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The Tax Organizers to assist in compiling the information necessary to prepare your 2023 individual income tax return(s) were mailed at the beginning of February 2024. Please complete the organizer to the best of your ability. In connection with all items of income, if married, please indicate whether the income is the taxpayer, spouse or joint (TSJ). When submitting materials, please include original and/or corrected source documents to ensure we have all copies or at a minimum the most current version (please note the date of changes on the tax documents). Please contact us if you haven't received your 2023 Tax Organizer or if you would like a blank version.

The Internal Revenue Service and State Taxing Authorities are matching information returns submitted by businesses, employers and financial/investment institutions with amounts reported on individual tax returns. Negligence penalties may be assessed when income is underreported. Please be certain to mail or bring with you all of the following original unstapled forms:

1) Dependent information including names, relationship, date of birth and social security numbers (if a dependent is no longer a student please indicate). Please remember that names and social security numbers must match exactly in order for the dependent to be allowed. Also be sure to update your contact information.

2) All W-2 forms for wages.

3) All 1099 forms for interest, dividends, sales of securities, pension / IRA distributions, social security benefits, commissions and other income received as well as brokerage statements and realized gain/loss schedules. If you have a foreign bank account, please list it and all applicable information. If you took any early distributions from retirement plans, please be sure to provide the details regarding the reason and amount of the distributions. If any of these distributions were paid back to the retirement plan in full or in part within 60 days, please provide the details. Congress has been sharply focused on requiring taxpayer reporting of foreign bank/financial accounts and assets for the last several years. Besides filing the Report of Foreign Bank and Financial Accounts, information may be required to be attached to the taxpayer's income tax return for those assets with aggregate values exceeding specific thresholds. If applicable, you will be requested to provide additional information.

NOTE: Form 114 FinCEN (previously known as Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts) (FBAR) must be electronically filed via the BSA E-Filing System. Our firm can assist you with the preparation and submission of the electronic FBARs; however, the primary responsibility for this filing remains with the taxpayer. 2023 FBAR filings are due April 15, 2024 with a maximum extension for a 6- month period ending October 15, 2024 to file.

4) All notices from corporations, financial institutions or mutual funds that advise of special tax treatment for earnings.

5) Report of tax-exempt interest and dividends received with payer identification. Please be sure to include any supplemental information received regarding the taxability of this income by state, if applicable.

6) Supporting information (including 1099-K, 1099-MISC & 1099-NEC forms) for business income and expenses. For business use of your home, please include the square footage of your home used exclusively for business as well as total square footage of your home (this is required information).

7) Copies of closing statements for any real estate, co-op or condominium purchases or sales which occurred during the year and a copy of the Form 1099-B received for gross proceeds. Please remember to include the acquisition date of the property sold, the original cost and improvements.

8) All 5498 forms and support for 2023 retirement contributions made to date or anticipated to be made for the 2023 tax year (Form 9 and 9A). Please indicate on Form 9 if you want maximum contribution limits calculated.

9) All 1098 and 1099-MISC forms supporting rental income and expenses. Please be sure to include details for all improvements made and capital assets purchased including acquisition dates.

10) All Schedule K-1 forms from partnerships, limited liability companies, S corporations, trusts and estates including all supporting literature received including state specific K-1s and transmittal/cover letters.

11) All 1099-G forms for unemployment and state tax refunds/overpayments issued/received from State Taxing Authorities and Departments of Labor. These forms are only available online from the applicable Connecticut and New York departments.

12) Adjustments to Income – please be sure to include educator expenses, alimony paid/received, health savings account contributions/distributions and student loan interest paid including all 1098-E forms. For Health Savings Accounts, please include a statement(s) and 1099-SA and 5498-SA forms that recap the 2023 activity in order to verify the beginning and ending balances of the account.

13) Real estate and personal property taxes paid – please be sure to include only taxes paid during the calendar year 2023.

14) All 1098 forms for mortgage interest expense deductions - Please identify for each 1098 form if the loan interest paid is for a home mortgage (secured by principal residence or vacation home) or investment activity. If your total debt exceeds $1 million for home acquisition loans acquired before December 15, 2017, please include the balance of each loan at January 1, 2023 and December 31, 2023. In addition, please supply the balance of each loan at January 1, 2023 and December 31, 2023 for new home acquisition loans acquired subsequent to December 15, 2017 if the debt exceeds $750,000.

15) Contributions – be careful in reporting your contributions as the IRS is aggressively challenging those which appear to be excessive in dollars and valuation. Please include supporting documentation for cash contributions with values in excess of $250 and noncash contributions with values that exceed $500 as well as the original costs of noncash items donated.

16) Child/Dependent Care expenses – Please provide the name, address and social security number and/or employer identification number of the providers as this is required.

17) Household Employment taxes including W-2 forms for wages paid and quarterly state unemployment returns filed for the 2023 tax year.

18) A schedule of estimated taxes paid for federal and state income taxes including payments made in January 2024 for the 2023 tax year and payments made in January 2023 for the 2022 tax year. Please be sure to include the FULL date for each payment made.

19) All W-2G forms for gambling winnings.

20) HEALTH INSURANCE: Notification received from the provider documenting the existence of health insurance coverage through the Marketplace for 2023 for you, your spouse and/or dependents. Please provide all Forms 1095-A received for Marketplace insurance as this is required information to prepare your tax return.

21) Copies of any notices or other communications received during the year from the Internal Revenue Service and State Taxing Authorities.

22) Identity Protection Personal Identification Number – If you have received notification that an IP PIN has been assigned to you and/or your spouse by the IRS, it is imperative that this information be provided to us with your tax documents as you cannot efile your income tax return without it and our firm has no access to this information. IP PINs can be retrieved online through the IRS website. If you had one in the past but did not receive a letter for Tax Year 2023 from the IRS, it is likely that you still have one so please check the IRS website before tax filing day arrives. Please do not wait until the last minute to retrieve this information.

Because of government enforcement regulations and fraud prevention initiatives, we are requesting that you include copies of the social security cards for yourself, spouse and dependents. If you provided us with copies of social security cards in the past, you do not have to provide it again; however, the driver’s license and passports on file must be current. Also, if you are a new client to the firm, include a copy of the current driver’s license for yourself and your spouse as we are required to input the current information in order to electronically file. If you have any questions, please call our office to verify your information on file. Please be sure to provide complete personal and dependent information, including dates of birth. The spelling of names must match the social security cards issued or correspondence from the IRS will be generated. Returns cannot be filed electronically if discrepancies exist between the tax return and the Social Security Administration. Refunds will not be issued until the matter is resolved.

When providing information related to the Sales of Stocks, Securities, Capital Assets & Installment Sales, special care should be taken in providing complete and accurate information, especially acquisition dates and cost. For re-investment programs, such as mutual funds and dividend reinvestment programs, it is necessary to provide all data since initial acquisition unless the fund/broker provides the cost information. Taxpayers are required to complete Form 8949, Sales and Other Dispositions of Capital Assets, along with Schedule D to report this activity. Form 8949 captures the detail data of each individual sales transaction in conjunction with cost basis information as reported by your broker/financial institution under reporting regulations.

In order to continue providing quality service on a timely basis, we urge you to collect your information as soon as possible. If information from a “pass-through” entity such as a partnership, S corporation, limited liability company, trust or estate is the only data you are missing, please send the data you have assembled and forward the missing information as soon as it is available. Please clearly indicate which information is missing. If we do not receive your complete information by March 22, 2024, we cannot guarantee timely completion of your tax returns for the April 15, 2024 filing deadline.

Please be sure to include all of your contact information with your package - telephone numbers, fax numbers and email addresses, if applicable and the preferred method of contact.

If you or your spouse worked in New York with your residence outside of New York or you worked in Connecticut with your residence outside of Connecticut, please complete the enclosed Allocation of Wage and Salary Income worksheet. If you held multiple jobs during the year, please provide a separate allocation schedule for each job.

We appreciate the opportunity to be of service to you.

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The following is a discussion of the rules applicable to the filing of 2023 individual income taxes and 2024 at this time.

TAX RATES - For 2023 there are seven income tax brackets ranging between 10% and 37% for ordinary income. The 37% tax bracket is imposed on taxable income over threshold amounts as follows:

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

For 2024, there are still seven brackets and the 37% tax bracket is imposed on taxable income over the following thresholds:

$731,200 for married taxpayers filing jointly and surviving spouses
$365,600 for married taxpayers filing separately
$609,350 for heads of households
$609,350 for single taxpayers
$15,200 for estates and trusts

These seven tax brackets apply, absent new legislation, to all years through December 31, 2025.

Besides the reduction in rates and expansion of the tax brackets, perhaps the biggest change to deductions was the elimination of the personal exemption effective 2018. This was offset, in part, by the increase in the standard deduction. For 2023, the standard deduction is $13,850 for single taxpayers and $27,700 for married couples filing jointly. For 2024, the standard deduction is projected to be $14,600 for single taxpayers and $29,200 for married filing jointly.

LONG TERM CAPITAL GAINS AND QUALIFYING DIVIDENDS TAX RATE – The favorable rate of 0% for taxpayers in the 10% and 15% brackets remains unchanged from 2017. In the Tax Cuts and Jobs Act (TCJA), these rates apply at different thresholds for 2023 and 2024 as follows:

The 0% tax rate applies to adjusted net capital gains up to $89,250 and $94,050 for joint filers and surviving spouses, $59,750 and $63,000 for heads of household, $44,625 and $47,025 for single filers and married taxpayers filing separately and $3,000 and $3,150 for estates and trusts;
The 15% tax rate applies to adjusted net capital gains over the amount subject to the 0% rate, and up to $553,850 and $583,750 for joint filers and surviving spouses, $523,050 and $551,350 for heads of household, $492,300 and $518,900 for single filers, $276,900 and $291,850 for married taxpayers filing separately and $14,650 and $15,450 for estates and trusts; and
The 20% tax rate applies to adjusted net capital gains over $553,850 and $583,750 for joint filers and surviving spouses, over $523,050 and $551,350 for heads of household, over $492,300 and $518,900 for single filers, over $276,900 and $291,850 for married taxpayers filing separately and over $14,650 and $15,450 for estates and trusts.

Remaining unchanged from prior years is the 25% rate for unrecaptured Code Sec. 1250 gain, the 28% rate for collectibles and the gain on qualified small business stock equal to its partial exclusion.

Qualified dividends received from domestic corporations and qualified foreign corporations continue to be taxed at the same rates that apply to capital gains. Certain dividends do not qualify for the reduced rates, including dividends paid by credit unions, mutual insurance companies and farmers’ cooperatives.

NET INVESTMENT INCOME TAX (NIIT) – An additional Medicare surtax of 3.8% is imposed on the lesser of net investment income (NII) or modified adjusted gross income (MAGI) above a specified threshold. However, the Medicare surtax is not imposed on income derived from a trade or business, nor from the sale of property used in a trade or business.

NII includes the following investment income reduced by certain investment-related expenses, such as investment interest expense, investment brokerage fees, royalty related expenses, and state and local taxes allocable to items included in net investment income:

Gross income from interest, dividends, annuities, royalties, and rents, provided this income is not derived in the ordinary course of an active trade or business
Gross income from a trade or business that is a passive activity
Gross income from a trade or business of trading in financial instruments or commodities
Gain from the disposition of property, other than property held in an active trade or business

Individuals are subject to the 3.8% NIIT if their MAGI exceeds the following thresholds (which are not adjusted for inflation):

$250,000 for married taxpayers filing jointly or a qualifying widower with a dependent child
$125,000 for married taxpayers filing separately
$200,000 for single and head of household taxpayers

ADDITIONAL HIGHER INCOME MEDICARE TAX - Higher income (HI) individuals continue to be subject to an additional 0.9% HI (Medicare) tax, not to be confused with the 3.8% Medicare surtax on NIIT. The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately) is subject to a 2.35% Medicare tax rate (normal 1.45% plus additional .9%). The additional Medicare tax also applies to self-employed individuals.

ALTERNATIVE MINIMUM TAX (AMT) – The TCJA temporarily increased the alternative minimum tax (AMT) exemption amounts for 2023 and 2024 as follows:

$126,500 for married taxpayers filing jointly and surviving spouses for 2023 and $133,300 for 2024
$81,300 for unmarried taxpayers and heads of household, other than surviving spouses, for 2023 and $85,700 for 2024
$63,250 for married taxpayers filing separately for 2023 and $66,650 for 2024
$28,400 for estates and trusts for 2023 and $29,900 for 2024

Exemptions for the AMT are phased out as taxpayers reach high levels of alternative minimum taxable income (AMTI). Generally, the exemption amounts are phased out by an amount equal to 25% of the amount by which an individual’s AMTI exceeds a threshold level. The threshold amounts for calculating the exemption phase-out are adjusted for inflation as follows:

$1,156,300 in 2023 and $1,218,700 in 2024 for married taxpayers filing jointly and surviving spouses
$578,150 in 2023 and $609,350 in 2024 for unmarried taxpayers and heads of household, other than surviving spouses
$578,150 in 2023 and $609,350 in 2024 for married taxpayers filing separately
$94,600 in 2023 and $99,700 in 2024 for estates and trusts

For 2023 and 2024, the AMT rates are 26% and 28% on the excess of AMTI over the applicable exemption amount. You should not ignore the possibility of being subject to the AMT as it can negate certain year-end tax strategies; however, tax planning strategies can be used to reduce its impact. As a general rule, taxpayers subject to AMT should accelerate income into AMT years and postpone deductions into non-AMT years.

STOCK LOSSES – Taxpayers should continually review their investments for return and portfolio balance. They should monitor their investments to take steps necessary to time the recognition of capital gains and losses to minimize their net capital gains tax and maximize the benefit of capital losses. Remember for tax purposes it is not how much your investments have gone up or down in value but rather how much gain or loss you have realized when an investment is sold since its original purchase date. The maximum capital loss deduction available to offset ordinary income is $3,000 ($1,500 for married taxpayers filing separately) with the additional capital losses being carried forward until used. Taxpayers also need to take “wash sale” rules into consideration when generating losses. The wash sale rule defers use of a tax loss realized upon a sale of stock if the investor repurchases it within 30 days before or after the sale. Worthless stock also generates an immediate capital loss; however, the rules for “worthless” stocks are very strict. Stocks and securities must be totally worthless for a taxpayer to take a loss deduction; a mere decrease in value, no matter how great, will not trigger a loss deduction.

DIGITAL ASSETS / CRYPTOCURRENCY – Increased attention was placed on digital assets (two examples are cryptocurrency and non-fungible tokens (NFTs)) due to their volatility and the publicized collapse of crypto giant FTX. Holders of cryptocurrency claim it is a form of currency and fluctuations in value are not taxable. IRS law defines it as property, like any other investment, where fluctuations in value are subject to gains and losses when realized. When cryptocurrency is “spent”, exchanged for goods and services, the IRS expects the calculation of gains/losses from the original basis to be recognized. The IRS is escalating attention to this area as it suspects widespread under reporting of cryptocurrency transactions. The 2023 Form 1040 once again will prominently display a required question for Digital Assets right under the taxpayers’ name and address: “At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” Per IRS instructions, the following actions or transactions in 2023 alone, generally do not require a “Yes” answer: 1) holding a digital asset in a wallet or account, 2) transferring a digital asset from one wallet or account you control to another one you control, or 3) purchasing digital assets using US currency including through the use of electronic platforms such as PayPal and Venmo.

ROTH IRA CONVERSIONS - Modified gross income limitations applicable to Roth IRA conversions were repealed and 2010 was the first year in which a taxpayer could convert all or part of their traditional retirement accounts to a Roth account, regardless of income, age or filing status. A conversion is a taxable transfer and is taxable in the year of conversion. Under prior law, a taxpayer could recharacterize IRA contributions from one type of IRA to another. TCJA provides that a recharacterization cannot be used to unwind a Roth conversion. A taxpayer may still make a contribution to a traditional IRA and convert the Traditional IRA to a Roth IRA but the change is that the Roth conversion can then not be unwound using recharacterization.

IRA & ROTH IRA CONTRIBUTIONS – The maximum contribution is $6,500 for 2023 and $7,000 for 2024 provided you have at least $6,500 and $7,000, respectively of wage, salary or net self-employment earnings. An additional “catch-up” contribution of $1,000 is allowed for taxpayers over 50 years of age by the end of the tax year for 2023 and 2024. Contributions to a traditional or Roth IRA may continue after age 70 1/2 (by the end of the tax year). Remember that IRA and Roth IRA contributions for the 2023 tax year can be made up to April 15, 2024.

401K AND 403B CONTRIBUTIONS - The annual limit on employee elective deferrals to these plans for 2023 is $22,500 and $23,000 for 2024. The maximum “catch-up” contribution to a 401K and 403B plan for taxpayers over 50 years of age by the end of the tax year is an additional $7,500 for 2023 and 2024.

RETIREMENT PLANS - The SECURE Act primarily intended to encourage savings for retirement, though not entirely favorable to taxpayers. Most provisions took effect January 1, 2020. Here are some of the most significant provisions:

Elimination of the age 70½ limit for making traditional IRA contributions, so that anyone can contribute as long as they’re working, matching the existing rules for 401(k) plans and Roth IRAs,
Increase of the age at which taxpayers must begin to take required minimum distributions (RMDs) from 70½ to 72,

An exemption from the 10% tax penalty on early retirement account withdrawals of up to $5,000 within one year of the birth of a child or an adoption becoming final,
Elimination of the “stretch” RMD provisions that have permitted beneficiaries of inherited retirement accounts to spread the distributions over their life expectancies,
Expansion of access to open multiple employer plans (MEPs), which give smaller, unrelated businesses the opportunity to team up to provide defined contribution plans at a lower cost, due to economies of scale, with looser fiduciary duties.
Elimination of employers’ potential liability when it comes to selecting appropriate annuity plans, and
A new requirement that employers allow participation in their retirement plans by part-time employees who’ve worked at least 1,000 hours in one year (about 20 hours per week) or three consecutive years of at least 500 hours.

In addition to the above, the SECURE 2.0 Act of 2022 was part of the 2023 Omnibus Bill recently signed into law at the end of 2022. Among the key retirement provisions in the Act are:

The age requirement to begin taking RMDs will increase from age 72 to age 73 starting on January 1, 2023 (with respect to individuals who attain age 72 after December 31, 2022 and age 73 before January 1, 2033) and then to age 75 on January 1, 2033 (with respect to individuals who attain age 74 after December 31, 2032). In addition, the penalty for not taking an RMD is reduced from the current 50%, to 25%, and in some cases to 10% if the failure is corrected timely. In addition, beginning in 2024, the pre-death RMD distribution requirement for Roth 401(k) accounts will be eliminated. Also in 2024, surviving spouses can elect to be treated as the deceased employee for purposes of RMDs.
In 2023 and 2024, participants age 50 and older can contribute an extra $7,500 per year annually into their 401k account. This amount increases to $10,000 per year in 2025 for participants age 60 – 63. Additionally, catch up provisions will be indexed for inflation commencing in 2026.
Defined contribution plan sponsors will be able to provide participants with the option of receiving matching and non-elective contributions on a Roth basis.
Plan participants generally will be able to withdraw up to $1,000 per year from their retirement savings account for emergency purposes (unforeseeable or immediate financial needs relating to personal or family emergency expenses) without having to pay the 10% tax penalty for early withdrawal if they are under the age of 59 1/2. The provision is effective for distributions made after December 31, 2023.
Employers who start new retirement plans will be required to automatically enroll employees in the plan at a rate of at least 3% but not more than 10%, beginning in 2025.
Beginning in 2024, beneficiaries of 529 college savings accounts are permitted to rollover unused dollars (up to $35,000) over their lifetime from their 529 account to a Roth IRA tax and penalty free account under certain conditions including being subject to Roth IRA annual limits and the 529 account being open for more than 15 years.

CHILD TAX CREDIT (CTC) – The amount of the credit through 2025 is $2,000 per qualifying child up to age 17. The credit is subject to phase-out at modified adjusted gross income (MAGI) levels of $400,000 for joint filers and $200,000 for all other returns.

CHILD DEPENDENT CARE (CDC) CREDIT – Beginning 2022, this credit is nonrefundable and is subject to limit based on the taxpayer’s tax liability. For 2023 and 2024, the maximum amount of qualifying expenses to which the credit may be applied is $3,000 for individuals with one qualifying child or dependent or $6,000 for individuals with two or more qualifying children or dependents. Generally, the qualifying child has to be under age 13. The credit percentage is 35% up to adjusted gross income (AGI) of $15,000 subject to the maximum credit amounts. The percentage decreases by one percentage point for each $2,000 (or fraction thereof) of additional AGI until it’s reduced to 20% (which applies at AGI over $43,000).

EDUCATION INCENTIVES – The following are education incentives which exist under current law:

American Opportunity Tax Credit: The American Opportunity Tax Credit (AOTC) was made permanent by the 2015 PATH Act and was not changed by TCJA. This $2,500 maximum credit per eligible student is subject to the higher income phase-out ranges of $80,000 to $90,000 for single filers ($160,000 to $180,000 for joint filers) and contains a 40% refundable credit component. The eligibility extension to the first four years of post-secondary education contains an inclusion for text books and course materials as eligible expenses. The Lifetime Learning Credit was also retained.

Student Loan Interest Deduction: If your modified adjusted gross income during 2023 is less than $75,000 ($155,000 for married filing jointly), a deduction is allowed for interest paid on a student loan used for higher education up to a maximum of $2,500. This figure will continue to be adjusted each year for inflation.

Coverdell Education Savings Accounts (ESAs): Total contributions for the beneficiary of this account (under age 18) cannot exceed $2,000 in any year no matter how many accounts have been established. Contributions to a Coverdell ESA are not deductible but amounts deposited in the account grow tax free until distributed.

Employer-Provided Education Assistance: Employees are allowed to exclude from gross income and wages up to $5,250 in annual educational assistance provided under an employer's nondiscriminatory "educational assistance plan."

Scholarship Programs: An amount received as a qualified scholarship and used for qualified tuition and related expenses is excludable from income. The exclusion does not apply to any portion of the amount received which represents payment for teaching, research, or other services by the student as a required condition for receiving the qualified scholarship. However, scholarship recipients with obligatory service requirements under the National Health Service Corps Scholarship Program and the Armed Forces Scholarship Program can exclude from income qualified tuition and related expenses as well as amounts that represent payment for services.

Section 529 Accounts: TCJA expanded potential usage of 529 plans to include elementary and secondary school tuition for public, private and religious schools up to $10,000 per year per student. Previously, only Coverdell ESA funds could be used for primary and secondary expenses. New York opted not to follow TCJA; therefore, for New York purposes, withdrawals for kindergarten through 12^th grade school tuition are NOT qualified withdrawals under the New York 529 college savings account program.

MEDICAL EXPENSE THRESHOLD - For 2023, a deduction is allowed for expenses paid during the tax year for the medical care of the taxpayer, the taxpayer’s spouse and the taxpayer’s dependents to the extent the expenses exceed 7.5% of adjusted gross income.

According to the IRS, COVID-19 testing kits are an eligible medical expense along with personal protective equipment (PPE), such as masks, hand sanitizer and sanitizing wipes, if they’re used primarily for preventing the spread of COVID-19. As eligible medical expenses, they can be paid for with money in a health flexible spending arrangement (FSA), health savings account (HSA), health reimbursement arrangement (HRA) or Archer medical savings account (Archer MSA).

CHARITABLE GIVING –

Congress has long used the tax laws to encourage charitable giving and for many individuals, charitable giving is also a part of their year-end tax strategy. The 2015 PATH Act made permanent the popular charitable giving incentive with tax-free IRA distributions to public charities by individuals age 70 1/2 and older up to a maximum of $100,000 per qualified taxpayer per year. Individuals taking this option cannot claim a deduction for the charitable gift as the distribution is not claimed as income.
Congress tightened the rules for substantiation requirements for charitable contributions effective August 17, 2006. The IRS will not allow charitable deductions, regardless of the amount, without proper documentation. Contributions of $250 or more must be substantiated by a written acknowledgement from the donee organization; the acknowledgement must include the date of the donation, amount of cash or a description of property donated and a description and good faith estimate of the value of any goods or services received in exchange for the contribution. If the donor does not receive a written acknowledgment from a charitable organization, it is the donor’s responsibility to obtain it in order to claim the charitable contribution. Contributions under $250 must be substantiated by cancelled checks, bank records or receipts from the donee organization. If it would be impracticable to obtain a receipt, the donor must maintain reliable written records.
Just like the rules for cash gifts, the rules for substantiating deductions for donations of clothing and household items (i.e., furniture, furnishings, electronics, appliances) were tightened after August 17, 2006 and will only be allowed if the property is in “good used condition or better”. Donors must have a written acknowledgement from the charity documenting the donation date, description of property donated, a description and good faith estimate of the value of any goods or services received in exchange for the contribution and a valuation/qualified appraisal of the property donated, if applicable. A deduction for the noncash goods will be allowed, without regard to condition, only if a qualified appraisal is attached to the return for each single item or group of similar items over $500. We recommend that pictures be taken of any noncash goods that are donated as it will be helpful in supporting the deduction.

Taxpayers donating vehicles (i.e., car, truck, boat, and aircraft) to a charity valued over $500 must obtain from the charity and attach to the tax return Form 1098-C and/or a written acknowledgment of the contribution. The donation amount is usually limited to the gross proceeds from the sale of the vehicle by the charity.

Gifting of appreciated securities for making charitable contributions continues to be a significant alternative instead of using cash. In this manner, the appreciated value will not be taxed, low-cost basis stock is removed from your portfolio/estate and the fair-market value of the security will be used as the charitable contribution.

Individual taxpayers are allowed a deduction for cash contributions to public charities up to 60% of adjusted gross income (AGI) and 30% of AGI for noncash contributions. Donations to donor advised funds and private foundations are not eligible for the increased limit.

IRS has been aggressively reviewing and challenging charitable donations in response to these new substantiation requirements. It is expected that this trend will continue. The burden of proof will be on the taxpayer so it is imperative that good records and supporting documentation is maintained.

EDUCATOR EXPENSES – A grade K-12 teacher, instructor, counselor, principal or aide in a school for at least 900 hours during a school year is eligible to claim an above-the-line deduction up to $300 for qualified expenses paid out-of-pocket during the year. Qualified expenses include educator expenses, professional development courses, books, supplies, classroom materials and COVID related expenses. The deduction will stay the same at $300 for 2023.

BONUS DEPRECIATION & SECTION 179 BUSINESS EXPENSING ELECTIONS –

Bonus Depreciation: Pursuant to TCJA for qualified purchases placed into service after September 27, 2017, 100% of the purchase price can be expensed. This 100% expensing continued until 2022 and there is a scheduled phase-down to 80% starting 2023 and ending at 20% in 2026, after which the provision is set to expire. Unlike regular depreciation, where half-year and mid-quarter conventions may apply, a taxpayer is entitled to the full bonus depreciation level based on when the asset is purchased. Therefore, year-end placed in service strategies provide immediate “cash discount” for qualifying purchases, even when considering finance costs. Bonus depreciation under old law is available only for new property (i.e., property whose original use begins with the taxpayer) depreciable under MACRS that (a) has a recovery period of 20 years or less, (b) is MACRS water utility property, (c) is computer software depreciable over three years, or (d) is qualified leasehold improvement property. An enticing provision under the new law whereby qualified property includes property that has been used (i.e., the original use does not have to originate with the purchaser). A taxpayer may elect out of bonus depreciation with respect to any class of property placed in service during the tax year. Although this election may be factored into a year-end strategy, a final decision on making it is not required until the tax return is filed. Bonus depreciation is not a preference item for alternative minimum tax.

Code Sec. 179 Expensing: The PATH Act’s provisions made the enhanced Section 179 expense deduction permanent for taxpayers (other than estates, trusts or certain non-corporate lessors) that elect to treat the cost of qualifying property (generally defined as depreciable tangible property that is purchased for use in an active trade or business) as an expense rather than a capital expenditure. Thus, the current Section 179-dollar cap for 2023 and 2024 is $1,160,000 and $1,220,000, respectively, with an overall investment limitation of $2,890,000 and $3,050,000, respectively.

BUSINESS MEALS – The provision allowing 100% deduction of certain business meals under the Consolidated Appropriations Act of 2020 expired December 31, 2022. Beginning January 1, 2023, the original limitation of 50% deductibility on all food and beverage expenses is restored.

AUTOMOBILE MILEAGE RATE - Many taxpayers use the standard mileage rates to help simplify their recordkeeping. Using the business standard mileage rate takes the place of deducting the applicable business percentage of the actual costs of your vehicle such as maintenance, repairs, gas, insurance, license and registration fees. If you choose to use the actual expense method to calculate your business vehicle deduction, you must maintain very careful records by keeping track of the actual costs during the year to maintain and run your vehicle. One of the most important tools is a mileage log book that details date, miles driven, location and purpose for the vehicle during the calendar year. Our office can help you compare the benefits of using the business standard mileage rate or the actual expense method.

Business standard mileage rate: The business standard mileage rate for 2023 is 65.50 cents per mile. The mileage rate is 67.0 cents per mile for 2024.

Medical/Moving standard mileage rate: The medical/moving standard mileage rate for 2023 is 22.00 cents per mile. The 2024 per mile rate is 21.00 cents. The deduction for moving expenses was eliminated beginning 2018 except for members of the Armed Forces on active duty and, due to a military order, you move because of a permanent change of station.

Charitable standard mileage rate: Taxpayers who itemize deductions may be able to claim a deduction for miles driven in service of a charitable organization. The standard mileage rate for charitable miles as determined by IRS for 2023 and 2024 is 14.00 cents per mile.

COLLEGE SAVINGS PROGRAMS/PLANS – Connecticut allows a deduction from federal adjusted gross income for contributions made into a CT higher education trust fund (CHET). New York allows a deduction from federal adjusted gross income for contributions into a New York 529 college savings plan. The maximum deduction in each state is $5,000 for a single taxpayer and $10,000 for married filing joint. However, Connecticut allows contributions in excess of these limits to be carried forward for five years while New York does not allow any carry forward.

RESIDENTIAL ENERGY CREDIT – As amended by the Inflation Reduction Act (IRA), the energy efficient home improvement credit is increased for years after 2022, with an annual credit of generally up to $1,200. Beginning January 1, 2023, the amount of the tax credit is equal to 30% of the sum of amounts paid by the taxpayer for certain qualified expenditures, including 1) qualified energy efficiency improvements installed during the year, 2) residential energy property expenditures during the year and 3) home energy audits during the year. There are limits on the allowable annual credit and the amount of the credit for certain types of qualified expenditures. The credit is allowed for qualifying property placed in service on or after January 1, 2023 and before January 1, 2033. The IRA added reforms as follows:

The energy efficient home improvement credit provides for an increased and broadened nonrefundable tax credit limited to 30%, not exceeding $1,200 in any year, of the sum of expenditures for installation of qualified efficiency improvements (energy efficient windows, skylights, exterior doors and energy audits).
Annual limitations apply to exterior windows and skylights ($600), exterior door ($250, individually and $500 in the aggregate), and home energy audits ($150).
A separate nonrefundable tax credit of 30% of expenditures limited to no more than $2,000 is allowed for heat pump and heat pump water heaters and biomass stoves and boilers meeting specified requirements purchased and installed between January 1, 2023 and December 31, 2032.
Energy-efficient home improvement credits allowed for a taxpayer’s expenditure reduces the taxpayer’s basis in the property by the amount of the credit allowed.

The residential clean energy property credit is a 30% credit for expenditures for qualified solar electric property, qualified solar water heating property, qualified fuel cell property, battery storage technology, qualified small wind energy property and qualified geothermal heat pump property. The credit for these property expenditures applies to those placed in service in 2022 through 2032. Beginning January 1, 2033, the credit phases down to 26%, 22% in 2034 and no credit after that.

HEALTH CARE REFORM - The Affordable Care Act (ACA) brought a sea of change to our traditional image of health insurance. Taxpayers and employers will continue to weigh the benefits and costs of obtaining coverage in a public marketplace or a private insurance exchange for themselves and their employees. Small businesses may be eligible for a tax credit to help pay for health insurance. Individuals may qualify for a premium assistance tax credit, which is refundable and payable in advance, to offset the cost of coverage. Those who obtained insurance through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, which will explain their coverage and detail any premium tax credit they received in advance.

Individuals with flexible spending accounts (FSAs) and similar arrangements should take a look at their annual spending habits and project how they will use these tax favored funds in the future. The maximum salary reduction contribution to a FSA is $3,050 for 2023 and $3,200 for 2024. Adjusted for inflation, the annual limitation on deductible contributions to health savings accounts (HSAs) for an individual with self-only coverage under a high deductible health plan (HDHP) is $3,850 for 2023 and $4,150 for 2024; $7,750 for 2023 and $8,300 in 2024 for family coverage. The HSA catch up contributions for age 55 or older is $1,000 for 2023 and 2024 for both single and family coverage.

GIFT TAXES – Slow and steady estate planning can yield dramatic results - take advantage of the annual gift giving limits to reduce your income and estate tax liabilities. For 2023, the annual exclusion was $17,000 ($34,000 per person for couple). For 2024, the annual exclusion is $18,000 ($36,000 for couple.) Remember that if you gift stock, the recipient of the gift takes over the donor’s cost basis and holding period for the security; therefore, the donor needs to provide the recipient with this information. Current Connecticut legislation has the estate and gift tax thresholds at $12,920,000 for 2023 and $13,610,000 for 2024. Direct payments of educational expenses to a qualified institution for family members, or other beneficiaries, is not treated as a gift for tax purposes and does not count against the annual exclusion amount or the lifetime exemption. Please note that absent any new legislation on a federal level, these higher exemptions are scheduled to sunset on December 31, 2025 and return to a $5 million exemption, indexed upward for inflation as established under 2012 legislation. At this time, it is not known what Connecticut will do when federal levels sunset.

ESTATE TAX REFORM – While TCJA retains the estate tax rate at 40% for 2023 and 2024, the estate tax exemption moved up to $12,920,000 and $13,610,000 respectively. TCJA did not repeal the death tax as had been a goal and also did not make the above changes permanent as they expire after 2025. The portability election remains as part of the tax law. Portability allows the second spouse to have the benefit of the deceased spouse’s unused portion of the exemption even if the second spouse dies when a lower exemption is in effect, possibly after 2025. No changes were made in TCJA with respect to step up in basis despite the increase in the exemption.

AUTOMATIC REFUND REDUCTIONS - With the number of information sharing acts signed by federal and state taxing authorities as well as other organizations, please be aware that refunds could be automatically reduced for the following matters: delinquent federal taxes, delinquent state taxes, back spousal and/or child support and delinquent non-tax federal debts such as student loans. If the Department of Treasury’s Financial Management System (FMS), which disburses IRS refunds, offsets the refund for a delinquent amount (correctly or incorrectly), they will send a letter to the taxpayer explaining the reduction and giving the taxpayer the right to challenge the offset.

MAILING & RECORDKEEPING OF TAX PAYMENTS AND TAX RETURNS - When mailing tax returns or payments to federal and state taxing authorities, we advise the use of registered or certified mail to prove timely filing. We also recommend that you make copies of the checks before mailing for your records and maintain records for proof of mailing. The IRS has stated that other than direct proof of actual delivery, a mail receipt would be the only evidence of the timely delivery of tax documents. It is also a good practice to make sure that you have good copies of the front and the back of the check images (where available) once your payments clear the bank in case you have to present this information at a later date. The IRS, as well as many state taxing authorities, are providing options to make direct payments electronically via direct links and established account log ins; therefore, you may want to consider making estimated tax payments and paying notices via these methods in the future. Please keep in mind that as electronic systems of filing continue to be required, manpower at the federal and state taxing authorities will continue to decline causing longer delays in resolution of matters and placing the burden of proof on the taxpayer. With the staff shortages and remote work environment, these delays have only increased.

INCREASED REPORTING PROVISIONS ARE IN EFFECT AIMED AT COMPLIANCE AND REVENUE GENERATION - Banks and other processors of merchant payment cards are required to report a merchant’s annual gross payment card receipts to the IRS along with the merchant’s EIN #. The law also requires reporting of third-party network transactions such as ones used by online retailers. Expanded information reporting will continue to assist the IRS in increasing the compliance among merchants. The IRS plans to compare the merchant’s overall volume of payment card sales in relation to expenses claimed and cash transactions reported, estimating to raise more than $9.5 billion over 10 years as a result of the increased reporting and monitoring.

We have also seen an increased emphasis by IRS and state taxing authorities on enforcement of tax provisions. Additionally, several pieces of legislation provided increased resources for enforcement activities by the IRS, which may affect more than the wealthy. The Treasury Department has stated that increased enforcement through additional staff and information reporting systems could raise revenue.

As of 2013, new rules were fully implemented that required brokers to file information returns that not only provided the IRS and customers with details on the sales proceeds from each trade executed during the year, but also the customer's adjusted basis in the security and whether any realized gain/loss is short or long term. These information reporting requirements effect business customers as well. Securities subject to the reporting requirements include stocks, bonds, debentures, commodities, derivatives and other financial instruments designated by Treasury. Brokers notified customers in 2011 regarding elections to make in their accounts concerning the methods to be used for reporting cost basis. In response to broker reporting changes, the IRS introduced Form 8949 Sales and other Dispositions of Capital Assets in 2011. Form 8949 is used to list all capital gain and loss transactions previously reported on Schedule D of Form 1040. The subtotals from Form 8949 are then carried over to Schedule D where realized gain or loss is calculated in the aggregate. Accurate reporting and matching of data from taxpayer returns to that reported by the brokers directly to the IRS is the key compliance focus and purpose of this form.

Foreign Compliance Activities: Foreign Account Tax Compliance Act (FATCA) dominated international news beginning in 2014 and continues today. Along with FACTA, the U.S. has been expanding its tax treaties and information agreements with foreign jurisdictions to encourage greater transparency and authorities are getting tighter with compliance efforts. FinCen Report 114, Report of Foreign Bank and Financial Accounts (FBAR), reporting for tax year 2023 is due by April 15, 2024 with an automatic 6-month extension available until October 15, 2024.

Identity Theft: Tax fraud and identity theft have become a growing problem over the years. Further initiatives continue to be taken by the industry to combat identity theft issues for taxpayers throughout the country. IRS has joint efforts with various state taxing authorities and tax preparation software companies to create a security plan to safeguard taxpayer information. Taxpayers who have experienced identity theft issues have been issued IP PIN numbers which are required to be input by tax preparers when submitting your return for electronic filing. These numbers are unique by tax year and it is the responsibility of the taxpayer to supply the tax preparer with this information. Tax preparers are also required to input the current driver’s license state identification number, issue date and expiration date for ALL taxpayers prior to e-filing without exception.

OTHER FEDERAL NEWS -

The Internal Revenue Service issued IR-2023-221 on November 21, 2023 announcing another delay in reporting thresholds for third-party settlement organizations (TPSO) set to take effect for the 2023 tax filing season. As IRS continues to work to implement the new law, the agency will treat 2023 as an additional transition year similar to 2022. As a result, Form 1099-K reporting will not be required unless the taxpayer receives over $20,000 and has more than 200 transactions in 2023. Given the complexity of the new provision, the large number of individual taxpayers affected and the need for stakeholders to have certainty with enough lead time, the IRS at this time is planning for a threshold of $5,000 for tax year 2024 as part of a phase-in to implement the $600 reporting threshold enacted under the American Rescue Plan (ARP).

Starting January 1, 2024 the new Corporate Transparency Act (CTA) requires certain “reporting companies” to file a report of “beneficial owners” with FinCEN. A reporting company is either a 1) domestic reporting company – corporation, limited liability company, limited partnership, or similar entity created by the filing of a document with any state, territory or Indian tribe, or 2) a foreign reporting company – a non-US entity that registers to do business with a US state, territory or Indian tribe. There are 23 listed exemptions for CTA reporting requirements and various reporting dates based on existence of the reporting company. Guidance on this is incomplete at this time and FinCEN stated that additional guidance will forthcoming to provide additional clarity regarding definitions. This is NOT a tax reporting requirement but a reporting requirement. There is a considerable amount of discussion within the accounting industry and its regulatory bodies as to what the CPAs/accountants exact role in regards to this legal reporting requirement is as it crosses the line into the practice of law which we are not authorized to do. Therefore, our firm at this time is NOT going to do this reporting. We will answer questions as we can and provide information that is published; however, you may want to consult legal counsel.

CONNECTICUT DEPARTMENT OF REVENUE NEWS –

Reduced Income Tax Rates: For tax years beginning January 1, 2024, the 3% rate on the first $10,00 earned by unmarried filers and the first $20,000 by couples will decrease to 2%. The 5% rate on the next $40,000 earned by unmarried filers and the next $80,000 by couples will decrease to 4.5%. The benefit will be capped at unmarried filers who earn $150,000 and couples who earn $300,000.

Pass-through Entity Tax: Starting with tax years on or after January 1,2024, an entity that elects to pay such tax must give the Commissioner of Revenue Services written notice for each tax year it makes the election and must do so no later than the due date (or extended due date) for filing the return.

Connecticut Income Tax Subtraction for Pensions and Annuity Income: Beginning with the 2022 tax year, taxpayers with federal AGIs below specified thresholds were allowed to deduct 100% of their qualifying pension and annuity income when calculating their CT AGI. This modification applies to the extent such income is properly included in the taxpayer’s federal AGI for the taxable year. The deduction applies to taxpayers with federal AGIs below 1) $75,000 for single filers, married filing separately and heads of households and 2) $100,000 for married people filing jointly.

Certain IRA Distributions: Beginning with the 2023 tax year, taxpayers may deduct a portion of their distributions from individual retirement accounts (IRAs), other than Roth IRAs. The deduction is 25% for 2023, 50% for 2024, 75% for 2025 and 100% beginning in 2026. The qualifying income thresholds for this exemption are the same as those for the pension and annuity exemption described above.

Teachers’ Retirement System (TRS) Income: Taxpayers may deduct 50% of their TRS income. Those who qualify for the general pension and annuity exemption described above may take either exemption.

Limitation of Property Tax Credit: Residents may qualify for a credit up to $300 for property taxes paid on a primary residence or automobile in Connecticut subject to Connecticut adjusted gross income limits.

Subtraction Modification for Contributions made by taxpayers to ABLE accounts: For tax years beginning January 1, 2024, the subtraction modification shall not exceed $5,000 per taxable year for single filers and not more than $10,000 per taxable year for joint filers.

Expansion of Credit for Taxes Paid to Qualifying Jurisdictions: Corresponding amendments to Connecticut General Statutes serve to authorize claims for refund due to changes made by another jurisdiction impacting a taxpayer’s Connecticut income tax liability on or before the ninetieth day after the final determination of said change, even if an original return was not filed. These provisions are effective for taxable years commencing on and after January 1, 2022.

NEW YORK DEPARTMENT OF TAXATION NEWS –

On December 28, 2018 New York State Department of Taxation issued a Technical Memorandum stating that they decoupled from certain personal income tax IRS changes implemented by TCJA for tax years 2018 and thereafter. These items include certain itemized deductions, alimony or separate maintenance payments, qualified moving expenses reimbursement and moving expenses, Empire State child tax credit and New York 529 college savings account withdrawals.

New York State’s current maximum tax rate for individuals increased from 8.82% to 9.65% for 2021 – 2027 calendar years. Two new upper limit tax bracket rates were also created regardless of filing status at 10.3% and 10.9%. These increases leave New York State with one of the highest marginal state tax rates in the country.

New York tax authorities continue to focus on auditing income tax returns filed by non-residents who work for New York employers, and have started issuing desk audit notices in an effort to claw back missed tax revenue.

NEXUS

As many states continue to face substantial budgetary restraints for 2024 and beyond, they are aggressively pursuing revenue collections from residents and nonresidents. States have continued to expand the definition of nexus – creating activity leading to many taxpayers being required to file state taxes in more states. With telecommuting becoming the norm as a result of the COVID pandemic, many individuals find themselves working in states other than their pre-COVID primary office locations. Taxpayers need to consider whether their income will be taxed in the state in which they are working as well as the state in which their primary office is located. Certain states impose a “convenience” rule that sources income to the employer’s office location if an employee is working remotely out of convenience and not out of necessity for the employer. With telecommuting comes the flexibility to work from any location, not just the state where the individual resides potentially creating a change of residence on a domicile and/or statutory basis.

Remote work is likely here to stay for the foreseeable future. As a “hot topic”, it is expected that regulations and guidance will continue to develop and change as both taxpayers and preparers will be looking for additional guidance as released. The tax impact of remote work and the potential for increased scrutiny and auditing exists. Analyzing all facts and maintaining detailed records and documentation is critical. It is recommended that you retain pay stubs as some states do not make allocations on your W2 and this documentation is critical. If you have an employment change, payroll provider and/or benefit provider change, make sure to access all records before you no longer can. As of the release of this letter, here are some notable announcements from Connecticut and New York:

Connecticut:

On March 4, 2021, Governor Lamont signed H.B. No.6516, which provided that any Connecticut resident who paid tax to a state that uses a convenience of the employer rule will be allowed a credit against their Connecticut income tax for the paid to the other state on income earned while working remotely from Connecticut. Connecticut explained that these credits only apply to the 2020 tax. For tax year 2021, Connecticut did not issue a change in position on this matter. Continued guidance is expected on this subject so it is unclear if there might possibly be double taxation of state taxes in the future. Like New York, Connecticut has been sending out notices challenging credits for taxes paid to other states as well as modifications.

Absence further legislation subsequent to tax year 2021 and as of this date, it appears Connecticut will adhere to the convenience rule for tax year 2023. Residents that work remotely from home for their employer in New York will continue to pay tax to New York on their wages and qualify for the credit for taxes paid to another state on their Connecticut tax return. Tax experts continue to think it will take several smaller states to form a coalition and take on New York in the courts.

New York:

New York has remained in defense of its “convenience of the employer rule” during the COVID-19 pandemic and beyond. The Department of Taxation and Finance posted an FAQ with the position that the convenience rule continues to apply regardless of any imposed restrictions. An employee whose primary work location is in New York is subject to New York taxes unless a bona fide office has been established in the employee’s remote location (specific requirements for this as specified by New York have to be fulfilled to qualify). In 2021 and 2022, New York sent out notices and audited tax returns of nonresident filers that showed a substantial change of income source to New York; we expect that this behavior will continue. New York has also increased audit focus on resident taxpayers who are taking credit for taxes paid to other states.

For 2023, New York continues to take the same stance outlined in the previous paragraph. Time will tell if other states will be able to take on New York in court and turn things around.

Once again, we have faced a challenging economic year. Continuing discussion of a possible recession, tight labor markets and high inflation permeate the news. Interest rates continue to stay high, and may rise, creating pressure on taxpayers to reduce borrowing costs. The politically divided Congress struggles to pass any kind of legislation; consequently, substantial changes to tax legislation were minimal. Discussions around extending or modifying the expiring tax provisions of the Tax Cuts and Jobs Act (TCJA) will continue. After 2025, most of the individual tax provisions of the 2017 tax law will revert to pre-TCJA levels. The top individual tax rate will increase to 39.6% (from 37%) while the income level to which it applies will decrease to approximately $553,600 for joint filers. In addition, the $10,000 cap on state and local tax deduction will go away, as will the doubled standard deduction, the increased child tax credit and the 20% qualified business income deduction (QBI), among others including the decrease in the estate tax exemption. Addressing most aspects of the expiring TCJA provisions will most likely wait until after the 2024 presidential and congressional elections. With the continued economic uncertainty, it is unclear at this time whether any of the TCJA provisions will be extended or modified. Traditional tax planning, such as accelerating income into years with lower tax rates or deferring deductions into years with higher tax rates, are normally common approaches and should continue to be carefully reviewed and analyzed, certainly over the next few years.

We appreciate the opportunity to be of service to you. We wish you and your families good health and best wishes for the New Year!

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When you make retail purchases of goods or services in your resident state, you usually pay sales tax to the seller if the sale of such goods or services is subject to sales tax according to the law of your resident state. The seller in turn remits the sales tax collected to the state taxing authority. In general, when these same types of goods or services are purchased outside of your resident state, they are subject to "use tax" when the goods are brought into your resident state.

Today, with the increase in catalog and online shopping, many taxpayers are buying items out of state, as well as goods that are being imported, that would be subject to tax if they were purchased in their resident state. The state tax authorities, especially Connecticut and New York, are actively pursuing the collection of this use tax in order to meet budgetary constraints. In fact, the states, along with the Internal Revenue Service and U.S. Customs, have signed information sharing agreements to help each other collect all outstanding tax money. Working together, the authorities have many resources available to gather their information.

Keep in mind that the taxing authorities are specifically targeting the purchase of items such as automobiles (and parts), appliances, furniture, jewelry, cameras, computers, electronics, cigarettes and other tobacco products, alcohol, boats, art and antiques. However, they are also seeking out those taxpayers who are steady catalog and online shoppers not paying sales tax.

The individual use tax is declared and paid when you file your resident state individual income tax return.

If all the goods purchased and brought into Connecticut at one time total $25 or less, you do not have to pay Connecticut use tax. The $25 exemption does not apply to goods shipped or mailed to you. Connecticut requires that taxpayers separately list any individual item with a purchase price of $300 or more. When listing this information, you must provide the date of purchase, a description of goods or service, the retailer or service provider and the purchase price. Items with an individual purchase price under $300 do not have to be listed separately; instead the total combined purchases must be given to calculate the use tax due.

The general Connecticut sales and use tax rate for 2022 was 6.35%; however, there are categories with different tax rates from the general rates. There are too many categories to list for the purposes of this letter; however, there are a few that need to be highlighted. Specifically a use tax rate of 7.75% applies to the following: the sale of most motor vehicles exceeding $50,000, the sale of each piece of jewelry exceeding $5,000, the sale of each piece of clothing or pair of footwear exceeding $1,000 and a handbag, luggage, umbrella, wallet or watch exceeding $1,000.

New York provides two options for calculating the use tax due on purchases of less than $1,000 (excluding shipping and handling) each that are not related to a business, rental real estate or royalty activities - the exact calculation method or the sales and use tax chart. For the exact calculation method, the taxpayer must provide the purchase price, purchase date and jurisdiction of purchase. The sales and use tax chart is a simple, time-saving method whereby the taxpayer pays use tax based on their federal adjusted gross income according to the chart established by the state. The exact calculation method must be used on each purchase of $1,000 or more. For individual items subject to use tax greater than $25,000, the following information must be provided: date item was purchased, description of item purchased, seller’s name and address, delivery address/address of use and purchase price.

Failure to pay use tax may result in the imposition of penalties and interest. The states are requiring taxpayers to declare an obligation for use tax on their individual income tax returns. Zero is a valid declaration if you do not have a liability. If you do not make an entry on the individual use tax line of your resident tax return, you are considered to not have filed a use tax return.

Therefore, when providing your information for payment of use tax, please be sure to specify the following complete information:

Details of purchase information as specified by the state thresholds for reporting individual purchases
Details of purchase information as specified by the special categories in Connecticut

If you have any questions regarding sales and use tax, please give us a call. Information is also published on each state's website regarding this subject.

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Internal Revenue Service regulations along with the tax authorities of Connecticut, New York and Massachusetts mandate that tax preparers electronically file individual, fiduciary and business income tax returns. We believe that trends will continue with authorities requiring taxpayers and businesses to electronically file of more information including routine filings, responses, tax returns and tax payments. Therefore, all 2023 income tax returns filed federally and in the States of Connecticut, New York and Massachusetts are required to be filed using the Federal & State Electronic Filing Program (E-File). The firm will voluntarily file individual returns electronically in the States of California and New Jersey. We also reserve the right to electronically file in additional states as deemed appropriate and will encourage this method of filing.

Our firm has informed you of the regulations and mandates for electronic filing. However, the decision as to whether your income tax returns will be electronically filed or not rests with you, the taxpayer. If you choose not to file electronically, we will inform you of the necessary procedures that need to be followed for “opting out.”

Electronic filing offers the following benefits:

Allows the Revenue Departments to process returns quickly and accurately, saving tax dollars.
Taxpayers who have a return with a balance due can file their return early and choose to make payment anytime on or before April 15, 2024.
Taxpayers who file returns with refunds receive those refunds faster especially if the refund is directly deposited into their bank account.
Electronically filed returns receive an acknowledgment of receipt from the Internal Revenue Service and the applicable State Tax Authority and are verified to be mathematically correct, eliminating data entry errors and lost or misplaced mail.

If we did not prepare your returns for 2022, we will need copies of your driver’s licenses and social security cards or passports for you and your family members.

How does this affect the process of preparing your 2023 income tax returns?

The actual preparation process of your return does not change. However, the administration, review process and completion of the returns will be affected. The following is an overview of how the electronic filing process will work.

1) Taxpayers should forward complete information for the preparation of their 2023 income tax returns including all supporting documentation. Regulations for electronic filing require that our firm maintain copies of the social security cards and driver's licenses for yourself, your spouse and all dependents claimed on the 2023 tax return. NOTE: If you provided this information to us last year regarding the preparation of your 2022 tax return, you do not have to provide it again. However, the driver’s license and passports on file must be current. Please call our office to verify your information on file if you have any questions.

2) Electronic filing provides various methods for payment and receipt of your refunds. Payments can be made by 1) paper check, 2) credit card (a convenience fee will be charged by the processing company used by tax authorities) and 3) direct debit out of a designated account. Refunds can be issued by 1) paper check, 2) application of all or a portion to the 2024 tax year and 3) direct deposit into designated account(s) – see NOTE below. Returns filed electronically can be filed early but payment not made until a later date designated by you whether payment is by check, credit card or direct debit until April 15, 2024. After that date, payment is due with filing. When submitting the information to prepare your tax return, please indicate to us how you would like to handle payments and/or refunds and return it with the information to prepare your tax return. If you desire to use direct deposit or direct debit, please enclose a voided check so we have complete account information and the financial institution routing transit number. It is the taxpayer’s responsibility to provide proper banking information and to verify that the payments have been withdrawn from the designated account. Please allow enough time when scheduling payments to be made directly from accounts. If problems with payment by direct debit are encountered, taxpayers need to have enough time available for a paper check to be submitted on time.

NOTE: Generally, if you do not elect direct deposit, the State of Connecticut will issue refunds by paper check; however, they are encouraging direct deposit. Direct deposit will NOT be available for first time Connecticut filers. IRS and the State of New York are offering the option for receipt of refunds by direct deposit or paper check.

WARNING: It is suggested that refunds on joint tax returns should only be directly deposited into joint bank accounts. The federal banking regulations, as applied by each bank, may not accept a joint refund into an individual account; our firm has no knowledge of how your bank will handle this matter. Also, be aware that refunds will be retained, not issued or decreased for any of the following: 1) delinquent federal taxes, 2) delinquent state taxes, 3) delinquent student loans, 4) delinquent spousal and/or child support, 5) delinquent state unemployment compensation debts and 6) debts owed to other state and/or federal agencies.

3) Once your return has been prepared, our firm will forward a "Review Copy" to you. This review copy can be sent electronically using access through a portal system for your protection or by hard copy (either mail or you can pick it up at our office). Please let us know the delivery method for the "Review Copy" on the bottom of the enclosed engagement letter which should be submitted with your tax information.

4) If you review the return and are in agreement with the return as prepared, the taxpayer(s) will need to sign Form 8879, IRS e-file Signature Authorization, Form TR-579-IT New York State e-file Signature Authorization, Form FTB 8879 California e-file Signature Authorization, Form M-8453, Massachusetts e-file Signature Authorization, as applicable, and any additional efile form(s) as necessary and included in your "Review Copy" package. Connecticut and New Jersey accept the federal signature on Form 8879. Tax returns cannot be filed electronically until our firm is in receipt of the signature authorization forms signed by the taxpayer(s). We can accept the signed forms electronically.

5) If you review the return and are NOT in agreement with the return as prepared, please call our office to discuss the questions/issues. If necessary, a new "Review Copy" and signature authorization forms will be prepared. Please remember that the only way electronically filed tax returns can be changed is by amending the returns. Therefore, it is imperative that you are in complete agreement with the returns before returning the signature authorization forms to us.

6) Once we receive your completed signature authorization forms, our firm will electronically submit your Federal, Connecticut, Massachusetts, New York, New Jersey and/or California income tax returns. Income tax returns for all other states will be filed on paper at this time unless we deem it appropriate to electronically file in the other state(s). Once we receive acknowledgement that your electronically filed returns have been accepted by the taxing authorities, we will forward a complete package to you which will include the following documents: 1) your original information if it has not already been returned with your review copy, 2) 2023 payment vouchers to taxing authorities, if necessary, 3) 2023 income tax returns for other states to be filed by paper, if necessary, 4) 2024 estimated tax payments, if necessary, 5) a copy of the 2023 individual return electronic transmission history and acceptance notification, and 6) a final signed copy of your electronically filed 2023 Federal and state income tax returns, if requested. Please include on the bottom of the enclosed engagement letter how you would like to receive this complete package. Any payments for taxes due to tax authorities should be filed using certified mail, return receipt requested.

Some extensions for filing 2023 tax returns must be filed electronically as paper is no longer an acceptable filing method. Therefore, taxpayers must allow enough time for completing this process. Please contact our office by Friday, March 22, 2024 if you will need to file extensions for the 2023 tax year.

We ask for your continued cooperation in implementing income tax return preparation and filing requirements. If you have any questions, please give us a call.

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Taxpayers received about $659 million in refunds during fiscal year 2023, representing a 2.7 percent increase in the amount of refunded to taxpayers in the previous fiscal year.

The refunds were on nearly $4.7 trillion in gross revenues collected by the Internal Revenue Service, which represents about 96 percent of the funding that supports federal government operations, the agency reported in its annual Data Book for fiscal year 2023, which was released April 18, 2024. This is down from more than $4.9 trillion in gross tax revenues in FY 2022.

Business income taxes declined in 2023 to nearly $457 billion in FY 2023 from nearly $476 billion in the previous fiscal year. Individual and estate and trust income taxes declined to nearly $2.6 trillion from just over $2.9 trillion. Employment taxes, estate and trust taxes, and excise and gift taxes all grew fiscal year-over-year.

More than 271.4 million tax returns and other forms were processed during FY 2023, the IRS reported. Of those, 163.1 million were individual tax returns. The report describes the 2023 filing season as "successful".

Paid prepared filed more than 84 million individual tax returns electronically, and taxpayers file nearly 2.9 million returns using the IRS Free File program, the agency reported.

The Taxpayer Advocate Service reported it resolved 219,251 cases in FY 2023. The top five case types included:

Processing amended returns (36,171)
Pre-refund wage verification hold (26,052)
Decedent account refunds (12,695)
Identity theft (11,915)
Earned Income Tax Credit (10,507)

On the compliance side, the IRS reported that for all returns from tax years 2013 through 2021, it examined 0.44 percent of individual returns filed and 0.74 percent of corporate returns filed. Additionally, the agency examined 8.7 percent of taxpayers filing individual returns reporting total positive income of $10 million or more. Isolating tax year 2019 (the most recent year outside the statute of limitations period), the examination rate was 11.0 percent.

In FY 2023, the IRS said it "closed 582,944 tax return audits, resulting in $31.9 billion in recommended additional tax." Additionally, the agency “completed 2,584 criminal investigations” across three areas:

1,052 illegal-source financial crimes cases
979 legal-source tax crime cases
553 narcotics-related financial crimes cases

On the collections side, the IRS in FY 2024 collected more than $104.1 billion in unpaid assessments on returns filed with additional tax due, netting about $68.3 billion after credit transfers. It also assessed more than $25.6 billion in additional taxes for returns not filed timely and collected nearly $2.8 billion with delinquent returns.

By Gregory Twachtman, Washington News Editor

IR-2024-115

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The IRS announced that final regulations related to required minimum distributions (RMDs) under Code Sec. 401(a)(9) will apply no earlier than the 2025 distribution calendar year. In addition, the IRS has provided transition relief for 2024 for certain distributions made to designated beneficiaries under the 10-year rule. The transition relief extends similar relief granted in 2021, 2022, and 2023.

SECURE Act Changes

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) (P.L. 116-94) changed the RMD rules for employees and IRA owners who died after December 31, 2019. Under Code Sec. 401(a)(9)(H)(i), if an employee in a defined contribution plan or IRA owner has a designated beneficiary, the 5-year distribution period has been lengthened to 10 years, and the 10-year rule applies regardless of whether the employee dies before the required beginning date. Proposed regulations would interpret the 10-year rule to require the beneficiary of an employee who died after his required beginning date to continue to take an annual RMD beginning in the first calendar year after the employee’s death. This aspect of the 10-year rule differs from the 5-year rule, which required no RMD until the end of the 5-year period. Thus, the IRS provided transition relief for 2021, 2022, and 2023.

Guidance for Specified RMDs for 2024

Under the transition guidance, a defined contribution plan will not be treated as having failed to satisfyCode Sec. 401(a)(9) for failing to make an RMD in 2024 that would have been required under the proposed regulations. The relief also applies to an individual who would have been liable for an excise tax under Code Sec. 4974. The guidance applies to any distribution that, under the interpretation included in the proposed regulations, would be required to be made under Code Sec. 401(a)(9) in 2024 under a defined contribution plan or IRA that is subject to the rules of Code Sec. 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:

a designated beneficiary of an employee or IRA owner under the plan if the employee or IRA owner died in 2020, 2021, 2022 or 2023, and on or after the employee’s (or IRA owner’s) required beginning date and the designated beneficiary is not using the lifetime or life expectancy payments exception under Code Sec. 401(a)(9)(B)(iii); or
a beneficiary of an eligible designated beneficiary if the eligible designated beneficiary died in 2020, 2021, 2022, or 2023, and that eligible designated beneficiary was using the lifetime or life expectancy payments exception under Code Sec. 401(a)(9)(B)(iii).

Applicability Date of Final Regulations

The IRS has announced that final regulations regarding RMDs under Code Sec. 401(a)(9) and related provisions are anticipated to apply for determining RMDs for calendar years beginning on or after January 1, 2025.

Notice 2024-35

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The IRS, in connection with other agencies, have issued final rules amending the definition of "short term, limited duration insurance" (STLDI), and adding a notice requirement to fixed indemnity excepted benefits coverage, in an effort to better distinguish the two from comprehensive coverage.

Comprehensive coverage is health insurance which is subject to certain federal consumer protections. Both STLDI and fixed indemnity excepted benefits coverage generally provide limited benefits at lower premiums than comprehensive coverage, and enrollment is typically available at any time rather than being restricted to open and special enrollment periods. However, the government is concerned about the financial and health risks that consumers face if they use either form of coverage as a substitute for comprehensive coverage, particularly as a long-term substitute. Consumers who do not understand key differences between STLDI, fixed indemnity excepted benefits coverage, and comprehensive coverage may unknowingly take on significant financial and health risks if they purchase STLDI or fixed indemnity excepted benefits coverage under the misunderstanding that such products provide comprehensive coverage.

The Definition of STLDI

STLDI is a type of health insurance coverage sold by health insurance issuers that is primarily designed to fill temporary gaps in coverage that may occur when an individual is transitioning from one plan or coverage to another (for example, due to application of a waiting period for employer coverage). Because STLDI falls outside of "individual health insurance coverage," it is generally exempt from the Federal individual market consumer protections and requirements for comprehensive coverage. This can be an issue because individuals who enroll in STLDI are often not aware that they will not be guaranteed these key consumer protections.

Under the definition in the final rules, STLDI is health insurance coverage provided pursuant to a policy, certificate, or contract of insurance that has an expiration date specified in the policy, certificate, or contract of insurance that is no more than three months after the original effective date of the policy, certificate, or contract of insurance, and taking into account any renewals or extensions, has a duration no longer than four months in total. For purposes of this definition, a renewal or extension includes the term of a new STLDI policy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance.

STLDI issuers must display a notice on the first page (in either paper or electronic form, including on a website) of the policy, certificate, or contract of insurance, and in any marketing, application, and enrollment materials (including reenrollment materials) provided to individuals at or before the time an individual has the opportunity to enroll or reenroll in the coverage, in at least 14-point font. A sample notice has been provided by the agencies.

Fixed Indemnity Insurance

Federal consumer protections and requirements for comprehensive coverage do not apply to any individual coverage or any group health plan in relation to its provision of certain types of benefits, known as "excepted benefits." Like other forms of excepted benefits, fixed indemnity excepted benefits coverage does not provide comprehensive coverage. Rather, its primary purpose is to provide income replacement benefits. Benefits under this type of coverage are paid in a fixed cash amount following the occurrence of a health-related event, such as a period of hospitalization or illness. In addition, benefits are provided at a pre-determined level regardless of any health care costs incurred by a covered individual with respect to the health-related event. Although a benefit payment may equal all or a portion of the cost of care related to an event, it is not necessarily designed to do so, and the benefit payment is made without regard to the amount of health care costs incurred.

In an effort to give consumers an informed choice, the final rules adopt the requirement of a consumer notice that must be provided when offering fixed indemnity excepted benefits coverage in the group market and update the existing notice for such coverage offered in the individual market. The final rule does not address any other provision of the 2023 proposed rules (NPRM REG-120730-21) relating to fixed indemnity excepted benefits coverage.

Effective Date

The final rules apply to new STLDI policies sold or issued on or after September 1, 2024. For fixed indemnity coverage, plans and issuers will be required to comply with the notice provisions for plan years (in the individual market, coverage periods) beginning on or after January 1, 2025.

NPRM REG-120730-21 is modified.

T.D. 9990

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The Tax Court has ruled against the IRS's denial of a conservation easement deduction by declaring a Treasury regulation to be invalid under the enactment requirements of the Administrative Procedure Act (APA).

An LLC conveyed a conservation easement of land to a foundation that was properly registered with the county clerk. The deed conveyed the easement in perpetuity, allowing for extinguishment only in cases where the conservation purposes became impossible to accomplish or if the property were to be condemned by the local government through eminent domain. The LLC then timely filed Form 1065, U.S. Return of Partnership Income, claiming a $14.8 million deduction under Code Sec. 170(h) for conveyance of the easement, and included with the return Form 8283, Noncash Charitable Contributions.

The IRS disallowed the deduction stating the conservation purpose of the easement was not "protected in perpetuity" as required by Code Sec. 170(h)(5)(A) and, specifically, by operation of Reg. § 1.170A-14(g)(6)(ii). The LLC contended that Reg. § 1.170A-14(g)(6)(ii) is procedurally invalid under the APA and that the deed therefore need not comply with its requirements.

The Tax Court decided to reverse its prior position regarding the validity of this regulation in Oakbrook Land Holdings, LLC, (154 TC 180, Dec. 61,663; aff’d, CA-6, 2022-1 USTC ¶50,128). Despite the fact the Sixth Circuit affirmed this earlier opinion, the Eleventh Circuit had reversed the Tax Court on the same issue. This case is situated in the Tenth Circuit, which had not ruled on this issue.

The Tax Court agreed with the LLC’s argument that Reg. § 1.170A14(g)(6)(ii) is invalid because the concerns expressed in significant comments filed during the rulemaking process were inadequately responded to by the Treasury Department in the final regulation’s "basis and purpose" statement, in violation of the APA’s procedural requirements.

Four judges dissented, arguing there is no substantial basis for reversing their opinion of only four years prior, and that invalidating a regulation for failing to include a statement of basis and purpose should not occur when the basis and purpose are "obvious."

Valley Park Ranch, LLC, 162 TC —, No. 6, Dec. 62,442

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For purposes of the energy investment credit, the IRS released 2024 application and allocation procedures for the environmental justice solar and wind capacity limitation under the low-income communities bonus credit program. Many of the procedures reiterate the rules in Reg. §1.48(e)-1 and Rev. Proc. 2023-27, but some special rules are also provided.

The guidance superseded Rev. Proc. 2023-27 for the 2024 program year only.

Submitting an Application

The IRS will publicly announce the opening and closing dates for the 2024 Program year application period on the Department of Energy (DOE) landing page for the Program (Program Homepage) at https://www.energy.gov/justice/low-income-communities-bonus-credit-program. DOE will not accept new application submissions for the 2024 Program year after 11:59 PM ET on the date the application period closes. The owner of the solar or wind facility is the person who must apply for an allocation and is the recipient of any awarded allocation.

An applicant must apply for an allocation of Capacity Limitation through DOE online Program portal system (Portal) at https://eco.energy.gov/ejbonus/s/. Applicants must register in the Portal before they can begin the application process; and they must create a login.gov account before accessing the Portal. The Program Homepage includes an Applicant User Guide.

Identifying Category and Sub-Reservation

In addition to the other information detailed below, the application must identify the relevant facility category:

-- Category 1: Project Located in a Low-Income Community (and the application must also specify whether the facility is a behind the meter (BTM) or front of the meter (FTM) facility),
-- Category 2: Project Located on Indian Land,
-- Category 3: Qualified Low-Income Residential Building Project, or
-- Category 4: Qualified Low-Income Economic Benefit Project.

An applicant may submit only one application for the 2024 program year. Thus, if an applicant wishes to change its chosen category (or its Category 1 sub-reservation), it must withdraw its first application and submit a second one. Otherwise, any application submitted after the first application is treated as a duplicate application.

Application Contents

The application must contain all required information, documentation, and attestations submitted under penalties of perjury by a person who has personal knowledge of the relevant facts. That person must also be legally authorized to bind the applicant entity for federal income tax purposes, to communicate with DOE about the application, and to receive notifications, letters, and other communications from DOE and the IRS.

The guidance details the required information regarding the applicant and the facility, as well as the required documentation. The guidance also describes the information that must be submitted if an applicant wants to be considered under the additional ownership criteria or the additional geographic criteria. The DOE may require additional information in its publicly available written procedures.

DOE Review and Selection

DOE will review applications and provide a recommendation to the IRS. If the DOE identifies an error in the application, such as missing or incorrect information or documentation, it will notify the applicant through the Portal. The applicant will have 12 business days to correct the information; otherwise, DOE will treat the application as withdrawn.

Once the application period opens for the 2024 Program year, all applications submitted during the first 30 days are treated as submitted at the same time. DOE will publicly announce on the Program Homepage the opening and closing dates of this 30-day period. If applications during this period exhaust the available allocation for a category, DOE will conduct an allocation lottery. After the 30-day period, DOE will review applications in the order they are submitted until the available capacity in the identified category is allocated.

Receiving an Allocation and Claiming the Bonus Credit

After the IRS receives the DOE recommendation, it will award an allocation or reject the application. The IRS will send final decision letters through the Portal, which will identify the amount of any allocation awarded. However, an allocation is not a final determination that the facility is eligible for the bonus credit.

The owner of a facility that receives an allocation must use the Portal to report the date the facility is placed in service. The guidance details the additional information the owner must provide with the notification. After the facility is placed in service, and the owner submits the additional documentation and attestations, the owner is notified that it may claim the bonus credit.

After the IRS awards all the Capacity Limitation within each facility category, or the 2024 Program year is closed, DOE will stop reviewing applications. At the end of the 2024 Program year, no further action will be taken on applications that were not awarded an allocation. DOE will publicly announce on the Program Homepage when the 2024 Program year closes.

Effect on Other Documents

Rev. Proc. 2023-27, I.R.B. 2023-35, 655, is superseded solely with respect to the 2024 program year.

IR-2024-86

Rev. Proc. 2024-19

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The IRS has provided a limited waiver of the addition to tax under Code Sec. 6655 for underpayments of estimated income tax related to application of the corporate alternative minimum tax (CAMT), as amended by the Inflation Reduction Act (P.L. 117-169).

The Inflation Reduction Act added a new corporate AMT under Code Sec. 55, beginning after December 31, 2022, based on a corporation's adjusted financial statement income. Code Sec. 6655 generally requires corporations to pay estimated income taxes quarterly, with an addition to tax for failure to make sufficient and timely payments. The quarterly estimated tax payments must add up to 100 percent of the income tax due.

Estimated Taxes

The IRS waived the addition to tax under Code Sec. 6655 that is attributable to a corporation’s CAMT liability for the installment of estimated tax that is due on or before April 15, 2024, or May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024). Accordingly, a corporate taxpayer’s required installment of estimated tax that is due on or before April 15, 2024, or on or before May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024), need not include amounts attributable to its CAMT liability under Code Sec. 55 to prevent the imposition of an addition to tax under Code Sec. 6655. However, if a corporation fails to pay its CAMT liability, other Code sections may apply. For instance, additions to tax under Code Sec. 6651 could be imposed.

Instructions to Form 2220

The instructions to Form 2220, Underpayment of Estimated Tax by Corporations, will be modified to clarify that no addition to tax will be imposed under Code Sec. 6655 based on a corporation’s failure to make estimated tax payments of its CAMT liability for any covered CAMT year. Taxpayers may exclude such amounts when calculating the amount of its required annual payment on Form 2220. Affected taxpayers must still file Form 2220 with their income tax return, even if they owe no estimated tax penalty.

Applicability Date

The waiver of the addition to tax imposed by Code Sec. 6655 applies to the installment of estimated tax that is due on or before April 15, 2024, or on or before May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024).

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The IRS has issued proposed regulations that would provide guidance on the application of the new excise tax on repurchases of corporate stock made after December 31, 2022 (NPRM REG-115710-22). Another set of proposed rules would provide guidance on the procedure and administration for the excise tax (NPRM REG-118499-23).

Code Sec. 4501 and IRS Guidance

Beginning in 2023, Code Sec. 4501 subjects a covered corporation to an excise tax equal to one percent of the fair market value of its stock that is repurchased by the corporation during the tax year. A covered corporation for this purpose is any domestic corporation the stock of which is traded on an established securities market.

Repurchase includes stock redemptions and economically similar transactions as determined by the IRS. The amount of repurchase subject to the tax is reduced by the value of new stock issued to the public or employees during the year. Repurchase of the covered corporation’s stock by its specified affiliate (a more-than-50-percent owned domestic subsidiary or partnership) also subjects the covered corporation to the excise tax.

The excise tax does not apply if the total amount of stock repurchases during the year is less than $1 million and in certain other situations.

Notice 2023-2, 2023-3 I.R.B. 374, provides initial guidance regarding the application of the excise tax. It describes rules expected to be provided in forthcoming proposed regulations for determining the amount of stock repurchase excise tax owed, along with anticipated rules for reporting and paying any liability for the tax.

Proposed Operative Rules under Code Sec. 4501 (NPRM REG-115710-22)

The proposed regulations would provide general rules regarding the application and computation of the stock repurchase excise tax, the statutory exceptions, and the application of Code Sec. 4501(d). Specifically, the proposed regulations would provide guidance addressing the following:

Certain issues related to the effective date and transition relief, including:
- repurchases before January 1, 2023, are not taken into account for purposes of applying the de minimis exception;
- in the case of a covered corporation that has a tax year that both begins before January 1, 2023, and ends after December 31, 2022, that covered corporation may apply the netting rule to reduce the fair market value of the covered corporation’s repurchases during that tax year by the fair market value of all issuances of its stock during the entirety of that tax year;
- contributions to an employer-sponsored retirement plan during the 2022 portion of a tax year beginning before January 1, 2023, and ending after December 31, 2022, should be taken into account for purposes of Code Sec. 4501(e)(2);
- the date of repurchase for a regular-way sale of stock on an established securities market is the trade date.
Definition of stock and the application of the excise tax to various types of stock, options, and financial instruments. The proposed regulations generally would maintain the definition of "stock" from Notice 2023-2, but would exclude "additional tier 1 preferred stock"; therefore, unless the limited-scope exception regarding additional tier 1 preferred stock applies, the stock repurchase excise tax would apply to preferred stock in the same manner as to common stock.
Rules for valuation of stock. Generally, the proposed regulations would adopt the valuation approach of Notice 2023-2 that the fair market value of stock repurchased or issued is the market price of the stock on the date the stock is repurchased or issued, respectively.
Rules for timing of issuances and repurchases. The approach that stock generally should be treated as repurchased when tax ownership of the stock transfers to the covered corporation or to the specified affiliate (as appropriate) would generally be retained.
Rules regarding becoming or ceasing to be a covered corporation and determining specified affiliate status.
Rules regarding Code Sec. 301 distributions, and complete and partial liquidations.
Treatment of taxable transactions, including LBOs and other taxable "take private" transactions.
Treatment of Code Sec. 304 transactions, reorganizations, and Code Sec. 355 transactions.
Application of the statutory exceptions, including repurchase as part of a reorganization, contributions to employer-sponsored retirement plans, the de minimis exception, repurchases by dealers in securities, repurchases by RICs and REITs, and the dividend exception.
Application of the netting rule (the adjustment for stock issued by a covered corporation, including stock issued or provided to employees of a covered corporation or its specified affiliate).
Considerations for mergers and acquisitions with post-closing price adjustments and troubled companies.
Application of Code Sec. 4501(d).

Applicability Dates of Proposed Operative Rules

The proposed regulations, other than the proposed regulations under Code Sec. 4501(d), would generally apply to repurchases of stock of a covered corporation occurring after December 31, 2022, and during tax years ending after December 31, 2022, and to issuances and provisions of stock of a covered corporation occurring during tax years ending after December 31, 2022. However, certain rules that were not described in Notice 2023-2 would apply to repurchases, issuances, or provisions of stock of a covered corporation occurring after April 12, 2024, and during tax years ending after April 12, 2024.

Except as described below, so long as a covered corporation consistently follows the provisions of the proposed regulations, the covered corporation may rely on these proposed regulations with respect to (1) repurchases of stock of the covered corporation occurring after December 31, 2022, and on or before the date of publication of final regulations in the Federal Register, and (2) issuances and provisions of stock of the covered corporation occurring during tax years ending after December 31, 2022, and on or before the date of publication of final regulations in the Federal Register.

In addition, so long as a covered corporation consistently follows the provisions of Notice 2023-2 corresponding to the rules in the proposed regulations, the covered corporation may choose to rely on Notice 2023-2 with respect to (1) repurchases of stock of a covered corporation occurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions of stock of a covered corporation occurring during taxable years ending after December 31, 2022, and on or before April 12, 2024.

A covered corporation that relies on the provisions of Notice 2023-2 corresponding to the proposed rules with respect to (1) repurchases occurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions of stock of a covered corporation occurring during tax years ending after December 31, 2022, and on or before April 12, 2024, may also choose to rely on the provisions of the proposed regulations with respect to (1) repurchases occurring after April 12, 2024, and on or before the date of publication of final regulations in the Federal Register, and (2) issuances and provisions of stock of a covered corporation occurring after April 12, 2024, and on or before the date of publication of final regulations in the Federal Register.

Special applicability dates are provided for the proposed rules under Code Sec. 4501(d).

Rules Regarding Procedure and Administration (NPRM REG-118499-23)

The IRS has also proposed regulations with guidance on the manner and method of reporting and paying the stock repurchase excise tax. These proposed regulations provide requirements for return and recordkeeping, the time and place for filing the return and paying the tax, and tax return preparers.

Consistent with Notice 2023-2, the proposed regulations add rules on procedure and administration in proposed subpart B of the proposed Stock Repurchase Excise Tax Regulations (26 CFR part 58) under Code Secs. 6001, 6011, 6060, 6061, 6065, 6071, 6091, 6107, 6109, 6151, 6694, 6695, and 6696.

In addition to requiring the excise tax to be reported on IRS Form 720, Quarterly Federal Excise Tax Return, the proposed regulations include items relevant to tax forms other than Form 720 (such as Form 1120, U.S. Corporation Income Tax Return, and Form 1065, U.S. Return of Partnership Income) to assist in identifying transactions subject to the tax.

Applicability Date of Proposed Procedural Rules

Proposed Reg. §58.6001-1 would be applicable to repurchases, adjustments, or exceptions required to be shown in any stock repurchase excise tax return required to be filed after the date of publication of final regulations in the Federal Register.

The rest of the proposed regulations would be applicable to stock repurchase excise tax returns and claims for refund required to be filed after the date of publication of final regulations in the Federal Register.

Effect on Other Documents

Notice 2023-2, 2023-3 I.R.B. 374, is obsoleted for repurchases, issuances, and provisions of stock of a covered corporation occurring after April 12, 2024.

Requests for Comments

Written or electronic comments and requests for a public hearing with respect to the proposed operative rules must be received by the date that is 60 days after April 12, 2024, the date of publication in the Federal Register. Comments and requests for a public hearing on the proposed procedural rules must be received by the date that is 30 days after publication in the Federal Register.

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