529 Plans and More

529 Plans

529 plans are a great college savings option. And surprise…they aren’t just for college. Let’s review some key features of these plans

Contributions to 529 plans are treated as gifts to the beneficiary, so generally you can’t contribute more than the annual gift exclusion amount each year… $19,000 in 2025…per beneficiary. But there’s a twist. You can bunch up to five years of 529 contributions. If you do this in 2025, you can contribute $95,000. You’ll be treated as gifting $19,000 to that beneficiary in 2025 and in each of the next four years…2026-29.

You can’t deduct contributions to 529 plans on your federal tax return. But many states give residents a deduction or credit on state tax returns.

Distributions from 529 plans used for college are tax-free. Eligible expenses include the cost of room and board for students enrolled at a college or university at least half-time, tuition, books, supplies, fees, computers and internet access. 529 funds can cover off-campus housing, food and utilities, but the tax-free payout can’t exceed the room and board allowance included in the school’s cost of attendance.

529 funds can also be used tax-free for certain apprenticeship programs. The cost of many postsecondary credentialing programs is now 529-eligible.

529 plans can help pay for K-12 education as well. Tax-free payouts of up to $10,000 per year per beneficiary ($20,000 per year beginning in 2026) can be taken from 529 accounts to pay tuition for elementary and secondary schools. The “One Big Beautiful Bill” has expanded this tax break, so that tax-free payouts can also cover the costs of materials for curricula and online studying, books, educational tutoring, fees for advanced placement tests or college admission exams, and educational therapies performed by a licensed provider to students with disabilities. This OBBB easing begins with distributions from 529 accounts made after July 4, 2025. Note that tax-free 529 payouts cannot be made to cover homeschooling expenses. Also, not all states treat payouts for K-12 schooling as tax-free for state-tax purposes.

SALT Deduction

Let’s take a deeper look at the OBBB’s changes to the SALT deduction cap. The 2017 Tax Cuts & Jobs Act imposed a $10,000 federal limit on the deduction for state and local taxes claimed by itemizers on Schedule A of Form 1040. That $10,000 limit was set to expire at the end of 2025. The OBBB raised the cap to $40,000 for 2025 through 2029. It goes back down to $10,000 beginning in 2030. There is also an income limit. For 2025, the SALT write-off begins to phase out… but not below $10,000…for filers with modified adjusted gross incomes over $500,000… $250,000 for married couples filing separate returns. Modified AGI for this purpose is AGI plus any foreign earned income exclusion, foreign housing exclusion, and certain income excluded from gross income because it was received from sources in Puerto Rico, American Samoa, Guam and the Northern Mariana Islands. The $40,000 cap and income limit increase 1% each year through 2029.

The OBBB doesn’t restrict state workarounds for owners of pass-throughs to help them circumvent the SALT cap. Most states offer these workarounds, commonly known as the pass-through entity tax (PTET) regime, in which partnerships and other pass-through entities can elect to pay an entity-level state income tax instead of having the owners pay state tax on income that is passed through to them. The owners then get a state tax break for their pro-rata share of tax paid by the firm. When an election is made, state income tax payments shift from the business owners, who are subject to the $40,000 SALT cap (or less, based on the owner’s modified AGI), to the pass-through entities, which are not. The House version of the OBBB included language that would have ended these popular state PTET workarounds. The Senate version, which ultimately became law, removed that language.

Payroll Corner

We are excited to update our clients on the latest developments in the payroll world. We will be highlighting payroll topics each month. Information on payroll is provided by Kylie Beloian.

Managing payroll and HR has become increasingly complex for business owners, especially as regulations evolve and workforce expectations change. 70% of business leaders say managing compliance and workforce regulations is one of their biggest operational hurdles.

That’s why many organizations are turning to modern payroll and HR solutions. By automating tax filings, streamlining onboarding, integrating time and attendance, and centralizing employee data, businesses can reduce manual processing by up to 80% while minimizing compliance risks. These tools also provide real-time insights into labor costs, turnover trends, and workforce productivity - empowering leaders to make smarter, data-driven decisions.

Payroll and HR aren’t just administrative tasks anymore - they’re strategic drivers of growth. Companies that leverage integrated solutions are better equipped to attract top talent, retain employees, and stay ahead of changing regulations freeing up time and resources to focus on what matters most: growing the business.

Best,

Kylie Beloian

Kylie.beloian@adp.com

916-756-7095

Tax Update

Congress is now on its month-long recess after passing the so-called One Big Beautiful Bill act. When lawmakers return to D.C. in early Sept… They’ll have lots of items on their to-do list. Here are a few…..

• Pulling off another reconciliation bill this fall is something GOP leaders and Trump would like to see happen. But the odds of them accomplishing this are quite low. Items that could be included in any such bill are further cuts to Medicaid and other provisions that were in the House’s version of the OBBB but were slashed by the Senate parliamentarian because they violated procedural rules.

• Extending the expansions to the premium tax credit is a priority of Dems. The PTC is an Obamacare subsidy for eligible individuals who buy health insurance through the marketplace. Most people who qualify opt for the PTC to be paid in advance directly to the health insurance company to lower their monthly premium payments. During the height of the COVID-19 pandemic, federal lawmakers enhanced the PTC, letting more people qualify and increasing the credit amount. But these expansions are temporary, ending after 2025. Letting these expansions lapse will impact people seeking coverage for 2026 and later years and could cause millions to lose insurance. Don’t be surprised if Dems use this as a negotiating tool. There’s a willingness among some Republicans on Capitol Hill to make a deal with Dems on this issue.

Student Loans

2025 is the last year for an income tax easing on forgiven student loan debt. Most student loan debt, including parent PLUS loans, forgiven in 2021-25 is tax-free for federal income tax purposes. This relief, which was enacted in 2021, is an exception to the general rule that income from the cancellation of indebtedness is taxable. The OBBB, which includes lots of nontax changes to student loans, doesn’t extend the relief. So forgiven college loans are again generally taxable after 2025.

Donations

Heed the substantiation rules to nail down your charitable deduction. These include keeping cancelled checks, electronic fund transfer receipts, credit card statements, or a letter from the charity when making cash donations. A letter or receipt from the charity will suffice for property donations under $250. Also required: Getting a contemporaneous written acknowledgement from the donee for cash or property gifts of $250 or more and filing Form 8283 for noncash donations over $500. Plus obtaining a written appraisal for property gifts valued at over $5,000.

Failing to strictly comply can cost you the write-off, as shown in this case. A man took a $6,760 charitable deduction on Schedule A for donations of property. He attached Form 8283, listing the charity and a description of the donated items. But he didn’t include the donation dates or the items’ values. The Tax Court found these errors fatal and nixed the deduction (Besaw, TC Summ. Op. 2025-7).

Damages

Take a look at the tax rules for receipt of damages or settlement proceeds. Amounts you receive for physical injuries or physical illness are nontaxable. Compensation for emotional distress is generally taxable…with two narrow exceptions. Amounts paid for mental anguish that arises from physical injuries are tax-free. The same applies to reimbursements for medical treatment of emotional trauma.

IRS knows some taxpayers mistakenly report taxable damages as tax-free. On audit, agents will review the court petition, complaint or claim that was filed, showing the original grounds for the lawsuit. They’ll peruse the settlement agreement to see how the document characterizes the amounts paid and received by the parties.

If your settlement is taxable, you’re generally taxed on the gross award… Without reduction for attorney fees. Say the lawyer who represents you in a case in which you are awarded $200,000 receives the money, deducts $60,000 in attorney fees and sends you a check of $140,000. The full $200,000 is taxable to you.

You generally can’t deduct the attorney’s fees…with limited exceptions. For example, a taxpayer may deduct lawyers’ fees on Schedule C if the underlying case was related to his or her business. Also, a plaintiff who receives damages or proceeds in connection with an action involving a claim of unlawful discrimination can take a write-off for attorney fees, thanks to a federal tax law that gives plaintiffs in discrimination cases an above-the-line deduction for such costs. The Tax Court in the above case said that the woman might be able to deduct her lawyers’ fees.

Penalties

Many taxpayers try to assert a reasonable-cause defense to avoid a penalty. In doing so, they must prove their tax position was based on reasonable cause and they acted in good faith. They must show that they exercised the same care that a reasonably prudent person would have under similar circumstances.

Here are key factors IRS looks at in weighing a reasonable-cause defense: The taxpayer’s effort to report the proper tax liability. The taxpayer’s experience, education, knowledge and sophistication with respect to the federal tax laws. Plus reliance on the advice of a tax advisor with the requisite knowledge and expertise, who was provided all relevant information to properly evaluate the tax matter.

Reasonably relying on a CPA’s tax advice gets a couple out of a penalty. The Tax Court decided they engaged in an improper microcaptive insurance scheme and nixed the tax benefits. But it ruled in the couple’s favor on the 20% penalty for substantial understatements, saying they relied in good faith on the advice of a competent tax professional who had full knowledge of the relevant facts and had proposed the transaction to them (CFM Insurance, TC Memo. 2025-83).

Tax Refunds

The White House-mandated end to paper refund checks likely will be delayed. A March executive order mandates that Treasury get rid of paper checks for recipients of benefits, tax refunds and the like after Sept. 30. Federal agencies would instead use electronic fund transfers, prepaid card accounts, direct deposit, etc. Many tax experts believe Treasury won’t be able to meet the Sept. 30 deadline.

IRS

More chaos at IRS. It’s now on its seventh commissioner since Jan. 1. Billy Long, the latest IRS commissioner to come and go, was on the job for less than two months. The new acting head of the agency is Scott Bessent, who will be doing double duty…leading the Service along with his primary job as Treasury secretary…until Trump picks another commissioner who is confirmed by the Senate. This change in leadership couldn’t come at a worse time for IRS, which has a lot on its plate in implementing the tax changes in the OBBB, many of which take effect in 2025, in time for next year’s filing season.

Let's Get Started

Republican lawmakers enacted tax changes. The so-called One Big Beautiful Bill legislation includes over 100 tax sections in its 800-plus pages.

The law makes the tax code more complex. Although most of the tax changes are permanent, some new breaks for individuals are temporary. The changes also have different effective dates. Many take effect this year. Others kick in next year. Lots of the new breaks have income limit thresholds, so that upper-income earners won’t benefit from them. And expiration dates for clean-energy credits differ depending on what type of tax break is at play.

Now it’s time for IRS to implement the changes. This will be a herculean task for an agency that by Sept. 30, 2025, is expected to lose 25% of its total workforce, most through the voluntary deferred resignation program and others via layoffs. Many workers who took the deferred resignation offers are at or near retirement age. The lost experience and know-how will be hard to replenish with those who remain. There has also been lots of turmoil at the executive level within the agency. IRS now has a Senate-approved commissioner in former congressman Billy Long, after going through five other bosses since Jan. 1. But lots of high-level IRS officials have left or are soon leaving the agency, including its chief information officer.

There will be hiccups. For example, next year’s filing season will be delayed. IRS is aiming to start the 2026 filing season around Presidents’ Day, according to IRS Commissioner Long. That’s about three weeks later than normal. The last time the filing season began in Feb. was 2021, during the COVID-19 pandemic.

Don’t look for much live assistance from IRS. Its taxpayer service group has been slashed along with the rest of IRS. It’s expected to be down 9,000 workers. It would be nice if IRS hires temporary workers for its toll-free telephone lines and properly trains them on the new tax law provisions, but that’s unlikely to happen. Yes, there will be people answering the phone…after a long wait…but getting answers to your tax queries on the substantive changes in the OBBB is a bit of a pipe dream.

Social Security

The federal income taxation of Social Security benefits hasn’t changed under the OBBB. Trump had promised to make the benefits fully tax-free. But the complex budget reconciliation process that Republican lawmakers used to pass the OBBB while circumventing the 60-vote filibuster rule in the Senate didn’t allow for this federal income tax change to Social Security benefits.

Below is a summary of the income tax rules for Social Security recipients

• Some people aren’t taxed on their benefits. They include individuals for whom Social Security is the sole or primary source of gross income.

• Many others could owe tax at ordinary income rates on up to 50% or 85% of Social Security benefits, depending on the amount of their provisional income. Provisional income is generally equal to the combined total of (1) tax-exempt interest, (2) 50% of your Social Security benefits and (3) other non-Social-Security income items that make up your adjusted gross income, minus certain deductions and exclusions. Many Social Security recipients have their monthly Part B Medicare premiums paid from Social Security benefits, thus lowering the amount they receive every month. To calculate the amount of Social Security benefits for federal income tax purposes, these taxpayers use the amount prior to the reduction for Medicare premiums. This number can be found in box 5 of the Form SSA-1099 that recipients receive.

• For single filers: If provisional income is less than $25,000, then the benefits are tax-free. If provisional income is between $25,000 and $34,000, then up to 50% of the benefits is taxable. If provisional income is over $34,000, up to 85% is taxed.

• For joint filers: If provisional income is less than $32,000, then the benefits are tax-free. If provisional income is between $32,000 and $44,000, than up to half of benefits is taxable. If provisional income is over $44,000, up to 85% is taxed.

• If you want federal income tax withheld from your Social Security benefits… Complete Form W-4V to have 7%, 10%, 12% or 22% of your benefits taken out.

• Most states exempt Social Security benefits from state income tax. But not all. The outliers that tax all or part of the benefits are Colo., Conn., Minn., Mont., N.M., R.I., Utah, Vt. and W.Va. Many of these have exceptions based on income figures, so check out https://www.kiplinger.com/kpf/tax-social for the details on each state.

Business Taxes

Fewer partnerships and S corps will need to file Schedules K-2 and K-3. The schedules give greater clarity to partners and S corporation owners on how to compute their U.S. income tax liability with respect to foreign tax credits, income from U.S. sources, etc. But there is an exception for many domestic entities. Partnerships with no or limited foreign activity and no foreign partners are exempt from the K-2 and K-3 filing rules, as are S corps with no or limited foreign activity. IRS has now offered more relief. Partnerships with total receipts under $250,000 and total assets under $1 million, and S corps with total receipts under $250,000 and total assets of less than $250,000, needn’t file the Schedules K-2 or K-3.

Estate Taxes

Follow the rules for making federal estate tax portability elections. Portability allows a married decedent’s unused federal estate and gift tax exemption to pass to the surviving spouse. But transferring the unused exemption isn’t automatic. An estate elects portability by timely filing an estate tax return on Form 706. This is so even if the estate is not otherwise required to file a return because its assets and previous taxable gifts made by the decedent are below the normal threshold amount for filing a federal estate tax return on Form 706…$13,990,000 for 2025 deaths. The lifetime estate and gift tax exemption will soar to $15 million for 2026 deaths.

Small estates that fail to timely make the portability election have relief. They must file Form 706 no later than the fifth anniversary of the decedent’s death and include the following at the top of the form: “Filed Pursuant to Rev. Proc. 2022-32 to Elect Portability Under Section 2010(c)(5)(A).” This relief is only for those estates that aren’t otherwise required to file an estate tax return because they are too small. Small estates that missed the five-year date can seek a private letter ruling from the IRS.

Enforcement

A win for a partnership audited under IRS’s partnership audit regime. Beginning with returns of large partnerships filed for the 2018 tax year, IRS audits the partnership’s tax returns, issues its notice of partnership adjustment and collects any additional tax due from the partnership…not from the partners. Alternatively, the partnership has the option of issuing adjusted K-1 forms to partners, who would account for the changes on their own individual tax returns. Partnerships with 100 or fewer partners can opt out of this partnership audit regime.

IRS’s notice of final partnership adjustment isn’t timely, the Tax Court rules. The agent issued a notice of proposed adjustment to the partnership on June 9, 2022. The partnership asked IRS to modify the notice, and it provided backup documents on Feb. 14, 2023. The agent issued the final adjustment notice on Dec. 1, 2023. IRS claimed that its required 270 days to mail the final audit adjustment notice to the partnership began 270 days after it issued the notice of proposed adjustment. IRS relied on language in the pertinent regulations to make this argument. Not so, says the Court. The agent had 270 days from Feb. 14, 2023, to issue the final notice. That is Nov. 13, 2023. So IRS’s Dec. 1, 2023 notice is late (JM Assets, LP, 165 TC No. 1).

"OBBB" The Hits Keep Coming

Part three of The One Big Beautiful Bill Impact.

SALT

The cap on deducting state and local taxes on Schedule A rises to $40,000 for 2025 through 2029. It goes back down to $10,000 beginning in 2030. There is also an income limit. For 2025, the SALT deduction begins to phase out… but not below $10,000…for filers with modified AGIs over $500,000…$250,000 for separate filers. The cap and income limit increase 1% each year through 2029.

Four New Breaks

The 2025 law temporarily offers four new above-the-line deductions, meaning they are available for taxpayers who claim the standard deduction and for those who itemize on Schedule A of the 1040. These four tax write-offs first take effect on 2025 tax returns filed next year, and they end after 2028.

• First, there is a new senior deduction of $6,000 per filer age 65 or older. Married couples with both spouses 65 and older can deduct $12,000. Not every senior will qualify. The deduction begins to phase out for taxpayers with modified AGI over $150,000 on joint returns and $75,000 on single and head-of-household returns.

• Second, up to $25,000 of qualified tips is deductible. The write-off begins to phase out at modified AGIs over $300,000 on joint returns…$150,000 on others. There are lots of rules and complexities, and IRS guidance will be needed.

• Third, up to $12,500 of overtime pay is deductible…$25,000 for joint filers. This write-off begins to phase out at modified AGIs over $300,000 on joint returns… $150,000 on others. And there are many rules, guardrails and knotty technicalities.

• Fourth, individuals with auto loans can deduct up to $10,000 of interest that they pay on loans to buy a new car, minivan, SUV, pickup truck or motorcycle after 2024. Final assembly of the vehicle must take place in the U.S. And the write-off begins to phase out at modified AGI over $200,000 for joint filers…$100,000 for others.

Donations

There’s mixed news for taxpayers who make charitable donations. Nonitemizers can deduct up to $1,000 of charitable cash contributions, starting with 2026 returns filed in 2027. The amount is $2,000 for joint filers. But itemizers who make charitable gifts don’t fare as well, beginning in 2026.

Charitable donations claimed on Schedule A are subject to a haircut. They are deductible only to the extent they exceed 0.5% of adjusted gross income.

Charitable gifts made by C corps also get a haircut. Beginning in 2026, they’re deductible only to the extent that they exceed 1% of taxable income. Excess donations made by itemizers and C corps can be carried forward five years. Note that the 60%-of-AGI limit on cash gifts by itemizers is made permanent.

GOP lawmakers get their wish to expand school choice for K-12 students. There’s a new income tax credit for donating to scholarship organizations. The OBBB gives a nonrefundable federal tax credit of up to $1,700 to individuals who donate cash to qualifying organizations created to provide scholarships to K-12 students. Additionally, scholarship recipients won’t be taxed on the funds. Note that the credit is allowed only for donations to eligible scholarship organizations in states that opt in to the program. This new break is scheduled to begin in 2027.

Itemizers

Upper-incomers will again see their total itemized deductions phased out, beginning in 2026. That’s because the OBBB reinstates a revised version of the sneaky tax hike that applied to pre-2018 returns of wealthy individuals. Essentially, it caps the value of itemized deductions at the 35% income tax rate

Gambling

Bad news for gamblers: Starting in 2026, they can deduct only 90% of losses against their taxable winnings. Now, gamblers report winnings on Schedule 1 of the 1040 and deduct losses on Schedule A to the extent of their reported winnings.

Adoption

There’s a helpful easing to the adoption credit. Beginning with 2025 returns, up to $5,000 of the credit…adjusted annually for inflation…is refundable.

One Big Beautiful Bill Continued

Tax changes take effect this year and next… Thanks to the massive new federal legislation commonly referred to as the “One Big Beautiful Bill,” which President Trump signed as promised on July 4.

There are over 100 tax sections in the OBBB. The changes permanently extend most tax provisions in the 2017 Tax Cuts and Jobs Act that were slated to expire on Dec. 31 and enhance some of them, provide new tax breaks, repeal clean-energy credits in the 2022 Inflation Reduction Act, and much more. Many changes begin in 2025. Others in 2026. Most are permanent. Some are temporary. This newsletter is devoted to the key tax changes enacted in the OBBB.

Tax Rates

Income tax rates for C corps, individuals, trusts and estates stay the same. C corps are taxed at a 21% rate, and individuals have a top rate of 37%. The individual alternative minimum tax easings are permanent, with a few changes.

Standard Deductions

Standard deductions increase by $1,500 for joint filers, $750 for singles and $1,125 for household heads, beginning with 2025 returns filed next year. For 2025 returns, the basic standard deduction is $31,500 for joint filers, $15,750 for singles and $23,625 for heads of household. Filers 65 and older get $1,600 more per spouse on joint returns and $2,000 more on single and head-of-household returns.

Child Credit

The child tax credit rises to $2,200 per qualifying child…up from $2,000… beginning with 2025 returns, and will be annually adjusted for inflation. The refundable part for lower-incomers is $1,700. Filers need Social Security numbers to claim the child credit. On joint returns, at least one spouse must have an SSN. And, as before, each child for whom the credit is claimed must have an SSN.

Child Care

Three breaks for child and dependent care are bigger, beginning in 2026: The child and dependent care credit is more generous. The maximum credit for 2025 is $1,050 for one dependent and $2,100 for two or more dependents. The OBBB increases the top credit to $1,500…$3,000 for two or more dependents.

Working parents can contribute up to $7,500 to a dependent care FSA, beginning in 2026. The 2025 cap for this type of flexible spending account is $5,000. Employers that provide child care for their workers also get more relief. The $150,000 maximum credit is rising to $500,000…$600,000 for small businesses.

SSN’s

Lots of the tax breaks require filers to have Social Security numbers: The $6,000 bonus deduction for seniors. The deductions for tip income and overtime. The American Opportunity and Lifetime Learning credits. Plus more.

Estate Tax

The higher lifetime estate and gift tax exemption is now permanent… And bigger…$15 million starting with 2026 deaths. The exemption for 2025 deaths is $13,990,000. The top federal estate tax rate stays at 40%.

We will be sending out more information about The Big Beautiful Bill in the coming weeks. Stay tuned.

Tax Returns and Disputes

Tax Returns

One question we get asked a lot: How long to keep individual tax returns? You should keep your 1040 for at least three years. That’s how long IRS has to question items on your return and to bill you for any additional tax that may be due. It’s also the timeframe for you to file an amended return and seek a refund. IRS can go back up to six years if over 25% of income is omitted from your return. If fraud is proved, there is no limit. State tax returns may have to be retained longer.

You may want to keep some returns and tax records for more than three years. Here are some examples: Hold on to records that establish the tax basis of securities or real estate for at least three years after you dispose of the property. If you’ve made nondeductible contributions to IRAs or post-tax payments to 401(k)s, save records until three years after the accounts are depleted. If you inherit property that you might eventually sell, you’ll need to know the date-of-death value of the asset, so keep documentation of this figure until three years after you sell the property.

Don’t fret if you need information on a tax return that you’ve thrown out. There are a few ways to get a tax transcript, which is a summary of key data on your tax return. Individuals who have online accounts with IRS can go on its site to access their transcripts and print them out. If you don’t have an online account, you can set one up. Alternatively, you can call IRS toll-free at 800-908-9946 to have a transcript sent to you, or you may submit Form 4506-T by mail. People seeking copies of tax returns must request them by mail on Form 4506.

Tax Disputes

Watch what you cop to in a guilty plea. IRS may use it against you, as a man who pled guilty to criminal tax evasion for the 2014 tax year discovered. After his guilty plea, IRS audited him and assessed a civil fraud penalty for 2014. The Service relied on the disclosures made by the man in his plea agreement for purposes of proving civil fraud. The man claimed this was wrong. But the Tax Court sided with IRS. His guilty plea to tax evasion in his criminal case precludes him from litigating the fraud penalty in his civil tax case (Miller, TC Memo. 2025-41).

Amended Returns

Have lots of patience once you file your amended tax return with IRS. IRS’s processing of most amended individual returns is taking longer than 45 days. Although most people can e-file amended returns, IRS workers manually review them. 63% of Form 1040-X filings processed by IRS’s accounts management function and 73% of such filings processed by the agency’s submission processing function are included in overaged inventory, meaning processing time is greater than 45 days. IRS says it is currently processing paper amended returns received in March 2025. Use IRS’s “Where’s My Amended Return” to check the status of a filed 1040-X.

The One Big Beautiful Bill

Here are some important highlights about The One Big Beautiful Bill.

Lots of back-door deals were made in a bid to secure Republican holdouts. Here are a few examples: The $10,000 cap on state and local tax deductions was hiked to $40,000 to gain the support of GOPers from high-tax states. A tax break for whalers and clean-energy tax easings helped to lure Sen. Lisa Murkowski (R-AK). And a tax break for the space industry pushed by Sen. Rick Scott (R-FL) made it in.

The GOP’s use of budget reconciliation procedures complicated the process. Budget reconciliation requires only a simple-majority vote in the Senate, thus overriding the need for 60 votes in the chamber to defeat a Democratic filibuster. But it has lots of technical rules. We discuss two of these rules below. First, each provision must have a budgetary impact, meaning a change in revenues or expenditures. The Senate parliamentarian ruled against proposals to scrap IRS’s Direct File program, impose red tape on earned income credit filers, deregulate gun silencers, and cut an estimated $250 billion in health care spending.

Second, the bill’s provisions can’t increase deficits outside a 10-year window. This is the reason that many tax changes affecting individuals in the 2017 tax law, which was also passed in Congress using budget reconciliation, were temporary. However, GOPers pushed to make many OBBB tax provisions permanent… Which, under normal accounting rules, violates the 10-year requirement. So GOPers used a controversial accounting gimmick to mask the bill’s cost.

Child Care

Here’s a tutorial on the rules for claiming the dependent care credit. Expenses for the care of your kids under age 13 and other qualifying relatives must be incurred so you can work or look for employment. If you’re taking the credit to help care for a relative who isn’t a qualifying child, such as an aging parent, that person needs to have lived with you for more than six months during the year and be unable to care for him- or herself. You calculate the credit on Form 2441.

The One Big Beautiful Bill would make the credit more generous. For 2025, the credit is worth 20% to 35% of up to $3,000 in care expenses…$6,000 if you have two or more dependents needing care. That makes the maximum credit for 2025 $1,050 for one dependent and $2,100 for two or more dependents. The OBBB would make the credit worth 20% to 50% of up to $3,000 in expenses…$6,000 for two or more dependents. That would make the top credit $1,500 or $3,000 for 2026. If you’re a working parent who would qualify for the dependent care credit… Check whether your employer offers a dependent care FSA benefit option that you can fund with pretax wages. For 2025, you can contribute up to $5,000 to this flexible spending account. The OBBB would hike the cap to $7,500 in 2026. Employers that provide child care for workers can get a tax credit to offset up to 10% of child care resource and referral expenditures and 25% of facility costs. The maximum annual credit is capped at $150,000. Firms use Form 8882 to claim it. The OBBB would hike the credit for facility costs to as much as 40% of expenditures… 50% for small firms…and it would increase the yearly total credit limit to $500,000… $600,000 for small firms. Additionally, more employer costs would be credit-eligible.

Tax Talks

It’s summer, and tax talks are heating up.

Odds are good for major tax changes in the next month or so. But Congress still has work to do before any bill gets to President Trump’s desk.

The House passed its version of tax changes four weeks ago in a very narrow vote…215-214.

The One Big Beautiful Bill has lots of proposals. It would extend many of the expiring tax provisions in the 2017 Tax Cuts and Jobs Act and enhance a few, provide brand new tax breaks that Trump promised on the campaign trail, repeal clean-energy credits for individuals and businesses, and make Medicaid cuts to offset some of the bill’s cost.

The Senate has now released its tax plan.

Its version takes a similar approach to the House bill in that it would extend many of the TCJA’s expiring provisions, scale back energy credits, enact new tax breaks and make Medicaid cuts. But there are also key distinctions, some of which have sparked backlash from factions of Republican lawmakers in the upper chamber and in the House. Changes will have to be made before the Senate votes on any package. But for now, we’ll point out a few major differences between the versions. Note that there are lots of other differences that we don’t have room to discuss here.

Start with the deduction for state and local taxes that individuals claim on Schedule A of their 1040.

The TCJA capped the SALT deduction at $10,000. The House bill would quadruple the cap to $40,000, with the deduction phasing out for filers with modified adjusted gross incomes over $500,000. The Senate bill would permanently keep the cap at $10,000. Senate taxwriters say this is a placeholder because negotiations are still under way on the amount of the limit. The House bill narrowly passed after House GOP leaders and Trump reached a deal with a faction of House members from high-tax states who pushed for a higher cap. Senate leaders fervently hope those members can accept a figure between $10,000 and $40,000. But if they don’t and negotiations hit a standstill, it’s back to the drawing board. Though both versions of the tax bill would roll back clean-energy breaks that were originally enacted in Joe Biden’s 2022 Inflation Reduction Act… The Senate’s plan generally proposes a longer runway for the credits to end.

Three business tax breaks would be fully restored and made permanent.

The Senate plan would revive 100% bonus depreciation, let firms expense their costs for domestic R&D in the year incurred instead of amortizing them over five years, and ease the rules on the limitation on interest deduction write-offs for large firms. The House bill would temporarily restore these three breaks only through 2028.

The Skinny on Business Taxes

Firms that receive over $10,000 in cash from a customer must file Form 8300. These include casinos, car dealers, pawn shops and other types of businesses that tend to take in large amounts of cash. Banks that receive large cash deposits file FinCEN Form 112. These filings help IRS sniff out unreported income of the payers.

Businesses that don’t file accurate Forms 8300 can face large penalties… $340 per 8300 for inadvertent slip-ups or $60 for errors fixed within 30 days. The penalty is much higher for businesses that intentionally disregard the rules.

IRS has a reference guide that instructs firms on their 8300 filing obligation. Reporting is required not only when a customer pays over $10,000 cash at one time, but also for multiple cash payments within 24 hours that total more than $10,000. Note that cash doesn’t include personal checks or funds transmitted from a bank. Filings by the business are due within 15 days of receiving the cash.

There is also a key recordkeeping rule: The business must retain a copy of each Form 8300 it files, along with any supporting documents and statements that it sends to customers, for a mandatory five years from the date of the filing. E-filing is required for firms required to file at least 10 information returns, other than the 8300, during a year. Otherwise, filers can e-file or mail in the form.

A company lacks reasonable cause for its failure to timely file Form 8300… So it must pay penalties assessed by IRS, the Tax Court rules. The business sells cars through an auction house and regularly receives cash payments from buyers, with some payments exceeding $10,000. The firm uses software to help it determine whether and when it should file Form 8300. On audit, IRS determined that the firm filed 266 fewer Forms 8300 than it should have, and IRS assessed delinquency fines. The firm argued it shouldn’t be hit with penalties, claiming it had reasonable cause for failing to file all the required Forms 8300. It argued that software malfunctions outside its control led to the nonfiling. The Tax Court sided with IRS, saying the firm didn’t prove that the software failed to perform as intended, and it didn’t have controls to identify noncompliance (Dealers Auto Auction of Southwest, TC Memo. 2025-38).

Stock Market Changes and Roth IRA Conversions

With the recent volatility in the stock market…

You might be weighing a Roth IRA conversion. Of course, you are responsible for paying income tax on the conversion from a traditional IRA to a Roth IRA for the year you do the switch. But once the money is in the Roth, you can take contributions at any time. And distributions of earnings are free of income tax, provided you’re 59½ or older when you take the payout, and at least five years have passed from the year that you first put funds in any Roth IRA you own, either by contribution or through a Roth conversion.

Present and future income tax rates are key to deciding on a Roth conversion.

If you expect the rate you’ll pay in retirement will be equal to or higher than the rate on conversion, then switching to a Roth IRA can pay off taxwise. If your tax rate in retirement will be lower, then tax-free Roth distributions are less advantageous. Federal income tax rates are low right now, and we think they’ll stay low for a while. Although the lower rates enacted in late 2017 are set to expire at the end of this year, it’s widely thought that President Trump and congressional GOPers will extend them. We have heard some rumbling about a higher federal income tax rate of 40% or so for millionaires, but it’s too soon to know whether this tax hike will come to fruition.

If you do a conversion, don’t tap IRA funds to pay the tax on converted funds.

A Roth conversion is treated as a taxable distribution to you followed by a contribution of those funds to the Roth. The IRA custodian will by default withhold 10% federal tax from the converted funds. This withheld amount is treated as a distribution to you on which you have to pay tax, in addition to the funds that you move to the Roth. That is why experts advise paying tax owed on a Roth conversion with non-IRA funds and requesting that the custodian withhold 0% from the converted IRA money.

Let’s turn to other factors to consider when pondering a Roth IRA conversion.

You don’t need to convert all the funds in your traditional IRA at one time. You can do conversions in increments over time, and space out the income tax hit. Conversions can ease the pain of the 10-year clean-out rule for inherited IRAs. Beneficiaries of inherited Roths would have to empty the accounts within 10 years. But the money would be tax-free to them, unlike beneficiaries of traditional IRAs. Converting can pay off if you expect your IRA assets will soar in value. The same rationale applies if you have IRA assets that now are depressed in value. The additional income from converting can trigger higher Medicare premiums. Individuals with 2023 modified adjusted gross incomes over $212,000 for joint filers and $106,000 for singles pay a monthly surcharge in 2025 for Parts B and D coverage on top of their regular premiums. These figures will be somewhat higher for 2025 MAGI, used for figuring 2027 monthly Medicare premium surcharges. Income from converting from a traditional IRA to a Roth IRA is included in the calculation of MAGI. If you’re subject to required minimum distributions from your traditional IRA… You must take your annual RMD from it in the year of the Roth conversion.

It's The Worst Part

We thought we would provide a little comic relief as we approach Tax Day. Everyone is playing the game and no one likes the worst part of the game, TAXES. Enjoy!

Business Taxes

As Republicans negotiate a tax package…

They’ll have to consider business taxes. Business lobbying groups are pushing for an extension of the 20% qualified business income (QBI) deduction. They also want to bolster three business tax provisions that have been watered down over the last few years.

Let’s first turn to the 20% QBI write-off. Self-employed people, independent contractors, farmers, some landlords, and owners of pass-through entities… such as partnerships, LLCs, and S corporations… can claim the break on line 13 of their Form 1040.

This deduction ends after 2025, unless Congress acts. It was first enacted in the 2017 Tax Cuts and Jobs Act (TCJA) to provide some federal income tax parity between C corporations, which are taxed at a 21% rate, and pass-throughs, in which the individual owners pay income tax on earnings up to a 37% tax rate.

QBI is one’s allocable share of income less deductions from a business.

The rules can get complicated, especially for upper-income individuals… people with incomes greater than $394,600 for joint filers and $197,300 for others. Two special limitations apply. First, the break phases out for upper-incomers in specified service trades or businesses. Second, there is a W-2 wages-paid limitation.

Congressional GOPers want to make the 20% QBI deduction permanent. And they have support from lobbying groups representing Main Street businesses.

Some tax professional groups want the write-off expanded. For example, the American Institute of CPAs wants the specified service trade or business limit for upper-incomers removed, or alternately, an increase to the monetary threshold.

Extending the deduction would cost the government a boatload of money. This popular tax break is in the top 10 largest individual income tax expenditures rounded up by the staff of the bipartisan congressional Joint Com. on Taxation.

Lawmakers also want to fully restore three popular business tax breaks:

Bonus depreciation. Prior to 2023, businesses could deduct the full cost of new and used qualifying assets with lives of 20 years or less. Now, the break is 40%, and next year it falls to 20%. Businesses want 100% bonus depreciation revived.

R&D. Before 2022, firms could fully expense research and development costs in the year incurred. The TCJA changed this for tax years that started after 2021. Businesses are required to amortize their R&D expenses over five years…15 years for overseas research. House and Senate GOPers want the old rules resuscitated.

Interest deductions on business debts of large companies. The TCJA limited many big firms’ net interest write-offs to 30% of adjusted taxable income (ATI), with disallowed interest carried forward. Starting with tax years that began in 2022, depletion and amortization write-offs are accounted for in computing a firm’s ATI. Eliminating these two deductions from the ATI calculation would increase ATI, thus letting firms deduct more interest than if the two deductions were included.

IN CONGRESS

While congressional GOPers debate the best way forward for a big tax plan…

There is some bipartisan consensus on smaller, procedural tax items. Our last Letter highlighted a discussion draft of proposed changes to IRS procedure and administration from the chairman and ranking member of the Senate Finance Com. And earlier this month, four bills to improve tax administration that were supported by IRS’s National Taxpayer Advocate sailed through the House Ways & Means Com. One would help taxpayers whose paper refund checks were stolen, by allowing them to request a replacement refund in the form of a direct deposit. A second proposal would let the National Taxpayer Advocate office hire its own lawyers. The third bill would add clarifying language on IRS’s math error notices. Under the fourth proposal, electronic payments or documents submitted to IRS by midnight on the due date would be timely even if IRS doesn’t receive or process the submissions on that day.

Tax Filing Season

Tax FILING SEASON

IRS started accepting 2024 individual income tax returns on Jan. 27.

Returns for individuals and calendar-year C corps are generally due April 15. Taxpayers in all of Ala., Fla., Ga., N.C. and S.C., and parts of Alaska, N.M., Tenn., Va. and W.Va. have until May 1 to file their 2024 federal tax returns and pay tax due. Victims of the recent wildfires in Southern Calif. have until Oct. 15 to file and pay.

The deadline for calendar-year S corporations and partnerships is March 17. Businesses in the states listed above have until May 1 or Oct. 15 to file returns.

We generally expect a smooth filing season…with one potential major caveat.

Current government funding ends on March 14. If no agreement is reached before then to extend funding, many agencies, including IRS, will shutter on March 15.

If the Service has to close down in mid-March, there will be a disruption.

But the impact would be uncertain because a federal government shutdown has never occurred during a tax return filing season. IRS will still process returns, issue refunds and collect payments. But its ability to provide assistance will suffer.

The fastest way to get your tax refund is to file early, file electronically…

And request for the money to be deposited directly into your bank account. If you have to file a paper return, don’t be surprised if your refund check is delayed.

IRS pays most refunds within 21 days. But some refunds could be held up.

E-filing early can also help protect you from tax-related identity theft. Thieves who use stolen taxpayer identification numbers on fraudulent returns to seek improper refunds typically file the phony returns early in the filing season, so that the Service receives them before legitimate taxpayers file their returns. If you e-file early, IRS will likely process your valid return before any fake return.

Apply for an identity-protection PIN as extra protection from identity theft. The IP PIN is a six-digit number assigned by IRS to help verify a taxpayer’s identity. An IP PIN can also help some filers who claim dependents. IRS will accept Forms 1040, 1040-NR and 1040-SS that are electronically filed, even if a dependent has been claimed on an earlier return filed by someone else, provided the primary listed taxpayer who electronically filed the second federal return includes a valid IP PIN with the filing. To apply for an IP PIN, go to “Get an identity protection PIN (IP PIN)” on IRS’s website.

BJ Kane & Co Tax Filing Guidelines. For accurate and timely preparation of your returns in order to meet the April 15th filing deadline, we recommend that you submit your information as soon as possible. We generally complete returns on a first-in, first-out basis, so the sooner you deliver the returns to us, the better chance you have of getting them done without having to file an extension. Returns for clients who provide us with their information after March 15, 2025, are likely to be extended and prepared after the April 15th deadline. Based on the information we receive, we will project whether you will need to pay additional tax with the extension and notify you in sufficient time to make the necessary arrangements to pay the additional tax. (Please do not hold up the submission of your tax information for K-1s)

Tax Breaks Ending

Congress works best when there’s a deadline. And there’s an important deadline coming up. Many federal tax breaks end after this year: Lower income tax rates. Higher standard deductions and child credit. Larger estate and gift tax exemption. Alternative minimum tax easings. And much more.

Odds for a tax bill this year are quite good. But the process won’t be all smooth sailing. We’ll look at some of the key sticking points that Republican lawmakers will have to work through.

• First is timing. Donald Trump and some GOPers want taxes passed quickly. They want tax changes in one early big bill that would also include border security and energy reform. Others desire a two-pronged plan: Address border and energy first, thinking that would be easier procedurally, and then turn to federal tax changes. On top of this, lawmakers will have to tackle government funding and the debt ceiling.

• Second is the slim House GOP majority and less-than-60 Senate GOP majority. With a one- or two-person House majority, GOPers can’t afford to lose votes. A group of two or more naysayers can wield lots of power and affect what goes in or stays out of any tax bill. Also, Republicans will use budget reconciliation to override the need for 60 votes in the Senate to defeat a filibuster. This procedure has lots of arcane rules, which will make the nonpartisan Senate parliamentarian a key figure to watch.

• Third is the cost. It’s estimated that extending the expiring tax provisions would add $4.6 trillion to the now $36 trillion federal debt. Not included in that cost are the other tax breaks that Trump promised various groups during his campaign.

• Fourth is the issue of tariffs. Trump backs blanket tariffs on imported goods. The tariffs would raise revenue that could be used to help offset the cost of tax cuts, but they would also cause the prices of many everyday items to go up for consumers.

• Fifth is Trump’s campaign vows for even more tax cuts above and beyond what is expiring in 2017’s Tax Cuts & Jobs Act. They include making tips, overtime pay and Social Security benefits tax-free; letting individuals deduct interest that they pay on loans to buy a car; and increasing the child tax credit amount. These extra easings would hike the cost of any tax bill, and there might not be enough GOP support.

• Sixth is how to fix the state and local tax (SALT) deduction taken by itemizers on Schedule A. Currently, there is a $10,000 cap on this write-off. But House GOPers from some high-tax states want to hike the limit or repeal it. If nothing is done, the $10,000 cap disappears. Trump supported lifting the cap on the campaign trail, and he needs the votes of these Republicans from high-tax states to pass a tax bill. But increasing the cap or getting rid of it altogether would cost the government a lot of revenue that Trump and Congress would want to use for other tax cuts.

Important Action Required

Important Information:

RE: CORPORATE TRANSPARENCY ACT — BENEFICIAL OWNERSHIP INFORMATION REPORTING REQUIREMENT

Starting January 1, 2024, a significant number of businesses will be required to comply with the Corporate Transparency Act (“CTA). The CTA was enacted into law as part of the National Defense Act for Fiscal Year 2021. The CTA requires the disclosure of the beneficial ownership information (otherwise known as “BOI”) of certain entities from people who own or control a company.

It is anticipated that 32.6 million businesses will be required to comply with this reporting requirement. The intent of the BOI reporting requirement is to help US law enforcement combat money laundering, the financing of terrorism and other illicit activity.

The CTA is not a part of the tax code. Instead, it is a part of the Bank Secrecy Act, a set of federal laws that require record-keeping and report filing on certain types of financial transactions. Under the CTA, BOI reports will not be filed with the IRS, but with the Financial Crimes Enforcement Network (FinCEN), another agency of the Department of Treasury.

Below is some preliminary information for you to consider as you approach the implementation period for this new reporting requirement. This information is meant to be general-only and should not be applied to your specific facts and circumstances without consultation with competent legal counsel.

What entities are required to comply with the CTA’s BOI reporting requirement?

Entities organized both in the U.S. and outside the U.S. may be subject to the CTA’s reporting requirements. Domestic companies required to report include corporations, limited liability companies (LLCs) or any similar entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

Domestic entities that are not created by the filing of a document with a secretary of state or similar office are not required to report under the CTA.

Foreign companies required to report under the CTA include corporations, LLCs or any similar entity that is formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by filing a document with a secretary of state or any similar office.

ARE THERE ANY EXEMPTIONS FROM THE FILING REQUIREMENTS?

There are 23 categories of exemptions. Included in the exemptions list are publicly traded companies, banks and credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities and certain inactive entities, among others. Please note these are not blanket exemptions and many of these entities are already heavily regulated by the government and thus already disclose their BOI to a government authority.

In addition, certain “large operating entities” are exempt from filing. To qualify for this exemption, the company must:

a)    Employ more than 20 people in the U.S.;

b)    Have reported gross revenue (or sales) of over $5M on the prior year’s tax return; and

c)     Be physically present in the U.S.

WHO IS A BENEFICIAL OWNER?

• Any individual who, directly or indirectly, either:

• Exercises “substantial control” over a reporting company, or

• Owns or controls at least 25 percent of the ownership interests of a reporting company
  

An individual has substantial control of a reporting company if they direct, determine or exercise substantial influence over important decisions of the reporting company. This includes any senior officers of the reporting company, regardless of formal title or if they have no ownership interest in the reporting company.

The detailed CTA regulations define the terms "substantial control" and "ownership interest" further.

WHEN MUST COMPANIES FILE?

There are different filing timeframes depending on when an entity is registered/formed or if there is a change to the beneficial owner’s information.

 - New entities (created/registered in 2024) — must file within 90 days

·       New entities (created/registered after 12/31/2024) — must file within 30 days

·       Existing entities (created/registered before 1/1/24) — must file by 1/1/25

·       Reporting companies that have changes to previously reported information or discover inaccuracies in previously filed reports — must file within 30 days

WHAT SORT OF INFORMATION IS REQUIRED TO BE REPORTED?

Companies must report the following information: full name of the reporting company, any trade name or doing business as (DBA) name, business address, state or Tribal jurisdiction of formation, and an IRS taxpayer identification number (TIN).

Additionally, information on the beneficial owners of the entity and for newly created entities, the company applicants of the entity is required. This information includes — name, birthdate, address, and unique identifying number and issuing jurisdiction from an acceptable identification document (e.g., a driver’s license or passport) and an image of such document.

RISK OF NON-COMPLIANCE

Penalties for willfully not complying with the BOI reporting requirement can result in criminal and civil penalties of $500 per day and up to $10,000 with up to two years of jail time. For more information about the CTA, visit www.aicpa-cima.com/boi.

 YOU CAN FILE ONLINE

HERE

Please contact our office with any questions or concerns.

Taxation of Capital Gains

Let’s discuss the taxation of capital gains, in light of the election and the post-2025 expiration of many provisions in the 2017 Tax Cuts and Jobs Act.

Long-term capital gains get favorable rates. Profits from the sale or exchange of capital assets held for over a year are generally taxed at 0%, 15% or 20%. The rates are based on income thresholds adjusted annually for inflation. For 2024, the 0% rate applies to taxpayers with taxable income up to $47,025 on single returns, $63,000 for head-of-household filers and $94,050 on joint returns. The 20% rate begins at $518,901 for singles, $551,351 for household heads and $583,751 for joint filers. The 15% rate is for filers with taxable incomes between the 0% and 20% break points. Before 2018, long-term capital gains rates were based on your tax bracket. The 0% rate applied to people in the 10% or 15% income tax brackets, the 20% rate hit filers in the 39.6% top bracket, and the 15% rate was for filers in the other brackets. The pre-2018 rules are slated to return after 2025, unless Congress acts.

Kamala Harris proposes to hike the top long-term capital gains rate to 28%. Her proposal would apply only to the extent that a taxpayer’s taxable income exceeds $1 million. For example, a couple reports $1,400,000 in taxable income on their joint return, $500,000 of which is long-term capital gain. $400,000 of the capital gain would be taxed at 28%, and $100,000 would be taxed at 20%. And she may adopt Joe Biden’s idea to tax unrealized capital gains at death. This proposal would treat death as a realization event for income tax purposes… a deemed taxable sale at fair market value, with capital gains and losses reported on the decedent’s final income tax return…with a $5 million lifetime gain exclusion.

Donald Trump wants to make the tax cuts in his 2017 law permanent and take it further with even lower federal income tax rates for individuals. But what else does Trump propose to do with long-term capital gains? He hasn’t said, but Project 2025 might provide some insights into this. This policy blueprint, which was designed for the next Republican administration and spearheaded by the Heritage Fdn., suggests two changes to the capital gains tax.

First, Project 2025 calls for a 15% top long-term capital gains tax rate. It also supports the idea of indexing capital gains for inflation each year. Essentially, if this concept was enacted, taxpayers could increase their tax basis in capital assets by the rate of inflation between the purchase date and time of sale. Say you bought stock in early 2010 for $10,000 and sold it in Jan. 2024 for $35,000. Absent indexing, you’d have a $25,000 long-term capital gain ($35,0000–$10,000). With indexing, using the Chained CPI-U inflation measure, your basis would jump to $13,740, making your gain $21,260 ($35,000–$13,740), thus lowering your tax bill. This idea may sound simple, but it’s not. There are lots of complexities involved. Trump was all over the map on capital gains indexing during his presidency. He first touted the idea and then nixed it. We don’t know where he stands on it now.

PLEASE NOTE; This information is intended to inform and educate not to support or promote any political party.

Question and Answer

With Election Day about a month away… Readers are peppering us with questions on Donald Trump’s and Kamala Harris’s tax plans.

Question #1

“I’m in the midst of starting a small business. Will Harris’s proposal for start-ups help me?”

Answer

It could. Expenses in the start-up phase of a business aren’t currently deductible right away. Firms can elect to write off up to $5,000 of such costs in the first year they actively engage in business, with the rest amortized over 180 months. The $5,000 phases out dollar for dollar once total costs top $50,000. In our Aug. 29 Letter, we mistakenly said the first-year deduction is $10,000. Harris wants to increase the first-year start-up deduction to $50,000. She also calls for a simplified standard deduction for small firms, in lieu of deducting specific expenditures. No specifics yet on the amount. Harris’s proposals aren’t new. While running for president in 2016, Hillary Clinton wanted to raise the deduction for start-up costs to $40,000, and she backed a standard deduction for small businesses to take on their returns.

Question #2

“Where do Trump and Harris stand on the $10,000 SALT deduction cap? “

Answer

Taxpayers who itemize on Schedule A can deduct state and local taxes that they pay, up to a $10,000 cap. After 2025, unless Congress acts, itemizers would again be able to fully write off state and local taxes, as they generally could prior to 2018. Trump has floated axing the cap, but we don’t know how serious this idea is, given that the $10,000 limit was enacted in his late-2017 Tax Cuts and Jobs Act. His economic policy advisers stridently oppose any increase to the $10,000 figure and are instead urging him to lower the cap or eliminate the SALT deduction altogether. Trump recently vowed on social media and at a rally to restore the SALT write-off, saying people in N.J., N.Y., Pa. and other high-tax states would save lots in taxes. Harris has stayed silent so far. But it’s likely that if she’s elected president, she will get lots of pressure from congressional Democrats from high-tax states, who are clamoring for full deductibility of SALT or, alternatively, a higher cap. Here are two points to consider: Eliminating the $10,000 SALT write-off cap would disproportionately benefit upper-incomers. It would also cost the government a lot of money that the future president and Congress could use for other tax cuts.

Question #3

“Does Harris want to limit the gain deferral from like-kind exchanges of realty? “

Answer

It’s possible. When real property used in a business or held for investment is exchanged for like-kind real property, the gain that would otherwise be triggered if the realty were sold can be deferred. Harris wants to cut what she and many Dems see as tax loopholes for businesses and the wealthy. The deferral for like-kind swaps could very well be on that list. Curbing it was included in the 2025 budget proposals for President Biden’s administration. That proposal would cap the amount of deferred gain each year at $500,000 for each taxpayer…$1 million for joint filers. Gains over the $500,000 and $1 million caps would then be immediately taxed.

PLEASE NOTE; This information is intended to inform and educate not to support or promote any political party.

Estate Tax Update

What’s going to happen with the estate tax? Now, the federal lifetime estate and gift tax exemption is $13,610,000, and the highest estate tax rate is 40%. However, after 2025, the $13,610,000 figure will drop, reverting to the 2017 amount, adjusted for inflation… $7 million or so…unless Congress chooses to act.

We don’t know what lawmakers will do. But let’s look at some options out there.

1. The first one is keeping things as they are, meaning extending the current estate tax exemption and maintaining the top 40% tax rate. Donald Trump often says he wants to make permanent the tax cuts in the 2017 law, and we believe that promise would also include the higher lifetime estate and gift tax exemption. Whether Trump wants other additional easings to the estate tax remains to be seen.

2. The second is lowering the tax rate and/or raising the exemption amount. The authors of Project 2025, the blueprint spearheaded by the Heritage Foundation and designed for the next GOP administration, sets forth a federal estate tax rate of no higher than 20% and would make permanent the current estate tax exemption, adjusted for inflation. Some Republican lawmakers want a higher exemption amount.

3. Third is getting rid of the estate tax. A bill that draws strong GOP support in the House and the Senate, the Death Tax Repeal Act, calls for the repeal of the estate tax and the generation-skipping transfer tax. This is not a new idea.

4. Fourth is coming up with a middle-ground estate tax exemption figure, somewhere between the current $13,610,000 and the $7 million amounts.

5. Fifth is doing nothing. This would cause the higher estate tax exemption in the 2017 tax law to automatically lapse, reverting to about $7 million for 2026 deaths. The 40% top estate tax rate would remain in place, as it wasn’t changed in the 2017 law.

6. Sixth is lowering the exemption below 2017’s figure and/or hiking the tax rate. An example is the American Housing and Economic Mobility Act of 2024, a bill introduced in the Senate by Elizabeth Warren (D-MA) and in the House by Emanuel Cleaver (D-MO). The bill sets forth a slew of affordable housing proposals. It also calls for changes to estate and gift taxes to offset the cost of the provisions.

Among the key proposed estate and gift tax changes: Lower the exemption to $3.5 million, an amount last seen in 2009. Replace the current 40% estate tax rate with a series of progressive rates, ranging from 55% for estates over $3.5 million to 75% for estates of billionaires. Reduce the annual gift tax exclusion to $10,000 per donee.

Some online stories say that Kamala Harris endorses the bill’s estate tax plan. But we’ve found no concrete evidence of this. So far, Harris has been mum on the campaign trail when it comes to estate taxes. President Joe Biden in 2020 might have supported a $3.5 million exemption, but he apparently changed course.

PLEASE NOTE; This information is intended to inform and educate not to support or promote any political party.

Election Day

Election Day is a couple of months away… And taxes are on the ballot. Many provisions in the 2017 tax law are slated to expire after 2025. Donald Trump wants the 2017 law made permanent.

Kamala Harris is sticking with this pledge: No tax hikes if you make less than $400,000. We take this to mean that she would give her support to extending the tax breaks in the 2017 law to people earning less than $400,000, which are most taxpayers. Let’s look at other tax ideas Harris supports. Some are new, while others are retreads.

High-income individuals would pay more in taxes, if Harris gets her way. She’d bring back the top 39.6% income tax rate for people making $400,000 or more and hike the 3.8% net investment income surtax to 5% for these taxpayers.

The wealthy would pay more capital gains tax. Long-term capital gains tax would be imposed at ordinary tax rates up to 39.6% (44.6% with 5% NII tax added in) for taxpayers with taxable incomes over $1 million…$500,000 for separate filers.

Similar to Biden, she may want to tax unrealized gains upon death. This proposal would treat death as a realization event for income tax purposes… a deemed taxable sale at fair market value, with capital gains and losses reported on the decedent’s final income tax return…with a $5 million lifetime gain exclusion. And she might back a 25% minimum income tax on the ultrarich… people with at least $100 million in wealth. The tax would apply to taxable income plus unrealized capital gains, meaning the gain on appreciated assets not yet sold or disposed of. If this provision is ever adopted, expect opponents to quickly sue. Some Supreme Court justices don’t look favorably on taxing unrealized gains.

Families, first-time home buyers, tipped workers and others would get breaks. She’d bring back the 2021 expansions to the child credit…hiking the amount from $2,000 per child to $3,600, with monthly payments and full refundability. And she’d make it even bigger, by giving taxpayers a one-time child credit of $6,000, to be claimed on the parent’s tax return for the first year of the child’s life.

Among other proposals: Give first-time home buyers a credit of up to $10,000. Extend the expansions to Obamacare subsidies, allowing more people to get credits for buying health insurance through the marketplace. Plus make tipped income tax-free. There’s radio silence on what she’d do with the state and local tax deduction that itemizers claim on Schedule A. Some Capitol Hill lawmakers from high-tax states are pressuring leadership to get rid of the current $10,000 cap on SALT write-offs.

On business taxes, Harris wants to raise the 21% corporate tax rate to 28%. She would increase the 15% alternative minimum tax on very big corporations to 21%. She’d do away with what she and many Democratic lawmakers see as tax loopholes, while keeping the green-energy tax subsidies enacted in the Inflation Reduction Act. She’d quadruple the 1% excise tax on stock buybacks by publicly held firms. And she has proposed a new credit for home builders who build starter homes.

Lazy Days of August

Though it’s still the lazy days of August… the U.S. celebrated National Lazy Day on Aug. 10… Readers continue to ask us tax questions. One topic that pops up from time to time: Federal taxation of Social Security benefits. So we thought we would review the rules.

Some people aren’t taxed on their benefits. They include individuals for whom Social Security is the sole or primary source of gross income. Many others unfortunately could owe tax at ordinary income tax rates on up to 50% or 85% of Social Security benefits, depending on the amount of their provisional income. Provisional income is generally equal to the combined total of (1) tax-exempt interest, (2) 50% of your Social Security benefits and (3) other non-Social-Security income items that make up your adjusted gross income, minus certain deductions and exclusions.

For single filers: If provisional income is less than $25,000, then the benefits are tax-free. If provisional income is between $25,000 and $34,000, then up to 50% of benefits is taxable. If provisional income is over $34,000, up to 85% is taxed. For joint filers: If provisional income is less than $32,000, then the benefits are tax-free. If provisional income is between $32,000 and $44,000, then up to half of benefits is taxable. If provisional income is over $44,000, up to 85% is taxed. If you want federal income tax withheld, complete IRS Form W-4V to have 7%, 10%, 12% or 22% of your monthly Social Security benefits taken out.

Many tax breaks and income levels are indexed to inflation each year… But not the provisional income thresholds for taxing Social Security benefits. For decades, they have stayed static at $25,0000, $34,000, $32,000 and $44,000. Democrats have proposed bills over the years to raise the thresholds… But they never pass. That’s because the bills also include payroll tax hikes on upper-incomers. For example, in 2022 Dems proposed to increase the $25,000 and $32,000 income thresholds to $35,000 and $50,000. However, that same bill also had the 6.2% Social Security tax for employees and employers kick in again for high-income workers on wages over $400,000. For 2024, up to $168,600 of wages are hit with the 6.2% Social Security tax. The proposed payroll tax hike on upper-income individuals made the bill a nonstarter with Republicans.

Donald Trump wants to end federal taxation of Social Security benefits. On July 31, he posted on Truth Social, his social media platform, that “seniors should not pay tax on Social Security.” He didn’t elaborate on how he would do this.

Most states exempt Social Security benefits from state income tax. But not all. The outliers that tax all or part of the benefits are Colo., Conn., Minn., Mont., N.M., R.I., Utah and Vt. Most of these have exemptions based on income guidelines.