President Donald Trump targeted federal hiring, including specific rules for the Internal Revenue Service, and the United States’ participation in the global tax framework being developed by the Organisation for Economic Co-operation and Development among his flurry of executive orders signed on the first day of his second term in the Oval Office.

The Financial Crimes Enforcement Network is keeping beneficial reporting information reporting voluntary even though the Supreme Court has lifted the injunction that was put in place by a lower court to keep the BOI regulation from being enforced.

The Financial Crimes Enforcement Network is keeping beneficial reporting information reporting voluntary even though the Supreme Court has lifted the injunction that was put in place by a lower court to keep the BOI regulation from being enforced.

"In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force," the agency posted to its website on January 24, 2025. "However, reporting companies may continue to voluntarily submit beneficial ownership information reports."

The posting follows a Supreme Court order stating on January 23, 2025, that the injunction put in place by the United States District Court for the Eastern District of Texas on December 5, 2024, was removed.

Justice Ketanji Brown Jackson offered a dissenting opinion on lifting the injunction.

"However likely the Government’s success on the merits may be, in my view, emergency relief is not appropriate because the applicant has failed to demonstrate sufficient exigency to justify our interventions," Justice Jackson wrote, citing two reasons: the Fifth Circuit Court of Appeals has already expedited the hearing of the case and the government has deferred the implementation of the regulations on its own accord.

"The Government has provided no indication that injury of a more serious or significant nature would result if the Act’s implementation is further delayed while the litigation proceeds in the lower courts. I would therefore deny the application and permit the appellate process to run its course," Justice Jackson added.

By Gregory Twachtman, Washington News Editor

The Treasury and IRS have issued final regulations that provide rules for classifying digital and cloud transactions. The rules apply for purposes of the international provisions of the Code.

The rules retain the overall approach of the proposed regulations (NPRM REG-130700-14, August 14, 2019), with some revisions.

The Treasury and IRS also issued proposed regulations that provide sourcing rules for cloud transactions.

The Treasury and IRS have issued final regulations that provide rules for classifying digital and cloud transactions. The rules apply for purposes of the international provisions of the Code.

The rules retain the overall approach of the proposed regulations (NPRM REG-130700-14, August 14, 2019), with some revisions.

The Treasury and IRS also issued proposed regulations that provide sourcing rules for cloud transactions.

Background

Reg. §1.861-18 provides rules for classifying cross-border transactions involving digitized information, specifically computer programs, broadly grouped into the following categories:

• the transfer of a copyright;
• the transfer of a copyrighted article;
• the provision of services for the development or modification of a computer program; and
• the provision of know-how relating to the development of a computer program.

The 1998 final regulations focus on the distinction between the transfer of the copyright itself and transfer of a copyrighted article, using a substance-over-form characterization approach and by examining the underlying rights granted to the transferee. Transfers of copyrights and copyrighted articles are further characterized as complete or partial transfers, resulting in the transfers being characterized as either sales or licenses, in the case of a copyrights, or sales or leases, in the case of a copyrighted articles.

2025 Final Regulations

The 2025 final regulations maintain the basic framework for characterizing transfers of content and extend the characterization framework to digital content. Digital content is generally defined as any computer program or other content protected by copyright law, not just transactions involving computer programs.

The categories of transactions include:

• the transfer of a copyright in the digital content;
• the transfer of a copy of the digital content (a copyrighted article);
• the provision of services for the development or modification of the digital content; and
• the provision of know-how relating to the development of digital content.

The 2025 final regulations also provide for cloud transactions and characterize the transactions as a provision of services.

Cloud transactions are generally defined as transactions through which a person obtains on-demand network access to computer hardware, digital content, or similar resources.

The 2025 final regulations replace the de minimis rule and the concept of arrangement with a predominant character rule that applies to both digital content transactions and cloud transactions. Under the rule, a transaction with multiple elements is characterized based on the predominant character of the transaction.

Request for Comments on 2025 Final Regulations

The Treasury and IRS are considering whether the characterization rules should apply to all provisions of the Code and have requested comments on any specific areas that would be affected, with examples if appropriate. Comments are also requested on any guidance that would be needed and the approach the guidance should take. In addition to general comments, the Treasury and IRS also request comments on the desirability and effect of applying the rules in specific areas and the guidance need.

Comments should be submitted 90 days after the Notice requesting comments is published in the Internal Revenue Bulletin, with consideration for comments submitted after that date that do not delay the guidance. Comments may be submitted electronically via the Federal eRulemaking Portal www.regulations.com or or by mail to: Internal Revenue Service, CC:PA:01:PR (Notice 2025-6, Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044.

Proposed Sourcing Rules for Cloud Transactions

Gross income from a cloud transaction is sourced as services. Under the Code, gross income from the performance of services is sourced to the place where the service is performed.

To determine the place of performance, the proposed regulations would take into account the location of the employees and assets, including both tangible and intangible assets, that contribute to the provision of cloud transactions. The sourcing rules would apply on a taxpayer-by-taxpayer basis.

The place of performance of a cloud transactions is established through a formula composed of a fraction that has three parts-the intangible property factor, the personnel factor, and the tangible property factor. The factors make up the denominator of the fraction. The numerator is the sum of each portion of each factor that is from sources within the United States. The gross income from a cloud transaction multiplied by the fraction is the U.S. source portion of the gross income.

T.D. 10022

Proposed Regulations, NPRM REG-107420-24

Notice 2025-6

The IRS has released final regulations implementing the clean hydrogen production credit under Code Sec. 45V, as well as the election to treat a clean hydrogen production facility as energy property for purposes of the energy investment credit under Code Sec. 48. The regulations generally apply to tax years beginning after December 26, 2023.

The IRS issued updates to frequently asked questions (FAQs) about the Energy Efficient Home Improvement Credit (Code Sec. 25C) and the Residential Clean Energy Property Credit (Code Sec. 25D). The former credit applies to qualifying property placed in service on or after January 1, 2023, and before January 1, 2033. The updates pertained to FS-2024-15. More information is available here.

The IRS issued updates to frequently asked questions (FAQs) about the Energy Efficient Home Improvement Credit (Code Sec. 25C) and the Residential Clean Energy Property Credit (Code Sec. 25D). The former credit applies to qualifying property placed in service on or after January 1, 2023, and before January 1, 2033. The updates pertained to FS-2024-15. More information is available here.

Energy Efficient Home Improvement Credit

The credit is limited to $2,000 per taxpayer per taxable year in the aggregate for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves or boilers.

Thus, a taxpayer could claim a total credit of $3,200 if they had sufficient expenditures in property categories (or a home energy audit) subject to the $1,200 limitation and in property categories subject to the $2,000 limitation.

Additionally, a taxpayer can claim the credit only for qualifying expenditures incurred for an existing home, or for an addition to or renovation of an existing home, but not for a newly constructed home.

Residential Clean Energy Property Credit

One of the FAQs mentions that this credit is a nonrefundable personal tax credit. A taxpayer claiming a nonrefundable credit can only use it to decrease or eliminate tax liability.

The credit is generally limited to 30 percent of qualified expenditures made for property placed in service between 2022 and 2032. However, the credit allowed for qualified fuel cell property expenditures is 30 percent of the expenditures, up to a maximum credit of $500 for each half kilowatt of capacity of the qualified fuel cell property.

FS-2025-1

IR-2025-17

The IRS has provided updated guidance on the implementation of section 530 of the Revenue Act of 1978 (P.L. 95-600), as amended, regarding controversies involving whether individuals are "employees" for employment tax purposes. Section 530 (which is not an Internal Revenue Code section) provides relief for employers who are involved in worker classification status disputes with the IRS and face large employment tax assessments as a result of the IRS’s proposed reclassifications of workers.

The IRS has provided updated guidance on the implementation of section 530 of the Revenue Act of 1978 (P.L. 95-600), as amended, regarding controversies involving whether individuals are "employees" for employment tax purposes. Section 530 (which is not an Internal Revenue Code section) provides relief for employers who are involved in worker classification status disputes with the IRS and face large employment tax assessments as a result of the IRS’s proposed reclassifications of workers.

Section 530 Safe Harbor

Section 530 provides that an employer will not be liable for federal employment taxes regarding an individual or class of workers if certain statutory requirements are met. Section 530 relief applies only if the taxpayer did not treat the individual as an employee for federal employment tax purposes for the period at issue, and meets each of the following requirements for that period:

• the taxpayer filed all required federal tax returns, including information returns, on a basis that is consistent with the taxpayer’s treatment of the individual as not being an employee (reporting consistency requirement);
• the taxpayer did not treat the individual or any individual holding a substantially similar position as an employee (substantive consistency requirement); and
• the taxpayer had a reasonable basis for not treating the individual as an employee (reasonable basis requirement).

Rev. Proc. 85-18, 1985-1 CB 518, provided instructions for implementing section 530 relating to the employment tax status of independent contractors and employees.

Updated Guidance

The updated guidance clarifies provisions in Rev. Proc. 85-18 regarding the definition of employee, the section 530 requirement for the filing of required returns, and the reasonable basis safe harbor rules. The updated guidance also includes new provisions that reflect certain statutory changes made to section 530 since 1986.

Among other things, the updated guidance amplifies guidelines in Rev. Proc. 85-18 which interpreted the word “treat” for purposes of determining whether a taxpayer did not treat an individual as an employee for section 530 purposes. Under the updated guidance, with respect to any individual, actions that indicate “treatment” of the individual as an employee for section 530 purposes include:

• withholding of income tax or FICA taxes from any payments made;
• filing of an original or amended employment tax return;
• filing or issuance of a Form W-2; and
• contracting with a third party to perform acts required of employers.

Provisions in Rev. Proc. 85-18 that explained how refunds, credits, abatements, and handling of claims applied to taxpayers who were under audit or otherwise involved in administrative or judicial processes with the IRS at the time of enactment of section 530 are no longer applicable and were not included in the updated guidance. Section 530 relief remains available at any stage in the administrative or judicial process if the requirements for relief are met.

Effect on Other Documents

Rev. Proc. 85-18, 1985-1 CB 518, is modified and superseded.

Rev. Proc. 2025-10

The IRS has issued final regulation identifying certain partnership related-party basis adjustment transactions as transactions of interest (TOI), a type of reportable transaction under Reg. §1.6011-4. Taxpayers that participate and material advisors to these transactions, and substantially similar transactions, are required to disclose as much to the IRS using Form 8886 and Form 8918, respectively, or be subject to penalties.

Regulations under Code Sec. 2801, which imposes a tax on covered gifts and covered bequests received by a citizen or resident of the United States from a covered expatriate, have been issued.

The IRS has issued a revenue ruling addressing the federal tax treatment of contributions and benefits under state-administered paid family and medical leave (PFML) programs. The ruling clarifies how these contributions and benefits are classified for income tax, employment tax, and reporting purposes, with distinctions drawn between employer and employee contributions.

The IRS has issued a revenue ruling addressing the federal tax treatment of contributions and benefits under state-administered paid family and medical leave (PFML) programs. The ruling clarifies how these contributions and benefits are classified for income tax, employment tax, and reporting purposes, with distinctions drawn between employer and employee contributions.

PFML Contributions

Mandatory contributions made by employers under PFML programs are classified as excise taxes deductible as ordinary and necessary business expenses under Code Sec. 164. These payments are deemed state-imposed obligations for the purpose of funding public programs and are not included in employees' gross income under Code Sec. 61. In contrast, mandatory contributions withheld from employees’ wages are treated as state income taxes under Code Sec. 164(a)(3). Employees may deduct these amounts on their federal tax returns if they itemize deductions, subject to the state and local tax (SALT) deduction cap under Code Sec. 164(b)(6).

The ruling further specifies the treatment of benefits paid under PFML programs. Family leave benefits, which provide wage replacement during caregiving periods, are included in the recipient’s gross income under Code Sec. 61 but are not considered wages for federal employment tax purposes under Code Sec. 3121. By comparison, medical leave benefits attributable to employee contributions are excluded from gross income under Code Sec. 104(a)(3). However, medical leave benefits attributable to employer contributions are partially taxable under Code Sec. 105 and are subject to FICA taxes.

The ruling also addresses scenarios where employers voluntarily cover portions of employees’ contributions, referred to as "employer pick-ups." Such pick-ups are treated as additional compensation, included in employees’ gross income under Code Sec. 61, and are subject to federal employment taxes. Employers, however, may deduct these payments as ordinary business expenses under Code Sec. 162.

To ensure compliance, the IRS requires states and employers to report benefits exceeding $600 annually under Code Sec. 6041 using Form 1099. Additionally, benefits subject to employment taxes must be reported on Form W-2.

The ruling modifies prior guidance and includes a transition period for 2025 to allow states and employers to adjust their systems to meet reporting and compliance requirements. This clarification provides a framework for managing the tax implications of PFML programs, ensuring consistent treatment across jurisdictions.

Effective Date

This revenue ruling is effective for payments made on or after January 1, 2025. However, transition relief is provided to the states, the District of Columbia, and employers from certain withholding, payment, and information reporting requirements for state-paid medical leave benefits paid made during calendar year 2025.

Effect on Other Guidance

Rev. Rul. 81-194, Rev. Rul. 81-193, Rev. Rul. 81-192, and Rev. Rul. 81-191 are amplified to include the holdings in this revenue ruling that are applicable to the facts in those rulings. Rev. Rul. 72-191, as modified by Rev. Rul. 81-192, is further modified.

Rev. Rul. 2025-4

IR-2025-16

National Taxpayer Advocate Erin Collins identified the lengthy processing and uncertainty regarding the employee retention credit as being among the ten most serious problems facing taxpayers.

National Taxpayer Advocate Erin Collins identified the lengthy processing and uncertainty regarding the employee retention credit as being among the ten most serious problems facing taxpayers.

"Although the [Internal Revenue Service] has processed several hundred thousand claims in recent months, it was still sitting on a backlog of about 1.2 million claims as of October 26, 2024," Collins noted in her just released 2024 Annual Report to Congress. "Many claims have been pending for more than a year, and with the imminent start of the 2025 filing season, the IRS will shift its focus and resources to administering the filing season, resulting in even longer ERC processing delays."

Collins is calling on the IRS to provide more specific information with claims denials, more transparency on the timing of claims processing, and allowing taxpayers to submit documentation and seek an appeal before disallowing a claim that was not subject to an audit.

In addition to ERC processing, Collins identified delays in processing of tax returns as another serious problem taxpayers are facing, including delays associated with the more than 10 million paper 1040 returns and more than 75 million paper-filed returns and forms overall each year, as well as issues surrounding rejections of e-filed returns, most of which are valid returns. These delays end up delaying refunds and can be particularly hard on low-income filers who are receiving the Earned Income Tax Credit.

"We recommend the IRS continue to prioritize automating its tax processing systems, including by scanning all paper-filed tax returns in time for the 2026 filing season and processing amended tax returns automatically," the report states.

Another processing issue identified in the report deals with delays in processing and refunds for victims of identity theft.

Collins reported that the delays in addressing identity theft issues grew to 22 months in fiscal year 2024, affecting nearly 500,000 taxpayers.

"The IRS has advised us that it has begun to prioritize resolution of cases involving refunds over balance-due returns rather than following its traditional ‘first in, first out’ approach," the report states. "This is somewhat good news, but I strongly encourage the IRS to fix this problem once and for all during the coming year."

Other issues in the top 10 include:

• Taxpayer service is often not timely or adequate;
• The prevalence of tax-related scams;
• Employment recruitment, hiring, training, and retention challenges are hindering transformational change within the industry;
• The dependence on paper forms and manual document review in processing Individual Taxpayer Identification Numbers is causing delays and potential security risks;
• Limited taxpayer financial and tax literacy;
• The IRS’s administration of civil tax penalties is often unfair, inconsistently deters improper behavior, fails to promote efficient administration, and thus discourages tax compliance; and
• Changes to the IRS’s criminal voluntary disclosure practice requirements may be reducing voluntary compliance and negatively impacting the tax gap.

Collins also called on Congress to ensure the IRS receives adequate funding specifically for taxpayer services and technology upgrades, noting that many improvements that are highlighted in the report were made possible by the Inflation Reduction Act, which provided supplemental funding to the agency.

"Much of the funding has generated controversy – namely, the funding allocated for enforcement," the report notes. "But some of the funding has received strong bipartisan support – namely, the funding allocated for taxpayer services and technology modernization."

She reported that telephone service has improved dramatically, correspondence processing has improved dramatically, and in-person has become more accessible following the IRA funding, as well as technology improvements including increased scanning and processing of paper-filed tax returns electronically; increases in electronic correspondence; expansion of secure messaging; the ability to submit forms from mobile phones; and increases in both chatbot and voicebot technology.

"I want to highlight this distinction so that if Congress decides to cut IRA funding, it does not inadvertently throw the baby out with the bathwater," she reports.

By Gregory Twachtman, Washington News Editor

IR-2025-4

The IRS has reminded taxpayers who are earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year.

The IRS has reminded taxpayers who are earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year. Before 2022, Form 1099-K was issued for third party payment network transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. However, now, a single transaction exceeding $600 can trigger a 1099-K The Service emphasized that money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable. Taxpayers can access Form 1099-K, its instructions and a set of answers to frequently asked questions on the IRS web site.

In addition, the Service reminded taxpayers that they must pay income tax either through withholding or estimated tax payments. Taxpayers should use estimated tax payments to pay other taxes such as self-employment tax and the alternative minimum tax. IRS Publication 17, Your Federal Income Tax (for Individuals), provides general rules to help taxpayers pay the income taxes they owe. Additional helpful information is available in Chapter 5, Business Income, of Publication 334, Tax Guide for Small Business; Publication 525, Taxable and Nontaxable Income, and on the IRS website at Understanding Your Form 1099-K.

Many taxpayers may be surprised in early 2023 when they receive a Form 1099-K, Payment Card and Third-Party Network Transactions, to report income earned in the “gig economy” or in sales of goods and services through certain internet sites. The number of taxpayers receiving the forms is expected to skyrocket because the threshold for reporting payments made through third-party processors has plummeted.

Many taxpayers may be surprised in early 2023 when they receive a Form 1099-K, Payment Card and Third-Party Network Transactions, to report income earned in the “gig economy” or in sales of goods and services through certain internet sites. The number of taxpayers receiving the forms is expected to skyrocket because the threshold for reporting payments made through third-party processors has plummeted.

Before 2022, reporting was required only when a third-party settlement organization (TPSO) made more than 200 payments to a payee that totaled more than $20,000 for the year. However, beginning in 2022, a TPSO must report a payee’s payments once they total $600, regardless of their number.

The IRS recently updated its Form 1099-K Frequently Asked Questions (FAQs) to help taxpayers understand who files the form, who receives it, and what it means. The updated FAQs are divided into five sections.

1. General

The General section of the FAQs explains that the IRS will also use Forms 1099-K for systemic computer matching to tax returns to identify potential unreported income. The agency will also use the information to develop taxpayer education and outreach efforts, as well as new approaches to audits and collection.

2. Definition

The second section of the FAQs defines several relevant terms, including:

• Payment cards (credit cards, debit cards, gift cards, etc.)
• Merchant category code
• Third-party settlement organization (TPSO)
• Merchant acquiring entity
• Participating payee
• Gross amount of reportable transactions.

3. Individuals

The third section of the FAQs explains who will receive a Form 1099-K and who will not. An individual who receives a form should use the information to compute gross sales and receipts, and correctly calculate gross income.

An individual who has questions about the form, believes it was issued in error, or believes it includes incorrect information should generally contact the form’s issuer. The individual may also contact the payment settlement entity (PSE) whose name and phone number appear on the form.

4. Reporting

The reporting section of the FAQs explains due dates for filing Form 1099-K with the IRS and providing a copy to the payee. This section also reiterates that the form must report the gross amount of the payee’s reportable transactions, with no adjustments for fees, refunds, and other adjustments.

5. Filing Form 1099-K

Finally, the last section of the FAQs explains which party is responsible for filing which forms. For example, a merchant acquiring entity is responsible for filing some Forms 1099-K, while a third-party settlement organization is responsible for filing others.

Reportable payments include payments to a government unit or a foreign payee. However, they do not include payments that are reportable under Code provisions other than Code Sec. 6050W.

Beginning with their 2021 tax years, partnerships with "items of international tax relevance" must file Schedule K-2, Partners’ Distributive Share Items—International, and Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International.

Beginning with their 2021 tax years, partnerships with "items of international tax relevance" must file Schedule K-2, Partners’ Distributive Share Items—International, and Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International.

Draft partnership instructions for the 2022 Schedules K-2 and K-3 (Form 1065) and partner’s instructions for the 2022 Schedule K-3 were released October 25. The instructions add a “domestic filing exception” for a partnership that meets all four of the following requirements for its 2022 tax year:

• The partnership has:
  • no foreign activity, defined as foreign income taxes paid or accrued, foreign source income or loss, or an ownership interest in a foreign partnership, corporation, foreign branch, or foreign disregarded entity, or
  • foreign activity that is limited to passive category foreign income generating no more than $300 of taxes subject to the foreign tax credit (and shown on a payee statement);
• All of the partners are U.S. citizens or resident aliens, domestic decedent’s estates with only U.S.-citizen or resident-alien beneficiaries, domestic grantor trusts with only U.S.-citizen or resident-alien grantors and beneficiaries, or domestic non-grantor trusts with only U.S.-citizen resident-alien beneficiaries;
• The partners receive a notification from the partnership electronically or by mail, dated no later than two months before the due date of the partnership’s return, that the partners will not receive Schedules K-3 unless they request them; and
• The partnership does not receive a request from any partner for Schedule K-3 at least one month before the due date of the return (that is, a calendar-year partnership does not receive any requests by February 15, 2023).

A partnership that receives a timely request from a partner for a Schedule K-3 does not qualify for the domestic filing exception and must file Schedules K-2 and K-3 with the IRS and provide Schedule K-3 to the requesting partner. However, the partnership only needs to complete the parts of Schedules K-2 and K-3 that are relevant to that partner.

If a partnership receives a request from a partner for a Schedule K-3 after the one-month date but no requests by that due date, the partnership only needs to provide Schedule K-3 to the requesting partner by the date on which the partnership files its return or one month after it receives the request, whichever is later.

The draft instructions note that if a partnership fails the domestic filing exception test, it may still qualify for an exception to the filing requirement if all of its partners are eligible for the exemption from filing Form 1116.

A regularly updated IRS FAQ sheet on Schedules K-2 and K-3 states that "comments on the draft instructions can be provided to lbi.passthrough.international.form.changes@irs.gov on or before November 8, 2022."

The draft instructions also add guidance on when a domestic partnership with only domestic activity needs to file Schedules K-2 and K-3, on reporting capital gains and losses and foreign tax redeterminations, and on reporting income inclusions required by 2022 regulations that apply aggregate treatment to domestic partnerships in some situations.

Draft instructions for S corporations’ 2022 Schedules K-2 and K-3 have not been issued yet.

The IRS has released the annual inflation adjustments for 2023 for the income tax rate tables, plus more than 60 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 2023 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2023 Income Tax Brackets

For 2023, the highest income tax bracket of 37 percent applies when taxable income hits:

• $693,750 for married individuals filing jointly and surviving spouses,
• $578,125 for single individuals,
• $578,100 for heads of households,
• $346,875 for married individuals filing separately, and
• $14,450 for estates and trusts.

2023 Standard Deduction

The standard deduction for 2023 is:

• $27,700 for married individuals filing jointly and surviving spouses,
• $20,800 for heads of households, and
• $13,850 for single individuals and married individuals filing separately.

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

• $1,250 or
• the sum of $400, plus the dependent’s earned income.

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

• $1,500 for married taxpayers and surviving spouses, or
• $1,850 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2023

The AMT exemption for 2023 is:

• $126,500 for married individuals filing jointly and surviving spouses,
• $81,300 for single individuals and heads of households,
• $63,250 for married individuals filing separately, and
• $28,400 for estates and trusts.

The exemption amounts phase out in 2023 when AMT exceeds:

• $1,156,300 for married individuals filing jointly and surviving spouses,
• $578,150 for single individuals, heads of households, and married individuals filing separately, and
• $94,600 for estates and trusts.

Expensing Code Sec. 179 Property in 2023

For tax years beginning in 2023, taxpayers can expense up to $1,160,000 in Code Sec. 179 property. However, this dollar limit is reduced when the cost of Code Sec. 179 property placed in service during the year exceeds $2,890,000.

Estate and Gift Tax Adjustments for 2023

The following inflation adjustments apply to federal estate and gift taxes in 2023:

• the gift tax exclusion is $17,000 per donee, or $175,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $12,920,000; and
• the maximum reduction for real property under the special valuation method is $1,310,000.

2023 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2023 is $120,000.

The IRS also provided inflation-adjusted amounts for the:

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

Effective Date of 2023 Adjustments

These inflation adjustments generally apply to tax years beginning in 2023, so they affect most returns that will be filed in 2024. However, some specified figures apply to transactions or events in calendar year 2023.

The 2023 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 2022 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. 

The 2023 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 2022 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2023 cost-of-living adjustments (COLAs) were released for:

• pension plan dollar limitations, and
• other retirement-related provisions.

Highlights of Changes for 2023

The contribution limit has increased from $20,500 to $22,500 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 $6,000 to $6,500.

The catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

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 $73,000 to $83,000, up from between $68,000 and $78,000.
• For joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $116,000 to $136,000, up from between $109,000 and $129,000.
• For an IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $218,000 and $228,000, up from between $204,000 and $214,000.
• For a married individual covered by a workplace plan filing a separate return, the phase-out range remains between $0 and $10,000.

The phase-out ranges for Roth IRA contributions are:

• $138,000 and $153,000, for singles and heads of household,
• $218,000 and $228,000, for joint filers, and
• $0 to $10,000 for married separate filers.

The income limit for the Saver' Credit is:

• $73,000 for joint filers,
• $54,750 for heads of household, and
• $36,500 for singles and married separate filers.

Lastly, the amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500, up from $14,000.

For 2023, the Social Security wage cap will be $160,200, and social security and Supplemental Security Income (SSI) benefits will increase by 8.7 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2023, the Social Security wage cap will be $160,200, and social security and Supplemental Security Income (SSI) benefits will increase by 8.7 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax

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 Medicare 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 2023, the wage base is $160,200. Thus, OASDI tax applies only to the taxpayer’s first $160,200 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $160,200.

There is no wage cap for Medicare tax.

Maximum Social Security Tax for 2023

For workers who earn $160,200 or more in 2023:

• an employee will pay a total of $9,932.40 in social security tax ($160,200 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $19,864.80 in social security tax ($160,200 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.

Benefit Increase for 2023

A cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2023 by 8.7 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The IRS has released the 2022-2023 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. 

The IRS has released the 2022-2023 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

• the special transportation industry meal and incidental expenses (M&IE) rates;
• the rate for the incidental expenses only deduction; and
• the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates

The special M&IE rates for taxpayers in the transportation industry are:

• $69 for any locality of travel in the continental United States (CONUS); and
• $74 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate

The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method

For purposes of the high-low substantiation method, the 2022-2023 special per diem rates are:

• $297 for travel to any high-cost locality; and
• $204 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $74 for travel to any high-cost locality, and
• $64 for travel to any other locality within CONUS.

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $74 for travel to any high-cost locality, and
• $64 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1392. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

Notice 2021-52, I.R.B. 2021-38, 381 is superseded.