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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 released the 2024-2025 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

The IRS has released the 2024-2025 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

1. the special transportation industry meal and incidental expenses (M&IE) rates,
2. the rate for the incidental expenses only deduction,
3. and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates

The special M&IE rates for taxpayers in the transportation industry are:

• $80 for any locality of travel in the continental United States (CONUS), and
• $86 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate

The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method

For purposes of the high-low substantiation method, the 2024-2025 special per diem rates are:

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

The amount treated as paid for meals is:

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

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

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

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1392. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

Notice 2023-68, I.R.B. 2023-41 is superseded.

Notice 2024-68

The U.S. Department of the Treasury announced it has recovered $172 million from 21,000 wealthy taxpayers who have not filed returns since 2017.

The U.S. Department of the Treasury announced it has recovered $172 million from 21,000 wealthy taxpayers who have not filed returns since 2017.

The Internal Revenue Service began pursuing 125,000 high-wealth, high-income taxpayers who have not filed taxes since 2017 in February 2024 based on Form W-2 and Form 1099 information showing these individuals received more than $400,000 in income but failed to file taxes.

"The IRS had not had the resources to pursue these wealthy non-filers," Treasury Secretary Janet Yellen said in prepared remarks for a speech in Austin, Texas. Now it does [with the supplemental funding provided by the Inflation Reduction Act], and we’re making significant progress. … This is just the first milestone, and we look forward to more progress ahead.

This builds on a separate initiative that began in the fall of 2023 that targeted about 1,600 high-wealth, high-income individuals who failed to pay a recognized debt, with the agency reporting that nearly 80 percent of those with a delinquent tax debt have made a payment and leading to more than $1.1 billion recovered, including $100 million since July 2024.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service has made limited progress in developing a methodology that would help the agency meet the directive not to increase audit rates for those making less than $400,000 per year, the Treasury Inspector General for Tax Administration reported.

National Taxpayer Advocate Erin Collins is working to address deficiencies highlighted by the Treasury Inspector General for Tax Administration regarding the speed of service offered by the Taxpayer Advocate Service.

National Taxpayer Advocate Erin Collins is working to address deficiencies highlighted by the Treasury Inspector General for Tax Administration regarding the speed of service offered by the Taxpayer Advocate Service.

Collins noted in a September 19, 2024, blog post that TAS, as highlighted by the TIGTA audit, is “not starting to work cases and we are not returning telephone calls as quickly as we would like.”

She noted that while overall satisfaction with TAS is high, Collins is hearing "more complaints than I would like of unreturned phone calls, delays in providing updates, and delays in resolving cases." She identified three core challenges in case advocacy:

• The increasing number of cases;

• An increase in new hires that need proper training before they can effectively assist taxpayers; and

• A case management system that is more than two decades old that causes inefficiencies and delays.

Collins noted that there has been an 18 percent increase in cases in fiscal year 2024 and advocates have inventories of more than 100 cases at a time. According to the blog post, in each of FY 2022 and 2023, there were about 220,000 cases. TAS is on track to receive nearly 260,000 in FY 2024.

"Our case advocates are doing their best to advocate for you," Collins wrote in the blog. "But when we experience a year like this in which case receipts have jumped by 18 percent, something must give. Since we don’t turn away taxpayers who are eligible for our assistance, the tradeoff is that we’re taking longer to assign new cases to be worked, longer to return telephone calls, and sometimes longer to resolve cases even after we’ve begun to work them."

Collins added that while the employment ranks continue to rise, about 30 percent of the case advocates "have less than one year of experience, and about 50 percent have less than two years of experience," meaning "nearly one-third of our case advocate workforce is still receiving training and working limited caseloads or have no caseloads yet, and half are likely to require extra support for complex cases."

She said TAS is revieing its training protocols, including focusing new hires on high volume cases so "they can begin to work those cases more quickly, while continuing to receive comprehensive training that will enable them to become effective all-around advocates over time."

TAS is also deploying a new case management system next year that will better integrate with the Internal Revenue Service’s electronic data offerings.

"My commitment is to continue to be transparent about our progress as we work toward becoming a more effective and responsive organization, and I ask for your understanding and patience as our case advocates work to resolve your issues with the IRS," Collins said.

By Gregory Twachtman, Washington News Editor

The IRS has highlighted important tax guidelines for taxpayers who are involved in making contributions and receiving distributions from online crowdfunding. The crowdfunding website or its payment processor may be required to report distributions of money raised, if the amount distributed meets certain reporting thresholds, by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS.

The IRS has highlighted important tax guidelines for taxpayers who are involved in making contributions and receiving distributions from online crowdfunding. The crowdfunding website or its payment processor may be required to report distributions of money raised, if the amount distributed meets certain reporting thresholds, by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS.

The reporting thresholds for a crowdfunding website or payment processor to file and furnish Form 1099-K are:

• Calendar years 2023 and prior – Form 1099-K is required if the total of all payments distributed to a person exceeded $20,000 and resulted from more than 200 transactions; and
• Calendar year 2024 – The IRS announced a plan for the threshold to be reduced to $5,000 as a phase-in for the lower threshold provided under the ARPA.

Alternatively, if non-taxable distributions are reported on Form 1099-K and the recipient does not report the transaction on their tax return, the IRS may contact the recipient for more information.

If crowdfunding contributions are made as a result of the contributor’s detached and disinterested generosity, and without the contributors receiving or expecting to receive anything in return, the amounts may be gifts and therefore may not be includible in the gross income of those for whom the campaign was organized. Additionally, contributions to crowdfunding campaigns by an employer to, or for the benefit of, an employee are generally includible in the employee’s gross income. If a crowdfunding organizer solicits contributions on behalf of others, distributions of the money raised to the organizer may not be includible in the organizer’s gross income if the organizer further distributes the money raised to those for whom the crowdfunding campaign was organized. More information is available to help taxpayers determine what their tax obligations are in connection with their Form 1099-K at Understanding Your Form 1099-K.

The IRS has significantly improved its online tools, using funding from the Inflation Reduction Act (IRA), to facilitate taxpayers in accessing clean energy tax credits. These modernized tools are designed to streamline processes, improve compliance, and mitigate fraud. A key development is the IRS Energy Credits Online (ECO) platform, a free, secure, and user-friendly service available to businesses of all sizes. It allows taxpayers to register, submit necessary information, and file for clean energy tax credits without requiring any specialized software. The platform also features validation checks and real-time monitoring to detect potential fraud and enhance customer service.

The IRS has significantly improved its online tools, using funding from the Inflation Reduction Act (IRA), to facilitate taxpayers in accessing clean energy tax credits. These modernized tools are designed to streamline processes, improve compliance, and mitigate fraud. A key development is the IRS Energy Credits Online (ECO) platform, a free, secure, and user-friendly service available to businesses of all sizes. It allows taxpayers to register, submit necessary information, and file for clean energy tax credits without requiring any specialized software. The platform also features validation checks and real-time monitoring to detect potential fraud and enhance customer service.

In November 2023, the IRS announced a significant enhancement to the ECO platform. Qualified manufacturers could submit clean vehicle identification numbers (VINs), while sellers and dealers were enabled to file time-of-sale reports completely online. Additionally, the platform facilitates advance payments to sellers and dealers within 72 hours of the clean vehicle credit transfer, significantly reducing processing time and enhancing the overall user experience.

In December 2023, the IRS expanded the ECO platform’s capabilities to accommodate qualifying businesses, tax-exempt organizations, and entities such as state, local, and tribal governments. These entities can now take advantage of elective payments or transfer their clean energy credits through the ECO system. This feature allows taxpayers who may not have sufficient tax liabilities to offset to still benefit from the available tax credits under the IRA and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act.

The IRS’s move towards digital transformation also led to the creation of an online application portal for the Qualifying Advanced Energy Project Credit and Wind and Solar Low-Income Communities Bonus Credit programs in partnership with the Department of Energy. The portal, which launched in June 2023, simplifies the submission and review processes for clean energy projects, lowering barriers for taxpayers to participate in these incentives.

These advancements reflect the IRS’s commitment to modernizing taxpayer services, focusing on efficiency, and enhancing the overall user experience. Looking ahead, the IRS is poised to continue leveraging technology to further improve processes and support taxpayers in utilizing clean energy tax incentives.

Final regulations on consistent basis reporting have been issued under Code Secs. 1014 and 6035.

Final regulations on consistent basis reporting have been issued under Code Secs. 1014 and 6035.

Consistent Basis Requirement

The general rule is that a taxpayer's initial basis in certain property acquired from a decedent cannot exceed the property's final value for estate tax purposes or, if no final value has been determined, the basis is the property's reported value for federal estate tax purposes. The consistent basis requirement applies until the entire property is sold, exchanged, or otherwise disposed of in a recognition transaction for income tax purposes or the property becomes includible in another gross estate.

"Final value" is defined as: (1) the value reported on the federal estate tax return once the period of limitations on assessment has expired without that value being adjusted by the IRS; (2) the value determined by the IRS once that value can no longer be contested by the estate; (3) the value determined in an agreement binding on all parties; or (4) the value determined by a court once the court’s determination is final.

Property subject to the consistent basis requirement is property the inclusion of which in the gross estate increases the federal estate tax payable by the decedent’s estate. Property excepted from this requirement is identified in Reg. §1.1014-10(c)(2). The zero-basis rule applicable to unreported property described in the proposed regulations was not adopted. The consistent basis requirement is clarified to apply only to "included property."

Required Information Returns and Statements

An executor of an estate who is required to file an estate tax return under Code Sec. 6018, which is filed after July 31, 2015, is subject to the reporting requirements of Code Sec. 6035. Executors who file estate tax returns to make a generation-skipping transfer tax exemption or allocation, a portability election, or a protective election to avoid a penalty are not subject to the reporting requirements. An executor is required to file Form 8971 (the Information Return) and all required Statements. In general, the Information Return and Statements are due to the IRS and beneficiaries on or before the earlier of 30 days after the due date of the estate tax return or the date that is 30 days after the date on which the estate tax return is filed with the IRS. If a beneficiary acquires property after the due date of the estate tax return, the Statement must be furnished to the beneficiary by January 31 of the year following the acquisition of that property. Also, by January 31, the executor must attach a copy of the Statement to a supplement to the Information Return. An executor has the option of furnishing a Statement before the acquisition of property by a beneficiary.

Executors have a duty to supplement the Information Return or Statements upon the receipt, discovery, or acquisition of information that causes the information to be incorrect or incomplete. Reg. §1.6035-1(d)(2) provides a nonexhaustive list of changes that require supplemental reporting. The duty to supplement applies until the later of a beneficiary's acquisition of the property or the determination of the final value of the property under Reg. §1.1014-10(b)(1). With the exception of property identified for limited reporting in Reg. §1.6035-1(f), the property subject to reporting is included property and property the basis of which is determined, wholly or partially, by reference to the basis of the included property.

Penalties

Penalties may be imposed under Reg. §301.6721-1(h)(2)(xii) for filing an incorrect Information Return, and Reg. §301.6722-1(e)(2)(xxxv) for filing incorrect Statements. In addition, an accuracy-related penalty can be imposed under Reg. §1.6662-9 on the portion of the underpayment of tax relating to property subject to the consistent basis requirement that is attributable to an inconsistent basis.

Applicability Dates

Reg. §1.1014-10 applies to property described in Reg. §1.1014-10(c)(1) that is acquired from a decedent or by reason of the death of a decedent if the decedent's estate tax return is filed after September 17, 2024. Reg. §1.6035-1 applies to executors of the estate of a decedent who are required to file a federal estate tax return under Code Sec. 6018 if that return is filed after September 17, 2024, and to trustees receiving certain property included in the gross estate of such a decedent. Reg. §1.6662-9 applies to property described in Reg. §1.1014-10(c)(1) that is reported on an estate tax return required under Code Sec. 6018 if that return is filed after September 17, 2024.

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.