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.