualified retirement savings contributions to receive matching contributions of up to $1,000 as saver’s match contributions.

Background

On April 30, 2026, President Trump issued an executive order to (1) increase public awareness of saver’s match contributions; (2) facilitate participation in eligible retirement savings vehicles; and (3) establish a website that informs about high-quality, low-cost IRAs and taxpayers without an employer-sponsored retirement plan. These taxpayers include independent contractors.

Saver’s Match Contributions vs Saver’s Credit

For tax years beginning after December 31, 2026, Saver’s Match contributions would replace the Saver’s Credit under Code Sec. 25B. This would apply to elective contributions, qualifying retirement plans and IRAs.

However, the Saver’s Credit would continue to be available after December 31, 2026, with respect to contributions made to ABLE accounts under Code Sec. 529A. Saver’s match contributions would be claimed on a new (unpublished) Form 8880-A, Saver’s Match for Qualified Retirement Savings Contributions.

Eligibility

Individual taxpayers who make qualified retirement savings contributions could be eligible for a Saver's Match contribution based on those contributions. The contributions to a new or already-existing IRA after the end of a tax year could be made until the tax filing deadline. The contributions should be designated as being made for the prior tax year.

Tax Status

An eligible individual taxpayer’s saver’s match contribution directly paid by the Treasury to a retirement plan is generally treated as an elective deferral made by the individual taxpayer. The contribution is not taken into account for any elective deferral and catch-up limitations that apply to Code Secs. 401(k), 403(b), or governmental 457(b) plans.

Comments Requested

The Treasury Department and the IRS request comments on the issues addressed on or before October 5, 2026. Comments can be submitted electronically via the Federal eRulemaking Portal at www.regulations.gov.

Notice 2026-48

IR 2026-89

The Treasury Department and IRS have issued initial guidance on the employer credit under Code Sec. 45S for premiums paid on family and medical leave insurance as provided by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). Beginning in 2026, an employer may elect to determine the credit based on premiums paid or incurred during the tax year with respect to an insurance policy that provide such leave instead of based on wages paid to a qualifying employee during paid family and medical leave. The Treasury intends to issue proposed regulations that include this guidance.

The Treasury Department and IRS have issued initial guidance on the employer credit under Code Sec. 45S for premiums paid on family and medical leave insurance as provided by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). Beginning in 2026, an employer may elect to determine the credit based on premiums paid or incurred during the tax year with respect to an insurance policy that provide such leave instead of based on wages paid to a qualifying employee during paid family and medical leave. The Treasury intends to issue proposed regulations that include this guidance.

Premium Method for Credit

The credit may be claimed under the premium method beginning in 2026 only to the extent the insurance premium funds a benefit that would be creditable under the wage method. Thus, the premium must be for insurance coverage with respect to leave that is:

• paid family and medical leave as defined under the Family Medical Leave Act (FMLA), or required by state local law or paid for by a state or local government,
• payable to an individual who is a qualifying employee of the employer at the time the premium is paid or incurred, and
• provides a benefit that would constitute wages to the employee.

In the case of a premium paid or incurred for an insurance policy that provides both creditable coverage and noncreditable coverage, the employer must allocate the premium between the creditable coverage and the noncreditable coverage using any reasonable method. For example, a blended premium would be a premium for coverage that provides both qualifying paid family and medical leave and other types of leave, or coverage for qualifying employees and nonqualifying employees.

An employer may calculate the tax credit using both the wage method with respect to certain leave and the premium method with respect to other leave. However, an employer may not use the wage method to claim a credit for wages paid to the extent that the employer claims a credit using the premium method for creditable coverage that funds such benefits (or vice versa).

Notice 2026-28

IR 2026-86

The IRS updated frequently asked questions (FAQs) for qualified overtime compensation. The FAQs update guidance on (1) the qualified overtime compensation deduction; (2) coverage and exemptions under the Fair Labor Standards Act (FLSA); (3) Form W-2, Form 1099-MISC, and Form 1099-NEC requirements; and more.

The IRS updated frequently asked questions (FAQs) for qualified overtime compensation. The FAQs update guidance on (1) the qualified overtime compensation deduction; (2) coverage and exemptions under the Fair Labor Standards Act (FLSA); (3) Form W-2, Form 1099-MISC, and Form 1099-NEC requirements; and more.

Qualified Overtime Compensation Deduction

The deduction is up to $12,500 of qualified overtime compensation earned for the year per individual tax return. It is $25,000 for joint return. The deduction is reduced if a taxpayer’s modified adjusted gross income (MAGI) for the tax year exceeds $150,000, and $300,000 for joint filers.

Coverage and Exemptions Under FLSA

The IRS noted that overtime under the FLSA must be paid to individual taxpayers who are (1) covered by the FLSA; and (2) not exempt from the FLSA’s overtime requirement. Ineligible taxpayers would not receive qualified overtime compensation regardless of other laws or circumstances. Employees who are exempt from the FLSA’s overtime requirement include teachers, academic administration personnel, employees of certain seasonal amusement or recreational establishments and more.

Employee-owners of businesses are not FLSA overtime-eligible employees. An employee who owns at least a bona fide 20-percent equity interest in the enterprise in which they are employed is ineligible.

Reporting Requirements

Starting in tax year 2026, payors and employers are required to separately report qualified overtime compensation on a Form 1099-MISC, Form 1099-NEC or Form W-2. Independent contractors would only report qualified overtime compensation on a Form 1099- MISC or Form 1099-NEC.

FS-2026-13

IR 2026-88

The Fifth Circuit Court of Appeals held that the original public meaning of "limited partner" in Code Sec. 1402(a)(13) is a partner who plays no significant role in managing or running a business. The court rejected the "passive investor" rule followed by the IRS and the Tax Court in Soroban Capital Partners LP (Dec. 62,310). The Fifth Circuit also withdrew its prior opinion in Sirius Solutions, L.L.L.P. (this was the prior name of the limited liability limited partnership in this litigation).

The Fifth Circuit Court of Appeals held that the original public meaning of "limited partner" in Code Sec. 1402(a)(13) is a partner who plays no significant role in managing or running a business. The court rejected the "passive investor" rule followed by the IRS and the Tax Court in Soroban Capital Partners LP (Dec. 62,310). The Fifth Circuit also withdrew its prior opinion in Sirius Solutions, L.L.L.P. (this was the prior name of the limited liability limited partnership in this litigation).

Background

A limited liability limited partnership operated a business consulting firm, and was owned by several limited partners and one general partner. For the tax years at issue, the limited partnership allocated all of its ordinary business income to its limited partners. Based on the limited partnership tax exception in Code Sec. 1402(a)(13), the limited partnership excluded the limited partners’ distributive shares of partnership income or loss from its calculation of net earnings from self-employment during those years, and reported zero net earnings from self-employment.

The IRS adjusted the limited partnership's net earnings from self-employment, and determined that the distributive share exception in Code Sec. 1402(a)(13) did not apply because none of the limited partnership’s limited partners counted as "limited partners" for purposes of the statutory exception. The Tax Court upheld the adjustments, stating it was bound by Soroban.

Limited Partners and Self Employment Tax

Code Sec. 1402(a)(13) excludes from a partnership's calculation of net earnings from self-employment the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments in Code Sec. 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services.

In Soroban, the Tax Court determined that Congress had enacted Code Sec. 1402(a)(13) to exclude earnings from a mere investment, and intended for the phrase "limited partners, as such" to refer to passive investors. Thus, the Tax Court there held that the limited partner exception of Code Sec. 1402(a)(13) did not apply to a partner who is limited in name only, and that determining whether a partner is a limited partner in name only required an inquiry into the limited partner's functions and roles.

No Significant Role in Management

The Fifth Circuit stated that the backdrop against which Congress enacted Code Sec. 1402(a)(13) in 1977 suggested that some participation is allowed, so long as the partners do not exercise control over the business, and that the plain text of the statute points towards this conclusion. The court observed that all relevant sources suggested that when the statute was enacted, the ordinary public meaning of"limited partner" included a partner who did not play a significant role in managing or running the business.

The Fifth Circuit rejected the Tax Court’s Soroban decision, which held that that the term "limited partner" could refer only to passive investors. The court stated that the Tax Court had selected a rule that was divorced from statutory text and that appeared to prohibit even the most minor involvement in corporate affairs. In the Fifth Circuit's view, it would have been understood at the time Congress enacted Code Sec. 1402(a)(13) that a limited partner could not manage the partnership, but perhaps could participate in certain nonmanagerial aspects of the business.

The court also stated that the Soroban decision could not be squared with decades of IRS-approved guidance insisting that what mattered was limited liability alone. The court characterized the IRS's position to be that it could change the meaning of "limited partner" from "limited liability alone" to the "passive investor" standard with no action from Congress to amend the text of Code Sec. 1402(a)(13). Even assuming that the IRS could unilaterally effectuate such changes through tax instructions, the court stated that the IRS's instructions must comport with the original public meaning of the text enacted by Congress.

Withdrawing Sirius Solutions, L.L.L.P., CA-5, 2026-1 ustc ¶50,109, and vacating and remanding an unreported Tax Court opinion.

K Alain, L.L.L.P., CA-5

The IRS has issued final regulations that clarify when backup withholding applies to payments made in settlement of third party network transactions. The final rules reflect amendments to Code Secs. 6050W and 3406 made by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21), and apply to payments made in calendar years beginning after December 31, 2024.

The IRS has issued final regulations that clarify when backup withholding applies to payments made in settlement of third party network transactions. The final rules reflect amendments to Code Secs. 6050W and 3406 made by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21), and apply to payments made in calendar years beginning after December 31, 2024.

Under the de minimis payment rule of Code Sec. 6050W(e) for information reporting purposes, a third party settlement organization (TPSO) must report payments made in settlement of third party network transactions to a payee only if the payments exceed $20,000 and 200 transactions in a calendar year. The final regulations align the backup withholding obligations under Code Sec. 3406 with this reporting threshold.

A payment will be considered a reportable payment subject to backup withholding only if both the $20,000 and 200 transaction thresholds are exceeded during the calendar year. The amount subject to backup withholding includes the entire amount of the transaction that causes either threshold to be breached, whichever occurs later, and the amount of any subsequent transactions made to the payee during the same calendar year. Further, if the TPSO made payments in settlement of third party network transactions to the payee in the previous calendar year that were reportable payments under the backup withholding rules, the de minimis exception to backup withholding would not to payments made to that payee in the current calendar year.

Participating Payees

In the preamble to the Treasury Decision, the Treasury Department and the IRS used the opportunity to clarify that de minimis TPSO reporting and the backup withholding thresholds apply with respect to each participating payee, as defined by Code Sec. 6050W(d)(1).

T.D. 10053

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule that permanently removes the requirement that U.S. companies and U.S. persons must report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act. The final rule adopts, with limited changes, an interim final rule issued on March 26, 2025, that narrowed the BOI reporting requirements.

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule that permanently removes the requirement that U.S. companies and U.S. persons must report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act. The final rule adopts, with limited changes, an interim final rule issued on March 26, 2025, that narrowed the BOI reporting requirements.

The Corporate Transparency Act (CTA) was enacted in 2021 as part of the broader Anti-Money Laundering Act of 2020. Its reporting requirement had been characterized as an important step in the fight against money laundering, financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption.

In late 2024 and early 2025, however, several federal district courts preliminarily enjoined FinCEN from implementing and enforcing the reporting rule. The Treasury Department announced in March 2025 that it was suspending enforcement of the CTA and its reporting requirements against U.S. citizens, domestic reporting companies, and their beneficial owners, and issued the interim final rule.

BOI Reporting Exemptions

The final rule:

• adopts exemptions that make the rollback of beneficial ownership reporting by U.S. companies permanent,
• exempts foreign pooled investment vehicles registered in the United States from reporting the BOI of a U.S person in control of the investment vehicle, and
• confirms that FinCEN will delete information about any individual that it reasonably believes is a U.S. person (for example, information that is linked to a U.S. passport or U.S. driver's license).

The final rule also makes substantive changes that expand on the relief in the interim final rule, by:

• exempting foreign companies from the requirement to report U.S. person “company applicants” (i.e., the individuals who helped those foreign companies register to do business in the United States), and
• exempting U.S. persons who have applied for FinCEN Identifiers (FinCEN IDs) from having to update or correct the information they provided to FinCEN when they applied.

Foreign entities that are reporting companies are still required under the final rule to report BOI for foreign individuals.

FinCEN has also issued answers to frequently asked questions on the final rule.

FinCEN Final Rule RIN-1506-AB67

It is never too early to begin planning for the 2016 filing season, the IRS has advised in seven new planning tips published on its website. Although the current filing season has just ended, there are steps that taxpayers can take now to avoid a tax bill when April 2016 rolls around. For example, the IRS stated that taxpayers can adjust their withholding, take stock of any changes in income or family circumstances, maintain accurate tax records, and more, in order to reduce the probability of a surprise tax bill when the next filing season arrives.

It is never too early to begin planning for the 2016 filing season, the IRS has advised in seven new planning tips published on its website. Although the current filing season has just ended, there are steps that taxpayers can take now to avoid a tax bill when April 2016 rolls around. For example, the IRS stated that taxpayers can adjust their withholding, take stock of any changes in income or family circumstances, maintain accurate tax records, and more, in order to reduce the probability of a surprise tax bill when the next filing season arrives.

IRS Recommended Action Steps

Specifically, the IRS advised the taxpayers take the following steps now to jump start a successful 2016 filing season for their 2015 tax year returns:

• Consider filing a new Form W-4, Employee's Withholding Allowance Certificate, with an employer if certain life circumstances have changed (such as a change in marital status or the birth of a child). A new child could mean an additional exemption and/or tax credits that might lower your tax liability. Therefore you might benefit from claiming an extra withholding allowance. Conversely, getting married (or divorced) could change your income, making it advantageous to readjust your withholding accordingly.
• Report any changes or projected changes in income to the Health Insurance Marketplace (if taxpayer obtained insurance through a marketplace). Income affects the calculation of subsidy payments. Recipients of the advance premium tax credit may owe tax for 2015 if their subsidy payments are too high.
• Maintain accurate and organized tax records, such as home loan documents or financial aid documents. Many deductions must be substantiated with evidence, and staying organized now could facilitate the tax return filing process in the future.
• Find a tax return preparer. Looking for a qualified tax return preparer may be easier in the off-season, when you are under no immediate pressure to select a person. This can provide taxpayers with more time to evaluate a preparer's credentials.
• Plan to increase itemized deductions. If a taxpayer plans to purchase a house, contribute to charity, or incur medical expenses that may not be reimbursed during 2015, it may be beneficial to consider whether itemizing deductions would be more beneficial than claiming the standard deduction for 2015.
• Stay informed of the latest tax law changes. Keeping on top of developments can reduce confusion in the long run.

A major repair to a business vehicle is usually deductible in the year of the repair as a "maintenance and repair" cost if your business uses the actual expense method of deducting vehicle expenses. If your business vehicle is written off under the standard mileage rate method, your repair and maintenance costs are assumed to be built into that standard rate and no further deduction is allowed.

Standard mileage rate

The standard mileage rate for business use of a vehicle is 48.5 cents per mile for 2007. The standard mileage rate replaces all actual expenses in determining the deductible operating business costs of a car, vans and/or trucks. If you want to use the standard mileage rate, you must use it in the first year that the vehicle is available for use in your business. If you use the standard mileage rate for the first year, you cannot deduct your repairs for that year. Then in the following years you can use the standard mileage rate or the actual expense method.

Actual cost

You can deduct the actual vehicle expenses for business purposes instead of using the standard mileage rate method. In order to use the actual expenses method, you must determine what it actually cost for the repairs attributable to the business. If you have fully depreciated your vehicle you can still claim your repair expenses.

Exceptions

Of course, the tax law is filled with exceptions and that includes issues relating to the deductibility of vehicle repairs and maintenance. Some ancillary points to consider:

• If you receive insurance or warranty reimbursement for a repair, you cannot "double dip" and also take a deduction;
• If you are rebuilding a vehicle virtually from the ground up, you may be considered to be adding to its capital value in a manner in which you might be required to deduct costs gradually as depreciation;
• If you use your car for both business and personal reasons, you must divide your expenses based upon the miles driven for each purpose.

You may want to calculate your deduction for both methods to determine which one will grant you the larger deduction. If you need assistance with this matter, please feel free to give our office a call and we will be glad to help.

In many cases, employees can elect to reduce their salary and contribute the amounts to a retirement plan. These plans include 401(k) cash or deferred arrangements, 403(b) tax-sheltered annuities, eligible Code Sec. 457 deferred compensation plans of state and local governments and tax-exempt entities, simple retirement accounts, and plans for self-employed persons such as a SEP individual retirement account (SEP IRA).

Each retirement plan limits the amount that can be contributed annually to the plan:

• IRAs - Contribution limits are $4,000 for 2006 and 2007; $5,000 for 2008.
• 401(k), 403(b), 457, SEP IRA - Contribution limits are $15,000 for 2006 and $15,500 for 2007. The contribution limits are indexed.
• Simple retirement accounts - The limit is $10,000 for 2006; $10,500 for 2007. The contribution limit is indexed.

Many retirement plans allow participants age 50 and older to make "catch-up" contributions. Participants can contribute an additional amount in excess of the normal limits. Making a catch-up contribution increases the amount available at retirement and is beneficial if the employee can afford it.

There is a separate limit for catch-up contributions. The limits are as follows:

• IRAs - $1,000 for 2007. This amount is not indexed.
• 401(k), 403(b), 457 and SEPs - $5,000 in 2006; indexed in $500 increments but unchanged for 2007.
• SIMPLE plans - $2,500 for 2006, indexed but unchanged for 2007.

Parents of a child under age 13 can take a tax credit for child care expenses to enable them to work. The credit can be taken for care of one or more children. Child care expenses are amounts you paid for someone to come to your home, for care at the home of a day care provider, and for care at a day care center.

The credit is a percentage of qualified child care costs. Qualified costs are limited to $3,000 for one child and $6,000 for two or more children. The credit is taken on the lowest of your earned income, your spouse's earned income, or your qualified costs. Generally, if the spouse is not working, no credit is allowed, unless the spouse is a student or is disabled.

The cost of child care includes incidental amounts for food and schooling, but not items with a separate cost. The cost of schooling does not qualify if the child is in kindergarten or above. The credit can also be claimed for the cost of taking care of a disabled spouse who cannot care for himself or herself, and for any other disabled person that you can claim as a dependent.

Married couples must file a joint return to claim the credit. You also qualify to claim the credit if you file as a single person, head of household, or qualifying widow(er).

To compute the amount of the credit, you multiply the amount determined from costs or earned income by a specified percentage. The percentage starts at 35 percent, if you have $15,000 or less of adjusted gross income. The percentage is reduced by one percentage point for every $2,000 of additional income for the next $23,000 in income above $15,000. You can use the minimum percentage of 20 percent if your income is $43,000 or more. Thus, the maximum credit is $1,050 (35 percent of $3,000) for one child and $2,100 for two or more children (35 percent of $6,000); and the minimum, no matter how much money you make, is $600 for one child and $1200 for more than one child.

The credit is taken on Form 2441. You must provide the name and address of the day care provider, the provider's taxpayer identification number, and the expenses paid to the provider. The day care provider cannot be your spouse, a parent of the child, or another person you claim as a dependent. However, payments to your child age 19 or older will qualify for the credit. You must also provide the names of your children and a social security number for each child.

If you are enrolled in a flexible spending account (FSA) with your employer, you may have elected to pay for child care expenses with funds from the FSA. These amounts are tax-free. To prevent a double benefit, you must reduce the child care credit by amounts used from the FSA to pay for child care.

In a final session, Congress approved a $45.1 billion package of tax extenders and other tax breaks during the night of December 8-9. The Tax Relief and Health Care Act of 2006 (H.R. 6111) renews many valuable - but temporary - tax breaks for individuals and businesses, including the state and local sales tax deduction, the higher education tuition deduction and employer tax incentives. The new law also extends some energy tax breaks, makes Health Savings Accounts (HSAs) more attractive and creates new tax incentives.

Temporary versus permanent tax cuts

Tax cuts come in two types: permanent and temporary. In recent years, Congress has favored temporary tax cuts over permanent ones largely because of how they are reflected in the federal budget. Temporary tax cuts appear to cost less over one, two or three years than permanent tax cuts.

The drawback is that they are temporary. They ultimately expire unless Congress extends them.

That's exactly what happened with the extenders. Nearly all of them expired at the end of 2005. The new law extends them through 2007.

Here's a rundown of the tax incentives that are extended through 2007:

--Deduction for state and local taxes;

--Higher education tuition deduction;

--Work Opportunity and Welfare-to-Work tax credits;

--Teacher's classroom expense deduction;

--Research tax credit;

--Archer Medical Savings Accounts;

--Indian employment tax credit;

--Accelerated depreciation for business property on a Native American reservation;

--15-year recovery period for some leasehold and restaurant improvements;

--Tax incentives for the District of Columbia;

--Brownfields remediation expensing;

--Cover over of tax on distilled spirits;

--Parity in application of mental health benefits; and

--Zone academy bonds.

State and local sales tax deduction

The new law allows taxpayers to deduct either state and local income taxes or state and local sales taxes as an itemized deduction. You have two options. You can calculate your deduction either by saving receipts or using the IRS' Optional State Sales Tax Tables. Be careful, the deduction phases-out for higher-income taxpayers. Even if you think the state and local income tax deduction would be larger, it's worthwhile to calculate both, especially if you may be liable for AMT. Our office can help you with all the calculations.

Teacher's classroom expense deduction

Teachers, aides and other education workers often pay for classroom expenses out of their own funds. The classroom expense deduction permits education workers to deduct some out-of-pocket classroom expenses up to $250. Many classroom purchases qualified for the deduction, such as paper and pens, books, computer software, and so on. However, you cannot take the deduction if your employer reimburses you for the classroom supplies.

Higher education tuition deduction

This deduction is often confused with the deduction for interest paid on a student loan. That's a separate tax break. The higher education tuition deduction is an above-the-line deduction for qualifying tuition and related expenses. However, you cannot deduct housing, transportation, food, insurance, and some other expenses. Taxpayers claiming the higher education tuition deduction also cannot take the HOPE and Lifetime Learning tax credits. Because this deduction has so many rules, it's important that our office carefully review your tax situation.

Welfare-to-Work and Work Opportunity tax credits

These credits are designed to encourage employers to hire economically-disadvantaged individuals. The credits are very similar and are equally complex. Only individuals in "targeted" groups qualify. Wages also cannot exceed certain thresholds. The new law extends them and consolidates them making tax planning very important.

Archer Medical Savings Accounts

If you own a small business, you know that health care costs are a huge drain on profits. Over the years, Congress has tried several "fixes." Archer Medical Savings Accounts were created to help workers save for health care expenses. They weren't very popular and today seem to be eclipsed by Health Savings Accounts. However, every employer is different. Archer Medical Savings Accounts may a good fit for you and your employees. The new law extends them through 2007.

New tax incentives

The Tax Relief and Health Care Act of 2006 creates two new tax breaks that could be very valuable: a temporary refundable credit for certain taxpayers with long-term unused AMT credits who have AMT income from incentive stock options and a new deduction for premiums paid for qualified mortgage insurance. Both of these tax breaks have some very important limitations. Our office can help decipher them for you.

Energy tax breaks

A surprise last-minute addition to the new law was a package of energy tax extenders. The big news here is what was not extended. Congress did not extend the tax break for individuals who make energy-efficiency improvements to their homes, such as energy-efficient windows and doors. Instead, Congress extended energy tax breaks targeted mostly to businesses and authorized more tax credits for research into alternative energy production. 

Health Savings Accounts

HSAs are similar to IRAs. Your contributions are deductible and are tax-free if used for qualified health care expenditures. With proper planning, HSAs can be a great asset.

The new law makes HSAs even more attractive by allowing a one-time transfer of IRA savings to an HSA. You can also make a one-time transfer of savings in a health flexible spending account (FSA) or a health reimbursement arrangement (HRA) to an HSA. These are valuable tools if you plan correctly. Give our office a call if you have any questions about HSAs.

Important planning steps

The lateness of the new law makes tax planning very important for these last few weeks of 2006.

Give our office a call. We can schedule an appointment to sit down and discuss the new law in detail. There are a lot more tax breaks than we covered in this short article. Don't miss out on some potentially very valuable tax savings.

Only 50 percent of the cost of meals is generally deductible. A meal deduction is customarily allowed when the meal is business related and incurred in one of two instances:

(1) while traveling away from home (a circumstance in which business duties require you to be away from the general area of your tax home for longer than an ordinary day's work); and

(2) while entertaining during which a discussion directly related to business takes place.

Entertainment expenses generally do not meet the "directly related test" when the taxpayer is not present at the activity or event. Both your meal and the meal provided to your business guest(s)' is restricted to 50 percent of the cost.

Related expenses, such as taxes, tips, and parking fees must be included in the total expenses before applying the 50-percent reduction. However, allowable deductions for transportation costs to and from a business meal are not reduced.

The 50-percent deduction limitation also applies to meals and entertainment expenses that are reimbursed under an accountable plan to a taxpayer's employees. It doesn't matter if the taxpayer reimburses the employees for 100 percent of the expenses. "Supper money" paid when an employee works late similarly may be tax free to the employee but only one-half may be deducted by the employer. The same principle applies to meals provided at an employees-only business luncheon, dinner, etc.

A special exception to the 50 percent rule applies to workers who are away from home while working under Department of Transportation regulations. For these workers, meals are 75 percent deductible in 2006 and 2007.

When a per diem allowance is paid for lodging, meal, and incidental expenses, the entire amount of the federal meals and incidental expense (M&IE) rate is treated as an expense for food or beverages subject to the percentage limitation on deducting meal and entertainment expenses. When a per diem allowance for lodging, meal, and incidental expenses for a full day of travel is less than the federal per diem rate for the locality of travel, the payer may treat 40 percent of the per diem allowance as the federal M&IE rate.

"Lavish" meals out of proportion to customary business practice are generally not deductible to the extent they are lavish. Generally, meals taken alone whentraveling generally have a lower threshold for lavishness than meals considered an entertainment expense for which a client or other business contact is "wined and dined."