Dear Client: Washington, Feb. 13, 2025
As Republican lawmakers work on a tax bill
They will have to tackle a key sticking point: The popular state and local tax deduction that is taken by itemizers on Schedule A of the 1040.
There’s now a $10,000 cap on SALT write-offs
Prior to 2018, the deduction was generally unlimited for individuals, except for people who owed the AMT… alternative minimum tax. The Tax Cuts and Jobs Act enacted the $10,000 limit on SALT deductions.
The cap ends after 2025. If nothing is done, filers could then deduct SALT as they did before 2018.
HIGHLIGHTS
Medicals Surrogacy expenses
Home Sales Gain exclusion
Exempt Groups Hospitals
Business Taxes Carried interest
Enforcement Fuel-tax credit
IRS Regulatory crackdown
House GOPers from high-tax states want to hike the $10,000 cap or to end it. And they have the ears of their congressional leaders and President Trump The president has called for increasing the cap, likely because he needs the votes of these GOP House members to pass tax legislation. With a one- or two-person majority in the lower chamber of Congress, Republicans cannot afford to lose many votes. The group of GOPers who support lifting the cap might be small, but they’re mighty. They can wield lots of power and affect what goes in or stays out of any tax bill.
But lifting the cap would cost lots of revenue and mainly benefit the wealthy.
Most experts think at the end of the day the SALT cap won’t be fully repealed, despite repeated calls by the bipartisan House SALT Caucus to do exactly that.
But it could be higher Let’s look at ideas already on the table: Double the cap to $20,000 for couples filing a joint return. Triple it to $30,000 for joint filers… $15,000 for others. Greatly hike it to $200,000 for joint filers…$100,000 for others.
Other options are a bit complex, involving more than just hiking the cap. For example, one alternative would let the $10,000 cap expire at the end of 2025, and then let filers deduct only property taxes, but not state and local income taxes. Another idea is to fully eliminate the SALT deduction for business taxpayers.
When analyzing the SALT write-off, there are two other things to consider:
First, the dreaded AMT. Prior to 2018, many upper-income individuals who were subject to AMT didn’t get a tax benefit from SALT write-offs. That’s because in figuring alternative minimum taxable income, you have to add back SALT deductions taken on Schedule A. The 2017 Tax Cuts and Jobs Act defanged much of AMT, resulting in far fewer taxpayers paying AMT now as compared with pre-2018 years. But, similar to the $10,000 SALT cap, the AMT easings lapse at the end of this year. And we don’t know exactly how Congress will handle the expiring AMT changes. Second, most states offer business owner workarounds, in which partnerships and other pass-through entities can elect to pay an entity-level state income tax instead of having the owners pay state tax on income that is passed through to them. The owners then get a state tax break for their pro-rata share of tax paid by the firm. When an election is made, state income tax payments shift from the business owners, who are subject to the $10,000 SALT cap, to the pass-through entities, which are not. Reported from Washington, D.C.
A couple can’t deduct as medical expenses the costs for using a surrogate. The wife has a medical condition and can’t get pregnant or carry a baby. So the couple are using a third party’s egg to be fertilized by the husband’s sperm, with the embryo implanted in the womb of a gestational surrogate. The couple sought a ruling from the Service on whether they can deduct as medical expenses the costs of egg donation, sperm donation and freezing, in vitro fertilization (IVF), childbirth expenses of the surrogate, and legal fees for the surrogacy. According to IRS, most of the costs aren’t incurred for the medical care of the couple or any dependent. Only medical expenses directly attributed to either spouse, such as sperm donation, qualify as deductible medicals that can be claimed on Schedule A of the Form 1040.
Having your refund deposited directly is the fastest way to get the money
You can ask IRS to directly deposit a refund in up to three bank accounts, such as a checking, savings or mutual fund account, or an IRA (Roth or traditional), provided the account is in your name, your spouse’s name, or both of your names. Attach Form 8888 to your 1040 or use tax software to split a refund between accounts.
A reminder on calculating gain or loss from the sale of your primary home: Start with the amount of gross proceeds reported in box 2 of Form 1099-S, and then subtract selling expenses such as commissions to arrive at amount realized. Reduce that figure by your adjusted tax basis in the home to come up with gain or loss. Taxpayers who have owned and used the property as their principal residence for at least two out of five years before the sale can exclude up to $250,000 of gain… $500,000 if filing a joint return. Losses from sales of primary homes aren’t deductible. IRS Publication 523 has details, including whether you need to report the sale at all.
If you have to sell your primary home early because of a natural disaster You can still qualify for the gain exclusion, albeit it may be a lesser amount. If you must sell your home early, you may still be eligible for a portion of the exclusion, depending on the circumstances. Sales of a residence due to a change in employment, illness or unforeseen circumstances qualify. A natural disaster that takes place within the otherwise two-out-of-five-year required period is an unforeseen circumstance, IRS says privately to a person who can’t live in her house because of such a disaster.
BENEFIT PLANS
The Labor Dept. gives relief to employers with unclaimed retirement benefits. All state governments maintain a repository or fund of unclaimed property, consisting of savings or checking accounts, insurance payments and benefits, salary checks, and more. DOL is making it easier for employer retirement plans to transfer small amounts of unclaimed retirement benefits to these state funds. Plan fiduciaries who meet certain rules can voluntarily transfer retirement benefits owed to a missing participant or beneficiary to a state unclaimed property fund, provided the participant’s total accrued retirement benefits don’t exceed $1,000.
401(k) plans get some easings on inadvertent overpayments to participants, thanks to 2022’s SECURE 2.0 Act. That law provides that a plan’s tax status won’t be jeopardized if the plan decides not to recoup repayment from a participant, beneficiary, or other party on account of any inadvertent benefit overpayment. Because employers needn’t make corrective contributions for these overpayments in many situations, it makes it easier for plan sponsors to correct inadvertent errors. IRS Notice 2024-77 has all the details in a helpful question-and-answer format.
OLYMPICS
U.S. Olympians who medaled in the summer games in Paris are tax winners. The value of their medals and cash prizes from the U.S. Olympics Com. are tax-free and needn’t be reported on Form 1040. Athletes with over $1 million of AGI don’t get the break. And the tax treatment of endorsement income isn’t affected.
IRS is stingy on granting homeowner associations tax-exempt status as social welfare organizations, finding that many of them are organized or operated to mainly serve the private interests of the group’s members. To qualify for federal tax exemption, a homeowner association must serve the public good or community over a sufficiently wide area, must have its facilities open for the use and enjoyment of the public, and can’t perform exterior maintenance activities on private dwellings. The agency recently denied tax exemption to an association because it is a gated community and restricts the public from accessing its grounds.
Nonprofit hospitals are coming under fire from a bipartisan pair of senators These hospitals must meet many rules to get and keep their federal tax exemption. They must provide a community benefit, observe organizational and operational rules, and satisfy other edicts related to emergency care policies, billing and collection data, community health needs assessment, and financial assistance policies for the indigent. Senators Charles Grassley (R-KS) and Elizabeth Warren (D-MA) wrote a letter to IRS, alleging that some nonprofit hospitals are shirking their duty to give charitable care and are engaging in abusive collection practices. They’re urging IRS to take steps, such as publishing guidance clarifying financial assistance policies of hospitals and prohibiting exempt hospitals from using aggressive collection measures.
A tax break for owners of hedge funds could be on the chopping block. Hedge fund and private equity managers have for years lowered their tax bills by treating their share of partnership or LLC profits received as compensation as long-term capital gains, and not ordinary income. Lawmakers have repeatedly called for an end to this “carried interest” tax break. The 2017 tax law narrowed it slightly, by requiring fund managers who take a share of their profits as compensation for services to hold their interest for at least three years for the profits to be treated as long-term capital gain. President Trump is now proposing to further nix the break as part of his plan to extend expiring tax provisions and enact other tax incentives.
Tax return preparation fees are currently not deductible on Schedule A. The 2017 tax law suspended through 2025 all miscellaneous itemized deductions that were subject to the 2%-of-AGI threshold, including tax return prep costs.
But if you file Schedule C, E or F, you can still deduct part of the cost IRS said in a 1992 revenue ruling that tax return preparation expenses incurred in preparing Schedule C (sole proprietors), E (rentals, royalties) or F (farmers) are deductible in calculating AGI, meaning they are above-the-line deductions. Taxpayers who are attaching these schedules to their Form 1040 should thus be able to write off an allocable portion of total return prep fees on the corresponding schedule.
IRS can foreclose on a dental practice that is co-owned by a tax cheat
Two men who are not related co-own a dental practice and the office in which the practice operates. One man owes nearly $500,000 in back taxes to IRS related to his income taxes. His only asset is his share of the dental practice and realty. IRS requested a foreclosure and forced sale of the entire practice and office space. The other dentist claimed only half the interest should be foreclosed upon and sold. But a district court ruled that IRS can foreclose on the practice and the office space in their entirety, much to the chagrin of the innocent dentist (Driscoll, D.C., N.J.).
The Tax Court rejects a man’s constitutional claim about IRS appeals officers. A man who didn’t pay his taxes had a due-process collection hearing with IRS’s Independent Office of Appeals. He argued that managers and officers in Appeals must be nominated by the president and confirmed by the Senate. Not so, says the Court, in deciding that appeals officers and team managers are not officers of the U.S. that must be appointed (Tooke, 164 TC No. 2).
IRS aims to improve its fast-track settlement procedures for certain taxpayers under audit. The program is available to eligible self-employed individuals, small businesses, large firms and tax-exempt groups, to work out an agreement on contested audit issues with the examiner and IRS’s appeals office within 60 days. IRS is piloting some changes and new approaches to alternative dispute resolution.
IRS is finally cracking down on tax scams involving fuel-tax-credit claims. Taxpayers can claim a credit for federal fuel tax that they pay for off-road business or farming driving. But some preparers and promoters, including those on social media, are telling taxpayers to take the credit on their Form 1040 even though most people don’t qualify for it. Filers must have a business purpose to take the tax break. Claiming a fuel tax credit without a sufficient business purpose is a frivolous position subject to penalty. And faulty fuel credits are on IRS’s Dirty Dozen list of tax scams. But IRS has been lambasted for not assessing frivolous return penalties in most cases. Now, filers who take the break must include a statement with their 1040 The detailed statement, which can be found in the instructions to Form 4136, asks for the business’s name and employer ID number, the model and type of vehicle for which the fuel was bought and more. IRS hopes this will deter improper credits.
The fee for a private letter ruling OK’ing some late IRA rollovers is increasing After Feb. 1, IRS will charge $14,500…up from $12,600. A lower user fee for late rollover requests will apply for taxpayers with gross incomes under $10 million. Remember, many people needn’t seek an IRS ruling for botched IRA rollovers if they meet the conditions to self-certify that they qualify for a waiver of the 60-day rule. The late rollover must be for one of 12 reasons, and the rollover must be completed within 30 days after the reason for failing to timely do it in the first place ceases.
Trump’s regulatory crackdown is shaking up IRS. He imposed a temporary halt on new regs to give his administration time to vet them and decide which ones to keep or toss. He ordered that 10 existing regs be wiped away for each one added. And he has reintroduced a rule from his first term that any proposed tax regulations undergo an extra layer of review by the Office of Information and Regulatory Affairs, a department that is within the White House’s Office of Management and Budget. Not all regs will be affected. For example, routine IRS guidance should be protected.
Two senators on the tax-writing committee want to fix IRS administration and procedures to enhance taxpayer and tax pro dealings with the agency. Sens. Mike Crapo (R-ID) and Ron Wyden (D-OR) have released a discussion draft of proposals that IRS’s Taxpayer Advocate says would strengthen taxpayer rights. The bill includes 71 specific proposals related to 10 broader topics: Improve tax administration and customer service. Help U.S. citizens who live abroad. Streamline judicial review for taxpayers who challenge IRS determinations in court. Strengthen the Taxpayer Advocate’s office. Handle unscrupulous return preparers. Strengthen taxpayer rights at IRS’s appeals office. Give protections to whistle-blowers. Provide administrative relief for small firms. Confer payment relief to U.S. citizens that are being held hostage overseas. And a few miscellaneous changes.
Yours very truly,
Feb. 13, 2025
Joy Taylor, Editor
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