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).