The IRS has released the 2021-2022 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 2021-2022 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:

1. the special transportation industry meal and incidental expenses (M&IE) rates;
2. the rate for the incidental expenses only deduction; and
3. 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 2021-2022 special per diem rates are:

• $296 for travel to any high-cost locality; and
• $202 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, 1390. 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.

The IRS and the Treasury Department have issued guidance to employers about reporting the amount of qualified sick and family leave wages paid to employees for leave taken in 2021 on Form W-2, Wage and Tax Statement.

The IRS and the Treasury Department have issued guidance to employers about reporting the amount of qualified sick and family leave wages paid to employees for leave taken in 2021 on Form W-2, Wage and Tax Statement. Further, the notice provides guidance under recent legislation, including: the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127), as amended by the COVID-Related Tax Relief Act of 2020 (Division N of P.L. 116-260) and the American Rescue Plan Act of 2021 ( P.L. 117-2). Employers are required to report these amounts to employees either on Form W-2, Box 14, or in a separate statement provided with the Form W-2. The wage amount that the notice requires employers to report on Form W-2 will provide employees who are also self-employed with the information necessary to determine the amount of any sick and family leave equivalent credits they may claim in their self-employed capacities.

Reporting Requirements
The guidance requires eligible employers to report to employees the amount of qualified sick leave wages and qualified family leave wages paid to the employees under (i) sections 7001 or 7003 of the Families First Act for leave provided during the period beginning January 1, 2021, through March 31, 2021, and (ii) Code Secs. 3131 and 3132 for leave provided during the period beginning April 1, 2021, through September 30, 2021. Moreover, eligible employers have separate reporting requirements for (i) leave provided to employees during the period beginning January 1, 2021, through March 31, 2021, under the Families First Act; and (ii) leave provided to employees during the period beginning April 1, 2021, through September 30, 2021, under Code Secs. 3131 and 3132.

Specific Reporting Instructions
Qualified leave wages paid in 2021 under the Families First Act and Code Secs. 3131 and 3132 are to be reported in Box 1 of Form W-2. To the extent that qualified leave wages are social security wages or Medicare wages, they must also be included in Box 3 (up to the social security wage base) and Box 5, respectively.

In addition to the regular reporting requirements, employers must report the following types and amounts of the wages that were paid, with each amount separately reported either in Box 14 of Form W-2 or on a separate statement to the employee:

• the total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021 (sick leave wages subject to the $511 per day limit);
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021 (sick leave wages subject to the $200 per day limit);
• the total amount of qualified family leave wages paid to the employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021;
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021;
• the total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021;
• the total amount of qualified family leave wages paid to the employee under EFMLEA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021.

Model Language for Employee Instructions
As part of the Instructions for Employee, under the instructions for Box 14, for the Forms W-2, or in a separate statement sent to the employee, the employer may provide additional information about qualified sick leave wages and qualified family leave wages, and explain that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income. The guidance provides model language for employee instructions.

Self-Employment Tax Reporting
If taxpayers have self-employment income in addition to wages paid by an employer, and they intend to claim any qualified sick leave or qualified family leave equivalent credits, they must report the qualified sick leave or qualified family leave wages on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with their income tax return. The self-employed taxpayer may have to reduce (but not below zero) any qualified sick leave or qualified family leave equivalent amounts by these qualified leave wages.

The IRS has issued temporary and proposed regulations that authorize the assessment of any erroneous refund of the COVID-19 employment tax credits which were added by the American Rescue Plan Act of 2021 ( P.L. 117-2). These credits for certain wages paid by employers are:

The IRS has issued temporary and proposed regulations that authorize the assessment of any erroneous refund of the COVID-19 employment tax credits which were added by the American Rescue Plan Act of 2021 ( P.L. 117-2). These credits for certain wages paid by employers are:

• the Credit for Paid Sick Leave under Code Sec. 3131,
• the Credit for Paid Family Leave under Code Sec. 3132, and
• the Employee Retention Credit under Code Sec. 3134.

The text of the temporary regulations also serves as the text of the proposed regulations.

The temporary regulations apply to all credits under Code Secs. 3131 and 3132, including any increases to the credits under Code Sec. 3133, credited or refunded on or after April 1, 2021, including advanced refunds, as well as all credits under Code Sec. 3134 that are credited or refunded on or after July 1, 2021, including advanced refunds.

Erroneous Refunds
These credits are taken against the employer's share of Medicare tax imposed under Code Sec. 3111(b) and the attributable Railroad Retirement Tax Act tax imposed under Code Sec. 3221(a). If the amount of the credits exceeds these taxes for any calendar quarter, then the excess must be treated as an overpayment to be refunded or credited under Code Secs. 6402(a) and 6413(b). Any credits claimed that exceed the amount to which the employer is entitled, and that are actually credited or refunded by the IRS, are considered to be erroneous refunds of these credits.

If a small eligible employer specified in Code Sec. 3134(j)(2) receives excess advance payments of the credit, then the tax imposed under Code Sec. 3111(b) (or the attributable Code Sec. 3221(a) tax) for the calendar quarter are increased by the excess amount.

The temporary regulations provide that erroneous refunds of these credits are treated as underpayments of the taxes imposed under Code Sec. 3111(b) (and the attributable Code Sec. 3221(a) tax). The temporary regulations authorize the IRS to assess any credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were the applicable taxes, subject to assessment and administrative collection procedures. This allows the IRS to prevent the avoidance of the purposes of the limitations under the credit provisions, and to recover the erroneous refund amounts efficiently, while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with litigation.

These assessment and administrative collection procedures do not replace the existing recapture methods, but instead represent an alternative method available to the IRS.

Any amount of the credits for qualified leave wages and certain collectively bargained contributions under Code Secs. 3131 and 3132, plus any amount of credits for qualified health plan expenses under Code Secs. 3131(d) and 3132(d), and including any increases in these credits under Code Sec. 3133, and any amount of the employee retention credit for qualified wages under Code Sec. 3134 that are erroneously refunded or credited to an employer must be treated as underpayments of the employer’s share of the applicable Medicare tax by the employer, and may be administratively assessed and collected in the same manner as the taxes. The temporary regulations provide that the determination of any amount of credits erroneously refunded must take into account any credit amounts advanced to an employer under the process established by the IRS.

In certain situations, third-party payors claim tax credits on behalf of their common law employer clients. The temporary regulations address this by providing that employers against which an erroneous refund of credits may be assessed as an underpayment include persons treated as the employer under Code Secs. 3401(d), 3504, and 3511, consistent with their liability for the employment taxes against which the credits applied.

Effective Date; Request for Comments
The temporary regulations are effective on the date they are published in the Federal Register.

A public hearing on the proposed regulations will be scheduled if requested in writing by any person who timely submits electronic or written comments. Written or electronic comments and requests for a public hearing must be received by the date that is 60 days after the proposed regulations are published in the Federal Register.

The IRS has announced that it intends to defer until 2023 the applicability of certain final regulations under Code Sec. 1446(a) and (f) relating to withholding of tax on foreign partners’ share of effectively connected income.

Withholding Provisions on Transfers of Interests in Publicly Traded Partnerships Deferred
The amendments will defer the applicability date to January 1, 2023, for certain provisions relating to (1) withholding under Code Sec. 1446(f) on transfers of interests in publicly traded partnerships ( "PTP interests"); (2) withholding under Code Sec. 1446(a) on distributions made with respect to PTP interests; and (3) withholding under Code Sec. 1446(f)(4) by partnerships on distributions to transferees.

Code Sec. 864(c)(8) generally provides that gain or loss derived by a foreign person on the sale or exchange of an interest in a partnership engaged in a U.S. trade or business is treated as effectively connected gain or loss and, therefore, is subject to U.S. tax. Code Sec. 1446(f)(1) generally requires a transferee of an interest in a partnership to withhold 10 percent of the amount realized if any portion of the gain on the disposition would be treated under Code Sec. 864(c)(8) as effectively connected with the conduct of a trade or business within the United States. Code Sec. 1446(f)(4) provides that if a transferee fails to withhold on the disposition as required under Code Sec. 1446(f)(1), the partnership must withhold on distributions to the transferee.

Taxpayers May Rely on Deferral Prior to Amendments
The final foreign partner withholding regulations were published on November 30, 2020, in T.D. 9926, I.R.B. 2020-51, 1602, and the provisions whose applicability dates the amendments will defer generally would have applied to transfers and distributions that occur on or after January 1, 2022. Taxpayers may rely on the deferrals announced in the notice prior to amendments being issued.

The IRS has reminded taxpayers to file their 2020 tax returns by the upcoming October 15, 2021 due date. Taxpayers must file on or before the extension deadline to avoid the penalty for filing late if they request an extension. Tax returns can still be filed through electronic filing options, such as the IRS Free File.

The IRS has reminded taxpayers to file their 2020 tax returns by the upcoming October 15, 2021 due date. Taxpayers must file on or before the extension deadline to avoid the penalty for filing late if they request an extension. Tax returns can still be filed through electronic filing options, such as the IRS Free File.

However, the following taxpayers may have more time to file their returns:

• members of the military and others serving in a combat zone as they have 180 days after they leave the combat zone to file returns and pay any taxes due, and
• taxpayers in federally declared disaster areas who already had valid extensions.

Taxpayers are usually not penalized for failure to file if a refund is due. However, people risk losing the refund if they wait too long to file and claim a refund. Taxpayers can avoid additional penalties and interest by filing the 2020 return as soon as possible and paying any taxes owed.

Taxpayers must remember the following while paying federal taxes electronically:

• electronic payment options are the best way to make a tax payment,
• payment can be made when taxpayers file electronically using tax software online,
• IRS Direct Pay permits taxpayers to directly pay online from a checking or savings account for free and to schedule payments up to 365 days in advance,
• taxpayers can pay with a credit card, debit card or digital wallet option through a payment processor, which would charge a fee for the transfer,
• the IRS2Go app provides mobile-friendly payment options, including Direct Pay and debit or credit card payments on mobile devices, and
• payment can be made conveniently using the Electronic Federal Tax Payment System Voice Response System.

Further, taxpayers can see the following information while preparing their tax return or following up on balances or notices through their online account:

• adjusted gross income,
• economic impact payment amounts,
• estimated tax payment amounts,
• amount owed for any past years, updated for the current calendar day,
• payment history and any scheduled or pending payments,
• payment plan details,
• digital copies of select notices from the IRS, and
• approve or reject authorization requests from tax professional

Direct Deposit for Refunds
Taxpayers must file electronically and have their refund electronically deposited into their bank or other financial accounts for safe and quick refund receipt. Taxpayers can use direct deposit to deposit their refund into one or more accounts or purchase U.S. Savings Bonds. People can visit the FDIC website or the National Credit Union Association to use their Credit Union Locator Tool for information on opening an online bank or credit union account if they do not have a bank account. Further, veterans can use the Veterans Benefits Banking Program (VBBP) to access financial services at participating banks.

Monthly Advance Child Tax Credit Payments
The IRS is using previous year tax information, 2019 for most, for determination of the credit amount for those eligible and on extension for their 2020 tax returns. People who request an extension must file as soon as possible if they experience a significant change like the birth of a child in 2020. The IRS can calculate the credit based on the 2020 return and pay it out in total over the remaining months in 2021 once that return is processed.

Taxpayers may be eligible for two payments of half the credit in 2021 if they file and have their 2020 return processed on or before November 1, 2021. Similarly, people may be eligible for one payment if they file and have their return processed on or before November 29, 2021. The IRS has encouraged taxpayers to file electronically for quick processing of returns and to avoid delays.

Claiming Missing Stimulus Payments
To claim missing stimulus payments, eligible people must file a 2020 tax return or use the Child Tax Credit Non-filer Sign-up Tool soon, even if they usually do not file. The IRS will also automatically evaluate the taxpayer’s eligibility for the third economic impact payment when the 2020 return is processed. It will continue to issue eligible taxpayers their third economic impact payment and plus-up payments through the end of 2021.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country. September is declared as the National Preparedness Month.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country. September is declared as the National Preparedness Month.

Further, the IRS advised taxpayers to:

• secure critical documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space;
• duplicate and scan key documents for backup storage on electronic media such as a flash drive, CD or in the cloud, which provide security and easy portability;
• record all property, especially expensive and high value items. The IRS disaster-loss workbooks in Publication 584 and Publication 584-B can help individuals and businesses compile lists of belongings or business equipment;
• employers who use payroll service providers should check payroll service provider’s fiduciary bonds as they could protect the employer in the event of default by the provider;
• employers should create an Electronic Federal Tax Payment System account at EFTPS.gov to monitor their payroll tax deposits and receive email alerts; and
• reconstruct records after a disaster for tax purposes, getting federal assistance or insurance reimbursement. Further, taxpayers who have lost some or all their records during a disaster can visit the IRS's Reconstructing Records webpage.

In addition, taxpayers residing in a federally declared disaster can check for the available disaster tax relief on the IRS Tax Relief in Disaster Situations webpage or Around the Nation on IRS.gov. The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. Taxpayers impacted by a disaster can contact the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues. Further, taxpayers impacted by a disaster outside of a federally declared disaster area may qualify for disaster relief. This includes taxpayers who are not physically located in a disaster area but their records essential for filing or payment deadlines postponed during the relief period are located in a covered disaster area.

The IRS has emphasized the importance of correctly determining whether the individuals providing services to businesses were employees or independent contractors.

The IRS has emphasized the importance of correctly determining whether the individuals providing services to businesses were employees or independent contractors. Generally, an employee performs services that businesses control. Independent contractors offer their services to the public. Businesses have a right to control the details of the services performed.

The classification depends on the:

• company’s behavioral Control on what the worker does and how the job is performed;
• business’ direct or control the financial and business aspects of the worker; and
• relationship of the Parties ascertained by written contracts or employee type benefits.

Misclassification of Workers
Businesses could be held liable for employment taxes if an employee is misclassified without a reasonable basis.

Workers can use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report their share of uncollected taxes due on their compensation if they believe they have been improperly classified as independent contractors

Voluntary Classification Settlement Program
Taxpayers can reclassify their workers as employees for future tax periods for eligible taxpayers that agree to treat their workers as employees through the Voluntary Classification Settlement Program. Taxpayers must fulfill eligibility requirements, apply by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

Self-employed individuals must file an annual tax return and pay estimated tax quarterly. They pay self-employment tax (Social Security and Medicare tax) and income tax. If self-employed individuals use part of business home, they may claim the home office deduction.

Gig Economy
Taxpayers must report gig economy income on a tax return even if the income is part-time, temporary or side work; not reported on a Form 1099-K, 1099-MISC, W-2 or other income statements; or paid in any form, including cash, property, goods or virtual currency.

The IRS has allowed taxpayers to use electronic or digital signatures on certain paper forms they cannot file electronically.

The IRS has allowed taxpayers to use electronic or digital signatures on certain paper forms they cannot file electronically. The Service has balanced the e-signature option with critical security and protection needed against identity theft and fraud. The IRS will accept a wide range of electronic signatures. Acceptable electronic signature methods include:

• a typed name typed on a signature block;
• a scanned or digitized image of a handwritten signature that’s attached to an electronic record;
• a handwritten signature input onto an electronic signature pad;
• a handwritten signature, mark or command input on a display screen with a stylus device; and
• a signature created by a third-party software.

Moreover, the IRS will accept images of signatures (scanned or photographed) including common file types supported by Microsoft 365 such as tiff, jpg, jpeg, pdf, Microsoft Office Suite, or Zip.

The IRS has allowed taxpayers and representatives to use electronic or digital signatures on paper forms, which they cannot file using IRS e-file, including for example:

• Form 11-C, Occupational Tax and Registration Return for Wagering;
• Form 637, Application for Registration (For Certain Excise Tax Activities);
• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return and other forms in the 706 series;
• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;
• Form 730, Monthly Tax Return for Wagers;
• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;
• Form 1120-C, U.S. Income Tax Return for Cooperative Associations and other forms in the 1120 series;
• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; and
• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.

The Tax Court had jurisdiction to determine the appropriate relief available to an individual who sought innocent spouse relief for two tax years at issue. Initially, the taxpayer submitted a request for innocent spouse relief for one tax year, which the IRS denied in a final determination.

The Tax Court had jurisdiction to determine the appropriate relief available to an individual who sought innocent spouse relief for two tax years at issue. Initially, the taxpayer submitted a request for innocent spouse relief for one tax year, which the IRS denied in a final determination. Subsequently, the taxpayer filed an untimely petition for Tax Court review which was dismissed for lack of jurisdiction. Later, the taxpayer submitted a request for innocent spouse relief for an additional tax year at issue (two tax years). The IRS issued a final determination denying relief as to both years on the merits. The Tax Court held it had jurisdiction to hear the case even though the IRS previously denied relief for one year and argued that the year was included in the notice by mistake.

Notice Is Evaluated on its Face
The Tax Court has jurisdiction to review a final determination denying innocent spouse relief. The Tax Court concluded that when evaluating whether a notice serves as the predicate for jurisdiction, it generally does not look beyond the face of the notice unless its text is ambiguous or inconsistent. In this case, the notice unambiguously denied relief for two years. The court also stated that nothing in the law or regulations prohibits the Commissioner from issuing more than one final determination as to a given tax year. Thus, the notice could be a final determination conferring jurisdiction, even though there had been a prior final determination.

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

New Deduction
The Tax Cuts and Jobs Act created Code Sec. 199A. The deduction is temporary and begins this year.

Generally, qualified taxpayers may deduct up to 20 percent of domestic QBI from a partnership, S corporation or sole proprietorship. Congress put in place a limitation based on wages paid, or on wages paid plus a capital element, among other requirements. Certain service trades or businesses generally may not take advantage of the deduction but there are exceptions.

Almost immediately after passage of the new tax law, the AICPA and other tax professional groups urged on the IRS to move quickly on guidance. Recently, the National Society of Accountants (NSA) reported that the IRS would issue guidance on Code Sec. 199A this summer.

Immediate Concern
The AICPA identified several areas of immediate concern. They are:

• Definition of Code Sec. 199A qualified business income.
• Aggregation method for calculation of QBI of pass-through businesses.
• Deductible amount of QBI for a pass-through entity with business in net loss.
• Qualification of wages paid by an employee leasing company.
• Application of Code Sec. 199A to an owner of a fiscal year pass-through entity ending in 2018.
• Availability of deduction for Electing Small Business Trusts (ESBTs).

Services
The AICPA asked the IRS to describe what activities are included in the definition of a services trade or business. "The guidance should clarify that the definition of the term ‘accounting services’ includes any services associated with the determination of tax liabilities including preparation, tax planning, cost segregation services, services rendered with respect to tax credits and deductions, and similar consultative services,"the AICPA told the Service.

The Tax Cuts and Jobs Act did not directly change the tax rate on capital gains: they remain at 0, 10, 15 and 20 percent, respectively (with the 25- and 28-percent rates also reserved for the same special situations). However, changes within the new law impact both when the favorable rates are applied and the level to which to may be enjoyed.

The Tax Cuts and Jobs Act did not directly change the tax rate on capital gains: they remain at 0, 10, 15 and 20 percent, respectively (with the 25- and 28-percent rates also reserved for the same special situations). However, changes within the new law impact both when the favorable rates are applied and the level to which to may be enjoyed.

Capital gains rates

The maximum rates on net capital gain and qualified dividends are generally retained after 2017 and are 0 percent, 15 percent, and 20 percent. The breakpoints between the zero- and 15-percent rates ("15-percent breakpoint") and the 15- and 20-percent rates ("20-percent breakpoint") are generally the same amounts as the breakpoints under prior law, except the breakpoints are indexed using the new C-CPI-U factor in tax years beginning after 2018. For 2018:

• the 15-percent breakpoint is $77,200 for joint returns and surviving spouses (one-half of this amount ($38,600) for married taxpayers filing separately), $51,700 for heads of household, $2,600 for estates and trusts, and $38,600 for other unmarried individuals; and
• The 20-percent breakpoint is $479,000 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.

“Zero” rate. In the case of an individual (including an estate or trust) with adjusted net capital gain, to the extent the gain would not result in taxable income exceeding the 15-percent breakpoint, such gain is not taxed.

Comment. The breakpoints are not aligned with the new general income tax rate brackets. For example, alignment for joint filers would have the 15-percent breakpoint at $77,400 rather than $77,200; and, more significantly, 20 percent at $600,000 rather than at $479,000. Instead, they continue the alignment themselves more closely to the prior-law rate brackets.

Comment. As under prior law, unrecaptured section 1250 gain generally is taxed at a maximum rate of 25 percent, and 28-percent rate gain is taxed at a maximum rate of 28 percent. In addition, an individual, estate, or trust also remains subject to the 3.8 percent tax on net investment income (NII tax).

Kiddie tax

Effective for tax years beginning after December 31, 2017, and before January 1, 2026, the "kiddie tax" is simplified by effectively applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child. A child’s "kiddie tax" is no longer affected by the tax situation of his or her parent or the unearned income of any siblings.

Taxable income attributable to net unearned income is taxed according to the brackets applicable to trusts and estates, with respect to both ordinary income and income taxed at preferential rates. For 2018, that means that the 15-percent capital gain rate starts at $2,600 and rising to 20 percent when $12,700 is reached.

Carried interest

Capital gain passed through to fund managers via a partnership profits interest (carried interest) in exchange for investment management services must meet an extended three-year holding period to qualify for long-term capital gain treatment. Under new Code 1061(a), if a taxpayer holds an applicable partnership interest at any time during the tax year, this rule treats carried interest as short-term capital gain—taxed at ordinary income rates— based on a three-year holding period instead of the usual one-year period.

SSBIC rollovers

For sales after 2017, the new law repeals the election to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sale proceeds to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC). Prior to 2018 under former Code Sec. 1044, C corporations and individuals could elect to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sales proceeds within 60 days to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC).

Like-kind exchanges

Like-kind exchanges have often been used to defer taxable gains. Going forward, like-kind exchanges are allowed only for real property after 2017 (Code Sec. 1031(a)(1)). Like-kind exchanges are no longer available for depreciable tangible personal property, and intangible and nondepreciable personal property after 2017. Gain on those assets will no longer be allowed to be deferred.

Code Sec. 199A deduction

The concept of capital gain is intertwined within the new passthrough deduction for partnerships, S corporations and sole proprietorships under Code Sec. 199A in several ways. A noncorporate taxpayer can claim a Code Sec. 199A deduction for a tax year for the sum of—

(1)

the lesser of —

(a) the taxpayer’s "combined qualified business income amount"; or

(b) 20 percent of the excess of the taxpayer’s taxable income over the sum of (i) the taxpayer’s net capital gain under Code Sec. 1(h) and (ii) the taxpayer’s aggregate qualified cooperative dividends; plus

(2)

the lesser of —

(a) 20 percent of the taxpayer’s aggregate qualified cooperative dividends; or

(b) the taxpayer’s taxable income minus the taxpayer’s net capital gain (Code Sec. 199A(a), as added by the 2017 Tax Cuts Act).

Comment. As a result, the Code Sec. 199A deduction cannot be more than the taxpayer’s taxable income reduced by net capital gain for the tax year, making monitoring of capital gains a “must” for some taxpayers.

The Tax Cuts and Jobs Act modifies Section 529 qualified tuition plans to allow the plans to distribute up to $10,000 in tuition expenses incurred during the tax year for designated beneficiaries enrolled at a public, private, or religious elementary or secondary school. Section 529 plans used to only be allowed for college tuition, up to full tuition amounts. That provision for college tuition remains the same.

The Tax Cuts and Jobs Act modifies Section 529 qualified tuition plans to allow the plans to distribute up to $10,000 in tuition expenses incurred during the tax year for designated beneficiaries enrolled at a public, private, or religious elementary or secondary school. Section 529 plans used to only be allowed for college tuition, up to full tuition amounts. That provision for college tuition remains the same.

Although contributions are not tax deductible for federal tax purposes, funds within a Section 529 plan can accumulate tax-free within the plan until they are distributed tax-free to the educational institution for the child-beneficiary. The new $10,000 limitation applies on a per-student, not per-account basis. As a result, if an individual is a designated beneficiary of multiple accounts, a maximum of $10,000 in distributions will be free of income tax, regardless of whether the funds are distributed from multiple accounts. Some state plans provide a limited deduction against state income taxes for contributions to Section 529 plans. They may also provide caps on contributions.

The expansion of Section 529 plans to cover elementary and secondary school education applies to distributions made after December 31, 2017. Since existing Section 529 set up for a child-beneficiary’s college education may now be redirected earlier to primary and secondary tuition, parents, grandparents and other contributors will need to decide how best to manage each child’s combined accounts: whether amounts needed to cover college tuition should accumulate tax-free until those years, or whether they should be used earlier. Generally, if contributions are limited either by a donor’s financial resources or by state caps, use for college tuition will allow a greater amount to accumulate tax-free. If projected accumulated contributions can cover more than college tuition, then using remaining Section 529 balances for secondary and even elementary school may make sense.

These expanded rules are still young, however, with expected IRS regulations and other guidance overlaid onto the basic law under the Tax Cuts and Jobs Act sure to come. But although the tax-free growth benefits of any Section 529 plans have a long-term perspective, giving some thought to how these expanded Section 529 plans might be used in your family situation might start soon. Please contact our offices for further details.