Newsletters

Deputy Secretary of the Treasury Wally Adeyemo was out promoting the positives of the Inflation Reduction Act in an apparent effort to counteract the messaging from Republicans who are working to abolish the law as well as to replace the IRS with a national sales tax.

Deputy Secretary of the Treasury Wally Adeyemo was out promoting the positives of the Inflation Reduction Act in an apparent effort to counteract the messaging from Republicans who are working to abolish the law as well as to replace the IRS with a national sales tax.

Speaking January 17, 2023, at a White House event, Deputy Secretary Adeyemo described the law as "the most significant piece of legislation in our country’s history when it comes to building a clean energy future," and highlighted the law’s tax incentives aimed at getting more Americans to invest in clean energy.

For example, he noted the $1,200 available to people for making homes more energy efficient with new insulation, doors, windows, and other upgrades. He also highlighted the up to $2,000 available to upgrade existing furnaces and air conditioners with energy efficient heat pumps, as well as tax credits to help defray the cost of installing solar panels on their home rooftops.

Adeyemo also highlighted the tax incentives related to the purchase of clean vehicles, including up to a $7,500 tax credit for a new vehicle and up to $4,000 for a pre-owned vehicle.

"Treasury is working expeditiously to provide clarity and certainty to taxpayers, so the climate and economic benefits of this historic legislation can be felt as quickly as possible," he said.

Adeyemo also referenced the additional funding the Internal Revenue Service is receiving due to the Inflation Reduction Act. He noted that a "well-resourced IRS … is essential for effective implementation of the IRA’s clean energy credits and other tax benefits, and for ensuring fairness of our tax system overall."

Countering Republican Messaging

Adeyemo’s comments come as Republicans in their new majority in the House of Representatives begin to work on abolishing the IRA and dismantling the IRS.

Already passed in the GOP-led House is the Family and Small Business Taxpayer Protection Act (H.R. 23), which would eliminate the additional IRS funding in the IRA and in particular targets the 87,000 new hires by the agency. GOP messaging continues to misrepresent those new hires as all being IRS agents who will target low- and middle-income taxpayers with audits, despite the stated purposed of those new hires to be primarily for customer service, with the new agents that do get hired to be used to target the wealthiest taxpayers in an effort to ensure they are paying their fair share and to close the tax gap.

Indeed a one-sheet on the H.R. 23 posted to the House Ways and Means website highlights that the bill is targeting the 87,000 new hires which it claims will all be agents. The bill passed the House on January 9, 2023, by a 221-210 vote along party lines. The Senate is likely not going to take up the bill and President Biden already threatened a veto if the bill made it to his desk.

The Congressional Budget Office estimates that enacting this bill would actually reduce revenue by nearly $186 billion and increase the deficit by more than $114 billion.

House Republicans also introduce a bill (H.R. 25) that would abolish the IRS and replace its revenue generating taxation authority with a national sales tax of 23 percent, with a means-tested monthly sales tax rebate available to taxpayers who qualify. No further action on this bill has been taken.

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2023 and the lease inclusion amounts for business vehicles first leased in 2023.

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2023 and the lease inclusion amounts for business vehicles first leased in 2023.

Luxury Passenger Car Depreciation Caps

The luxury car depreciation caps for a passenger car placed in service in 2023 limit annual depreciation deductions to:

• $12,200 for the first year without bonus depreciation
• $20,200 for the first year with bonus depreciation
• $19,500 for the second year
• $11,700 for the third year
• $6,960 for the fourth through sixth year

Depreciation Caps for SUVs, Trucks and Vans

The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2023 are:

• $12,200 for the first year without bonus depreciation
• $20,200 for the first year with bonus depreciation
• $19,500 for the second year
• $11,700 for the third year
• $6,960 for the fourth through sixth year

Excess Depreciation on Luxury Vehicles

If depreciation exceeds the annual cap, the excess depreciation is deducted beginning in the year after the vehicle’s regular depreciation period ends.

The annual cap for this excess depreciation is:

• $6,960 for passenger cars and
• $6,960 for SUVS, trucks, and vans.

Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans

If a vehicle is first leased in 2023, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:

• $60,000 for a passenger car, or
• $60,000 for an SUV, truck or van.

The 2023 lease inclusion tables provide the lease inclusion amounts for each year of the lease.

The lease inclusion amount results in a permanent reduction in the taxpayer’s deduction for the lease payments.

Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts

The depreciation caps and lease inclusion amounts do not apply to:

• cars with an unloaded gross vehicle weight of more than 6,000 pounds; or
• SUVs, trucks and vans with a gross vehicle weight rating (GVWR) of more than 6,000 pounds.

So taxpayers who want to avoid these limits should "think big."

IRS has reminded eligible workers from low and moderate income groups to make qualifying retirement contributions and get the Saver’s Credit on their 2022 tax return. Taxpayers have until the due date for filing their 2022 return, that is April 18, 2023, to set up a new IRA or add money to an existing IRA for 2022. 

IRS has reminded eligible workers from low and moderate income groups to make qualifying retirement contributions and get the Saver’s Credit on their 2022 tax return. Taxpayers have until the due date for filing their 2022 return, that is April 18, 2023, to set up a new IRA or add money to an existing IRA for 2022. The Retirement Savings Contributions Credit, also known as the Saver’s Credit, helps offset part of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements, 401(k) plans and similar workplace retirement programs. The credit also helps any eligible person with a disability who is the designated beneficiary of an Achieving a Better Life Experience (ABLE) account, contribute to that account. The Saver’s Credit is available in addition to any other tax savings that apply, and contributions to both, Roth and traditional IRAs qualify for the credit.

Taxpayers participating in workplace retirement plans must make their contributions by December 31, 2022. The Saver’s Credit supplements other tax benefits available to people who set money aside for retirement. The Service also urges employees who are unable to set aside money in 2022, to schedule their 2023 contributions soon, so their employers can begin withholding them in January, 2023.

The IRS also informs taxpayers about the eligibility and restrictions to Saver's Credit:

• Saver's Credit can be claimed by married couples filing jointly with incomes up to $68,000 in 2022 or $73,000 in 2023, heads of household with incomes up to $51,000 in 2022 or $54,750 in 2023, married individuals filing separately and singles with incomes up to $34,000 in 2022 or $36,500 in 2023.
• Eligible taxpayers must be at least 18 years of age.
• Anyone claimed as a dependent on someone else’s return cannot take the credit, and any person enrolled as a full-time student during any part of 5 calendar months during the year, cannot claim the credit.

A taxpayer’s credit amount is based on their filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs or ABLE accounts. The Service has cautioned that, though the maximum Saver’s Credit is $1,000 ($2,000 for married couples), it was often much less.

The IRS has also announced that, any distributions from a retirement plan or ABLE account, reduces the contribution amount used to figure the credit. For 2022, this rule applies to distributions received after 2019 and before the due date, including extensions, of the 2022 return.

The IRS and Treasury have announced have released a list of clean vehicles that meet the requirements to claim the new clean vehicle tax credit, along with FAQs to help consumers better understand how to access the various tax incentives for the purchase of new and used electric vehicles available beginning January 1, 2023.

The IRS and Treasury have announced have released a list of clean vehicles that meet the requirements to claim the new clean vehicle tax credit, along with FAQs to help consumers better understand how to access the various tax incentives for the purchase of new and used electric vehicles available beginning January 1, 2023. The Service has clarified the incremental cost of commercial clean vehicles in 2023 and stated that, for vehicles under 14,000 pounds, the tax credit was 15-percent of a qualifying vehicle’s cost and 30-percent if, the vehicle is not gas or diesel powered.

The Service has also given a notice of intent to propose regulations on the tax credit for new clean vehicles, to provide clarity to manufacturers and buyers, on changes that take effect automatically on January 1, such as Manufacturer’s Suggested Retail Price limits. The notice has further clarified, that a vehicle would be considered as placed in service, for the purposes of the tax credit, on the date the taxpayer takes possession of the vehicle, which may or may not be the same date as the purchase date.

In order to help manufacturers identify vehicles eligible for tax credit, when the new requirements go into effect after a Notice of Proposed Rulemaking is issued in March, the Treasury also released a white paper on the anticipated direction of their upcoming proposed guidance on the critical minerals and battery components requirements and the process for determining whether vehicles qualify under these requirements.

The Treasury Department and the Internal Revenue Service have issued guidance pertaining to the new credit for qualified commercial clean vehicles, established by the Inflation Reduction Act of 2022 ( P.L. 117-169). Notice 2023-9 establishes a safe harbor regarding the incremental cost of certain qualified commercial clean vehicles placed in service in calendar year 2023.

The Treasury Department and the Internal Revenue Service have issued guidance pertaining to the new credit for qualified commercial clean vehicles, established by the Inflation Reduction Act of 2022 ( P.L. 117-169). Notice 2023-9 establishes a safe harbor regarding the incremental cost of certain qualified commercial clean vehicles placed in service in calendar year 2023.

Credit for Qualified Commercial Clean Vehicles

The amount of the credit is equal to the lesser of (1) 15% of the basis of the vehicle (30% if the vehicle is not powered by a gasoline or diesel internal combustion engine), or (2) the incremental cost of the vehicle. The credit is limited to $7,500 for a vehicle with a gross vehicle weight rating (GVWR) of less than 14,000 pounds, and $40,000 for other vehicles.

A qualified commercial clean vehicle’s incremental cost is the excess of the vehicle’s purchase price over the price of a comparable vehicle. A comparable vehicle is any vehicle that is powered solely by a gasoline or diesel internal combustion engine and is comparable in size and use to the qualified vehicle.

Under Code 45W(c), a qualified commercial clean vehicle includes a vehicle treated as a motor vehicle for purposes of title II of the Clean Air Act and manufactured primarily for use on public streets, roads, and highways (not including street vehicles); and mobile machinery (as defined by Code 4053(8)).

Safe Harbor

The Treasury Department reviewed a Department of Energy incremental cost analysis (DOE analysis) of current costs for all street vehicles in calendar year 2023. The DOE analysis determined and/or provided the following:

• the incremental cost of all street vehicles (other than compact car PHEVs) that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500;
• the incremental cost for compact car PHEVs, including mini-compact and sub-compact cars, will be less than $7,500;
• an incremental cost analysis of current costs for several representative classes of street vehicles with a gross vehicle weight rating of 14,000 pounds or more in calendar year 2023; and
• the incremental cost will not limit the available credit amount for vehicles placed in service in calendar year 2023.

Accordingly, the Treasury Department and IRS will accept a taxpayer’s use of the incremental cost published in the DOE Analysis to calculate the credit amount for compact car PHEVs placed in service during calendar year 2023, and for the appropriate class of street vehicle to calculate the credit amount for vehicles placed in service during calendar year 2023.

A taxpayer's use of $7,500 as the incremental cost for all street vehicles (other than compact car PHEVs) with a gross vehicle weight rating of less than 14,000 pounds to calculate the credit for vehicles placed in service during calendar year 2023.

The IRS announced a delay in reporting thresholds for third-party settlement organizations (TSPOs). As a result of this delay, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan Act of 2021 ( P.L. 117-2).

The IRS announced a delay in reporting thresholds for third-party settlement organizations (TSPOs). As a result of this delay, third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower, $600 threshold amount enacted as part of the American Rescue Plan Act of 2021 ( P.L. 117-2).

Background

Code Sec. 6050W requires payment settlement entities to file an information return for each calendar year for payments made in settlement of certain reportable payment transactions. The annual information return must set forth the (1) name, address, and taxpayer identification number (TIN) of the participating payee to whom payments were made; and (2) gross amount of the reportable payment transactions with respect to that payee. The returns must be furnished to the participating payees on or before January 31 of the year following the calendar year for which the return was made. Further, the returns must be filed with the IRS on or before February 28 (March 31 if filing electronically) of the year following the calendar year for which the return was made.

Transition Period

A TPSO will not be required to report payments in settlement of third party network transactions with respect to a participating payee unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200. This condition applies to calendar years beginning before January 1, 2023. The Service will not assert penalties under Code Sec. 6721 or 6722 for TPSOs failing to file or failing to furnish Forms 1099-K unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of transactions exceeds 200.

For returns for calendar years beginning after December 31, 2022, a TPSO would be required to report payments in settlement of third party network transactions with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of such transactions. The delay does not affect requirements of Code Sec. 6050W that were not modified by the American Rescue Plan Act. Taxpayers that have performed backup withholding under Code Sec. 3406(a) during calendar year 2022 must file a Form 1099-K, Payment Card and Third-Party Network Transactions, with the IRS and furnish a copy to the payee if total payments to and withholding from the payee exceeded $600 for the calendar year.

The IRS has notified taxpayers of the applicable reference standard required to be used to determine the amount of the energy efficient commercial building (EECB) property deduction allowed under Code Sec. 179D as amended by the Inflation Reduction Act of 2022 (IRA) ( P.L. 117-169). 

The IRS has notified taxpayers of the applicable reference standard required to be used to determine the amount of the energy efficient commercial building (EECB) property deduction allowed under Code Sec. 179D as amended by the Inflation Reduction Act of 2022 (IRA) ( P.L. 117-169). Further, the IRS has announced the existing reference standard, affirmed a new reference standard and clarified when each of the two reference standards will apply to taxpayers. The effective date of this announcement is January 1, 2023.

The American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America Reference Standard 90.1-2019 has been affirmed as the applicable Reference Standard 90.1 for purposes of calculating the annual energy and power consumption and costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the reference building as follows:

• For property for which construction begins after December 31, 2022, ASHRAE 90.1-2019 will be the applicable standard for property that is placed in service after December 31, 2026.
• Taxpayers who already began or will begin construction by December 31, 2022, or who already placed property in service or will place property in service by December 31, 2026, are not subject to the updated Reference Standard 90.1-2019. For such property, the applicable Reference Standard 90.1 is Reference Standard 90.1-2007.
• Taxpayers who begin construction before January 1, 2023 may apply Reference Standard 90.1-2007 regardless of when the building is placed in service.

The Treasury Department and the IRS have provided guidance announcing that they intend to issue proposed regulations to address the application of the new one-percent corporate stock repurchase excise tax under Code Sec. 4501, which was added by the Inflation Reduction Act of 2022 ( P.L. 117-169).

The Treasury Department and the IRS have provided guidance announcing that they intend to issue proposed regulations to address the application of the new one-percent corporate stock repurchase excise tax under Code Sec. 4501, which was added by the Inflation Reduction Act of 2022 ( P.L. 117-169).

Excise Tax on Stock Repurchases

Beginning in 2023, a publicly traded U.S. corporation is subject to a one-percent excise tax on the value of its stock that the corporation repurchases during the tax year, effective for stock repurchases made after December 31, 2022. Repurchases include stock redemptions, as well as economically similar transactions as determined by the Treasury Secretary.

The excise tax does not apply if:

• the total value of the stock repurchased during the tax year does not exceed $1 million;
• the repurchased stock (or its value) is contributed to an employee pension plan, employee stock ownership plan (ESOP), or similar plan;
• the repurchase is by a regulated investment company (RIC) or a real estate investment trust (REIT);
• the repurchase is part of a reorganization in which no gain or loss is recognized;
• the repurchase is treated as a dividend; or
• the repurchase is by a dealer in securities in the ordinary course of business.

Interim Guidance

The interim guidance is intended to clarify excise tax calculation, and the application of Code Sec. 4501 to certain transactions and other events occurring before the proposed regulations are issued.

Among other things, the interim guidance addresses the $1 million de minimis exception; the stock repurchase excise tax base; redemptions and economically similar transactions; acquisitions by specified affiliates, applicable specified affiliates, or covered surrogate foreign corporations; timing and fair market value of repurchased stock; statutory exceptions; and a netting rule. The guidance also includes illustrative examples.

Reporting

The proposed regulations are anticipated to provide that the stock repurchase excise tax must be reported on IRS Form 720, Quarterly Federal Excise Tax Return. To facilitate the tax computation, the IRS also intends to issue an additional form that taxpayers will be required to attach to Form 720.

Although Form 720 is filed quarterly, the Treasury and IRS expect the proposed regulations to provide that the stock repurchase tax will be reported once per tax year, on the Form 720 that is due for the first full quarter after the close of the taxpayer’s tax year.

Applicability Dates

The proposed regulations are anticipated to provide that rules consistent with those in the guidance will generally apply to repurchases of stock of a covered corporation made after December 31, 2022, and to issuances of stock made during a tax year ending after December 31, 2022. Rules consistent with those in the guidance on purchases funded by applicable specified affiliates will apply to repurchases and acquisitions of stock made after December 31, 2022, that are funded on or after the date the guidance is released to the public.

Until the proposed regulations are issued, taxpayers can rely on the rules in the guidance.

Request for Comments

Interested parties can submit written comments on the rules by or before 60 days after the date the guidance is published in the Internal Revenue Bulletin. Comments may be submitted by the Federal E-rulemaking Portal ( https://www.regulations.gov), or by mail to Internal Revenue Service, CC:PA:LPD:PR ( Notice 2023-2), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044. Refer to Notice 2023-2.

With the transition of leadership from Democrats to Republicans in the House of Representatives comes new rules that legislators must adhere to, and they could have implications on tax policy.

With the transition of leadership from Democrats to Republicans in the House of Representatives comes new rules that legislators must adhere to, and they could have implications on tax policy.

The rules, which were adopted January 9, 2023, almost exclusively along party lines (only one Republican voted against and no Democrats voted in favor), contain two key provisions that could impact tax policy in at least the next two years. First is the need for a supermajority of lawmakers to vote in favor of a tax rate increase and the second is a replacement of the "pay as you go" rule {any increase in spending needs a mechanism to fund the increase) to a "cut as you go" rule, which means any increase in spending in one area must be offset by a cut of funding in another area.

A summary of the rules states that it "restores a requirement for a three-fifths supermajority vote on tax rate increases." This is likely to have little impact as there likely will not be many, if any, proposals to increase taxes coming out of the GOP-led House, especially considering many Republicans signed a pledge to oppose increase taxes.

"While it is unsurprising that Republicans approved this rule, it undermines the stated goal of lowering the debt," Joe Hughes, federal policy analyst at the Institute on Taxation and Economic Policy, stated in a blog on the rules. He added that "there is a clear contradiction in stating that government should take on less debt while putting tight restraints on the government’s ability to pay for things."

The second provision, cut as you go, requires that increases in mandatory spending programs, including programs such as Social Security, Medicare, veterans’ benefits and unemployment compensation, be offset by cuts to other mandatory spending programs.

"This means that the House cannot even pass increases to these programs that are fully paid for with new revenue, unless they also cut some other program in this category," Hughes notes.

This could make passage of enhancements to popular tax provisions more problematic. For example, the cut as you go rule "makes it harder to enhance proven and effective policies like the Child Tax Credit (CTC) or Earned Income Tax Credit (EITC) because the refundable portions of the credits—the amount that can exceed the income tax a family would otherwise owe—are counted as mandatory spending under the budget scoring rules used by Congress," Hughes writes, noting that any improvements would require cuts to another essential program like Social Security or Medicare.

"Advocates and lawmakers hoping to restore the 2021 expansion, or otherwise improve the CTC or EITC, will now face an even tougher road ahead" due to the cut as you go rule, he states.

Despite a significant number of challenges faced by taxpayers in 2022, National Taxpayer Advocate Erin Collins has reason to be more optimistic for 2023.

"We have begun to see the light at the end of the tunnel," Collins wrote in the 2022 annual NTA report to Congress, released on January 11, 2023. "I’m just not sure how much further we have to travel before we see sunlight."

Despite a significant number of challenges faced by taxpayers in 2022, National Taxpayer Advocate Erin Collins has reason to be more optimistic for 2023.

"We have begun to see the light at the end of the tunnel," Collins wrote in the 2022 annual NTA report to Congress, released on January 11, 2023. "I’m just not sure how much further we have to travel before we see sunlight."

She highlighted three key areas that are providing a foundation for the optimistic outlook for this year:

• The IRS has largely worked through its backlog of unprocessed returns, though there still remains a high volume of suspended returns and correspondence;
• Congress has provided funding to increase customer service staffing; and
• The agency has already added 4,000 new customer service and is seeking to add 700 additional employees to provide in-person help at its Taxpayer Assistance Centers.

Collins did caution that while she is optimistic for the future, the near term will still be faced with challenges. In particular, she noted that while new staff are being trained, some of the issues that have been plaguing the IRS will continue.

"As new employees are added, they must be trained." Collins noted. "For most jobs, IRS does not maintain a separate cadre of instructors. Instead, experienced employees must be pulled off their regular caseloads to provide the initial training and act as on-the-job instructors. In the short run, that may mean that fewer employees are assisting taxpayers, particularly experienced employees who are likely to be the most effective trainers."

2022 Challenges

Taking into consideration the time needed to train new employees, some of the challenges from 2022 that were highlighted in the report could still be an issue early into 2023.

That could mean ongoing processing and refund delays. The COVID-19 pandemic created a significant backlog of unprocessed returns and while the IRS has made strides to reducing that backlog, as of December 23, 2022, the agency reported it still has a backlogged inventory of about 400,000 individual tax returns and about 1 million business tax returns. It could also mean ongoing delays in processing taxpayer correspondence and other cases in the Accounts Management function.

Another issue that could linger as more employees are being trained is getting a live person on the telephone. NTA reported that about one in eight calls from taxpayers to the agency made it through to a live person, with hold times for taxpayers averaged 29 minutes.

Tax professionals were able to get through to a live person about ever one in six calls to the Practitioner Priority Service, with about 25 minutes of hold time on average.

"Tax professionals are key to a successful tax administration," Collins wrote. "The challenges of the past three filing seasons have pushed tax professionals to their limits, raising client doubts in their abilities and created a loss of trust in the system."

Recommendations

The report makes a number of recommendations both to the IRS and legislative recommendations to strengthen taxpayer rights and improve tax administration.

To the IRS, Collins recommends a couple of employee-related items – hiring and training more human resource employees to manage the hiring of all agency employees and ensuring all IRS employees are well-trained to do their jobs.

On the IT front, she also recommended improvements to online account accessibility and functionality to make them comparable to private financial institutions’ online accounts, as well as temporarily expand the uses of the documentation upload tool or similar technology. Also, there was a call to enable all taxpayers to e-file their tax returns.

Among the legislative recommendations are amending the “lookback period” to allow tax refunds for certain taxpayers who took advantage of the postponed filing deadlines due to COVID-19; establish minimum standards for paid tax preparers; expand the U.S. Tax Court’s jurisdiction to adjudicate refund cases and assessable penalties; modify the requirement that written receipts acknowledge charitable contributions must predate the filing of a tax return; and make the Earned Income Tax Credit structure simpler.

Imagine you had a camera that could take a snapshot of your financial transactions over the course of a year. This snapshot would give you a chance to see the results of financial decisions you made during the course of the year -- good and bad. By using your recently filed Form 1040 as a "snapshot" of your past spending and investment habits, you can use this information to make better financial decisions in the current year.

Imagine you had a camera that could take a snapshot of your financial transactions over the course of a year. This snapshot would give you a chance to see the results of financial decisions you made during the course of the year -- good and bad. By using your recently filed Form 1040 as a "snapshot" of your past spending and investment habits, you can use this information to make better financial decisions in the current year.

Evaluate your investment strategies. Reviewing Schedule D, Capital Gains and Losses, of Form 1040 for the past few years can be an eye-opener for many people. Did you hold stocks long enough to be entitled to the long-term capital gains rate? Did you try to balance short-term gains with short-term losses? Are you bouncing from one investment trend to another without a long-term investment plan that achieves long-term needs? Are your mutual funds "tax smart"? Looking at your tax return will help you decide whether the investments you now have are the right ones for you.

Become familiar with different types of banking institutions and their products. Find out about CDs, money-market funds, government securities, mutual funds, index funds, and sector funds and how they interrelate with the determination of your tax liability each year. If you are in a high tax bracket and need to diversify away from common stocks, for example, looking into tax-exempt bonds might help, especially if you have state income taxes to worry about, too. You may want to put that knowledge to work in your investment strategy.

Identify borrowing patterns. A look at the interest deductions you claimed on Schedule A, Itemized Deductions, of your Form 1040 can also pinpoint ways for you to let Uncle Sam help pay off some of your loans with tax deductions. Should you have more home-equity interest rather than credit card debt? Are you maximizing -- or overusing -- the advantages of borrowing on margin? Consumer debt is a necessary way of life these days for many taxpayers, but smart borrowing on an after-tax basis can help "tame that tiger."

Revisit medical costs. Should you be taking advantage of the medical expense deduction? Many people assume that with the 7.5 percent adjusted gross income floor on medical expenses that it doesn't pay for them to keep track of expenses to test whether they are entitled to itemize. But with the premiums for long-term care insurance now counted as a medical expense, some individuals are discovering that along with other health insurance premiums, deductibles and timing of elective treatments, the medical tax deduction is theirs for the taking.

Maximize retirement planning efforts. A look at your Form W-2 for the year, and at the retirement contribution deductions allowed in determining adjusted gross income, should tell you a lot. Are you maximizing the amount that Uncle Sam allows you to save tax-free for retirement? Should your spouse set up his or her own retirement fund, too? Are you over-invested in tax-deferred retirement plans, facing a large amount of tax each year after you retire?

Remember, too, that a defined amount of retirement income will only be available for a definite amount of time after you retire. If you are spending down your retirement savings with a five percent return at ten percent per year, those savings will be exhausted in a finite number of years. Do the analysis and try to save enough so that, between Social Security and your savings, you can keep your annual withdrawals to under five percent per year and still meet living expenses.

Extrapolate into the future. Review your Form 1040 like you would reconcile your checkbook except, instead of balancing your monthly budget in your check register, balance your annual budget in your life's registry. You may already use your checkbook to extrapolate one, three or five months into the future to ensure that your income will cover the bills. So why not use your tax return to extrapolate one, three or five years into the future to develop a plan that will cover your life?

Consider "The Big Picture". Many people ask "How long should I keep my tax returns?" It depends on how much of your own financial history you want to see documented. The tax code requires retention of tax returns for a minimum of three years but the more history you have of your financial progress - or regress - over the years, the more information you will have for your analysis for the future.

When you are reviewing your tax return and learning how you have spent your money during the last year, it may help to review some of what you've learned with the person who prepared the return. In fact, taking this step is very important to enable you to work together to better plan your financial future. Please contact the office if you need additional assistance or have any questions as you review your recently filed return.

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

A. For most people, all interest paid on a home equity loan would be fully deductible as an itemized deduction on their personal tax returns. However, due to changes made to tax laws governing home mortgage interest deduction in 1987, there are limitations and special circumstances that must be considered when determining how much of your home mortgage interest expense is deductible.

Mortgages secured by your qualified home generally fall under one of three classifications for purposes of determining the home mortgage interest deduction: grandfathered debt, home acquisition debt, and home equity debt. Grandfathered debt is simply home mortgage debt taken out prior to October 14, 1987 (including subsequent refinancing of that debt). The other two types of mortgage debt are discussed below. A "qualified home" is your main or second home and, in addition to a house or condominium, can include any property with sleeping, cooking and toilet facilities (e.g., boat, trailer).

Home Acquisition Debt

Home acquisition debt is a mortgage (including a refinanced loan) taken out after October 13, 1987 that is secured by a qualified home and where the proceeds were used to buy, build, or substantially improve that qualified home. "Substantial improvements" are home improvements that add to the value of your home, prolong the useful life of your home, or adapt your home to new uses.

In general, interest expense on home acquisition debt of up to $1 million ($500,000 if married filing separately) is fully deductible. Keep in mind, though, that to the extent that the mortgage debt exceeds the cost of the home plus any substantial improvements, your mortgage interest will be limited. Mortgage interest expense on this excess debt may be deductible as home equity debt (see below).

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to build a new addition to your home, your mortgage interest would be fully deductible.

Home Equity Debt

Home equity debt is debt that is secured by your qualified home and that does not qualify as home acquisition debt. There are generally no limits on the use of the proceeds of this type of loan to retain interest deductibility.

The amount of mortgage debt that can be treated as home equity debt for purposes of the mortgage interest deduction is the smaller of a) $100,000 ($50,000 if married filing separately) or b) the total of each qualified home's fair market value (FMV) reduced by home acquisition debt & debt secured prior to October 14, 1987. Mortgage debt in excess of these limits would be treated as non-deductible personal interest.

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to pay off your credit cards (you really like to shop!), your mortgage interest deduction would be limited to the amount paid on only $100,000 of the home equity debt.

In addition to the above limitations, there are other circumstances that, if present, can affect your home equity debt interest expense deduction. Here are a few examples:

As illustrated above, determining your deduction for mortgage interest paid can be more complex than it appears. Before you obtain a home equity loan, please feel free to contact the office for advice on how it may affect your potential home mortgage interest deduction.