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The IRS has released the annual inflation adjustments for 2026 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.

2026 Income Tax Brackets

For 2026, the highest income tax bracket of 37 percent applies when taxable income hits:

$768,700 for married individuals filing jointly and surviving spouses,
$640,600 for single individuals and heads of households,
$384,350 for married individuals filing separately, and
$16,000 for estates and trusts.

2026 Standard Deduction

The standard deduction for 2026 is:

$32,200 for married individuals filing jointly and surviving spouses,
$24,150 for heads of households, and
$16,100 for single individuals and married individuals filing separately.

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

$1,350 or
the sum of $450, plus the dependent’s earned income.

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

$1,650 for married taxpayers and surviving spouses, or
$2,050 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2026

The AMT exemption for 2026 is:

$140,200 for married individuals filing jointly and surviving spouses,
$90,100 for single individuals and heads of households,
$70,100 for married individuals filing separately, and
$31,400 for estates and trusts.

The exemption amounts phase out in 2026 when AMTI exceeds:

$1,000,000 for married individuals filing jointly and surviving spouses,
$500,000 for single individuals, heads of households, and married individuals filing separately, and
$104,800 for estates and trusts.

Expensing Code Sec. 179 Property in 2026

For tax years beginning in 2026, taxpayers can expense up to $2,560,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $4,090,000.

Estate and Gift Tax Adjustments for 2026

The following inflation adjustments apply to federal estate and gift taxes in 2026:

the gift tax exclusion is $19,000 per donee, or $194,000 for gifts to spouses who are not U.S. citizens;
the federal estate tax exclusion is $15,000,000; and
the maximum reduction for real property under the special valuation method is $1,460,000.

2026 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2026 is $132,900.

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 2026 Adjustments

These inflation adjustments generally apply to tax years beginning in 2026, so they affect most returns that will be filed in 2027. However, some specified figures apply to transactions or events in calendar year 2026.

Rev. Proc. 2025-32

IR-2025-103

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The IRS has released the 2025-2026 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:

$80 for any locality of travel in the continental United States (CONUS), and
$86 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 2025-2026 special per diem rates are:

$319 for travel to any high-cost locality, and
$225 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

$86 for travel to any high-cost locality, and
$74 for travel to any other locality within CONUS

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

$86 for travel to any high-cost locality, and
$74 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 2024-68, I.R.B. 2024-41, 729 is superseded.

Notice 2025-54

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The IRS has issued transitional guidance for reporting certain interest payments received on specified passenger vehicle loans made in the course of a trade or business during calendar year 2025. The guidance applies to reporting obligations under new Code Sec. 6050AA, enacted as part of the One Big, Beautiful Bill Act (P.L. 119-21).

Under Code Sec. 163(h)(4), as amended, "qualified passenger vehicle loan interest" is deductible by an individual for tax years beginning in 2025 through 2028. Code Sec. 6050AA requires any person engaged in a trade or business who receives $600 or more in such interest from an individual in a calendar year to file an information return with the IRS and statements to the borrowers. The information return must include the borrower’s identifying information, the amount of interest paid, loan details, and vehicle information.

Recognizing that lenders may need additional time to update their systems and that the Service must design new reporting forms, the Treasury Department and the IRS have granted temporary relief. For calendar year 2025 only, recipients may satisfy their reporting obligations by providing a statement to each borrower by January 31, 2026, indicating the total amount of interest received in calendar year 2025 on a specified passenger vehicle loan. This information may be delivered electronically, through online portals, or via annual or monthly statements.

No penalties under Code Sec. 6721 or 6722 will be imposed for 2025 if recipients comply with this transitional reporting procedure. The notice is effective for interest received during calendar year 2025. The IRS estimates that approximately 35,800 respondents will issue about 8 million responses annually, with an average burden of 0.25 hours per response.

Notice 2025-57

IR 2025-105

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The IRS issued updates to frequently asked questions (FAQs) about Form 1099-K, Payment Card and Third-Party Network Transactions (Code Sec. 6050W). The updates reflect changes made under the One, Big, Beautiful Bill Act (OBBBA), which reinstated the prior reporting threshold for third-party settlement organizations (TPSOs) and provided clarifications on filing requirements, taxpayer responsibilities, and penalty relief provisions. The updates supersede those issued in FS-2024-03. More information is available here.

Form 1099-K Reporting Threshold

Under the OBBB, the reporting threshold for TPSOs has been restored to the pre-ARPA level, requiring a Form 1099-K to be issued only when the gross amount of payments exceeds $20,000 and the number of transactions exceeds 200. The lower $600 threshold established by the American Rescue Plan Act (ARPA) no longer applies. The IRS noted that while the federal threshold has increased, some states may impose lower thresholds, and TPSOs must comply with those state-level reporting requirements.

Taxpayer Guidance

The FAQs explain that a Form 1099-K reports payments received through payment cards (credit, debit, or stored-value cards) or payment apps and online marketplaces used for selling goods or providing services. All income remains taxable unless excluded by law, even if not reported on a Form 1099-K.

If a Form 1099-K is incorrect or issued in error, taxpayers should contact the filer listed on the form to request a correction. If a corrected form cannot be obtained in time, taxpayers may adjust the reporting on Schedule 1 (Form 1040) by offsetting the erroneous amount when filing their return.

New Clarifications and Examples

The updated FAQs include expanded examples to help taxpayers properly determine income and filing obligations:

Sales of personal items – How to determine taxable gain or nondeductible loss on items sold through online platforms?
Crowdfunding proceeds – When contributions are taxable income versus nontaxable gifts.
Backup withholding – How failure to provide a valid taxpayer identification number (TIN) can result in withholding under Code Sec. 3406?
Multiple Forms 1099-K – How to report combined or duplicate forms properly using Schedule 1 (Form 1040)?

Third-Party Filer Responsibilities

The FAQs reaffirm that merchant acquiring entities and TPSOs are responsible for preparing, filing, and furnishing Form 1099-K statements. There is no de minimis exception for payment-card transactions. Entities that submit payment instructions remain subject to penalties under Code Sec. 6721 and 6722 for failing to file or furnish correct information returns. TPSOs are not required to include Merchant Category Codes (MCCs), while merchant acquiring entities must do so where applicable.

Ticket Sales and Executive Order 14254

The updated FAQs also address Executive Order 14254, Combating Unfair Practices in the Live Entertainment Market, issued in March 2025. The IRS clarified that income from ticket sales and resales is includible in gross income and subject to reporting. Payment settlement entities facilitating these sales must issue Form 1099-K when federal thresholds are met, and non-PSE payors may be required to issue Form 1099-MISC or Form 1099-NEC for payments of $2,000 or more made after December 31, 2025.

Reliance and Penalty Relief

Although the FAQs are not published in the Internal Revenue Bulletin (IRB) and cannot be used as legal precedent, the IRS confirmed that taxpayers who reasonably and in good faith rely on them will not be subject to penalties that allow for a reasonable-cause standard, including negligence or accuracy-related penalties, if such reliance results in an underpayment of tax.

FS-2025-8

IR-2025-107

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For 2026, the Social Security wage cap will be $184,500, and Social Security and Supplemental Security Income (SSI) benefits will increase by 2.8 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 HI tax.

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

For 2026, the wage base is $184,500. Thus, OASDI tax applies only to the taxpayer’s first $184,500 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $184,500.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2026

For workers who earn $184,500 or more in 2026:

an employee will pay a total of $11,439 in social security tax ($184,500 x 6.2 percent);
the employer will pay the same amount; and
a self-employed worker will pay a total of $22,878 in social security tax ($184,500 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 2026

Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2026 by 2.8 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

Social Security Fact Sheet: 2026 Social Security Changes

SSA Press Release: Social Security Announces 2.8 Percent Benefit Increase for 2026

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The IRS issued frequently asked questions (FAQs) addressing the limitation on Employee Retention Credit (ERC) claims for the third and fourth quarters of 2021 under the One, Big, Beautiful Bill Act (OBBBA). The FAQs clarify when such claims are disallowed and how the IRS will handle related filings.

Limitation on Late Claims

ERC claims filed after January 31, 2024, for the third and fourth quarters of 2021 will not be allowed or refunded after July 4, 2025, under section 70605(d) of the OBBBA.

Previously Refunded Claims

Claims filed after January 31, 2024, that were refunded or credited before July 4, 2025, are not affected by this limitation. Other IRS compliance reviews, however, may still apply.

Withdrawn Claims

An amended return withdrawing a previously claimed ERC after January 31, 2024, is not subject to section 70605(d). The IRS will process such amended returns.

Filing Date

An ERC claim is considered filed on or before January 31, 2024, if the return was postmarked or electronically submitted by that date.

Processing of Other Items

If an ERC claim is disallowed under section 70605(d), the IRS may still process other items on the same return.

Appeals Rights

Taxpayers whose ERC claims are disallowed will receive Letter 105-C (Claim Disallowed) and may appeal to the IRS Independent Office of Appeals if they believe the claim was timely filed.

FS-2025-7

IR-2025-106

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The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.

When Sales of Livestock are Involuntary Conversions

Sales of livestock due to drought are involuntary conversions of property. Taxpayers can postpone gain on involuntary conversions if they buy qualified replacement property during the replacement period. Qualified replacement property must be similar or related in service or use to the converted property.

Usually, the replacement period ends two years after the tax year in which the involuntary conversion occurs. However, a longer replacement period applies in several situations, such as when sales occur in a drought-stricken area.

Livestock Sold Because of Weather

Taxpayers have four years to replace livestock they sold or exchanged solely because of drought, flood, or other weather condition. Three conditions apply.

First, the livestock cannot be raised for slaughter, held for sporting purposes or be poultry.

Second, the taxpayer must have held the converted livestock for:

draft,
dairy, or
breeding purposes.

Third, the weather condition must make the area eligible for federal assistance.

Persistent Drought

The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.

The first drought-free year is the first 12-month period that:

ends on August 31 in or after the last year of the four-year replacement period, and
does not include any weekly period of drought.

What Areas are Suffering from Drought

The National Drought Mitigation Center produces weekly Drought Monitor maps that report drought-stricken areas. Taxpayers can view these maps at

https://droughtmonitor.unl.edu/Maps/MapArchive.aspx.

However, the IRS also provided a list of areas where the year ending on August 31, 2025, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.

Notice 2025-52

IR-2025-93

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The IRS and Treasury have issued final regulations setting forth recordkeeping and reporting requirements for the average income test for purposes of the low-income housing credit. The regulations adopt the proposed and temporary regulations issued in 2022 with only minor, non-substantive changes.

Low-Income Housing Credit

An owner of a newly constructed or substantially rehabilitated qualified low-income building in a qualified low-income housing project may be eligible for the low-income housing tax credit (LIHTC) under Code Sec. 42. A project qualifies as a low-income housing project it satisfies certain set-aside tests or alternatively an average income test.

Under the average income test, at least 40 percent (25 percent in New York City) of a qualified group of residential units must be both rent-restricted and occupied by low-income individuals. Also, the average of the imputed income limitations must not exceed 60 percent of the area median gross income (AMGI).

Recording Keeping and Reporting Requirements

The regulations provide procedures for a taxpayer to identify a qualified group of residential units that satisfy the average income test. This includes recording the identification in the taxpayer’s books and records, including a change in a unit’s imputed income limit. The taxpayer also must communicate the annual identification to the applicable housing agency.

The final regulations clarify the submission of a corrected qualified group when the taxpayer or housing agency realizes that a previously submitted group fails to be a qualified group. The housing agency is also allowed the discretion to permit a taxpayer to submit one or two lists qualified groups of low-income units to demonstrate compliance with the minimum set-aside test and the applicable fractions for the building.

(T.D. 10036)

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The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) extended the 50-percent additional first-year bonus depreciation allowed under the Economic Stimulus Act of 2008, providing a generous boost for many businesses in 2009 in light of the economic downturn. Under the 2009 Recovery Act, all businesses, large or small, can immediately depreciate an additional 50-percent of the cost of certain qualifying property purchased and placed in service in 2009, from computer software to plants and equipment.

The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) extended the 50-percent additional first-year bonus depreciation allowed under the Economic Stimulus Act of 2008, providing a generous boost for many businesses in 2009 in light of the economic downturn. Under the 2009 Recovery Act, all businesses, large or small, can immediately depreciate an additional 50-percent of the cost of certain qualifying property purchased and placed in service in 2009, from computer software to plants and equipment. Moreover, the 50-percent bonus depreciation allowance can be taken together with any Code Sec. 179 expensing, which was also extended through 2009.

Bonus basics

The 2009 Recovery Act (just as with the 2008 Stimulus Act) allows all businesses to take a bonus first-year depreciation deduction of 50-percent of the adjusted basis of qualified property purchased and placed in service for use in your trade or business after December 1, 2009, and generally before January 1, 2010. Bonus depreciation is allowed only for: (1) tangible property to which MACRS applies that has an applicable recovery period of 20 years or less, (2) water utility property, (3) certain computer software, and (4) qualified leasehold improvement property. It is not allowed for intangible property, with the exception of certain computer software.

Bonus depreciation can be claimed for both regular and alternative minimum tax (AMT) liability. It is also important to note that, since bonus depreciation is treated as a depreciation deduction, it is subject to recapture as ordinary income under certain provisions of the Internal Revenue Code. And if you have a tax year that is less than 12 months, the amount of the bonus depreciation allowance is not affected by a short tax year.

Computing your bonus depreciation

To figure your allowable 50-percent bonus depreciation deduction, you must multiple the unadjusted depreciable basis of the property by 50 percent. This is the amount of additional first-year depreciation you can deduct in 2009. For example, you purchase qualifying property for your business in 2009 that costs $150,000. You are allowed an additional first-year depreciation deduction of $75,000.

Note. The "unadjusted depreciable basis" is the property's cost (including amounts you paid in case, debt obligations, or other property or services, plus any amounts you paid for items such as sales tax, freight charges, installation, or testing fees).

Regular depreciation. After you have computed the 50-percent bonus depreciation allowance for the property, you can use the remaining cost to compute your regular MACRS depreciation for 2009 and subsequent years. Under MACRS, the cost or other basis of an asset is generally recovered over a specific recovery period. In this case, the property must have a recovery period of 20 years or less.

Example. Assume that in 2009 a taxpayer purchases new depreciable property and places it in service. The property's cost is $1,000 and it is 5-year property subject to the half-year convention. The amount of additional first-year depreciation allowed under the provision is $500. The remaining $500 of the cost of the property is deductible under the rules applicable to 5-year property. Thus, 20 percent, or $100, is apportioned to 2009, which computes to an additional $50 regular depreciation deduction in 2009 under the half-year convention. Accordingly, the total depreciation deduction with respect to the property for 2009 is $550. The remaining $450 cost of the property is recovered under otherwise applicable rules for computing depreciation in subsequent years.

Code Sec. 179 expensing. The 50-percent bonus depreciation allowance is taken after any Code Sec. 179 expense deduction and before you compute regular depreciation under MACRS rules. Therefore, the cost (basis) of the property must be reduced by the amount of any Code Sec. 179 expense allowance claimed on the property before computing the 50-percent bonus depreciation allowance (multiplying the property's basis by 50-percent). Regular depreciation under MACRS is then computed after you have reduced the basis by any Code Sec. 179 expensing allowance and the 50-percent bonus depreciation allowance.

Example. On April 14, 2009, Tom bought and placed in service in his business qualified tangible property that cost $1 million. He did not elect to claim the Code Sec. 179 expensing deduction and he claims no other credits or deductions related to the property. He may deduct 50-percent of the cost ($500,000) for purposes of the 2009 special bonus depreciation. He will use the remaining $500,000 of the property's cost to figure his regular MACRS depreciation deduction for 2009 and the years thereafter.

Example. The facts are the same as above, except Tom uses the Code Sec. 179 expensing deduction. On April 14, 2009, Tom bought and placed in service in his business qualified tangible property that cost $750,000. He elects to deduct $250,000 of the property's cost as a Code Sec. 179 deduction. Tom will apply the 50-percent bonus depreciation allowance to $500,000 ($750,000 - $250,000), which is the cost of the property after subtracting the section 179 expensing deduction. Tom will then deduct 50-percent of the cost after section 179 expensing ($250,000) for purposes of the 2009 special bonus depreciation. He will use the remaining $250,000 of the property's cost to figure his regular MACRS depreciation deduction for 2009 and the years thereafter.

Computing bonus depreciation can be a complicated process, as many variables may come into play. Our tax professionals can help determine the best way for your business to utilize the new bonus depreciation allowance together with other tax incentives to achieve significant tax savings.

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On December 18, 2007, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 (Mortgage Debt Relief Act), providing some major assistance to certain homeowners struggling to make their mortgage payments. The centerpiece of the new law is a three-year exception to the long-standing rule under the Tax Code that mortgage debt forgiven by a lender constitutes taxable income to the borrower. However, the new law does not alleviate all the pain of all troubled homeowners but, in conjunction with a mortgage relief plan recently announced by the Treasury Department, the Act provides assistance to many subprime borrowers.

On December 18, 2007, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 (Mortgage Debt Relief Act), providing some major assistance to certain homeowners struggling to make their mortgage payments. The centerpiece of the new law is a three-year exception to the long-standing rule under the Tax Code that mortgage debt forgiven by a lender constitutes taxable income to the borrower. However, the new law does not alleviate all the pain of all troubled homeowners but, in conjunction with a mortgage relief plan recently announced by the Treasury Department, the Act provides assistance to many subprime borrowers.

Cancellation of debt income

When a lender forecloses on property, sells the home for less than the borrower's outstanding mortgage debt and forgives all, or part, of the unpaid debt, the Tax Code generally treats the forgiven portion of the mortgage debt as taxable income to the homeowner. This is regarded as "cancellation of debt income" (reported on a Form 1099) and taxed to the borrower at ordinary income tax rates.

Example. Mary's principal residence is subject to a $250,000 mortgage debt. Her lender forecloses on the property in 2008. Her home is sold for $200,000 due to declining real estate values. The lender forgives the $50,000 difference leaving Mary with $50,000 in discharge of indebtedness income. Without the new exclusion in the Mortgage Debt Relief Act, Mary would have to pay income taxes on the $50,000 cancelled debt income.

The Mortgage Debt Relief Act

The Mortgage Debt Relief Act excludes from taxation discharges of up to $2 million of indebtedness that is secured by a principal residence and was incurred to acquire, build or make substantial improvements to the taxpayer's principal residence. While the determination of a taxpayer's principal residence is to be based on consideration of "all the facts and circumstances," it is generally the one in which the taxpayer lives most of the time. Therefore, vacation homes and second homes are generally excluded.

Moreover, the debt must be secured by, and used for, the principal residence. Home equity indebtedness is not covered by the new law unless it was used to make improvements to the home. "Cash out" refinancing, popular during the recent real estate boom, in which the funds were not put back into the home but were instead used to pay off credit card debt, tuition, medical expenses, or make other expenditures, is not covered by the new law. Such debt is fully taxable income unless other exceptions apply, such as bankruptcy or insolvency. Additionally, "acquisition indebtedness" includes refinancing debt to the extent the amount of the refinancing does not exceed the amount of the refinanced debt.

The Mortgage Debt Relief Act is effective for debt that has been discharged on or after January 1, 2007, and before January 1, 2010.

Mortgage workouts

In addition to foreclosure situations, some taxpayers renegotiating the terms of their mortgage with their lender are also covered by the new law. A typical foreclosure nets a lender only about 60 cents on the dollar. When the lender determines that foreclosure is not in its best interests, it may offer a mortgage workout. Generally, in a mortgage workout the terms of the mortgage are modified to result in a lower monthly payment and thus make the loan more affordable.

More help

Recently, Treasury Department officials brokered a plan that brings together private sector mortgage lenders, banks, and the Bush Administration to help homeowners. The plan is called HOPE NOW.

Here's how it works: The HOPE NOW plan is aimed at helping borrowers who were able to afford the introductory "teaser" rates on their adjustable rate mortgage (ARM), but will not be able to afford the loan once the rate resets between 2008 and 2010 (approximately 1.3 million ARMs are expected to reset during this period). The plan will "freeze" these borrowers' interest rates for a period of five years. The plan, however, has some limitations that exclude many borrowers. Only borrowers who are current on their mortgage payments will benefit. Borrowers already in default or who have not remained current on their mortgage payments are excluded.

Under the HOPE NOW plan, borrowers may be able t

- Refinance to a new mortgage;

- Switch to a loan insured by the Federal Housing Authority (FHA);

- Freeze their "teaser" introductory rate for five years.

Without the Mortgage Debt Relief Act, a homeowner who modifies the terms of their mortgage loan, or has their interest rate frozen for a period of time, could be subject to debt forgiveness income under the Tax Code. This is why the provision of the Mortgage Debt Relief Act excluding debt forgiveness income from a borrower's income is a critical component necessary to make the HOPE NOW plan effective.

If you would like to know more about relief under the Mortgage Forgiveness Debt Relief Act of 2007 and the Treasury Department's plan, please call our office. We are happy to help you navigate these complicated issues.

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With the holidays quickly approaching, you as an employer may not only be wondering what type of gift to give your employees this season, but the tax consequences of the particular gift you choose. The form of gift that you give this holiday season not only has tax consequences for your employees, but for your business as well. If you plan on giving your employees a gift that can be basted or baked this holiday season, such as a traditional turkey or ham, you should understand how that gift will be treated by the IRS for tax purposes.

De minimis fringe benefit

Gifts of holiday turkeys and hams given to employees are considered non-taxable de minimis employee fringe benefits. They are excluded from employees' income and are fully deductible as a non-wage business expense by the employer. Moreover, the value of the turkey and ham is 100 percent deductible; that is, it is not subject to the 50 percent deductible limitation that generally applies to meals.

Generally, gifts provided to employees are treated as supplemental wages subject to income and payroll taxes unless the benefit is specifically excluded from tax by law. However, gifts considered to be a "de minimis" fringe benefit are not taxable to the employee. Code Sec. 132(a)(4) provides that gross income does not include a fringe benefit that qualifies as a "de minimis" fringe benefit. A de minimis fringe benefit is defined in Code Sec. 132(e)(1) as any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable after taking into account the frequency with which similar fringe benefits are provided by the employer to the employer's employees.

Generally, de minimis fringe benefits must satisfy the following requirements:

The value of the gift must be nominal;
Accounting for the gift would be administratively impractical;
The gift is provided only occasionally; and
The gift is given to promote the good will or health of employees.

In Treasury Reg. Sec. 1.132-6(e)(1), the IRS has specifically included traditional holiday gifts (not cash) with a low fair market value as a de minimis fringe benefit excludable from tax. The gift to employees of a holiday turkey or ham has long been recognized as falling within the rules for de minimis employee fringe benefits, and is not taxable to employees.

Gift certificates are taxable

If you give your employees a gift certificate or gift card (or similar item that can readily be converted into cash) for a turkey or ham in lieu of the actual food item itself, the value of the gift certificate or gift card is considered to be additional salary or wages and subject to income and payroll taxes. Gift certificates and gift cards are "cash equivalents" and taxable to employees even though the turkey itself, if provided in kind directly to the employee, is excludable from tax as a de minimis fringe benefit.

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