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The IRS has released the annual inflation adjustments for 2026 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

The IRS has released the annual inflation adjustments for 2026 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2026 Income Tax Brackets

For 2026, the highest income tax bracket of 37 percent applies when taxable income hits:

• $768,700 for married individuals filing jointly and surviving spouses,
• $640,600 for single individuals and heads of households,
• $384,350 for married individuals filing separately, and
• $16,000 for estates and trusts.

2026 Standard Deduction

The standard deduction for 2026 is:

• $32,200 for married individuals filing jointly and surviving spouses,
• $24,150 for heads of households, and
• $16,100 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,350 or
• the sum of $450, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,650 for married taxpayers and surviving spouses, or
• $2,050 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2026

The AMT exemption for 2026 is:

• $140,200 for married individuals filing jointly and surviving spouses,
• $90,100 for single individuals and heads of households,
• $70,100 for married individuals filing separately, and
• $31,400 for estates and trusts.

The exemption amounts phase out in 2026 when AMTI exceeds:

• $1,000,000 for married individuals filing jointly and surviving spouses,
• $500,000 for single individuals, heads of households, and married individuals filing separately, and
• $104,800 for estates and trusts.

Expensing Code Sec. 179 Property in 2026

For tax years beginning in 2026, taxpayers can expense up to $2,560,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $4,090,000.

Estate and Gift Tax Adjustments for 2026

The following inflation adjustments apply to federal estate and gift taxes in 2026:

• the gift tax exclusion is $19,000 per donee, or $194,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $15,000,000; and
• the maximum reduction for real property under the special valuation method is $1,460,000.

2026 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2026 is $132,900.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date of 2026 Adjustments

These inflation adjustments generally apply to tax years beginning in 2026, so they affect most returns that will be filed in 2027. However, some specified figures apply to transactions or events in calendar year 2026.

Rev. Proc. 2025-32

IR-2025-103

The IRS has released the 2025-2026 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 2025-2026 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 2025-2026 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 2024-68, I.R.B. 2024-41, 729 is superseded.

Notice 2025-54

The IRS has issued transitional guidance for reporting certain interest payments received on specified passenger vehicle loans made in the course of a trade or business during calendar year 2025. The guidance applies to reporting obligations under new Code Sec. 6050AA, enacted as part of the One Big, Beautiful Bill Act (P.L. 119-21).

The IRS has issued transitional guidance for reporting certain interest payments received on specified passenger vehicle loans made in the course of a trade or business during calendar year 2025. The guidance applies to reporting obligations under new Code Sec. 6050AA, enacted as part of the One Big, Beautiful Bill Act (P.L. 119-21).

Under Code Sec. 163(h)(4), as amended, "qualified passenger vehicle loan interest" is deductible by an individual for tax years beginning in 2025 through 2028. Code Sec. 6050AA requires any person engaged in a trade or business who receives $600 or more in such interest from an individual in a calendar year to file an information return with the IRS and statements to the borrowers. The information return must include the borrower’s identifying information, the amount of interest paid, loan details, and vehicle information.

Recognizing that lenders may need additional time to update their systems and that the Service must design new reporting forms, the Treasury Department and the IRS have granted temporary relief. For calendar year 2025 only, recipients may satisfy their reporting obligations by providing a statement to each borrower by January 31, 2026, indicating the total amount of interest received in calendar year 2025 on a specified passenger vehicle loan. This information may be delivered electronically, through online portals, or via annual or monthly statements.

No penalties under Code Sec. 6721 or 6722 will be imposed for 2025 if recipients comply with this transitional reporting procedure. The notice is effective for interest received during calendar year 2025. The IRS estimates that approximately 35,800 respondents will issue about 8 million responses annually, with an average burden of 0.25 hours per response.

Notice 2025-57

IR 2025-105

The IRS issued updates to frequently asked questions (FAQs) about Form 1099-K, Payment Card and Third-Party Network Transactions (Code Sec. 6050W). The updates reflect changes made under the One, Big, Beautiful Bill Act (OBBBA), which reinstated the prior reporting threshold for third-party settlement organizations (TPSOs) and provided clarifications on filing requirements, taxpayer responsibilities, and penalty relief provisions. The updates supersede those issued in FS-2024-03. More information is available here.

The IRS issued updates to frequently asked questions (FAQs) about Form 1099-K, Payment Card and Third-Party Network Transactions (Code Sec. 6050W). The updates reflect changes made under the One, Big, Beautiful Bill Act (OBBBA), which reinstated the prior reporting threshold for third-party settlement organizations (TPSOs) and provided clarifications on filing requirements, taxpayer responsibilities, and penalty relief provisions. The updates supersede those issued in FS-2024-03. More information is available here.

Form 1099-K Reporting Threshold

Under the OBBB, the reporting threshold for TPSOs has been restored to the pre-ARPA level, requiring a Form 1099-K to be issued only when the gross amount of payments exceeds $20,000 and the number of transactions exceeds 200. The lower $600 threshold established by the American Rescue Plan Act (ARPA) no longer applies. The IRS noted that while the federal threshold has increased, some states may impose lower thresholds, and TPSOs must comply with those state-level reporting requirements.

Taxpayer Guidance

The FAQs explain that a Form 1099-K reports payments received through payment cards (credit, debit, or stored-value cards) or payment apps and online marketplaces used for selling goods or providing services. All income remains taxable unless excluded by law, even if not reported on a Form 1099-K.

If a Form 1099-K is incorrect or issued in error, taxpayers should contact the filer listed on the form to request a correction. If a corrected form cannot be obtained in time, taxpayers may adjust the reporting on Schedule 1 (Form 1040) by offsetting the erroneous amount when filing their return.

New Clarifications and Examples

The updated FAQs include expanded examples to help taxpayers properly determine income and filing obligations:

• Sales of personal items – How to determine taxable gain or nondeductible loss on items sold through online platforms?
• Crowdfunding proceeds – When contributions are taxable income versus nontaxable gifts.
• Backup withholding – How failure to provide a valid taxpayer identification number (TIN) can result in withholding under Code Sec. 3406?
• Multiple Forms 1099-K – How to report combined or duplicate forms properly using Schedule 1 (Form 1040)?

Third-Party Filer Responsibilities

The FAQs reaffirm that merchant acquiring entities and TPSOs are responsible for preparing, filing, and furnishing Form 1099-K statements. There is no de minimis exception for payment-card transactions. Entities that submit payment instructions remain subject to penalties under Code Sec. 6721 and 6722 for failing to file or furnish correct information returns. TPSOs are not required to include Merchant Category Codes (MCCs), while merchant acquiring entities must do so where applicable.

Ticket Sales and Executive Order 14254

The updated FAQs also address Executive Order 14254, Combating Unfair Practices in the Live Entertainment Market, issued in March 2025. The IRS clarified that income from ticket sales and resales is includible in gross income and subject to reporting. Payment settlement entities facilitating these sales must issue Form 1099-K when federal thresholds are met, and non-PSE payors may be required to issue Form 1099-MISC or Form 1099-NEC for payments of $2,000 or more made after December 31, 2025.

Reliance and Penalty Relief

Although the FAQs are not published in the Internal Revenue Bulletin (IRB) and cannot be used as legal precedent, the IRS confirmed that taxpayers who reasonably and in good faith rely on them will not be subject to penalties that allow for a reasonable-cause standard, including negligence or accuracy-related penalties, if such reliance results in an underpayment of tax.

FS-2025-8

IR-2025-107

For 2026, the Social Security wage cap will be $184,500, and Social Security and Supplemental Security Income (SSI) benefits will increase by 2.8 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2026, the Social Security wage cap will be $184,500, and Social Security and Supplemental Security Income (SSI) benefits will increase by 2.8 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax

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

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

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

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

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

For 2026, the wage base is $184,500. Thus, OASDI tax applies only to the taxpayer’s first $184,500 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $184,500.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2026

For workers who earn $184,500 or more in 2026:

• an employee will pay a total of $11,439 in social security tax ($184,500 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $22,878 in social security tax ($184,500 x 12.4 percent).

Additional Medicare Tax

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

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

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

Benefit Increase for 2026

Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2026 by 2.8 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

Social Security Fact Sheet: 2026 Social Security Changes

SSA Press Release: Social Security Announces 2.8 Percent Benefit Increase for 2026

The IRS issued frequently asked questions (FAQs) addressing the limitation on Employee Retention Credit (ERC) claims for the third and fourth quarters of 2021 under the One, Big, Beautiful Bill Act (OBBBA). The FAQs clarify when such claims are disallowed and how the IRS will handle related filings.

The IRS issued frequently asked questions (FAQs) addressing the limitation on Employee Retention Credit (ERC) claims for the third and fourth quarters of 2021 under the One, Big, Beautiful Bill Act (OBBBA). The FAQs clarify when such claims are disallowed and how the IRS will handle related filings.

Limitation on Late Claims

ERC claims filed after January 31, 2024, for the third and fourth quarters of 2021 will not be allowed or refunded after July 4, 2025, under section 70605(d) of the OBBBA.

Previously Refunded Claims

Claims filed after January 31, 2024, that were refunded or credited before July 4, 2025, are not affected by this limitation. Other IRS compliance reviews, however, may still apply.

Withdrawn Claims

An amended return withdrawing a previously claimed ERC after January 31, 2024, is not subject to section 70605(d). The IRS will process such amended returns.

Filing Date

An ERC claim is considered filed on or before January 31, 2024, if the return was postmarked or electronically submitted by that date.

Processing of Other Items

If an ERC claim is disallowed under section 70605(d), the IRS may still process other items on the same return.

Appeals Rights

Taxpayers whose ERC claims are disallowed will receive Letter 105-C (Claim Disallowed) and may appeal to the IRS Independent Office of Appeals if they believe the claim was timely filed.

FS-2025-7

IR-2025-106

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

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

When Sales of Livestock are Involuntary Conversions

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

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

Livestock Sold Because of Weather

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

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

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

• draft,
• dairy, or
• breeding purposes.

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

Persistent Drought

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

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

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

What Areas are Suffering from Drought

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

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

However, the IRS also provided a list of areas where the year ending on August 31, 2025, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.

Notice 2025-52

IR-2025-93

The IRS and Treasury have issued final regulations setting forth recordkeeping and reporting requirements for the average income test for purposes of the low-income housing credit. The regulations adopt the proposed and temporary regulations issued in 2022 with only minor, non-substantive changes.

The IRS and Treasury have issued final regulations setting forth recordkeeping and reporting requirements for the average income test for purposes of the low-income housing credit. The regulations adopt the proposed and temporary regulations issued in 2022 with only minor, non-substantive changes.

Low-Income Housing Credit

An owner of a newly constructed or substantially rehabilitated qualified low-income building in a qualified low-income housing project may be eligible for the low-income housing tax credit (LIHTC) under Code Sec. 42. A project qualifies as a low-income housing project it satisfies certain set-aside tests or alternatively an average income test.

Under the average income test, at least 40 percent (25 percent in New York City) of a qualified group of residential units must be both rent-restricted and occupied by low-income individuals. Also, the average of the imputed income limitations must not exceed 60 percent of the area median gross income (AMGI).

Recording Keeping and Reporting Requirements

The regulations provide procedures for a taxpayer to identify a qualified group of residential units that satisfy the average income test. This includes recording the identification in the taxpayer’s books and records, including a change in a unit’s imputed income limit. The taxpayer also must communicate the annual identification to the applicable housing agency.

The final regulations clarify the submission of a corrected qualified group when the taxpayer or housing agency realizes that a previously submitted group fails to be a qualified group. The housing agency is also allowed the discretion to permit a taxpayer to submit one or two lists qualified groups of low-income units to demonstrate compliance with the minimum set-aside test and the applicable fractions for the building.

(T.D. 10036)

Holiday season - a time for giving to friends and family, but not, you hope, to the IRS. Many, if not most, people are aware that the Tax Code imposes a tax on certain gifts, but not everyone is certain as to how this works. How do you know when you've given the gift that keeps on taking - a taxable gift?

Exclusion Amount

The general rule is that there is a designated limit above which gifts become taxable to the giver. For the 2009 tax year, that limit is $13,000. The gift tax threshold is from each donor to each recipient per year. In other words, a donor may give multiple gifts to a single recipient in 2009 up to $13,000, and may repeat this with an unlimited number of recipients without incurring gift tax liability.

Furthermore, married couples may give up to $26,000 during 2009 to each recipient in a year without incurring tax, but to do this, they must indicate on a gift tax return that they are electing to split the gift.

Contributions to so-called 529 plans are subject to this limitation, except that a donor may "front-load" giving by contributing up to $60,000 to an individual's account in a single tax year and counting the gift against that year and the four succeeding years. This does make any gifts to that individual in the subsequent years taxable.

Exceptions to the Rule

Some gifts do not count against this threshold. There is no limitation on gifts to spouses or charitable organizations (although there are limits on the tax benefits of charitable contributions). Payments for medical or educational expenses also do not count against the threshold if the money is paid directly to the source of the expenses. A gift of $15,000 to a relative for college tuition is a taxable gift, but a $15,000 payment to the college is not.

Even when a gift exceeds the threshold, it is not necessary to pay tax on the gift. This is because in addition to the annual exclusion amount, there is a lifetime credit against the estate and gift tax. The credit effectively exempts the first $3.5 million of taxable gifts from gift tax in 2009, and must be claimed by filing a gift tax return, Form 709.

The gift tax applies not only to gifts of cash, but also to property. The value of property given as a gift counted against the exclusion amount is the fair market value of the property at the time of the gift, whether the gift is of stocks and other securities or more traditional holiday presents, including food and drink.

The Business Context

Sometimes, gift giving makes for good business. However, even if you give an employee or business contact a gift completely out of gratitude, with no expectation of profit in return, the IRS treats these gifts as business gifts. As such, certain tax rules apply. Gifts of cash within a business context are always taxed to the recipient, whether an employee, contractor or other business. Gifts of property are similarly taxed subject, however, to a de minimis exception for small gifts of approximately $35 or less. The silver lining for this rule is that if it is taxable to an employee, it is also deductible by the employer. In addition, that rule also has a favorable exception within it: the employer may deduct the cost of a de minimis gift or the cost of a general holiday office party (subject to the entertainment deduction limitations).

To sum up, a taxable holiday gift occurs when the total value of all gifts, both of money and property, to an individual over the course of a year, excluding direct payments for medical and educational expenses, exceeds the exclusion amount, which is currently $13,000. When given with a business context, however, it is the recipient and not the giver who is generally subject to tax. Nevertheless, certain important exceptions apply within that general rule. If you need further assistance in sorting out the tax repercussions of holiday gift giving, please feel free to contact this office.

Given a choice between recognizing income now or in a later year, most people want to be paid now and be taxed in a later year.  As a practical matter, however, an employee cannot defer compensation after performing services and becoming entitled to payment.  Routine compensation earned over a prescribed pay period -- a week, two weeks, or a month, for example - usually is paid or made available in the same year it was earned.  Recognition of the income cannot be put off to a later year.

If the employee earns compensation in one year but will not receive it until the following year, the amount is treated as deferred compensation (unless the employer has funded or secured its obligation to pay, or the 2 1/2 month rule, noted below, applies). If an amount is treated as deferred compensation, the employer cannot take a deduction until the year the employee includes the compensation in income. This rule applies even if the employer is on the accrual basis and all events have occurred that entitle the employee to a specific bonus amount. This "matching" principle is contained in Code Sec. 404(a)(5).

The 2 1/2 Month Rule

However, payments made in the first 2 1/2 months of the end of the year that the services were performed are not treated as deferred compensation. This allows the employer to accrue and deduct the compensation in the year it is earned (the year the services were performed), not the later year when it is paid. Nevertheless, the employee still is entitled to defer his or her recognition of income into the next year if certain conditions are satisfied.

Employers who want to spare their employees from being taxed in the year a bonus is earned should not make any amounts available to the employee until the following year. This is particularly important if the employee earns a bonus based on an objective measure, such as corporate earnings. If the bonus is paid solely in the employer's discretion, the amounts will not be taxable until the year paid. If the bonus is paid within the first 2 1/2 months of the following year, the amount is not deferred compensation, and an accrual-basis taxpayer can deduct the bonus in the year the employee performed the services.

Elective Deferral Requirements

If an employer wants to give the employee an election to defer the bonus, it is necessary to look to Code Sec. 409A, enacted in the American Jobs Creation Act of 2004. Under Code Sec. 409A, a bonus based on measures of the company's or the individual's performance is treated as deferred compensation. If the bonus is based on services performed over a 12-month period or longer, the employee must make an election to defer income at least six months before the end of the bonus period.

The tax rules are very liberal for individuals in the armed forces who are serving in a combat zone. The combat zone extension automatically extends the date for paying tax or claiming a refund, as well as for filing. The extension also applies to paying estimated tax.

Generally, the time period for filing returns, paying taxes or claiming a credit or refund is suspended for the period of the taxpayer's service in the combat zone plus 180 days. The time period is similarly suspended while the taxpayer is hospitalized because of a combat-related injury, or while the individual is missing in action, plus 180 days. If the taxpayer is hospitalized in the U.S., the maximum extension period is five years from the date the taxpayer returns to the U.S.

Example. Sandra is deployed to serve in a combat zone on September 15, 2005. Sandra does not make her third estimated tax payment for the year, due the same day.  The combat zone extension extends her deadline for making her third estimated tax payment for the period of her service in the combat zone plus 180 days after her last day in the combat zone.

Who qualifies?

The extension is available to all persons serving in the U.S. Armed Forces in a combat zone. This includes regular military personnel as well as National Guard and Reserve personnel. Civilian support personnel under the direction of the U.S. Armed Forces also qualify.

Red Cross personnel serving in a combat zone also may take advantage of the extension. Accredited press correspondents similarly qualify.