Homeownership and taxes: Things taxpayers should consider when selling a house

IRS Tax Tip 2021-83, June 10, 2021

It’s important for taxpayers to understand how selling their home may affect their tax return. When filing their taxes, they may qualify to exclude all or part of any gain from the sale from their income.

Here are some key things homeowners should consider when selling a home:

Ownership and use

To claim the exclusion, the taxpayer must meet ownership and use tests. During a five-year period ending on the date of the sale, the homeowner must have owned the home and lived in it as their main home for at least two years.

Gains

Taxpayers who sell their main home and have a gain from the sale may be able to exclude up to $250,000 of that gain from their income. Taxpayers who file a joint return with their spouse may be able to exclude up to $500,000. Homeowners excluding all the gain do not need to report the sale on their tax return.

Losses

Some taxpayers experience a loss when their main home sells for less than what they paid for it. This loss is not deductible.

Multiple homes

Taxpayers who own more than one home can only exclude the gain on the sale of their main home. They must pay taxes on the gain from selling any other home.

Reported sale

Taxpayers who don’t qualify to exclude all the taxable gain from their income must report the gain from the sale of their home when they file their tax return. Anyone who chooses not to claim the exclusion must report the taxable gain on their tax return. Taxpayers who receive Form 1099-S, Proceeds from Real Estate Transactions, must report the sale on their tax return even if they have no taxable gain.

Possible exceptions

There are exceptions to these rules for some individuals, including persons with a disability, certain members of the military, intelligence community and Peace Corps workers.

Worksheets

Worksheets included in Publication 523, Selling Your Home, can help taxpayers figure the adjusted basis of the home sold, the gain or loss on the sale and the excluded gain on the sale.

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Checking withholding can help taxpayers decide if they need to give their employer a new W-4

IRS Tax Tip 2021-75, May 26, 2021

All taxpayers should review their federal withholding each year to make sure they’re not having too little or too much tax withheld.

Employees, retirees and self-employed individuals can use the IRS Tax Withholding Estimator to help decide if they should make a change to their withholding. This online tool guides users, step-by-step through the process of checking their withholding, and provides withholding recommendations to help aim for their desired refund amount when they file next year. Taxpayers can check with their employer to update their withholding or submit a new Form W-4, Employee’s Withholding Certificate.

Adjustments to withholding

Individuals should generally increase withholding if they hold more than one job at a time or have income from sources not subject to withholding. If they don’t make any changes, they will likely owe additional tax and possibly penalties when filing their tax return.

Individuals should generally decrease their withholding if they qualify for income tax credits or deductions other than the basic standard deduction.

Either way, those who need to adjust their withholding must prepare a new Form W-4, Employee’s Withholding Certificate. They need to submit the new Form W-4 to their employer as soon as possible since withholding occurs throughout the year.

Individuals who should check their withholding include those:

  • whose spouse is an employee
  • who are working two or more jobs at the same time or who only work for part of the year
  • who claim credits such as the child tax credit
  • with dependents age 17 or older
  • who itemized deductions on prior year returns
  • with high incomes and more complex tax returns
  • with large tax refunds or large tax bills for last year

Tax Withholding Estimator benefits

The IRS Tax Withholding Estimator can help taxpayers:

  • determine if they should complete a new Form W-4.
  • know what information to put on a new Form W-4.
  • save time because the tool completes the form worksheets.

Taxpayers should prepare before using the Tax Withholding Estimator by having their most recent pay statements, information for other income sources and their most recent income tax return. The tool does not ask for sensitive information such as name, Social Security number, address, or bank account numbers.

State or local withholding

Some individuals might also need to adjust their state or local withholding. They can contact their state’s department of revenue to learn more.

More information:

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IRS explains which meals qualify for temporary 100% expense deduction

IRS explains which meals qualify for temporary 100% expense deduction

By Sally Schreiber, J.D.

April 8, 2021

The IRS released guidance on Thursday explaining when the temporary 100% deduction for restaurant meals is available and when the 50% limitation on the deduction for food and beverages continues to apply for Sec. 274 purposes (Notice 2021-25).

Under Sec. 274(n)(1), a deduction for any expense for food or beverages is generally limited to 50% of the amount that would otherwise be deductible. However, the Consolidated Appropriations Act, 2021, P.L. 116-260, enacted a temporary exception to the limitation for amounts paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023, for food or beverages provided by a restaurant (Sec. 274(n)(2)(D)). This temporary 100% deduction was designed to help restaurants, many of which have been hard-hit by the COVID-19 pandemic.

To provide certainty to taxpayers, the IRS guidance explains when the temporary 100% deduction applies and when the 50% limitation continues to apply.

Under the notice, the term “restaurant” means a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises. A restaurant does not include a business that primarily sells prepackaged food or beverages not for immediate consumption, including a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk. The 50% limitation continues to apply to the amount of any deduction otherwise allowable to the taxpayer for any expense paid or incurred for food or beverages acquired from those types of businesses (unless another exception in Sec. 274(n)(2) applies).

The notice explained that an employer may not treat as a restaurant for Sec. 274(n)(2)(D) purposes:

  • Any eating facility located on the employer’s business premises and used in furnishing meals excluded from an employee’s gross income under Sec. 119; or
  • Any employer-operated eating facility treated as a de minimis fringe under Sec. 132(e)(2), even if that eating facility is operated by a third party under Regs. Sec. 1.132-7(a)(3).

The notice is effective for amounts paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023.

— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.

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IRS will recalculate taxes on 2020 unemployment benefits and start issuing refunds in May

COVID Tax Tip 2021-46, April 8, 2021

Normally, any unemployment compensation someone receives is taxable. However, a recent law change allows some recipients to not pay tax on some 2020 unemployment compensation.

The IRS will automatically refund money to eligible people who filed their tax return reporting unemployment compensation before the recent changes made by the American Rescue Plan. These refunds are expected to begin in May and continue into the summer.

Under the new law, taxpayers who earned less than $150,000 in modified adjusted gross income can exclude some unemployment compensation from their income. This means they don’t have to pay tax on some of it. People who are married filing jointly can exclude up to $20,400 – up to $10,200 for each spouse who received unemployment compensation. All other eligible taxpayers can exclude up to $10,200 from their income.

Information for people who already filed their 2020 tax return
This law change occurred after some people filed their 2020 taxes. For taxpayers who already have filed and figured their 2020 tax based on the full amount of unemployment compensation, the IRS will determine the correct taxable amount of unemployment compensation. Any resulting overpayment of tax will be either refunded or applied to other taxes owed.

The agency will do these recalculations in two phases.

First, taxpayers who are eligible to exclude up to $10,200.

Second, those married filing jointly who are eligible to exclude up to $20,400, and others with more complex returns.
Taxpayers only need to file an amended return if the recalculations make them newly eligible for additional federal tax credits or deductions not already included on their original tax return.

For example, the IRS can adjust returns for taxpayers who claimed the earned income tax credit and, because the exclusion changed their income level, may now be eligible for an increase in the EITC amount.

However, taxpayers would have to file an amended return if they did not originally claim the EITC or other credits but are now eligible to claim them following the change in the tax law. Taxpayers can use the EITC Assistant to see if they qualify for this credit based upon their new taxable income amount. If they now qualify, they should consider filing an amended return to claim this money.

These taxpayers may want to review their state tax returns as well.

Information for people who haven’t filed their 2020 tax return
Tax preparation software has been updated to reflect these changes. People who haven’t yet filed and choose to file electronically, simply need to respond to the related questions when preparing their tax returns. These taxpayers should read New Exclusion of up to $10,200 of Unemployment Compensation for information and examples. For those who choose to file a paper return, instructions and an updated worksheet about the exclusion are available on IRS.gov.

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IRS offers guidance on unemployment benefits exclusion

The Internal Revenue Service posted information about how to correctly compute the new exclusion on a portion of unemployment income as Congress pushes the IRS for further tax-filing relief.

The guidance, which the IRS posted on its website Friday, explains a provision of the American Rescue Plan Act that President Biden signed into law last Thursday. Taxpayers who received unemployment benefits in 2020, and whose modified adjusted gross income was less than $150,000, don’t have to pay tax on the first $10,200 in unemployment compensation.

The provision should help millions of taxpayers who lost their jobs last year due to the pandemic. While many states do allow taxpayers to withhold taxes from their unemployment benefits, not all do, and many taxpayers either don’t know they can withhold the money or can’t afford to do it. Many taxpayers are surprised when they learn that unemployment benefits are taxable and find out to their dismay about the requirement when they do their taxes. The new law will be welcome news to many taxpayers who were hoping to get a tax refund for the full amount instead of owing taxes on their unemployment benefits. However, for those who filed early this year, the IRS said taxpayers should not file amended tax returns, which may save some extra work for tax preparers during what is already shaping up to be another hectic tax season.

Internal Revenue Service headquarters in Washington, D.C.Andrew Harrer/Bloomberg
“The IRS strongly urges taxpayers to not file amended returns related to the new legislative provisions or take other unnecessary steps at this time,” said the IRS in a separate statement Friday. “The IRS will provide taxpayers with additional guidance on those provisions that could affect their 2020 tax return, including the retroactive provision that makes the first $10,200 of 2020 unemployment benefits nontaxable. For those who haven’t filed yet, the IRS will provide a worksheet for paper filers and work with software industry to update current tax software so that taxpayers can determine how to report their unemployment income on their 2020 tax return. For those who received unemployment benefits last year and have already filed their 2020 tax return, the IRS emphasizes they should not file an amended return at this time, until the IRS issues additional guidance.”

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IRS and Treasury officials said during a press conference Monday that this statement was still operable, but they’re working on further guidance for taxpayers who have already filed tax returns under the assumption that the full unemployment benefits were taxable before the $10,200 exclusion was signed into law as part of the American Rescue Plan. The IRS is focusing on sending out the third round of Economic Impact Payments as quickly as possible. That process began over the weekend. The officials said they would work on getting the additional guidance as quickly as possible for taxpayers who have already filed returns listing unemployment benefits.

The rules are a little complicated for married taxpayers, but both spouses will be able to benefit from the exclusion. “If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200,” said the IRS. “Amounts over $10,200 for each individual are still taxable. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation.”

The IRS said the exclusion should be reported separately from unemployment compensation. The agency recommended taxpayers and preparers use the updated instructions and an upcoming Unemployment Compensation Exclusion Worksheet to calculate their exclusion and the amount to be entered on Schedule 1, lines 7 and 8. The instructions for Schedule 1 (Form 1040), line 7, Unemployment Compensation, and line 8 on the worksheet, have been updated to reflect the latest changes, and the IRS guidance page shows the revised instructions.

Another wrinkle is that identity thieves have been filing unemployment claims for the enhanced unemployment benefits using stolen personal information, and there have been reports around the country of taxpayers who weren’t unemployed receiving incorrect 1099-G forms from their state. Last month, members of the tax-writing House Ways and Means Committee asked the IRS to help taxpayers with the problem (see story).

The IRS guidance posted Friday doesn’t specifically address this problem, but it does note that taxpayers may receive the Form 1099-G from their state and explains what to do with it. However, the same day the IRS posted guidance about the $10,2000 exclusion, a group of Democrats in the Senate and the House asked the IRS and the Treasury Department to help spread the word about the tax exclusion to help more taxpayers take advantage of it, and avoid the need for them to file an amended tax return to claim it if they have already filed their taxes this year. Senate Majority Whip Dick Durbin, D-Illinois, and Rep. Cindy Axne, D-Iowa, led a group of colleagues in urging Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig to make every effort to ensure that people who received unemployment compensation in 2020 are able to utilize the tax exclusion. In a letter to Yellen and Rettig, they pointed out that the exclusion could reduce the tax bills of unemployed workers by over $1,000.

“We encourage you to determine whether it would be feasible for the IRS to automatically adjust taxable income and deliver refunds without requiring an amended tax return from eligible taxpayers who have already filed,” they wrote. “If this is not possible, we urge you to provide clear, accessible information to ensure eligible taxpayers who have already filed for 2020 can file an amended return as quickly and easily as possible. Treasury and the IRS should conduct a robust public awareness campaign to ensure that individuals who received unemployment benefits in 2020 are aware of this tax exclusion and understand the actions that need to be taken to receive it. This may be especially important for those who could be eligible for a larger Earned Income Tax Credit or Child Tax Credit with this exclusion, or are newly eligible for these credits.”

They noted that the Labor Department estimates that more than 20 million Americans are still receiving some form of unemployment benefits.

 

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American Rescue Plan Act Passes

American Rescue Plan Act passes with many tax components
By Alistair M. Nevius, J.D.
March 10, 2021

The House of Representatives passed the American Rescue Plan Act, H.R. 1319, on Wednesday by a vote of 220–211. It now goes to President Joe Biden for his signature. He is expected to sign it quickly.

H.R. 1319 was first passed by the House on Feb. 27. The Senate made several amendments and passed its version of the bill on March 6. The bill then came back to the House for a final vote on Wednesday.

Among the act’s many provisions are several tax items. Most of the tax provisions that were in the House version of the bill were unchanged in the Senate’s version, but the tax treatment of 2020 unemployment benefits, the phaseout ranges for economic impact payments, and the treatment of student loan debt forgiveness were changed by the Senate.

Here is a look at the final version of the tax provisions:

Unemployment benefits
The act makes the first $10,200 in unemployment benefits tax-free in 2020 for taxpayers making less than $150,000 per year.

Recovery rebates
The act creates a new round of economic impact payments to be sent to qualifying individuals. The same as last year’s two rounds of stimulus payments, the economic impact payments are set up as advance payments of a recovery rebate credit. The act creates a new Sec. 6428B that provides individuals with a $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent (as defined in Sec. 152) for 2021, including college students and qualifying relatives who are claimed as dependents. As with last year’s economic impact payments, the IRS will send out the advance payments of the credit.

For single taxpayers, the credit and corresponding payment will begin to phase out at an adjusted gross income (AGI) of $75,000, and the credit will be completely phased out for single taxpayers with an AGI over $80,000. For married taxpayers who file jointly, the phaseout will begin at an AGI of $150,000 and end at AGI of $160,000. And for heads of household, the phaseout will begin at an AGI of $112,500 and be complete at AGI of $120,000.

The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.

COBRA continuation coverage
The act provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between the date of enactment and Sept. 30, 2021. The act creates a new Sec. 6432, which allows a COBRA continuation coverage premium assistance credit to taxpayers. The credit is allowed against the Sec. 3111(b) Medicare tax. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount.

The credit applies to premiums and wages paid after April 1, 2021, and through Sept. 30.

Under new Sec. 6720C, a penalty is imposed for failure to notify a health plan of cessation of eligibility for the continuation coverage premium assistance.

Taxpayers who receive the COBRA continuation coverage premium assistance credit are not also eligible for the Sec. 35 health coverage tax credit.

Under new Sec. 139I, continuation coverage premium assistance is not includible in the recipient’s gross income.

Child tax credit
The act expands the Sec. 24 child tax credit in several ways and provides that taxpayers can receive the credit in advance of filing a return. The act makes the credit fully refundable for 2021 and makes 17-year-olds eligible as qualifying children.

The act increases the amount of the credit to $3,000 per child ($3,600 for children under 6). The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits.

The IRS is directed to estimate taxpayers’ child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021.

The IRS must set up an online portal to allow taxpayers to opt out of advance payments or provide information that would be relevant to modifying the amount.

The taxpayer in general will have to reconcile the advance payment amount with the actual credit amount on next year’s return and increase taxable income by the excess of the advance payment amount over the actual credit allowed. But taxpayers whose modified AGI for the tax year does not exceed 200% of the applicable income threshold ($60,000 for married taxpayers filing jointly) will have the increase for an excess advance payment reduced by a safe harbor amount of $2,000 per child.

Earned income tax credit
The act also makes several changes to the Sec. 32 earned income tax credit. It introduces special rules for individuals with no children: For 2021, the applicable minimum age is decreased to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.

The credit’s phaseout percentage is increased to 15.3%, and the phaseout amounts are increased.

The credit would be allowed for certain separated spouses.

The threshold for disqualifying investment income would be raised from $2,200 to $10,000.

Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.

Child and dependent care credit
The act makes various changes to the Sec. 21 child and dependent care credit, effective for 2021 only, including making it refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.

The act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.

Family and sick leave credits
The act codifies the credits for sick and family leave originally enacted by the Families First Coronavirus Response Act (FFCRA), P.L. 116-127, as Secs. 3131 (credit for paid sick leave), 3132 (credit for paid family leave), and 3133 (special rule related to tax on employers). The credits are extended to Sept. 30, 2021. These fully refundable credits against payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave.

The act increases the limit on the credit for paid family leave to $12,000.

The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.

The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination.

The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021.

The credits are expanded to allow 501(c)(1) governmental organizations to take them.

Employee retention credit
The act codifies the employee retention credit in new Sec. 3134 and extends it through the end of 2021. The employee retention credit was originally enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and it allows eligible employers to claim a credit for paying qualified wages to employees.

Under the act, the employee retention credit would be allowed against the Sec. 3111(b) Medicare tax.

Premium tax credit
The act expands the Sec. 36B premium tax credit for 2021 and 2022 by changing the applicable percentage amounts in Sec. 36B(b)(3)(A). Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount. A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 as an applicable taxpayer.

Student loans
The act amends Sec. 108(f) to specify that gross income does not include any amount that would otherwise be included in income due to the discharge of any student loan after Dec. 31, 2020, and before Jan. 1, 2026.

Miscellaneous tax provisions
The act amends Sec. 162(m), for years after 2026, to add a corporation’s five highest-compensated employees (besides the employees already covered by Sec. 162(m)) to the list of individuals subject to the $1 million cap on deductible compensation.

The act extends the Sec. 461(l) limitation on excess business losses of noncorporate taxpayers for one year, through 2027.

The act also repeals Sec. 864(f), which allows affiliated groups to elect to allocate interest on a worldwide basis.

The act provides that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase. Similar treatment is afforded SBA restaurant revitalization grants.

The act temporarily delays the designation of multiemployer pension plans as in endangered, critical, or critical and declining status and makes other changes for multiemployer plans in critical or endangered status.

For more on the nontax provisions in the act, see “House Gives Final Approval to $1.9 Trillion Pandemic Aid Bill.”

— Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor-in-chief, tax.

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What taxpayers need to know to claim the earned income tax credit

IRS Tax Tip 2021-06, January 25, 2021

The earned income tax credit can give qualifying workers with low-to-moderate income a substantial financial boost. In 2019, the average amount of this credit was $2,476. It not only reduces the amount of tax someone owes but may give them a refund even if they don’t owe any taxes or aren’t required to file a return. People must meet certain requirements and file a federal tax return in order to receive this credit.

EITC eligibility

  • A taxpayer’s eligibility for the credit may change from year to year, so it’s a good idea for people to use the EITC Assistant to find out if they qualify.
  • Eligibility can be affected by major life changes such as:
    • a new job or loss of a job
    • unemployment benefits
    • a change in income
    • a change in marital status
    • the birth or death of a child
    • a change in a spouse’s employment situation
  • Taxpayers qualify based on their income and the filing status they use on their tax return. The credit can be more if they have one or more children who live with them for more than half the year and meet other requirements.

New this tax season

There’s a new rule to help people impacted by a job loss or change in income in 2020. Taxpayers can use their 2019 earned income to figure their EITC, if their 2019 earned income was more than their 2020 earned income. The same is true for the additional child tax credit. For details, see the instructions for Form 1040 PDF.

2020 Maximum credit amounts allowed

The maximum credit amounts are based on whether the taxpayer can claim a child for the credit and the number of children claimed:

  • Zero children: $538
  • One child: $3,584
  • Two children: $5,920
  • Three or more children: $6,660

2020 income limits

Those who are working and earn less than these amounts may qualify for the EITC:

Married filing jointly:

  • Zero children: $21,710
  • One child: $47,646
  • Two children: $53,330
  • Three or more children: $56,844

Head of household and single:

  • Zero children: $15,820
  • One child: $41,756
  • Two children: $47,440
  • Three or more children: $50,954

Taxpayers who are married filing separately can’t claim EITC.

 

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Tax filing season to start Feb. 12

Tax filing season to start Feb. 12, IRS announces

By Alistair M. Nevius, J.D.

2 hours 28 minutes ago

 

The IRS on Friday announced that it will start accepting and processing 2020 tax returns on Friday, Feb. 12. This is later than in most previous years, when tax season has started in January. The IRS says the delay is due to the extra time it needs for programming and testing its systems following the tax law changes made by the Consolidated Appropriations Act, 2021 (CAA 2021), P.L. 116-260, which was enacted Dec. 27.

According to the IRS, much of the additional programming stems from the second round of recovery rebate credits authorized by the CAA 2021, which taxpayers can claim on their 2020 returns if they do not receive an economic impact payment.

The IRS anticipates starting to issue refunds for taxpayers who claim the earned income tax credit and/or additional child tax credit in the first week of March, for taxpayers who file electronically and provide direct deposit information and have no other issues with their returns.

The IRS says it expects more than 150 million tax returns to be filed this year.

Friday was also the day that IRS Free File products became available for the year. Taxpayers who qualify can use Free File to prepare their returns now. The IRS will then hold the completed returns until it starts processing returns on Feb. 12. MilTax returns — tax services for the military offered through the Department of Defense — will be available starting Jan. 19.

— Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is the JofA’s editor in chief, tax.