Each year, the IRS publishes guidance to encourage taxpayers to prepare for the upcoming filing season. Each taxpayer should consider his or her potential credits, deductions and tax refunds.

• Interest on Tax Refunds — If you received a federal tax refund in 2024, you may also have received additional interest. The IRS will send Form 1099-INT to anyone who received interest with a refund. This interest is taxable income and must be reported.
• Charitable Deductions — With the increase in the standard deduction, the number of taxpayers who itemize declined from approximately 30% to about 10%. If you itemize, you may deduct cash and appreciated property gifts to qualified charitable organizations. The normal cash contribution limit is 60% of adjusted gross income (AGI). The limit for gifts of appreciated stock, land and other property is 30% of AGI. You can combine both cash and property gifts in a single taxable year. If you are over the gift limit, the extra deduction may be used over the next five years. Gifts over $250 will require a receipt from the charity before you file your return. There is more information on charitable deductions in IRS Publication 526, Charitable Contributions.
• Tax refunds in 2025 — Some taxpayers plan to file in January of 2025 and hope to receive a prompt refund. The IRS cautions that some refunds may require a longer period for processing. Delays may be related to IRS efforts to protect against identity theft and refund fraud. The IRS is also required to delay refunds for tax returns that claim an Earned Income Tax Credit (EITC) or an Additional Child Tax Credit. These refunds will likely be issued on or after the middle of February.
• Best Refund Option — The IRS reminds taxpayers that the safest and most convenient way to receive a refund is to use the electronic filing options. Many taxpayers use the IRS Free File or IRS Direct File program. After you file, you may track a refund with the “Where’s My Refund?” Tool on IRS.gov.

Editor's Note: Many individuals with substantial state and local tax deductions, mortgage interest and charitable gifts will itemize deductions. The charitable gifts must be made prior to December 31 of this year. IRA owners over age 70½ and older, may choose to make a qualified charitable distribution (QCD) up to $105,000 in 2024. Plan to contact your IRA custodian as soon as possible to ensure the gift is made before December 31.

SAFE SPACE Exempt Petition Withdrawn

In Students and Academics for Free Expression, Speech, and Political Action in Campus Education, Inc. v. Commissioner; No. 4261-24X; 163 T.C. No. 9, the Tax Court allowed a nonprofit organization to withdraw a petition seeking a declaratory judgment under Section 7428.

Students and Academics for Free Expression, Speech, and Political Action in Campus Education, Inc. (SAFE SPACE) is a Louisiana nonprofit. In 2023, SAFE SPACE submitted IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The Internal Revenue Service (IRS) has not acted on the application for over 270 days. Therefore, SAFE SPACE filed a petition under Section 7428 and requested the Tax Court declare it was exempt under Section 501(c)(3).

However, SAFE SPACE subsequently filed a motion to withdraw the Section 7428 petition. SAFE SPACE and the IRS agreed that the initial Form 1023 application was incomplete. The IRS agreed with SAFE SPACE that it should have time to "perfect" this application. After SAFE SPACE improved the application, it would have the opportunity to file a new petition under Section 7428(a)(2). This would allow SAFE SPACE to include "extensive factual development." The Internal Revenue Service (IRS) joined together with SAFE SPACE in the motion to permit the withdrawal of the declaratory judgment petition. There would be no prejudice as a result of this withdrawal.

If there were a deficiency assessed by the IRS, then a dismissal requires the court to sustain that deficiency. However, because there is no deficiency in this case, the Federal Rules of Civil Procedure (FRCP 41(a)(1)(A)) generally allows for a voluntary dismissal.

An organization that has exhausted its remedies for its exempt application may file a petition under Section 7428. The failure of the IRS to make a determination within 270 days constitutes exhaustion of remedies. Because both the IRS and SAFE SPACE agreed to the withdrawal, the Tax Court granted the motion.

Editor's Note: SAFE SPACE is one of many organizations that engage in advocacy. The basic issue with advocacy organizations is whether it is primarily an educational entity or an advocacy organization. The IRS and Tax Court must attempt to draw lines to determine whether an entity is primarily a Section 501(e)(3) educational organization or a Section 501(e)(4) advocacy organization. The correction of deficiencies in Form 1023 and additional factual data will be helpful for the Tax Court if a new Section 7428 petition is filed.

IRS Prepares for Major 2025 Tax Bill

IRS Commissioner Danny Werfel has indicated that the Internal Revenue Service (IRS) is anticipating a major tax bill in 2025. The Tax Cuts and Jobs Act of 2017 has hundreds of provisions that sunset on December 31, 2025.

Commissioner Werfel stated, "The good news is that if Congress and the President enact together a new tax package that has complexity and moving pieces, that we are at a greater state of readiness because of the investments we have made to strengthen the engine under the hood of the IRS."

The IRS received additional funding from the Inflation Reduction Act. It has updated the information technology infrastructure, attempted to clean up massive IRS data files and engaged in extensive training of new staff. While there is still significant opportunity for improvement, Commissioner Werfel believes that there has been significant progress.

The primary consideration for the extension of all the TCJA provisions is cost. The Congressional Budget Office estimates the cost to be $4.6 trillion over the next decade. Werfel notes the IRS will be tasked with attempting to analyze the budget impact of many new provisions. He notes the IRS will have a "seat at the table" in many of the discussions.

While consulting with Congress on the 2025 tax bill, the IRS also will attempt to improve customer support services. IRS staff will attempt to answer millions of taxpayer phone calls and continue to convert from paper to electronic records. Werfel noted, "I like to say that as a nonpartisan entity, the IRS will work as tirelessly on a new Treasury's priorities for the IRS as we have worked for the outgoing Treasury's priorities."

There are three major areas of discussion for the Senate Finance Committee and the House Ways and Means Committee members. These include individual, corporate and estate taxes.

1. Individual Taxes — There will be major negotiation over tax brackets, the TCJA raised standard deduction and expanded the corporate alternative minimum tax (CAMT) exemption amounts. An ongoing controversy has been whether the $10,000 limit on state and local taxes (SALTs) should be modified.
2. Corporate Taxes — TCJA reduced the corporate rate to 21%. There will be discussions about if this should be changed. Corporate tax negotiations always include provisions for depreciation, expensing and the CAMT.
3. Estate Taxes — TCJA doubled the applicable exclusion amount to $10 million, plus indexed increases ($13.99 million in 2025). This substantial increase reduced taxable estates to under 1% of decedents. If the increased exemption were to sunset in 2026, the indexed amount could be approximately $7 million. This exemption amount and various provisions to limit planning strategies (such as the GRAT, FLP, QPRT and IDGT) will be major discussion points. Because estate tax revenue is far smaller than individual or corporate tax revenue, negotiations may focus on the prior two taxes and there could be modest changes in the estate tax provisions.

Editor's Note: A major issue will be the "pay-fors" involved in the extension of tax reductions. The new administration has indicated that there will be substantial tariffs on Canadian, Mexican and Chinese products. These tariffs may result in substantial tax increases that offset some of tax extensions. The IRS and Congress recognize that 2025 will be a year for major tax reform.

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.”