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Happy New Year 2024! It’s that time of year again. We hope you all had a great 2023 and would like to thank you for remaining loyal clients of Carefree Tax Service.  The office will operate much the same as last year (with the exception of the bakery next door being closed) with Robin and Tony working extended hours, Jen working full time, and Wendy limiting her time even more so than last year. 

Following are some of the new 2023 tax law updates and things to consider for 2024. If you are a returning client and would like a personalized client organizer for tax planning, request one via email at: tony@carefreetax1040.com .  An organizer is also on our website, www.carefreetax1040.com, under the Info Center tab. There are several financial calculators on the website along with a number of financial and tax links, including IRS and WI/IL Department of Revenue websites. Our website contains lots of information that will be helpful for tax planning.

We are looking forward to seeing you soon! Call 608-756-9930 to set up your appointment. Again, we thank you for allowing us the opportunity to serve you.

Sincerely,

Tony, Jen, Robin, and Wendy

Please Bring the Following Important Information to your Appointment.

It is important that you fill out the attached data sheet (front and back) and bring it to your appointment with related paperwork. It will help with your organization and our documentation.  Also, bring in any updated bank information for direct deposit of refunds. We appreciate your cooperation with this!

Reporting Rules for Businesses. In January 2021, the Corporate Transparency Act was signed into law to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity. As a result, businesses are now required to become more transparent about their ownership structures. Starting January 1, 2024, most business entities created in or registered to do business in the United States will be required to report information about their beneficial owners — the individuals who ultimately own or control a company — to the Financial Crimes Enforcement Network (“FinCEN”).  A business entity is defined as a corporation, a limited liability company (LLC), or a business entity otherwise created by filing a document with a secretary of state or similar office. Non-LLC sole proprietorships are excluded from this definition.

The reporting procedure goes into effect on January 1, 2024. The due date for the initial report depends on when the entity was created:

1.      If your company is created on or after January 1, 2024, then the initial report is due within 30 calendar days of the date the business is created.

2.      If the company was formed before January 1, 2024, then the initial report is due no later than January 1, 2025.

Electric vehicle credits for new vehicles. 2023 brought some changes to the rules for claiming federal tax credits for purchasing electric vehicles (EV). Some of those changes include:

·     Qualifying vehicles must be assembled in North America.

·     Increasing percentages of battery minerals and components must be sourced from the U.S. or from one of its free-trade partners.

·     The manufacturer vehicle sales caps have been eliminated, meaning brands such as Chevrolet, Tesla and Toyota are eligible for EV credits again starting in 2023.

·     Starting in 2024, buyers can take the EV tax credit directly at the point of sale rather than having to wait to claim it on their tax return.

Effective January 1, 2023, the following price and income limits apply:

Price limits for new vehicles:

·   SUVs, vans and pickup trucks - $80,000

·   Any other qualifying vehicle - $55,000

Income limits for new vehicles (based on MAGI):

·   $300,000 - Joint returns or surviving spouse

·   $225,000 - Head of household

·   $150,000 - Any other filing status

Electric vehicle credits for used vehicles.   A tax credit is also available for eligible used vehicles purchased from a dealer for $25,000 or less. The credit amount is 30% of the vehicle’s sale price, up to a maximum credit of $4,000. For this purpose, the credit is maxed out for vehicles purchased for $13,330 or more.

The credit is only available if you use the vehicle, rather than purchase it for resale. Those who qualify as your tax dependents do not qualify for the credit. You can only claim the credit for used vehicles once every three years, and it’s only allowed once for any vehicle.

To qualify for this credit, your modified adjusted gross income (increased by certain nontaxed foreign income) for either the sale year or the year preceding it is limited to the following:

·   $150,000 or less on a joint return

·   $112,500 for a head of household filer

·   $75,000 for singles and married filing separately

Energy efficient property credit. Property owners are eligible for a tax credit for installing energy efficient property in their homes.

The following annual credit limits apply:

·   $1,200 per taxpayer per year

·   $600 for windows and skylights

·   $250 for any exterior door ($500 total for all exterior doors)

·   A $2,000 annual limit applies to the cost of specified heat pumps, heat pump water heaters, and biomass stoves and boilers.

·   $150 for home energy audits

Residential clean energy credit. This credit was formerly known as the residential energy efficient property (REEP) credit which was equal to 26% of property place installed in residential homes in years before 2024.

The credit equals:

·   30% - placed in service after Dec. 31, 2021, and before Jan. 1, 2033

·   26%  - placed in service after Dec. 31, 2032, and before Jan. 1, 2034

·   22% - placed in service after Dec. 31, 2033, and before Jan. 1, 2035.

Qualified expenditures include the costs incurred for installing qualified solar property for generating electricity and hot water, geothermal heat pumps, fuel cell property biomass fuel property and small wind energy.

Required distributions to plan beneficiaries. If you are a non-spouse beneficiary of an IRA, you are required to take annual minimum distributions from the inherited IRA regardless of your age. The amount of the distribution varies depending on whether the decedent was already taking distributions.

If the deceased IRA owner died before his or her required beginning date, one of two rules apply:

(1) For a non-spouse beneficiary who is (a) disabled or chronically ill, (b) a child of the deceased IRA owner who has not reached the age of majority, or (c) no more than 10 years younger than the deceased IRA owner, distributions must begin by Dec. 31 of the year after the year in which the deceased owner died. The distributions must be made over the beneficiary’s life expectancy, or over a period not extending beyond his or her life expectancy.

(2) For beneficiaries other than those above, distributions must be completed within ten years of the death of the IRA owner. The beneficiary can, but doesn’t have to, take distributions before the tenth anniversary of the IRA owner’s death.

If the IRA owner died on or after his or her required beginning date, then:

(I) For a non-spouse beneficiary who is (a) disabled or chronically ill, (b) a child of the deceased IRA owner who has not reached the age of majority, or (c) no more than 10 years younger than the deceased IRA owner, the required minimum distributions for years after the year of the owner’s death must be based on the longer of the life expectancy of the inheritor, or the deceased owner’s life expectancy.

(II) For beneficiaries other than those listed above, distributions  must be completed within ten years of the death of the IRA owner. Distributions must be made by Dec. 31 each year beginning the year following the year of death.

Student loan debt. The maximum amount of student  loan  interest you can deduct each year is $2,500. The deduction is phased out if your adjusted gross income (AGI) exceeds certain levels.

For 2023, the deduction is phased out for taxpayers who are married filing jointly with AGI between $155,000 and $185,000 ($75,000 and $90,000 for single filers).

Retirement plan contribution limits for 2023. The qualified plan and IRA contribution limits for 2023.

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $22,500.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans, is increased to $7,500. Therefore, if you are 50 and older you  can contribute up to $30,000, starting in 2023.

Standard Mileage Rate. Taxpayers can use the standard mileage rate instead of actual expenses when computing the deductible costs of operating automobiles owned or leased by them (including vans, pickups, or panel trucks) for business purposes.

 
            Rate
Business
             $0.655
Medical
           $0.22
Moving
             $0.22*
Charitable
           $0.14
 

*Applies to members of the Armed Forces on active duty who move pursuant to a military order.

Tax Planning and Looking Ahead to 2024

Long-term capital gain from sales of assets held for more than one year is taxed at 0%, 15% or 20%, depending on your taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that, when added to regular taxable income, it is not more than the maximum zero rate amount (e.g., $89,250 for a married couple for 2023).

Consider a Roth IRA if you believe it’s better for you than a traditional IRA. Consider converting traditional-IRA money invested in any low performing stocks (or mutual funds) into a Roth IRA in 2023 if eligible to do so. Keep in mind that the conversion will increase your income for 2023, possibly reducing tax breaks subject to phaseout at higher AGI levels.

IRA contributions. If you are considering making an IRA contribution for 2023, you have until April 15, 2024. For 2023, you can contribute up to $6,500 or $7,500 if you are age 50 or older. Income limits apply if you or your spouse are covered by an employer provided retirement plan.

Health savings accounts. If you become eligible in December of 2023 to make health savings account (HSA) contributions, you can make a full year’s worth of deductible HSA contributions for 2023 provided you make them by April 15, 2024. For 2023, the maximum contribution you can make is $3,850 for self-only coverage, and $7,750 for family coverage. You can contribute an additional $1,000 if you are over age 55.

You are eligible to make contributions into a health savings account if you are covered under a high deductible health plan. Also keep in mind that HSA contributions are not allowed for the month an individual becomes eligible for Medicare (age 65 under current law) and for all subsequent months. 

Charitable giving. If you are age 72 or older by the end of 2023, have traditional IRAs, and especially if you are unable to itemize your deductions, consider making a qualified charitable distribution (QCD) from your IRA(s). These distributions are made directly to charities from your IRA. In addition, a qualified charitable distribution also counts as a distribution for purposes of the required minimum distribution (RMD) rules.

The amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. However, you are still entitled to claim the entire standard deduction.
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The IRS has provided guidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domestic abuse victim distributions. These exceptions were added by the SECURE 2.0 Act of 2022, P.L. 117-328, and became effective January 1, 2024. The Treasury Department and the IRS anticipate issuing regulations under Code Sec. 72(t) and request comments to be submitted on or before October 7, 2024.

The IRS has provided guidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domestic abuse victim distributions. These exceptions were added by the SECURE 2.0 Act of 2022, P.L. 117-328, and became effective January 1, 2024. The Treasury Department and the IRS anticipate issuing regulations under Code Sec. 72(t) and request comments to be submitted on or before October 7, 2024.

Distributions for Emergency Personal Expenses

Code Sec. 72(t)(2)(I) provides an exception to the 10 percent additional tax for a distribution from an applicable eligible retirement plan to an individual for emergency personal expenses. The term "emergency personal expense distribution" means any distribution made from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The IRS specifically noted that emergency expenses could be related to: medical care; accident or loss of property due to casualty; imminent foreclosure or eviction from a primary residence; the need to pay for burial or funeral expenses; auto repairs; or any other necessary emergency personal expenses.

The IRS provides that a plan administrator or IRA custodian may rely on a written certification from the employee or IRA owner that they are eligible for an emergency personal expense distribution. Furthermore, the IRS provides that an emergency personal expense distribution is not treated as a rollover distribution and thus is not subject to mandatory 20% withholding. However, the distribution is subject to withholding, the IRS said. If the emergency personal expense distribution is repaid, it is treated as if the individual received the distribution and transferred it to an eligible retirement plan within 60 days of distribution.

If an otherwise eligible retirement plan does not offer emergency personal expense distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is an emergency personal expense distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Distributions to Domestic Abuse Victims

Code Sec. 72(t)(2)(K) provides an exception to the 10 percent additional tax for an eligible distribution to a domestic abuse victim (domestic abuse victim distribution). The guidance defines a"domesticabusevictimdistribution" as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. "Domesticabuse" is defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.

As with distributions for emergency personal expenses, a retirement plan may rely on an employee’s written certification that they qualify for a domestic abuse victim distribution. Similarly, if an otherwise eligible retirement plan does not offer domestic abuse victim distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is a domestic abuse victim distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Request for Comments

The Treasury Department and the IRS invite comments on the guidance, and specifically on whether the Secretary should adopt regulations providing exceptions to the rule that a plan administrator may rely on an employee’s certification relating to emergency personal expense distributions and procedures to address cases of employee misrepresentation. Comments should be submitted in writing on or before October 7, 2024, and should include a reference to Notice 2024-55.

On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing tax loopholes and stopping abusive partnership transactions used by wealthy taxpayers to avoid paying taxes.

On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing tax loopholes and stopping abusive partnership transactions used by wealthy taxpayers to avoid paying taxes.

Specifically targeted by this new tax compliance effort are partnership basis shifting transactions. In these transactions, a single business that operates through many different legal entities (related parties) enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability. These basis shifting transactions allow closely related parties to avoid taxes.

The use of these abusive transactions grew during a period of severe underfunding for the IRS. As such, the audit rates for these increasingly complex structures fell significantly. It is estimated that these abusive transactions, which cut across a wide variety of industries and individuals, could potentially cost taxpayers more than $50 billion over a 10-year period, according to an IRS News Release.

"Using Inflation Reduction Act funding, we are working to reverse more than a decade of declining audits among the highest income taxpayers, as well as complex partnerships and corporations," IRS Commissioner Danny Werfel said during a press call discussing the new effort on June 14, 2024.

"This announcement signals the IRS is accelerating our work in the partnership arena, which has been overlooked for more than a decade and allowed tax abuse to go on for far too long," said IRS Commissioner Danny Werfel. "We are building teams and adding expertise inside the agency so we can reverse long-term compliance declines that have allowed high-income taxpayers and corporations to hide behind complexity to avoid paying taxes. Billions are at stake here".

This multi-stage regulatory effort announced by the Treasury and IRS includes the following guidance designed to stop the use of basis shifting transactions that use related-party partnerships to avoid taxes:

• proposed regulations under existing regulatory authority to stop related parties in complex partnership structures from shifting the tax basis of their assets amongst each other to take abusive deductions or reduce gains when the asset is sold;

• proposed regulation to require taxpayers and their material advisers to report if they and their clients are participating in abusive partnership basis shifting transactions; and

• a Revenue Rulingproviding that certain related-party partnership transactions involving basis shifting lack economic substance.

"Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit," said U.S. Secretary of the Treasury Janet L. Yellen.

In the June 14, 2024, press call, Commissioner Danny Werfel also noted that there will be an increase in audits of large partnerships with average assets over $10 billion dollars and larger organizational changes taking place to support compliance efforts, including the creation of a new associate office that will focus exclusively on partnerships, S corporations, trusts, and estates.

By Catherine S. Agdeppa, Content Management Analyst

A savings account with the tax benefits of a health savings account or an educations savings account but without the singular restricted focus could be something that gains traction as Congress addresses the tax provision of the Tax Cuts and Jobs Act that expire in 2025.

A savings account with the tax benefits of a health savings account or an educations savings account but without the singular restricted focus could be something that gains traction as Congress addresses the tax provision of the Tax Cuts and Jobs Act that expire in 2025.

The concept was promoted by multiple witnesses testifying during a recent Senate Finance Committee hearing on the subject of child savings accounts and other tax advantaged accounts that would benefit children. It also is the subject of a recently released report from The Tax Foundation.

Rather than push new limited-use savings accounts, "policymakers may want to consider enacting a more comprehensive savings program such as a universalsavingsaccount," Veronique de Rugy, a research fellow at George Mason University, testified before the committee during the May 21, 2024, hearing. "Universalsavingsaccounts will allow workers to save in one simple account from which they would withdraw without penalty for any expected or unexpected events throughout their lifetime."

She noted that, like other more focused savings accounts, like health savings accounts, it would have "the benefit of sheltering some income from the punishing double taxation that our code imposes."

De Rugy added that universal savings accounts "have a benefit that they do not discourage savings for those who are concerned that the conditions for withdrawals would stop them from addressing an emergency in their family."

Adam Michel, director of tax policy studies at the Cato Institute, who also promoted the idea of universal savings accounts. He said these accounts "would allow families to save for their kids or any of life’s other priorities. The flexibility of these accounts make them best suited for lower and middle income Americans."

He also noted that they are promoting savings in countries that have implemented them, including Canada and United Kingdom.

"For example, almost 60 percent of Canadians own tax-free savingsaccounts," Michel said. "And more than half of those account holders earned the equivalent of about $37,000 a year. These accounts have helped increase savings and support the rest of the Canadian savings ecosystem."

De Rugy noted that in countries that have implemented it, they function like a Roth account in that money that has already been taxed can be put into it and not penalized or taxed upon withdrawal.

Michel also noted that the if the tax benefits extend to corporations as they do with deposits to employee health savings accounts, "to the extent that you lower the corporate income tax, you’re going to encourage a different additional investment into savings by those entities."

Simulating The Universal Savings Account Impact

The Tax Foundation in its report simulated how a universal savings account could work, based on how they are implemented in Canada. The simulation assumed the accounts could go active in 2025 for adults aged 18 years or older.

On a post-tax basis, individuals would be allowed to contribute up to $9,100 on a post-tax basis annually, with that cap indexed for inflation. Any unused "contribution room" would be allowed to be carried forward. Earnings would be allowed to grow tax-free and withdrawals would be allowed for any purpose without penalty or further taxation. Any withdrawal would be added back to that year’s contribution room and that would be eligible for carryover as well.

"The fiscal cost of this USA policy would be offset by ending the tax advantage of contributions to HSAs beginning in 2025," the report states. "As such, future contributions to HSAs would be given normal tax treatment, i.e. included in taxable income and subject to payroll tax with subsequent returns on contributions also included in taxable income."

In this scenario, the Tax Foundation report estimates that "this policy change would on net raise tax revenue by about $110 billion over the 10-year budget window."

As for the impact on taxpayers, the "after-tax income would fall by about 0.1 percent in 2025 and by a smaller amount in 2034, reflecting the net tax increase in those years," the report states. "Over the long run, and accounting for economic impacts, taxpayers across every quintile would see a small increase in after-tax income on average, but the top 5 percent of earners would continue to see a small decrease in after-tax income on average."

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the tax gap needs more documentation and transparency, the U.S. Government Accountability Office stated.

The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the tax gap needs more documentation and transparency, the U.S. Government Accountability Office stated.

In a report issued June 5, 2024, the federal government watchdog noted that while the agency uses AI to improve the efficiency and selection of audit cases to help identify noncompliance, "IRS has not completed its documentation of several elements of its AI sample selection models, such as key components and technical specifications."

GAO noted that the IRS began using AI in a pilot in tax year 2019 for sampling tax returns for NRP audits. The current plan is to use AI to create a sample size of 4,000 returns to measure compliance and help inform tax gap estimates, although GAO expressed concerns about the accuracy of the estimates with that sample size.

"For example, NRP historically included more than 2,500 returns that claimed the Earned Income Tax Credit, but the redesigned sample has included less than 500 of these returns annually," the report stated.

IRS told GAO that it "is exploring ways to combine operational audit data with NRP audit data when developing its taxgapestimates. IRS officials also told us that if IRS can reliably combine these data for taxgap analysis, IRS might be better positioned to identify emerging trends in noncompliance and reduce the uncertainty of the estimates due to the small sample size."

The report also highlighted the fact that the agency "has multiple documents that collectively provide technical details and justifications for the design of the AI models. However, no set of documents contains complete information and IRS analyst could use to run or update the models, and several key documents are in draft form."

"Completing documentation would help IRS retain organizational knowledge, ensure the models are implemented consistently, and make the process more transparent to future users," the report stated.

By Gregory Twachtman, Washington News Editor

For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.

2021 Wage Cap
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 2021, the wage base is $142,800. Thus, OASDI tax applies only to the taxpayer’s first $142,800 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $142,800.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2021
For workers who earn $142,800 or more in 2021:

• an employee will pay a total of $8,853.60 in social security tax ($142,800 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $17,707.20 in social security tax ($142,800 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.

Benefits Increase for 2021
Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2019 by 1.3 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The IRS has issued final regulations that provide guidance for employers on federal income tax withholding from employees’ wages.

The IRS has issued final regulations that provide guidance for employers on federal income tax withholding from employees’ wages. The final regulations:

• address the amount of federal income tax that employers withhold from employees’ wages;
• implement changes made by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
• reflect the redesigned Form W-4, Employee’s Withholding Certificate, and related IRS publications.

TCJA Changes
The TCJA made many amendments affecting income tax withholding on employees’ wages. The TCJA made many amendments affecting income tax withholding on employees’ wages.After the TCJA was enacted, the IRS issued guidance to implement the changes (for example, Notice 2018-14, I.R.B. 2018-7, 353; Notice 2018-92, I.R.B. 2018-51, 1038; Notice 2020-3, I.R.B. 2020-3, I.R.B. 2020-3, 330). The IRS updated Form W-4 and its instructions with significant changes intended to improve the accuracy of income tax withholding and make the withholding system more transparent for employees. It also released IRS Publication 15-T, Federal Income Tax Withholding Methods, which provides percentage method tables, wage bracket withholding tables, and other computational procedures for employers to use to compute withholding for the 2020 calendar year.

On February 13, 2020, the IRS published a notice of proposed rulemaking ( REG-132741-17) to update the regulations under Code Sec. 3401 and Code Sec. 3402 to reflect the legislative changes, and expand the rules to accommodate changes necessary to fully implement the redesigned Form W-4 and its related computational procedures, along with most existing computational procedures that apply to 2019 or earlier Forms W-4.

The final regulations adopt the proposed regulations with a few revisions.

Form W-4
The final regulations do not require all employees with a 2019 or earlier Form W-4 in effect to furnish a redesigned Form W-4. Comments expressed concerns that the proposed regulations and the related forms, instructions, publications, and other IRS guidance would require employers to maintain two different systems for computing income tax withholding on wages: one for 2019 or earlier Forms W-4, and another for the redesigned Forms W-4.

In response, the IRS is acknowledging concerns with (1) instructions to the redesigned Form W-4 for employees with multiple jobs and (2) optional computational “bridge” entries permitted under the regulations and described in Publication 15-T that will allow employers to continue in effect 2019 or earlier Forms W-4 as if the employees had furnished redesigned Forms W-4.

The final regulations revise Reg. §31.3402(f)(4)-1(a) to provide that an employer’s use of the computational bridge entries to adapt a 2019 or earlier Form W-4 to the redesigned computational procedures as if using entries on a redesigned Form W-4 will continue in effect such a Form W-4 that was properly in effect on or before December 31, 2019.

Lock-in Letters
The IRS issues a "lock-in" letter to notify an employer that an employee is not entitled to claim exemption from withholding, or is not entitled to the withholding allowance claimed on the employee’s Form W-4. The lock-in letter prescribes the withholding allowance the employer must use to figure withholding. After the lock-in letter becomes effective, the IRS may issue a subsequent modification notice, but only after the employee contacts the IRS to request an adjustment to the withholding prescribed in the lock-in letter.

Under the final regulations, employers are not required to notify the IRS that they no longer employ an employee for whom a lock-in letter was issued. Further, the final regulations do not require the IRS to reissue lock-in letters or modification notices solely because of the redesigned Form W-4.

The final regulations revise Reg. §31.3402(f)(2)-1(g)(2)(iv) relating to lock-in letters. and Reg. §31.3402(f)(2)-1(g)(2)(vii) relating to modification notices, to provide that an employer may comply with a lock-in letter or modification notice that is based on a 2019 or earlier Form W-4, as required by the regulations, if the employer implements the maximum withholding allowance and filing status permitted in a lock-in letter or modification notice by using the computational bridge entries as set forth in forms, instructions, publications, and other IRS guidance to calculate withholding for such a Form W-4.

Estimated Tax Payments
The final regulations revise Reg. §31.3402(m)-1(d) to allow employees to take estimated tax payments into account, as long as the employee (1) follows the instructions to the IRS’s Tax Withholding Estimator (available at https://www.irs.gov/individuals/tax-withholding-estimator) or IRS Publication 505, (2) is not subject to a lock-in letter or modification notice, and (3) does not request withholding from wages that falls below the pro rata share of income taxes attributable to wages determined under forms, instructions, publications, and other IRS guidance. The IRS intends to update its Tax Withholding Estimator and Publication 505 to reflect this rule.

Applicable Date
The final regulations generally apply on the date they are published in the Federal Register. Reg. §31.3402(f)(2)-1(g), regarding withholding compliance, applies as of February 13, 2020. Reg. §31.3402(f)(5)-1(a)(3), regarding the requirement to use the current version of Form W-4, applies as of March 16, 2020. The removal of Reg. §31.3402(h)(4)-1(b), regarding the combined income tax withholding and employee FICA tax withholding tables, applies on and after January 1, 2020.

Except for the removal of Reg. §31.3402(h)(4)-1(b), taxpayers may choose to apply the final regulations on and after January 1, 2020, and before their applicability date set forth in the regulations.