The IRS has released the annual inflation adjustments for 2025 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

For 2025, the Social Security wage cap will be $176,100, and social security and Supplemental Security Income (SSI) benefits will increase by 2.5 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2025, the Social Security wage cap will be $176,100, and social security and Supplemental Security Income (SSI) benefits will increase by 2.5 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax

The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

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

For 2025, the wage base is $176,100. Thus, OASDI tax applies only to the taxpayer’s first $176,100 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $176,100.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2025

For workers who earn $176,100 or more in 2025:

• an employee will pay a total of $10,918.20 in social security tax ($176,100 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $21,836.40 in social security tax ($176,100 x 12.4 percent).

Additional Medicare Tax

Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the Additional Medicare tax.

Benefit Increase for 2025

Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2025 by 2.5 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The IRS announced tax relief for certain individuals and businesses affected by terrorist attacks in the State of Israel throughout 2023 and 2024. The Treasury and IRS may provide additional relief in the future.

The IRS announced tax relief for certain individuals and businesses affected by terrorist attacks in the State of Israel throughout 2023 and 2024. The Treasury and IRS may provide additional relief in the future.

For taxpayers who were affected taxpayers for purposes of Notice 2023-71, I.R.B. 2023-44, 1191, the separate determination of terroristic action and grant of relief set forth in this notice will also postpone taxpayer acts and government acts already postponed by Notice 2023-71 if the taxpayer is eligible for relief under both notices.

Filing and Payment Deadlines Extended

Affected taxpayers will have until September 30, 2025, to file tax returns, make tax payments, and perform certain time-sensitive acts, that are due to be performed on or after September 30, 2024, and before September 30, 2025, including but not limited to:

• Filing any return of income tax, estate tax, gift tax, generation-skipping transfer tax, excise tax (other than firearms tax), harbor maintenance tax, or employment tax;
• Paying any income tax, estate tax, gift tax, generation-skipping transfer tax, excise tax (other than firearms tax), harbor maintenance tax, or employment tax, or any installment of those taxes;
• Making contributions to a qualified retirement plan;
• Filing a petition with the Tax Court;
• Filing a claim for credit or refund of any tax; and
• Bringing suit upon a claim for credit or refund of any tax.

The government is also provided until September 30, 2025, to perform certain time-sensitive acts, that are due to be performed on or after September 30, 2024, and before September 30, 2025, such as assessing any tax.

Taxpayers eligible for relief under Notice 2023-71 who are also eligible for relief under this notice have until September 30, 2025, to perform the time-sensitive acts that were postponed by Notice 2023-71. Taxpayers eligible for relief under Notice 2023-71 who are not also eligible for relief under this notice have until October 7, 2024, to perform the time-sensitive acts postponed by Notice 2023-71.

Government acts that were postponed by Notice 2023-71 until October 7, 2024, are also postponed by this notice until September 30, 2025, for taxpayers that are eligible for relief under Notice 2023-71 and this notice.

Notice 2024-72

IR-2024-252

The IRS has expanded the list of preventive care benefits permitted to be provided by a high deductible health plan (HDHP) under Code Sec. 223(c)(2)(C) without a deductible, or with a deductible below the applicable minimum deductible for the HDHP, to include oral contraception, breast cancer screening, and continuous glucose monitors for certain patients.

The IRS has expanded the list of preventive care benefits permitted to be provided by a high deductible health plan (HDHP) under Code Sec. 223(c)(2)(C) without a deductible, or with a deductible below the applicable minimum deductible for the HDHP, to include oral contraception, breast cancer screening, and continuous glucose monitors for certain patients.

Contraceptives

A health plan will not fail to qualify as an HDHP under Code Sec. 223(c)(2) merely because it provides benefits for over-the-counter (OTC) oral contraceptives, including emergency contraceptives, and male condoms before taxpayers satisfied the minimum annual deductible for an HDHP under Code Sec. 223(c)(2)(A). The HRSA-Supported Guidelines relating to contraceptives have been updated and no longer contain the "as prescribed" restriction.

Breast Cancer and Diabetes Care

The IRS has also clarified that all types of breast cancer screening for taxpayers (including those other than mammograms) who have not been diagnosed with breast cancer will be treated as preventive care under Code Sec. 223(c)(2)(C). Moreover, continuous glucose monitors for individuals diagnosed with diabetes are also treated as preventive care under Code Sec. 223(c)(2)(C).

Insulin Products Safe Harbor

The new safe harbor for absence of a deductible for certain insulin products under Code Sec. 223(c)(2)(G) will apply without regard to whether the insulin product was prescribed to treat taxpayers diagnosed with diabetes. or prescribed for the purpose of preventing the exacerbation of diabetes or the development of a secondary condition.

Effective Date

This guidance is generally effective for plan years (in the individual market, policy years) that begin on or after December 30, 2022.

Effect on Other Documents

Notice 2004-23 is clarified by noting the safe harbor for absence of a deductible for breast cancer screening.

Notice 2018-12 is superseded with respect to the guidance regarding male condoms.

Notice 2019-45 is clarified and expanded by noting the safe harbor for absence of a deductible for continuous glucose monitors and for certain insulin products pursuant to the Inflation Reduction Act of 2022.

Notice 2024-75

The IRS has released the applicable terminal charge and the Standard Industry Fare Level (SIFL) mileage rate for determining the value of noncommercial flights on employer-provided aircraft in effect for the second half of 2024 for purposes of the taxation of fringe benefits. 

The IRS has released the applicable terminal charge and the Standard Industry Fare Level (SIFL) mileage rate for determining the value of noncommercial flights on employer-provided aircraft in effect for the second half of 2024 for purposes of the taxation of fringe benefits. Further, in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) was enacted, directing the Treasury Department to allot up to $25 billion for domestic carriers to cover payroll expenses via grants and promissory notes, known as the Payroll Support Program (PSP). Therefore, the IRS has provided the SIFL Mileage Rate. The value of a flight is determined under the base aircraft valuation formula by multiplying the SIFL cents-per-mile rates applicable for the period during which the flight was taken by the appropriate aircraft multiple provided in Reg. §1.61-21(g)(7) and then adding the applicable terminal charge.

For flights taken during the period from July 1, 2024, through December 31, 2024, the terminal charge is $54.30, and the SIFL rates are: $.2971 per mile for the first 500 miles, $.2265 per mile 501 through 1,500 miles, and $.2178 per mile over 1,500 miles.

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

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

When Sales of Livestock are Involuntary Conversions

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

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

Livestock Sold Because of Weather

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

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

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

• draft.
• dairy, or
• breeding purposes.

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

Persistent Drought

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

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

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

What Areas are Suffering from Drought

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

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

However, the IRS also provided a list of areas where the year ending on August 31, 2024, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.

The IRS has taken special steps to provide more than 500 employees to help with the Federal Emergency Management Agency’s (FEMA) disaster relief call lines and sending IRS Criminal Investigation (IRS-CI) agents into devastated areas to help with search and rescue efforts and other relief work as part of efforts to help victims of Hurricane Helene. The IRS assigned more than 500 customer service representatives from Dallas and Philadelphia to help FEMA phone operations.

The IRS has taken special steps to provide more than 500 employees to help with the Federal Emergency Management Agency’s (FEMA) disaster relief call lines and sending IRS Criminal Investigation (IRS-CI) agents into devastated areas to help with search and rescue efforts and other relief work as part of efforts to help victims of Hurricane Helene. The IRS assigned more than 500 customer service representatives from Dallas and Philadelphia to help FEMA phone operations.

Further, a team of 16 special agents from across the country were initially deployed last week by the IRS-CI to the Tampa area to help with search and rescue teams. During the weekend, the IRS team moved to North Carolina to assist with door-to-door search efforts. As part of this work, the IRS-CI agents are also assisting FEMA with security and protection for relief teams and their equipment.

Additionally, the IRS reminded taxpayers in Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia that they have until May 1, 2025, to file various federal individual and business tax returns and make tax payments. The IRS is offering relief to any area designated by FEMA. Besides all of Alabama, Georgia, North Carolina and South Carolina, this currently includes 41 counties in Florida, eight counties in Tennessee and six counties and one city in Virginia.

The IRS provided guidance addressing long-term, part-time employee eligibility rules under Code Sec. 403(b)(12)(D), which apply to certain 403(b) plans beginning in 2025. The IRS also announced a delayed applicability date for related final regulations under Code Sec. 401(k).

The IRS provided guidance addressing long-term, part-time employee eligibility rules under Code Sec. 403(b)(12)(D), which apply to certain 403(b) plans beginning in 2025. The IRS also announced a delayed applicability date for related final regulations under Code Sec. 401(k).

Application of Code Sec. 403(b)(12)

The IRS provided guidance in the form of questions and answers on the requirement that 403(b) plans allow certain long-term, part-time employee to participate. The IRS clarified that the long-term, part-time employee eligibility rules only apply to 403(b) plans that are subject to title I of ERISA. Thus, a governmental plan under ERISA §3(32) is not subject to the long-term, part-time employee eligibility rules because it is not subject to title I pursuant to ERISA §4(b). The guidance also provides that 403(b) plans can continue to exclude student employees regardless of whether the individual qualifies under long-term, part-time employee eligibility rules.

Future Guidance

The guidance for 403(b) plans applies for plan years beginning after December 31, 2024. The IRS anticipates issuing proposed regulations applicable to 403(b) plans that are generally similar to regulations applicable to 401(k) plans.

Applicability Date for 401(k) Regulations

The IRS also addressed the applicability date of rules for 401(k) plans. Final regulations related to long-term, part-time employee eligibility rules will apply no earlier than to plan years beginning on or after January 1, 2026, the IRS said.

The Internal Revenue Service is estimated a slight decrease in the estimated tax gap for tax year 2022.

According to Tax Gap Projections for Tax Year 2022 report, the IRS is projecting the net tax gap to be $606 billion in TY 2022, down from the revised projected tax gap of $617 billion for TY 2021. The decrease track with a one-percent decrease in the true tax liability during that time.

he Internal Revenue Service is estimated a slight decrease in the estimated tax gap for tax year 2022.

According to Tax Gap Projections for Tax Year 2022 report, the IRS is projecting the net tax gap to be $606 billion in TY 2022, down from the revised projected tax gap of $617 billion for TY 2021. The decrease track with a one-percent decrease in the true tax liability during that time.

The TY 2022 gross tax is projected to be $696 billion, and includes the following components:

• Underreporting (tax understated on timely filed returns) - $539 billion
• Underpayment (tax that was reported on time, but not paid on time) - $94 billion
• Nonfiling (tax not paid on time by those who did not file on time) - $63 billion

For TY 2022, the projected net tax gap broken down by tax type includes:

• Individual income tax - $447 billion
• Corporation income tax - $40 billion
• Employment taxes - $119 billion
• Estate tax and excise tax – less than $500 million in each category

The size of the tax gap "vividly illustrates the ongoing need for adequate funding for the IRS," agency Commissioner Daniel Werfel said in a statement. "We need to focus both on compliance efforts to enforce existing laws as well as improving services to help taxpayers with their tax obligations to help address the tax gap."

From TY 2021 to TY 2022, the voluntary compliance rate slightly increased from 84.9 percent to 85.0 percent and the net compliance rate rose slightly from 86.9 percent from 86.8 percent.

The agency stated in the report that the relatively static voluntary compliance rate was "largely expected since the projection methodology assumes that reporting compliance behavior has not changed since the TY 2014-2016 time frame," although the voluntary compliance rate is projected to fall from 58 percent in TY 2021 to 55 percent in TY 2022.

By Gregory Twachtman, Washington News Editor

Although taxes may take a back seat to the basic issue of whether refinancing saves enough money to be worthwhile, you should be aware of the basic tax rules that come into play. Sometimes, you can immediately deduct some of the costs of refinancing.

With mortgage rates at the lowest level in years, you may be debating whether to refinance your adjustable-rate or higher-interest fixed-rate mortgage to lock in what looks like a real bargain. Although taxes may take a back seat to the basic issue of whether refinancing saves enough money to be worthwhile, you should be aware of the basic tax rules that come into play. Sometimes, you can immediately deduct some of the costs of refinancing.

Boom in refinancing

Escalating home prices in many parts of the country have motivated many homeowners to refinance their existing mortgages. Many people are refinancing to secure cash for home improvements or to pay debts. These are often called "cash-out" refinancings because you receive cash back from the lender based upon the difference between the old and new mortgages.

Example. You have an existing mortgage of $195,000. Your home is valued at $325,000. You refinance and take a new mortgage for $225,000. You receive $30,000 from the lender and use the money to pay for home improvements.

Cash-out refinancings account for more than one-half of all refinancings. Some estimates pegged the value of "cash-out" refinancings at more than $100 billion in 2001.

Original mortgage points

The term "points" is used to describe certain charges paid, or treated as paid, by a borrower to obtain a mortgage. Generally, for individuals who itemize, points paid by a borrower at the time a home is purchased are immediately deductible as interest if they are charged solely for the use or forbearance of the lender's money. Points for this purpose include:

• Loan origination fees;

• Processing fees;

• Maximum loan charges; and

• Premium fees.

Amounts paid for services provided by the lender, however, are not deductible as interest. These services include:

• Appraisal fees;

• Credit investigation charges;

• Recording fees; and

• Inspection fees.

Refinancing points

Unlike points paid on an original mortgage, you cannot immediately deduct points paid for refinancing. However, if refinancing proceeds are used to refinance an existing mortgage and to pay for improvements, the portion of points attributable to the improvements is immediately deductible.

With interest rates so low, many homeowners are refinancing for the second or even third time. If you are refinancing for a second time, you may immediately deduct points paid and not yet deducted from the previously refinanced mortgage.

Example. You refinanced your home mortgage several years ago and used the proceeds to pay off your first mortgage. Your refinancing mortgage (loan #2) was a 30-year fixed-rate loan for $100,000. You paid three points ($3,000) on the refinancing. Because all of the loan proceeds were used to pay off the original mortgage and none were used to buy or substantially improve your home, all of the points on the refinancing loan must be deducted over the loan term. This year, you refinance again (loan #3) when there's a remaining (not-yet-deducted) points balance of $2,400 on loan #2. You can deduct the $2,400 as home mortgage interest on your 2003 return.

Deducting interest

Generally, home mortgage interest is any interest you pay on a loan secured by your home. The loan may be a first mortgage, a second mortgage, a line of credit, or a home equity loan.

The interest deduction for points is determined by dividing the points paid by the number of payments to be made over the life of the loan. Usually, this information is available from lenders. You may deduct points only for those payments made in the tax year.

Example. You paid $2,000 in points. You will make 360 payments on a 30-year mortgage. You may deduct $5.65 per monthly payment, or a total of $66.72, if you make 12 payments in one year.

Refinancing is anything but simple. There may be additional complications if there are several mortgages on your home or if you own a vacation home as well as a principal home. Please contact this office if you are considering refinancing now or in the near future.

Q. I converted my regular IRA to a Roth IRA when the account had a high value because the stock market was at an all time high. I paid the required tax on the conversion when the conversion proceeds pushed me up into the 36% tax bracket. The Roth IRA is now worth only about 40% of its original value. Is there any type of tax deduction that I can take based on this loss?

Q. I converted my regular IRA to a Roth IRA when the account had a high value because the stock market was at an all time high. I paid the required tax on the conversion when the conversion proceeds pushed me up into the 36% tax bracket. The Roth IRA is now worth only about 40% of its original value. Is there any type of tax deduction that I can take based on this loss?

A. Unfortunately, the answer is no. The benefit you get when you have a Roth IRA is that all income earned on the value of your account accumulates tax-free. Further, when it comes time to withdraw funds from your Roth IRA, you pay no taxes on these withdrawals (which includes the amount of earnings that accumulated on a tax-free basis). The other side of this equation is that you do not get a tax deduction when the assets in the account lose value.

Q. If I had acted earlier, was there any way out of the Roth IRA conversion?

A. You do have a way out if you can see that your account is losing money in the year in which you made the conversion. You have the ability to recharacterize the Roth IRA contribution which you made through the conversion back to a regular IRA if you meet the following requirements:

• 1. You make a "trustee-to-trustee" transfer of the amounts in the Roth IRA back to a regular IRA.

• 2. The transfer is accompanied by any earnings on the amount you first contributed to the Roth IRA.

• 3. When you made the contribution (conversion) to the Roth IRA, you were not allowed a deduction.

• 4. The recharacterization is made by the due date (plus extensions) of your tax return for the year that you made the Roth IRA conversion. For this purpose, the IRS lets you include the regular four-month automatic extension, plus the additional two-month extension if you apply for it.

This means that if you apply for the regular four-month extension for your tax return and the additional two-month extension, you will have until October 15th of the year following the year of the Roth conversion to transfer your money back to a regular IRA. If you accomplish the recharacterization within this timeframe, the IRS will refund the tax you paid when you made the Roth conversion.

If you find yourself in this situation, please feel free to contact us so that we can give you specific advice that possibly will save you money.

Generally, if you do volunteer work for a charity, you are not entitled to deduct the cost of services you perform for the charity. However, if in connection with the volunteer work you incur out-of-pocket expenses, you may be entitled to deduct some of those expenses.

Q. I spend 20 hours every week cooking meals and delivering them to an organization that feeds the hungry and homeless. Am I entitled to a deduction for my time and the food I pay for out of my own money?

A. Generally, if you do volunteer work for a charity, you are not entitled to deduct the cost of services you perform for the charity. However, if in connection with the volunteer work you incur out-of-pocket expenses, you may be entitled to deduct some of those expenses.

Qualifying expenses

If the amounts that you pay for food and other supplies used in the preparation and packaging of the meals are not reimbursed by the charity, generally you may deduct these expenses as contributions to the charity.

In addition, if the amounts that you pay to travel by car or other means to deliver the meals are not reimbursed by the charity, and you derive no personal benefit from the travel, the expenses are deductible. Qualifying expenses include gasoline for your car and fares for taxis or public transportation.

Special mileage rate

If you drive your own vehicle to deliver the meals, you can use a special IRS mileage rate to calculate charitable contribution deductions involving use of your car. The standard mileage rate for charitable purposes, which is statutorily set, is 14 cents per mile.

Other expenses

Other out-of-pocket expenses incurred in connection with services you provide to a charity that are deductible include costs related to uniforms, travel, meals, and lodging. Sometimes, expenses incurred while serving as a charity's delegate to a convention may be deducted.

Keep receipts

If you take a deduction for out-of-pocket expenses you incurred incident to your performance of services for a charity, it is important to have receipts to document expenses. It is also a good idea to get a written acknowledgement from the charity for the services you provide.

Q: What tax deductions am I entitled to as an investor?

A: Certain investment-related expenses are deductible, others are specifically restricted. Still others won't get you a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.

Certain investment-related expenses are deductible, while others are specifically restricted. Still other expenses likely will not provide you with a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.

Investor expenses

Investment counsel fees, custodian fees, fees for clerical help, office rent, state and local transfer taxes, and similar expenses that you pay in connection with your investments are deductible as an itemized deduction on Schedule A of Form 1040, subject to the 2% floor for all such itemized deductions.

Travel expenses related to the production or collection of income are deductible if you provide proof both of the expenses and the necessity for incurring them. Deductions for travel expenses related to attending investment seminars, however, are specifically prohibited. Travel expenses to attend stockholder meetings are permissible deductions only if travel is not for personal reasons and expenses are reasonable in relation to value of the investment.

Interest expenses

If you take out a loan to carry investment property, you are entitled to an itemized deduction for the interest you pay, reported on Form 4952, which is limited to your net investment income (dividends, interest, rents, etc.) Margin interest paid connected with your stock portfolio qualifies. The investment interest deduction is not subject to the 2% floor - you can start with deducting the first dollar of interest paid. Any disallowed interest over the net investment income limit can be carried over to a succeeding tax year.

Caution. Net capital gain from the disposition of investment property is not considered investment income. However, you may elect to treat all or any portion of such net capital gain as investment income by paying tax on the elected amounts at their ordinary income rates. This is usually not advisable.

Brokerage commissions

Brokerage commissions related to a particular stock purchase or sell, on the other hand, are considered a cost of the sale itself. As such, any commissions paid to buy a stock are added to your tax basis in the shares, which will later determine the amount of taxable gain you have when the property is sold. Any commission on the sale of the shares is netted from the amount you will be considered to realize on that sale.

Q: An extension to file my tax return seems such a painless procedure, is there any good reason for me not to postpone my filing deadline to avoid just one more hassle during the busy start of Spring?

Q: An extension to file my tax return seems such a painless procedure, is there any good reason for me not to postpone my filing deadline to avoid just one more hassle during the busy start of Spring?

A: Many taxpayers unrealistically and, to their own detriment, believe that when the IRS grants them an extension to file their tax return, it is the "magic wand" that waves away all tax concerns until the extended filing deadline is upon them. This is not the case. Even though getting extensions has been made easier--individuals can obtain an automatic four-month extension by phone, the mail or computer, and an additional two months is granted for qualifying taxpayers--there are drawbacks, and certainly "no free rides."

When a taxpayer gets an extension to file his or her return, this does not mean that he or she has more time in which to pay any taxes that are owed without interest or penalty. An extension to file also does not extend the time for payment of taxes. Your ultimate tax liability is an official obligation that starts on April 15^th, 2008. You don't have to pay; but if you don't pay, interest charges (currently 7 percent, compounded daily) are applicable to any tax unpaid after the regular deadline. And that may only be the start.

If payments by the regular deadline are less than 90 percent of the actual 2007 tax, the IRS also has the right to asses a 0.5 percent per month late filing penalty. In addition, you must properly estimate the amount of total tax liability based on current information when filing for an extension. If the IRS later determines that estimate to be unreasonable, it can treat the extension as completely void and assess hefty failure-to-file penalties.

An extension, and not filing until October 15^th also means that you won't receive a stimulus rebate check (up to $600 for individuals and $1,200 for joint filers, not including any applicable $300 rebate for a qualifying child) until November or early December, rather than based on the May through July distribution schedule for those filing their 2007 returns by the regular April 15^th, 2008 deadline.

Some procedural pitfalls can also surprise taxpayers who had every intention of making a proper extension request. For example, if a husband and wife file separate returns, an automatic extension application filed by one does not give an extension of the filing time to the other.

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

A. Cooking, cleaning and childcare: domestic concerns - or tax issues? The answer is both. A few years ago, several would-be Presidential appointees were rejected -- when it was revealed that they had failed to pay payroll taxes for their domestic help. The IRS is aggressively looking for cheaters so it's particularly important that you don't stumble through ignorance in not fulfilling your obligations.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What it costs

In general, if you paid cash wages of at least $1,300 in 2001 to any household employee, you must withhold and pay social security and Medicare taxes. The tax is 15.3 percent of the wages paid. You are responsible for half and your employee for the other half but you may choose to pay the entire amount. If you pay cash wages of at least $1,000 in any quarter to a household employee, you are responsible for paying federal unemployment tax, usually 0.8 percent of cash wages.

Deciding who is an employee is not easy. Contact us for more guidance.

Q:The holidays are approaching and I would like to consider giving gifts of appreciation to my employees. What kinds of gifts can I give my employees that they would not have to declare as income on their tax returns? I also would like to make sure my company would be able to deduct the costs of these gifts.

A:First of all, anything given in the business setting is presumed, until proven otherwise, not to be a gift (e.g., is taxable income) -- that is, you are either rewarding an employee for work done or providing an incentive in which he or she will be inclined to do more work in the future. However, the Tax Code and related IRS regulations still allow many gifts to remain tax-free to the employee while being tax deductible to the business. Here is a short list of the rules:

$25 gift rule

A business may deduct up to $25 in gifts given to each recipient during any given year. However, you can't get around this limit by giving to each family member of the intended recipient: they all share in one $25 limit. Items clearly of an advertising nature such as promotional items do not count as long as the item costs $4 or less.

No dollar limit exists on a deduction if the gift is given to a corporation or a partnership. The cost of gifts such as baseball tickets that will be used by an unidentified group of employees also qualifies for the unlimited deduction. However, once again, if the gift is intended eventually to go to a particular individual shareholder or partner, the deduction is limited to $25.

Separate "de minimis" rules

A "de minimis" fringe benefit from employer to employee is considered to be made tax-free to the employee. "De minimis" fringe benefits are not restricted by the $25 per recipient limit otherwise applicable outside of the employer-employee context. However, de minimis fringe benefits must be small "within reason." Typical de minimis gifts include holiday gifts such as a turkey or ham, the occasional company picnic, occasional use of the photocopy machine, occasional supper money, or flowers sent to a sick employee.

The general guidelines for de minimis fringe benefits are:

• the value of the gift must be nominal,
• accounting for all such gifts would be administratively nitpicking,
• the gifts are only occasional, and
• they are given "to promote health, good will, contentment, or efficiency" of employees.

Unfortunately, "gifts of nominal value" exclude such perks as use of a company lodge, season theater tickets, or country club dues. These cannot be given tax-free to an employee. But they do include occasional theater or sports tickets or group meals.

What's more, fringe benefits such as the use of an on-premise athletic facility or subsidized cafeteria are specifically included under IRS rules as de minimis fringe benefits. The traditional gold retirement watch -- or similar gift-- to commemorate a long period of employment is also treated as de minimis. However, cash or items readily convertible into cash, such as gift certificates, are taxable, no matter what the amount.