The Internal Revenue Service (IRS) announced that the 2025 tax season will commence on January 27 of this year. The IRS will provide expanded and enhanced tools to help improve customer service.

An estimated 140 million taxpayers will file tax year 2024 returns by the April 15 deadline. Of those returns, the IRS expects more than half will be filed with the help of a tax professional.

The IRS continues to modernize and add customer support solutions. The improvements include more text and voice assistance and an expanded IRS Individual Online Account. There will also be new warnings that will alert taxpayers to the latest scams and schemes.

The IRS highlighted several free filing options. These include the Direct File program, the Free File program, the Volunteer Income Tax Assistance program, the Tax Counseling for the Elderly program and MilTax, a Department of Defense program.

1. Direct File — The Direct File online program is available in 25 states this year. The 12 states from 2024 were Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington State, and Wyoming. The 2025 tax filing system season will add the states of Alaska, Connecticut, Idaho, Illinois, Kansas, Maine, Maryland, New Jersey, New Mexico, North Carolina, Oregon, Pennsylvania, and Wisconsin. There will be a new data import tool to allow information to be imported from your IRS online account. A new chatbot will help guide taxpayers through Direct File’s eligibility requirements. A live chat with IRS representatives will also be available in English and Spanish. In addition to the Earned Income Tax Credit, Child Tax Credit and Credit for Other Dependents, the current Direct File system will cover the Child and Dependent Care Credit, Premium Tax Credit, Credit for the Elderly and Disabled and Retirement Savings Contribution Credits. The Direct File program is limited to taxpayers claiming the standard deduction and will permit deductions for student loan interest, educator expense or Health Savings Accounts (HSAs).

2. Free File — The Free File program is now available and offers free tax-preparation software from eight commercial companies. Taxpayers must go to the IRS Free File page on IRS.gov. While some vendors have different limits, Free File is available for taxpayers with adjusted gross income (AGI) of $84,000 or less. One of the eight options is available in Spanish. Returns prepared during January will be submitted to the IRS on January 27.

3. Other Free Options — For those individuals who desire a free option with assistance, there are the Volunteer Income Tax Assistance and the Tax Counseling for the Elderly programs. The IRS has trained volunteers to help eligible taxpayers with these programs. In addition, the Department of Defense sponsors MilTax, a program for all military members and qualifying veterans.

The IRS highlighted several new enhancements designed to improve customer support. There are expanded hours at the Taxpayer Assistance Centers. The IRS has increased the number of staff available on phone lines, aiming for an 85% service level this year.

More taxpayers continue to create an IRS Individual Online Account. With this account, taxpayers can review details from a tax return, request an Identity Protection PIN, obtain account transcripts and sign various forms, including powers of attorney. Taxpayers with an online account will also benefit from new notices with educational information on potential scams and schemes.

The IRS has also added virtual assistance. There are voicebots in both English and Spanish to assist taxpayers. The voicebots use natural language processing and are available by clicking the "Chat” button on the lower right corner of some IRS web pages.

A goal for the IRS is to process tax refunds in less than 21 calendar days. This is generally the result for taxpayers who filed electronically. Taxpayers who submitted a paper return can typically access their return information about four weeks later. The IRS also explains that paper refund checks are 16 times more likely to be lost, misdirected, stolen or not cashed.

With the complexity of the tax system, more than one half of taxpayers continue to use a CPA, an enrolled agent or other tax professional to assist them in filing their return. The IRS reminds taxpayers they can use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications to find a qualified individual.

Roth Catch-Up Proposed Regulations

On January 13, 2025, the Internal Revenue Service (IRS) issued proposed regulations on Roth catch-up contributions (REG-101268-24). The proposed regulations cover Section 414(v) of the Code. This section relates to elective deferrals and catch-up contributions for individuals age 50 and older.

Section 414(v)(2)(B) allows individuals to make elective deferrals. Individuals over the age of 50 may also make a catch-up contribution. The Secure 2.0 Act allowed individuals of age 60, 61, 62 or 63 to make an enhanced catch-up amount. The 401(k) maximum amount for 2025 is $23,500. Individuals of age 50 and older may make a catch-up contribution of $7,500. However, individuals of age 60, 61, 62 or 63 may make an enhanced catch-up amount of $11,250.

In August 2023, the IRS published Notice 2023-62, 2023-37 IRB 817. The Notice covered various provisions that affect catch-up contributions deemed as Roth contributions.

Proposed Reg. 1.401(k)-1(f)(5)(iii) states that certain individuals who make a catch-up contribution will be required to consider that a Roth contribution. This is referred to as "Rothification" of catch-up contributions. Proposed Reg. 1.414(v)-2(a) states that Rothification would apply to individuals with Federal Insurance Contributions Act (FICA) wages over $145,000.

One of the questions that commentators raised is whether Roth contributions made any time during the year may be counted toward the Roth catch-up requirement. The proposed regulations indicate that "if a catch-up eligible participant’s total elective deferrals that are designated Roth contributions over the course of a calendar year or taxable year equal or exceed the total elective deferrals that are determined to be catch-up contributions, then the participant would satisfy the Roth catch-up requirement."

Another issue raised by commentators is the opportunity to correct violations of the Roth catch-up requirement. The proposed regulations set forth a Form W-2 correction method. The proposed regulations under Section 414(v) will apply to contributions that "begin more than 6 months after the date that final regulations amending Section 1.414(v)-1 are issued.”

No Tax on Tips Act Introduced

A bipartisan group of Representatives and Senators introduced companion bills in the House and Senate. The bills have the title "No Tax on Tips Act."

Representative Vern Buchanan (R-FL) stated, "Florida's tourism-driven economy thrives because of the hardworking men and women in our restaurant and hospitality industries, many of whom rely on tipped wages to support their families." He emphasizes that the No Tax on Tips Act will have a maximum deduction of $25,000 and will not be available for highly compensated employees. The bill also requires the Secretary of the Treasury to publish regulations to limit the deduction to waiters, hospitality workers and those employees who are traditionally tipped.

Buchanan notes Florida residents tip an average of 21.68%. The Florida tourism industry supports over one million restaurant and food service employees.

Representative Byron Donalds (R-FL) also supported the act. He stated, "Americans deserve to take home more of what they have earned." Donalds has been a previous supporter of the bill.

A bipartisan group of Senators introduced the companion legislation. Senator Rick Scott (R-FL) indicated that he believes the bill will provide significant support to help "families keep more of their hard-earned dollars." Senator Ted Cruz (R-TX) stated, "American workers in many industries rely on tipped wages to make ends meet."

Two Democratic Senators supported the bill. Senator Jacky Rosen (D-NV) noted, "Nevada's service and hospitality workers are the backbone of our economy, and they deserve financial relief at a time when they are getting squeezed by rising costs." Senator Catherine Cortez Masto (D-NV) continued, "Working families in Nevada deserve a break, and this bipartisan bill will put more money in their pockets."

Several associations supported the bill. National Restaurant Association Executive Vice President for Public Affairs, Sean Kennedy, stated, "Eliminating taxes on tips would put cash back in the pocket of a significant number of workers in the restaurant and foodservice industry and could help restaurant operators recruit industry workforce."

Nina Daily, Executive Director of the Professional Beauty Association, noted, "As the second most-tipped sector after restaurants, we deeply value the Senator’s efforts to support the 1.3 million licensed beauty professionals and the employers who sustain this vital industry across the United States."

Editor's Note: The Senate bipartisan group will be quite influential in promoting this bill. The sponsors recognize it will be a challenge to limit the use to the intended purpose. As such, the legislation will need to address the potential abuse of these provisions.

Applicable Federal Rate of 5.4% for February: Rev. Rul. 2025-5; 2025-7 IRB 1 (16 January 2024)

The IRS has announced the Applicable Federal Rate (AFR) for February of 2025. The AFR under Sec. 7520 for the month of February is 5.4%. The rates for January of 5.2% and December of 5.0% 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.”