Washington News

The holiday season is a prime time for identity thieves to target victims. With the growth of online shopping, millions of Americans are potentially exposed to online fraudsters. The first line of defense against online attacks is strong passwords.

A previous IRS Commissioner noted, “Taking a few simple steps to protect your passwords can help protect your money and your sensitive financial information from identity thieves, which is critically important as tax season approaches. Protecting your information makes it harder for an identity thief to file a fraudulent tax return in your name.”

Cybersecurity experts have changed their recommendations related to password strategies. Previously, they suggested complex passwords that were different for every online account. Because most individuals have accounts for financial services, social media, online shopping and other purposes, the number of complex passwords needed became too overwhelming and difficult to recall. 

As a result, security experts now recommend longer phrases such as “SomethingYouCanRemember@30.” Here are nine IRS tips to help protect online accounts: 

• Password Length – Eight or more characters
• Combination – Use upper and lowercase letters, numbers and symbols in your password.
• Personal Information – Do not use your city, street, or other personal information in a password. This information is widely available to identity thieves.
• Default Password – Do not use “password” for your password. Change all default passwords.
• Reuse of Passwords – Do not use the same or similar passwords on accounts. For example, if you use Begood!17 as your password, do not simply change it to Begood!18 and Begood!19.
• Email Address – Do not use your email address as a username. Email addresses are easily known by fraudsters.
• Security – If you have a written list of passwords, store them in a safe or locked file cabinet.
• Disclosure – Never give out passwords over the internet. Be very cautious if an email sender asks for your password and claims to be from your bank, the IRS or your employer.
• Password Manager – Consider using a password manager program. Search to find password programs for smartphones or tablets. The best password programs typically have 256-bit encryption.

CRS Report on Estate and Gift Taxes

The Senate Finance Committee and House Ways and Means Committee are preparing for a major tax bill in 2025. To assist in the tax bill preparation process, the Congressional Research Service (CRS) published a report on December 11 that analyzed both estate and gift taxes.

The report notes there is a 40% tax on gifts and estates valued over the 2024 lifetime exemption of $13.61 million ($13.99 million in 2025). In 2017, the Tax Cuts and Jobs Act (TCJA) doubled the exemption levels to $10 million with indexed increases. However, the TCJA limits expire after 2025, and the estimated exemption may be approximately $7 million in 2026.

The estate tax revenue is substantially more than gift tax revenue. There is an annual exemption for present interest gifts of $18,000 in 2024 ($19,000 for 2025) and an unlimited gift tax exemption for transfers to a citizen spouse or to a charity. However, there are income tax limits on charitable gift deductions.

There will be a lively debate in 2025 on estate and gift taxes. Those who support the estate tax will note it is highly progressive and the step up in basis results in the avoidance of large capital gains tax. Supporters of the tax also state it encourages charitable bequests from large estates.

The members of Congress who oppose the tax claim that the levy is on property that has previously been subject to income taxes. In addition, there is a burden on family businesses and farms that may not have the liquidity to pay the tax.

There are six specific sections on the CRS analysis.

1. Revenues –– The estate and gift tax are small portions of federal revenue. In fiscal year 2023, the tax raised $33.7 billion. This was 0.8% of federal revenues and 0.1% of gross domestic product (GDP). The anticipated revenue in fiscal year 2028 would grow to $52 billion if the lower exemption levels are effective. In 2019, there were 2,129 taxable estates. This was 0.07% of total estates. When the exemption was reduced, an estimated 0.21% of estates were taxable. The share of decedents subject to estate tax declined from 2.1% in 2000 to 0.07% in 2019.
2. Progressive Tax–– The estate tax is "the most progressive of the federal taxes, since it applies to the top 0.07% of the wealth distribution." Approximately 59% of the tax is paid by decedents with $50 million or more in their estate. Even if the exemption is reduced, only 0.2% of estates will be subject to tax.
3. Step Up in Basis–– There is an income tax levied on capital assets for the difference between the basis and a recognized sale price. However, assets passing at death receive a step up in basis to the fair market value on the date of death. Many estates have large, appreciated asset values that avoid taxation due to the step up in basis. The CRS study estimates that property with unrealized capital gains is approximately half of estate value in taxable estates. Less than half of the estate assets are likely to have been subject to previous income tax.
4. Charitable bequests–– In 2019, taxable estates made substantial bequests to nonprofits. Approximately 17% of the estates were transferred to charities and qualified for a Section 2055 charitable estate deduction. While gifts during life are subject to deduction limits ranging from 20% to 60% (depending on the gifted property and whether it is transferred to a public charity or private foundation), estates have an unlimited charitable deduction provision. The CRS study notes, "There is also evidence that bequests are more sensitive to tax rates than inter-vivos gifts."
5. Family Businesses and Farms–– The opponents of the estate and gift tax note that it can have a seriously damaging impact on a family business or farm. There have been provisions created to protect these entities. Many family businesses are permitted to pay the estate tax in installments over 14 years. Businesses and farms that are actively operated may qualify for a reduction in value of up to $1.39 million in 2024 ($1.42 million in 2025). Some ranches and farms also qualify for a $500,000 conservation easement provision. Many family businesses benefit from minority interest or lack-of-marketability discounts. The U.S. Department of Agriculture (USDA) estimates that 0.2% of estates in 2023 were farms subject to estate tax. This was approximately 89 farms in 2023. If the exemption were returned to $7 million in 2026, the farms subject to tax would increase from 0.3% to 1.0%. In 2023 an estimated 300 farms or businesses were subject to tax and comprised 8% of taxable estates and 14% of estate tax revenue.
6. Tax Reform Options–– Under current law, the estate tax exemption will revert to approximately $7 million in 2026. The tax writers in Congress could continue the exemption at current levels ($13.99 million in 2025, plus indexed exemptions in future years), change the estate tax rate, or tax unrealized gains at death. They also could change the rules regarding minority interest and lack-of-marketability discounts.

Editor's Note: Both the Majority Leader of the Senate and the Speaker of the House are likely to oppose a reduction in the gift and estate exemption. The three-decade history of tax bills indicates the estate exemption is likely to be used as a bargaining point in the negotiations. While there have been many proposals to reduce the exemption, the final bills usually involve a trade-off with the estate exemption maintained at its current level. Because this is likely to be a large and complex tax bill, the ultimate result may not be known until late 2025.

FinCEN Delays Beneficial Ownership Reporting

The Treasury’s Financial Crimes Enforcement Network (FinCEN) has announced that it will delay the requirement for reporting of beneficial ownership.

The announcement was made on the Treasury beneficial ownership information webpage following a U.S. District Court decision in Texas Top Cop Shop Inc. v. Garland, No. 4-24-cv-00478. The District Court issued a nationwide injunction on December 3 that ruled the beneficial ownership reporting method was in excess of the constitutional authority granted to Congress.

The FinCEN webpage post stated, "While this litigation is ongoing, FinCEN will comply with the order issued by the U.S. District Court for the Eastern District of Texas for as long as it remains in effect. Therefore, reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect."

FinCEN states some business entities may still wish to submit beneficial ownership reports, even though this is now voluntary. Some professional advisors are recommending that their clients follow this course of action until the litigation is resolved.

The beneficial ownership requirement is a result of the Corporate Transparency Act of 2021. The reporting is designed to permit the identification of individuals who directly or indirectly own a business entity.

FinCEN notes that the reports may be used by federal agencies in national security, intelligence or law enforcement. Federal agencies, judges, prosecutors and other federal staff may request the beneficial ownership information that will facilitate fulfillment of their respective duties.

The FinCEN beneficial ownership report applies to companies registered to do business before January 1, 2024, and the initial deadline was January 1, 2025. FinCEN notes the voluntary reports may still be filed on boiefiling.fincen.gov/.

There are 23 different types of exemptions listed on the FinCEN website. Some of the principal exemptions apply to tax–exempt organizations and large operating companies. FinCEN defines a large company as one that has at least 20 full-time employees in the U.S., over $5 million in gross receipts or sales and a physical office in the U.S. Reporting exemptions also apply for inactive entities, an entity that is assisting a tax-exempt organization, a state-licensed insurance producer and most sole proprietorships.

Editor's Note: The beneficial ownership information reporting requirement has been quite controversial. FinCEN will appeal this to the Court of Appeals. Beneficial interest reporting may be delayed until a final decision is rendered by the U.S. Supreme Court.

Applicable Federal Rate of 5.0% for December: Rev. Rul. 2024-26; 2024-49 IRB 1 (15 November 2024)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2024. The AFR under Sec. 7520 for the month of December is 5.0%. The rates for November of 4.4% or October of 4.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2025, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”