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Tax News Now Ep. 12 - 2025 Year End Policy Playbook: OBBBA, Tariffs, and IRS Modernization (Part 1)
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This year-end episode highlights the biggest tax developments of 2025 and what they mean for planning heading into filing season. Mark and his guest walk through the significant individual and business tax changes resulting from the One Big Beautiful Bill Act, tariff policy and other major tax changes.
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Transcript
Introduction and Host Background
00:00:09
Speaker
everyone, I'm your host, Mark Gallegos, tax partner at Portie Brown and tax policy nerd in residence. I'm also an M&A strategist and someone who genuinely thinks reading committee reports is perfectly normal um and it's a good way to relax.
Year-End Tax Review Special
00:00:25
Speaker
But today's episode is a special one because this is our year-end tax v review.
00:00:29
Speaker
The episode where we pulled the together everything that happened in 2025, which was a lot, make sense of the changes, connect the dots, and talk about what it means for practitioners, business owners, and advisors as we head into the filing season.
00:00:42
Speaker
And there's a fun twist. Instead
Major Tax Developments Discussion
00:00:44
Speaker
of me steering the conversation, I'm stepping back into the guest chair, which is exactly where the entire series began. Chris is going to lead us through a deep dive into the biggest tax developments of the year, from the HR1 new tax bill to tariffs to IRS modernization, and how all these moving parts are reshaping the landscape in 2025 26. So whether you're driving, reviewing returns, prepping, or planning meetings, or just trying to make sense of the HR1 bill, this is your third cup of coffee and you're in the right place. So let's get into it.
00:01:16
Speaker
So, Mark, a little role reversal, a little change of hats. This is right where we were back in January, introducing you as the host of Becker's new Tax News Now podcast. And we're going to end the year the same way. But now we've got a lot to talk about for this year.
00:01:36
Speaker
But before we did that, I did want to get your impressions on How you think, like what you think about the podcast, how you thought it's going, your reflection on some of your guests.
00:01:46
Speaker
I think at the year end, it's always good to look back and then look forward. So let's start by looking back and maybe I just wanted to get your impressions on.
Podcast Growth and Impact
00:01:55
Speaker
What do you think about tax news now and the guests you've had on since ah January through now?
00:02:01
Speaker
Yeah, thanks, Chris. um the The Tax News Now podcast has been phenomenal. um And as I look back on the first, I guess, 11 episodes, what stands out most is what we is how we built something into an essential podcast for people to really tune into and get um tax news that in real time. right And we thought we were breaking down the tax updates, but we were treating...
00:02:26
Speaker
more of a professional lifeline
Significant Tax Changes in 2025
00:02:28
Speaker
during one of the most volatile tax years we've seen. You know, i mean, we started the year knowing that there's going reconciliation process and that there will be new tax legislation. and And back in January, we thought, well, will this happen, you know, by the end of the year? Will we be at this episode right now talking about what it potentially looks like? But instead, it went fast and it came out and and that's where we were.
00:02:52
Speaker
um But there are three things that stand out to me in this process. First was the relevance and reach. We've heard from to yeah CPAs and partners and CFOs and controllers and many staff people, people using these episodes as part of their weekly planning. So that was a great thing to hear. Second was the human element, right? Our guests aren't just explaining rules.
00:03:14
Speaker
They're talking about leadership, burnout, client expectations, innovation and what they're doing. And part of the practice, the code doesn't necessarily teach, you know? So I thought that was a very good relevant thing. And third,
00:03:27
Speaker
the narrative continuity. So each episode builds on the one before it it becomes a running commentary and how tax practice is evolving in real time and what we can do along the way.
HR1 Bill Breakdown
00:03:38
Speaker
So I think there's been some really cool things.
00:03:41
Speaker
And also from my impression, we created something that practitioners actually need. And that's incredibly ah rewarding. And I think, you know, we did a great job of really taking tax and making a human aspect of it so that people can really sit back, listen and go, you know what, I'm not alone in this profession. Yeah.
00:04:01
Speaker
I know I really enjoy hearing all about the stories of all the different guests and their backgrounds and how they ended up in where they are today, because there's so many varied stories amongst all the people and what they started thinking they were going to do. And some run went right into accounting. Some found their way there after a long time. Some didn't go into accounting. They went into law. It was just a nice, varied background. then And I also liked hearing all about the the Engage Conference and all the other things that accountants and account tax professionals are doing sort of to make sure that their lives, not just their tax work, is is' fulfilling and and makes makes them you know makes them whole.
00:04:49
Speaker
Absolutely. Yeah. All right. So... We've had a long year and there's been a lot that's happened um from a tax perspective.
00:05:01
Speaker
And I wanted to get from you just sort of your thoughts on, obviously there was, you know, there was tax bills and there was tariffs and there was like a whole bunch. What do you think were the most impactful and significant things from your perspective and then also that of your clients that we saw during these past 11 and a half months or so?
00:05:20
Speaker
Yeah, Chris, 2025 will go down as one of the most consequential tax years since 2017, maybe since 1986, if you really go far that far back in the profession.
00:05:33
Speaker
But we saw transformation at every level, in my opinion. First, we had the HR1, the OBVBA, a the One Big Beautiful Bill Act. um So this was not just a tweak, it was a rebuild.
00:05:46
Speaker
We saw permanent brackets, a new SALT regime, new deductions for TIPS, overtime, car loan interest, an enhanced senior deduction. we We most importantly got the retroactive R&E expensing relief we were all waiting on.
00:06:02
Speaker
There was AMT things that got put in there. credits for energy, their
Business Deductions and Implications
00:06:07
Speaker
sun setting, international rules, all kinds of things. When you think of tax, you think of the full gamut and there are many changes that came out and a lot there for that.
00:06:17
Speaker
Second, we you mentioned tariffs and industry policy. I mean, tariffs this year became a strategic tool, not just a revenue tool. And that changed cost structures, supply chains, and pricing models across industries.
00:06:30
Speaker
And what's important about it is sometimes we think of tariffs as, well, that doesn't affect us in the accounting world. The reality is every single client, whether they're manufacturing or distributing or selling some form of good is impacted by tariffs and that and thus the accounting is impacted.
00:06:49
Speaker
So that affects a lot of different things. Third, we saw a lot of IRS modernization, a lot of bills coming out, digital payments, enhanced online accounts, automation and case routing, and even legislative push forward towards a modern IRS. And so I think we're gonna continue to see that as time goes on, as things continue to change. We also saw a scale down of the IRS and employees and what that impact will will not be to everyone. And also a fourth thing, international tax overhaul. We'll talk about it today, but like i there are things in there that impact taxpayers and everyone needs to be or we're aware of. And lastly, I think the profession itself evolved. I mean, compliance alone just can't keep up.
00:07:35
Speaker
I mean, anytime you have what just mentioned, that's a lot, right? And there's a lot with it. So advisory is now the expectation. not just the product of the compliance. And practitioners that have lived this through 2025 are already starting to, hey, get ahead and try to figure out what planning looks like, what advisory work looks like, but at the same time, figure out how do they put this all together for the upcoming tax season.
00:08:00
Speaker
So it's a big year and not just a reset year, and we got to be ready for it. Okay. Well, so that's a lot to
New Charitable Rules and Children's Savings
00:08:07
Speaker
go through. And um so why don't we start With number one, right? So we had the the one big, beautiful bill act, get signed into law, meets the July 4th deadline. I know you and Casey had talked about that and came on right after that.
00:08:23
Speaker
um Why don't you go, if you could go through some of the the important provisions, the ones you're seeing or talking to your clients about a lot, i don't know if for the best way to break it down is maybe we start with the individual and then we can go to the business and some of the other ones. That's sort of a natural way to do it. That's kind of the way the bill did it to some respects.
00:08:42
Speaker
So, you know, whatever is logical, but walk us through some of the things you're really seeing or dealing with at this point in time. Yeah. So, I mean, the H.R. one bill, the one big, beautiful bill, um it it I mean, it moved fast, like I said, and it it was a whirlwind. I mean, the idea was, hey, the House wanted to get something to the president by Memorial Day, and they achieved that. They they passed a bill right before Memorial Day on 215 to abstained vote. And what abstained vote
00:09:13
Speaker
and And that was slim, slim margin, but they got it passed. Then it goes to the Senate. We have one iteration. It becomes a second iteration. And before you know it, on July 1st, it's voted 50 yeses, 50 noes.
00:09:26
Speaker
Vice president has to come to the Capitol to break the tiebreak. Then it goes back to the House because there were changes in it. And on July 3rd, the House passes it with 218 yeses to 214 noes. And now the president signs it on July 4th. And here we are with a number of provisions.
00:09:43
Speaker
and And when I think about the provisions that are in this,
Estate Exemptions and State Tax Awareness
00:09:46
Speaker
that are um there's a couple of things. Number one, um tax brackets. I mean, Chris, I mean, there are still seven tax brackets, just like we had with the Tax Cuts and Jobs Act.
00:09:57
Speaker
The difference, though, this time is that 37% is still the highest tax bracket and 10% is the first tax bracket. But the 10 and 12% brackets are are slightly larger in 2025 and forward. and And this is key. So when I think of the tax bracket system, people are like, well, but what do I care about it? It's just a table, right? The reality is where the planning, where the secret sauce is, is determining where people fill up the progressive brackets along the way as they widen.
00:10:28
Speaker
How do we utilize that in our planning to maximize the value at lower brackets before they end up at the higher brackets? So I think that is a huge takeaway that will help people in this process um from the tax bill.
00:10:42
Speaker
um Another one was the standard deduction. you know We saw with the standard deduction an enhanced version of it now. We're starting in 2025. And I will say, before i even say anything further, most of these provisions are are effective for 2025. There will be things that we'll mention that are for 26 or further, but just keep in mind, this is stuff we want to know now because it's important, right? um But the standard deduction has been increased. So for Married filing joint, it's been increased to $31,500. For single, it's $15,750. And what that means is that what we saw with TCGA and we'll so continue to see is more and more people will continue to not itemize, but we'll just get the standard deduction.
1099 Reporting and Bonus Depreciation Updates
00:11:25
Speaker
um And so we will see where that looks. But because that's the case, planning is going to be imperative because you're trying to figure out where to get all the deductions when you're not itemizing.
00:11:37
Speaker
um And so there's a lot of impact there. um And also part of itemized deductions in general, there may be an overall limitation now back into play in an AMT impact potentially.
00:11:49
Speaker
So, The limitation reduces allowable itemized deductions by a formula of 2 over 37 of the lesser of one, the taxpayer's total itemized deductions or the amount by which taxable income plus itemized deductions exceed the 37% bracket threshold. So again, people in the high tax bracket, but this is important.
00:12:11
Speaker
And this limitation does not apply for AMT purposes, but potentially could create a favorable AMT adjustment. And so going to want to model this stuff out. I think it's very imperative that we do so along the way.
00:12:24
Speaker
Now, there were a number of campaign promises that came out of the the the campaign under
R&E Expenditure and Pass-through Tax
00:12:30
Speaker
under last November, but with that, these provisions made it into the tax bill.
00:12:35
Speaker
So one of them was called the enhanced deduction for seniors. And this is where Social Security benefits and i And I think I got to make this crystal clear because I know there's some clarity out there. Some people think that they don't have to pay tax on Social Security anymore.
00:12:49
Speaker
But the reality is you're still going to pay tax on your Social Security benefits just like you did before. you can report it and it's going be taxable to you. However, there is a new benefit for taxpayers called the enhanced deduction for seniors.
00:13:04
Speaker
And so this is for the years 2025 through those individuals who are age 65 and older may claim an additional deduction of $6,000 or if both are married and and and are obtained the age of 65.
00:13:21
Speaker
um Remember, this deduction is separate from the standard deduction, meaning it's not lost if you itemize. So that's a good thing. Now, does it does everybody get it? Well, it begins to reduce when your modified adjusted gross income is 75,000 if you're single and 150,000 if you're joint. So keep in mind, this is a good thing.
00:13:41
Speaker
Now, remember also with this, this is not an above the line deduction. This is a below the line deduction. So it doesn't reduce AGI, it reduces taxable income. So I just want to clarify that in the process as well.
00:13:56
Speaker
Um, Child tax credit, which a lot of families have enjoyed and has been you know robust over the last number of years, has been increased again. So the permanent increase is to $2,200 per in 2025. And of that amount, $1,400 is refundable.
00:14:09
Speaker
in two thousand twenty five um and of that amount fourteen hundred dollars is refundable And it's that that number, these numbers may be indexed. So what does that mean? That means if someone has a qualifying child and they have the income,
Opportunity Zones 2.0
00:14:24
Speaker
meaning they're if they're single, it's 200,000. If it's married filing joint, it's 400,000 before it phases out. But with that being said, if you have a child under the age of 17, you can get $2,200 for that child. Now, let's just say someone's income is low enough where they pay no tax.
00:14:41
Speaker
Well, they still will get of that $2,200, they'll get $1,400 refunded to them. So I think it's a great thing. And I know some people wanted it to be higher. Some people wanted it to be lower.
00:14:52
Speaker
i think it was a good mix to get it to where it's at. And it's a good starting point to help the average taxpayer that qualifies in this process. um Now, one of the big things, Chris, that I would say that's out there is, and we've talked about till we're blue in the face forever here, is the SALT cap.
00:15:10
Speaker
Remember the SALT cap in TCGA? It went from being able to deduct all your state local taxes to $10,000. And that... and that You know, ah it throws people off a little bit, depending on what state you live in, obviously, and what you're paying in property taxes, sales tax, income tax.
00:15:28
Speaker
It matters, right? So now that was a debate going back and forth. Finally, where we land? We landed at $40,000 in 2025 the new SALT cap.
00:15:39
Speaker
So and that will be indexed for inflation, but not what we normally think of. will be indexed 1% year. So for 25, it's 40,000. 26, it's 40,400 and so forth. So 1% increase year. twenty six it's forty
International Tax Term Changes
00:15:50
Speaker
thousand four hundred and so on and so forth so one percent increase a year in through 2029. Then in 2030, if nothing changes in tax provisions and legislation, it reverts back to $10,000. So again, we wanna make sure we're taking advantage of this right now.
00:16:08
Speaker
But I always throw this out there when I talk, and that is the acronym 456. Four, meaning you got a $40,000 salt cap today. Five is $500,000 in adjusted gross income. That is where you start to phase out of that $40,000 salt cap.
00:16:25
Speaker
And six, $600,000 is the AGI amount where you have completely phased out of the $40,000 salt cap. And now you're back to $10,000 cap.
00:16:35
Speaker
So again, remember that because I think that's just a good way to help us in the process of determining some of these things. um Another great... Just to stop you there. So with that, right? So we have the the phase out i thought at the higher levels.
00:16:54
Speaker
Do we, do are you thinking or seeing maybe with your your tax planning for your clients that this is going to push more people into itemizing that maybe before would have, with a 10,000 cap, they might've been, all right, well, you
Energy Credits Reduction
00:17:08
Speaker
know, I'll take the standard deduction and now I've got 40,000 cap, but if I'm too high, i I'm back to 10,000 cap.
00:17:16
Speaker
So have you, have you started sort of see that It depends. Yeah. I mean, if someone is under that, you know, they're under that $500,000 and they now they get the $40,000 self-cap, it really depends how much their state taxes are. But if if they're like in a state like we are in Illinois, where you have high real estate taxes and they have other state income taxes,
00:17:36
Speaker
yeah i mean and then then maybe besides that that gives way to charity it's probably going to push them over to maximize that and they'll be able to itemize other people depending on how much they're paying or depending on the state they're in they still may just get the standard deduction um and this would be just a moot point for them so again this is where in as practitioners as we're talking to our clients and planning and trying to get our our wits about us of what's going on, you know understanding the rules, that four, five, six, in order to help make sure they're maximizing that.
00:18:12
Speaker
And where I've also seen this, Chris, is that you know if someone makes a million dollars a year, you know they're going to be a $10,000 salt cap, right? But if someone's in that close range
Conclusion and Next Segment Preview
00:18:20
Speaker
where they're approaching that $400,000,
00:18:23
Speaker
um and they still get the full 40, let's just say part of the planning is, hey, let's convert some traditional IRA to Roth or let's accelerate some income to utilize that tax bracket management we were talking about. Well, we have to also be careful because what if we start to, what if we push them into the over 600,000 in income and now their salt cap went from 40 to 10, we lose the itemized minimum um ability Now we're back to standard deduction. If you start running some numbers on some of this, it really impacts the effective tax rate.
00:18:57
Speaker
And I think that's going to be important to model out. Yeah, that's a great point.
00:19:03
Speaker
Another item I think that's part of the campaign promise was something called no tax on tips. Now, the idea of no tax on tips is a misnomer of a of a title because it's really a deduction based on tips, right?
00:19:17
Speaker
But they call it no tax on tips. But basically, it's a new deduction on your 1040. And this is for the years 2025 to 2028, where someone who is receiving qualified tips ah will be able to take a deduction, even if they're not itemizing.
00:19:34
Speaker
So like just to enhance senior deduction, again, this is a below the line deduction, meaning it doesn't reduce your AGI, but reduces taxable income. And what's important about this is we just need to make sure we understand the rules here.
00:19:48
Speaker
ah The maximum deduction is $25,000. And this would be for employees that are getting it, self-employed individuals. So we want to make sure we understand that.
00:19:58
Speaker
Also, there's a phase out here. So again, where your modified adjusted gross income is $150,000 you're single For $300,000, if you're married, filing joint, it's great. Those people will be able to take advantage of this.
00:20:12
Speaker
And they've put a little bit of guidance out on this so far. And they basically said, hey, self-employed individuals or people that are in a specialized service trader business, an SSTB, they will not qualify for this. So if you're sitting here listening to this and you're you know working in accounting, you're You can't convert your wages into tips and and and qualify for this deduction.
00:20:34
Speaker
So, and I know you're probably thinking of that as you thought. But with that being said, this, um there's one of the, we've had some guidance on this, but one of the things, and I will say for the no tax on tips, and we'll well i'll talk about next to no tax on overtime, is there is, um there's no update to the W-2. So the W-2s that were originally came out in draft format for 2025 will remain the same.
00:21:00
Speaker
The 2026 W-2 will have more changes to it to incorporate these tax changes. But remember this tax no tax on tips, no tax in overtime, will impact 2025. So the IRS has put some guidance out there to basically say how that's gonna get handled. There's some, hey, if you follow and you give a good faith effort, they're not gonna hit with penalties and stuff like that. So you know you're gonna have to make sure we're understanding that.
00:21:25
Speaker
More importantly, as we talk to our clients, you know we're gonna have to tell them, hey, you need to get some information on what the amount of tips you did receive. and And also, if your client is the business, you know, making sure that they help their employees understand the amount they're receiving. So I think those are some very important pieces to this that are easy to kind of a miss along the way.
00:21:50
Speaker
But then I said, no tax on overtime. Again, that's another campaign promise. And it's a new deduction on the 1040. And so effective again for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds the regular rate of pay, such as the half portion of that time and a half comp, right? And that is required by the Fair Labor Standards Act, FLSA, and that is reported to the individual.
00:22:19
Speaker
So an example, let's just say, Chris, yeah you're working and you get $30 an hour, right? And and then you decide you know, employer says, hey, can you help do some more? And you're like, sure. And you do some overtime pay. And they pay you, you know, $45 an hour for the overtime pay.
00:22:37
Speaker
And the question then becomes, well, how much does Chris have to report to get this deduction? Well, he is only gonna report that $15 of qualified overtime pay that may be excluded. So the $45 overtime rate minus the 30 base rate.
00:22:52
Speaker
So that is the amount that gets excluded under the deduction. and And I think probably the part that is going to be hard is that if i if we're not updating W-2s for this year, and I say, Chris is my client, I say, hey, you work overtime? He's like, yeah, absolutely. And I say, show me your w two you w two your Your regular rate of pay of that $30 and your overtime rate at $45 is all going to be in box one.
00:23:16
Speaker
And so I'm going to say, well, how much overtime did you, you know, work And so that's where you're going have to go back to the employer and get that information. And if your client is the business, you're going to have to advise them to make sure they're getting their employees at least a statement or something to say, hey, this is your your rate of overtime and in the amount. So Very important there.
00:23:39
Speaker
The deduction for this is an annual deduction of $12,500. If you're married, it can be up to $25,000. And again, just like the no tax on tips, this phases out with EI at $150,000 for single, $300,000 for joint.
00:23:54
Speaker
So very important here. um that That is a a deduction that we're going see more of Unfortunately, it may create some confusion um and and we're just go to have to deal with it.
00:24:07
Speaker
Now, the fourth campaign promise I told you is something called a no tax on car loan interest. Again, a misnomer on the name, but this is a deduction for to $10,000 of interest on a new personal car loan.
00:24:22
Speaker
So this is again, 2025 through 2028.
00:24:26
Speaker
Lease payments for that car do not qualify. The vehicle has to be less than 14,000 pounds. Final assembly, have that vehicle has to be in the US and secured by a lien on the vehicle, and you're going to have to disclose the VIN number.
00:24:40
Speaker
So this will be a deduction. um So if a client goes out and purchases a new vehicle this year and they pay $4,000 of interest, they potentially get that as a deduction.
00:24:52
Speaker
In addition, there's a modif- you phase out of this, um just like no tax on tips, no tax in overtime was at 150, 300. For no tax on car loan interest, it is, phases out at $100,000 individuals and married filing um So again, really, really matters here. And I think some really important things.
00:25:14
Speaker
So the four main new items that I mentioned, the enhanced senior deduction, the no tax on tips, the no tax on overtime and the no tax on car loan interest. Those four deductions will all show up this year on a brand new form schedule one dash a. So yeah,
00:25:33
Speaker
And then that that form will get filled out. I think it's two pages. And then it will flow to the second page of the 1040. And you'll see that line item on there on the draft right now. So very important to look at and understand this. But these are things that we haven't dealt with in the past.
00:25:51
Speaker
And these are things that I think matter. And I think we need to just make sure we're aware of it to help advise our clients, whether they're a business or individual in this process. And these deductions are irrespective of whether you itemize or um take the standard deduction. That's correct. The senior, the the car loan interest. So even if you're not taking your mortgage interest because you're you're taking the standard deduction, if you're paying car loan interest, you might be able to deduct that as well, assuming you meet all the other requirements.
00:26:24
Speaker
Yeah, very important there. Absolutely. And great point there, Chris. So again, a lot of times when we see these types of deductions, people think, is it above the line deduction? You know, there's this concept out there. So it is not an above the line deduction because it does not directly reduce adjusted gross income.
00:26:40
Speaker
It is a below the line deduction, meaning below adjusted gross income. So it reduces age um taxable income, but you get it irrespective of whether you itemize or not.
00:26:52
Speaker
So very important there. Now, another thing that popped up in here is wagering losses. So for those that like to gamble, maybe you go out and you played a slot and you won $10,000 and you feel excited about it. And then you sit down with your tax preparer and you say, hey, I got $10,000 gambling winnings.
00:27:13
Speaker
And then they might say, did you have any gambling losses for the year? And the rule in the past has always been, i can I can offset my winnings by the extent of my losses, right? and so now there's a new rule that has kicked in and this rule will kick in after 2025 so starting in 26 but the limitation is that it limits the wagering transaction losses to 90 of those such losses um so let's give you a quick example so let's just say somebody wins 25 000 in 2026 and they you lost 10 grand right
00:27:45
Speaker
and they tell you i lost ten grand So what you have to do is you have to take those 10,000 losses times 90%. That means you only get to utilize 9,000 of those losses. So you would get 25,000 of the winnings you'd report, and then you'd be able to take the limitation of 9,000 to offset that.
00:28:04
Speaker
So again, something that's out there, you know if you have clients that gamble, um we'll need to make them aware of. But again, that that takes place 26, not 25%. Yeah, that's interesting. It's not 90% of your winnings. You can't write take a deduction up to 90% of your winnings. So you're always, if you have winnings, it's 90% of the losses that you've earned. It doesn't matter how much winnings you've had. Obviously, you have to have enough winnings or else you can't deduct the losses. But that's not typically what you would see, right? or what you would have intuitively thought maybe.
00:28:42
Speaker
That's correct. And I know this is kind of a, it's an odd thing. And maybe we won't see people talking about it directly today because it's not effective for 25, but it will, it will rise to a level of more um scrutiny in 26 because we see more and more people, whether they're, you know, gambling, like in casino, but all that kind of stuff, maybe their fantasy football leagues and all the other stuff they do online. We see more of that, right? Sports. So yeah.
00:29:09
Speaker
And not everybody wins as much as they tell you. That's why there's big buildings in Las Vegas with a lot of fancy stuff in them. Right. Yes. Yes. Now, another point I think that's important to talk about is charitable.
00:29:21
Speaker
Um, and this is something that people continue, you know, they love giving away to charity. It's a great deduction. You know, you're still limited to 60% of your adjusted gross income or whatever the rules are, but important to know in this is that starting in 26, again, not 25, this is next year, 26, there is a new, uh,
00:29:40
Speaker
um So for those that don't itemize, there's an above the line deduction, essentially where you create a charitable contribution deduction for $1,000 for single filers, $2,000 for married filing joint.
00:29:52
Speaker
This is a permanent deduction. Again, so if someone who is taking the standard deduction and they give, you know let's say they give $500 to their local 501c3, they would still be able to get that deduction.
00:30:07
Speaker
So it's a good thing. But those that do itemize and love to you know give you know a significant amount away, or maybe they're using donor-advised funds or bunching situations in order to get a big deduction, there's something that we need to be aware of. and again, starting in 26, not 25.
00:30:26
Speaker
And this is called the charitable deduction with a haircut. And what this is, is it limits the charitable deduction for taxpayers who itemize for providing a deduction only for those contributions to the extent they exceed a half percent of AGI.
00:30:42
Speaker
So it basically creates a floor that you've got to get over before you start deducting. And so I'll give you an easy example. And that is, let's just say taxpayer has a million dollars of adjusted gross income.
00:30:54
Speaker
So we now have to calculate a floor in 26. So I take half a percent, 0.5% times that million of AGI, I get a $5,000 floor. So now if I talk to that taxpayer and they say, how much did you give to your local organization? They said, hey, I gave $4,900.
00:31:10
Speaker
Well, they're below the floor. So they get zero deduction and they get zero zero carry forward. So this is this is where it's going to be important to continue to model this out down the road. Now, that same taxpayer told you they gave $5,100 charitable gifts.
00:31:26
Speaker
Now they would get, so it would be 5,100 minus the floor of 5,000 in my example. So they would get a $100 deduction in 2026. And then the remaining 5,000 would be carried forward as a charitable contribution carried forward. So very important here. And so what why this is going to matter is depending on what clients are looking to do or choosing to do,
00:31:48
Speaker
Modeling this out, doing tax planning and helping them so that whatever they decide to do, they get to maximize the deduction. And that's going be very important, in my opinion, along the way and creating strategies um that we have to be very aware of. So very important. I think there's some good things that will come of that.
00:32:07
Speaker
So do you think there'll be a lot of sort of timing of your contributions, right? If I wait, lumping them all into certain years, so you're above the threshold, and or or if you're going to be below it for a year, you hold off from December to January and contribute in January. 100%. And I honestly, Chris, and then that's a great point, is I mean,
00:32:26
Speaker
We might see more more taxpayers still in that they can't itemize and, you know, maybe they don't have a mortgage. You know, they get the soft cap, they you know, and they're like, you know, in a given year, maybe they don't give enough away.
00:32:37
Speaker
And so they're just stuck with the standard deduction. So it may say, hey, you give x amount of dollars a year to your 501 What if instead of giving the same amount year after year, we take all the next five years and bunch it into one year, right?
00:32:52
Speaker
Now it gets them to be able to itemize and maximize that charitable contribution. Maybe it's in a year where their income's higher and they're playing the tax bracket game to really drive that effective tax rate down.
00:33:05
Speaker
So again, understanding those rules will be imperative in order to maximize that tax savings.
00:33:12
Speaker
Another item that's new is called the Trump account. And what is this? Trump account is a a new um mechanism to be able to put money away for kids.
00:33:24
Speaker
And so what what's going to happen is the federal government will contribute $1,000 to an investment account under ah in a Trump account for every American baby born between January 1st 2025 December will be able to get $1,000 deposited into Trump account.
00:33:40
Speaker
so anyone born will be able to get a thousand dollars deposited into a trump account Then an additional $5,000 in after-tax contributions can be made annually to those accounts by the parents, an employer, friends, family, private entities, doesn't matter. So up to $5,000 to be contributed.
00:34:00
Speaker
And so the idea is you these contributions, if done year after year, can be done for the beneficiary until they turn eighteen And then then they can start taking distributions out of that.
00:34:12
Speaker
But you have to have them. the So the idea is, hey, if I can put that, the government's funding a thousand of seed money on the year they're born here. And then everybody puts in, and you put 5,000 a year into that account to the time they're 18. And then essentially,
00:34:27
Speaker
you know, with compounded interest, the way it's invested, you've grown this nest egg of money. And then after 18, you can start pulling the money out. You have to pull it all out by the time the beneficiary turns 30 though.
00:34:40
Speaker
um and And the key here is this is going to be a a great mechanism or deferral option that we have to look at. Some people have said, well, that sounds like a 529 plan to some level. The only difference is the government's kicking $1,000 up front, right? And yes, um what I would say is 529 is truly you invest the money.
00:35:00
Speaker
um It grows and it's used purely for higher education expenses, right? where The nice thing about the Trump accounts is that the money grows tax deferred along the way. So you're deferring it, you know, that the 5,000 a year being put in there, but the money can be pulled out, you know, by the time they're 30 to be used by the beneficiary for whatever reason they want. so there's a lot of flexibility. They can use it for broader purposes beyond education. Like maybe it's a down payment on a home. Maybe it's, they want to buy a vehicle. Maybe they want to pay off some debt, you know,
00:35:35
Speaker
There are things that they use it for. And I think so in conjunction, 529s, I think are still a great investment plan should still be used. This is just another opportunity to put money away tax deferred.
00:35:47
Speaker
When the money comes out of the Trump account, it's going to be taxed as ordinary income um and you're going to pay tax on it. But, you know, the key here is um just that deferral and growth mechanism in it. and I think, know,
00:36:01
Speaker
Something that we will see more to that. I know that we're waiting on a lot of more guidance in that. And if you had a child born in 25, you probably haven't seen the thousand go into an investment account yet, but that is going to happen in 26 per the government. So um TBD on all that.
00:36:18
Speaker
So it's got a little little few elements of like a traditional IRA or 401k in the way it comes out, but it's also got a little bit of 529 flavor and who can contribute into it and so forth.
00:36:31
Speaker
That's correct. Yeah. Now, another big item that probably people have talked about to their blue in the face is what's going to happen with the lifetime exclusion, um the estate exemption, right?
00:36:42
Speaker
And, you know, we've seen it grow since TCGA, and um we knew that it potentially was going to reverse back to pre-2018. Right. Well, what they've done now is they've increased the exemption starting in 2026 to 15 million per person.
00:37:01
Speaker
And that will then be indexed for inflation going forward. So higher permanent exemption, portability is preserved. So if you're married and one spouse passes, you can file a state tax return and and still utilize that 15 million for the other deceased spouse for the surviving one. So there's some great things there that I think we have to be in play at. I think the more important thing is a lot of times people think, hey, now that going to be back to 15 million, I don't have to worry about estate planning. Don't care anymore because my income, my my my estate is less than that. And I would caution everyone. Number one, you still should do estate planning. You should still have a trust and a will. You still need to look at this at whatever level of income.
00:37:43
Speaker
But more importantly, A lot of states do not have that. They don't follow the $15 million. dollars They have their own version. And yeah I just use where I live in Illinois. We have a $4 million dollars exemption with no portability.
00:37:56
Speaker
So again, very important things that come into play. and And depending on where you live, you want to look at those rules and advise your clients on that. And so it's very, very important.
00:38:08
Speaker
Yeah, i thought that was I think you were talking with Marty about that. Was it was a Marty, I think, in one of our previous previous podcasts? It's like everyone thinks they're nowhere close to the new limit and they're like, oh, I'm fine. But you forget about the states and some states could really trip you up. And even in Illinois, where we are, mean, it's it's not one percent. Right. It's it's a it's a decent percentage, depending on your.
00:38:32
Speaker
how much you're over. So um definitely something to be be aware of. And then also obviously having the will, having the trusts, having all that type of thing, even not from a tax perspective, just from ah a pure estate planning perspective makes a lot of sense.
00:38:48
Speaker
Right. Now, a couple of quick provisions that I think um that are out there. One, you know, 1089, NEC, miscellaneous. um We've always had to issue those. Our businesses, if, you know, hey, they're paying somebody, a contractor, a vendor for service of $600 or more. Well, that's still in place, the $600 for 2025. Okay.
00:39:08
Speaker
kip But and starting in 26, that number goes to $2,000 and will be adjusted for inflation going forward thereafter. So something to keep in mind that's important.
00:39:20
Speaker
Also 1099K, we saw this kind of kind of get a little funky with everybody. and And you know for years it was, hey, I don't have to file this unless I have $20,000 in payments or 200 transactions.
00:39:34
Speaker
And then they kind of changed the rules on that and they had a bunch of adjustments and they were scaling it in as, hey, 5,024, was supposed to be 2,525 and then to $600 to 26 thereafter.
00:39:46
Speaker
The new HR1 bill take took all that out of the way and said, okay, starting now in 25 here, or even going back to 24, but we we back to the process of increased reporting threshold from $600 to 20,000 or over 200 transactions.
00:40:03
Speaker
So very important pieces to this that I think are important. We look at, and we say, the end of the day, As our clients are trying to deal with this, you know, i think less of them will fall into this range and that's important yeah to know.
00:40:18
Speaker
Now, kind of pivoting to some business things that I think are very important. You know, we have a lot of business clients that go out and buy, you know, machinery equipment. They buy furniture insurance fixtures. They're thinking about, you know, CapEx, right?
00:40:30
Speaker
So, bonus depreciation, which we've used in many fashions over the years, it's back to being 100%. which is a great win. But this is for assets placed in service after January 19th of 2025, and it's made permanent.
00:40:44
Speaker
So someone puts a machine in place on January 12th, 25, and they're not going to get the 100%. So it's the date placed in service. Also, Section 179, which is also an alternative option or a combination with, that cap has been raised to $2.5 million and starts to phase out when you place more than $4 million in assets in place. So very important to understand there. But again, there's different rules when you should use 179 in bonus, right?
00:41:11
Speaker
So very, very important along the way. um Another thing I think that's important in the business that we need to be very aware of is, and it's been a headache for a lot of my clients and many of yours, I'm sure, is the 174 research and experimentation expenditures.
00:41:28
Speaker
So this was one of those revenue raisers that was placed in the Tax Cuts and Jobs Act that Basically, starting in 22, as we know, you had to start capitalizing your qualified research and experimentation expenditures.
00:41:41
Speaker
So if you had domestic, you had to capitalize them and amortize over five years. If it was foreign, you had to capitalize and amortize over 15 years. Very important there.
00:41:51
Speaker
So we've been waiting for some sort of change and we finally got it with the HR1 bill. So what this did is it created a new code section, 174 cap A, that is for domestic R&E costs. And so the bill says, made permanent, immediate expensing of domestic R&E starting in 2025.
00:42:11
Speaker
automatic. You don't need to make an election. So so for your 2025 year, you don't have to capitalize those domestic R&E costs. You just expense them like we used to in the past. Anything that's foreign, you're still to have to capitalize and amortize over 15 But then what happens to those years 2022, 23, and 24, right? So couple things we first have to look at. One, do we have qualified R&E that we had to capitalize for domestic for 22, 23, and 24? If so, the next thing we look at is, are we a large business or small business? And that matters. Small business defined as average gross receipts of 31 million or less over the previous three years. If you fall under that, you're a small business, then you have-
00:42:53
Speaker
You have a couple of options. One, you can either go back and amend 22, 23, 24 and get refunds. those Those amendments have to be done by July 4th of 2026. So you don't have the typical statute to amend on that. you You have a very short time here to get it done. Okay.
00:43:09
Speaker
um And so one of the questions I get from people is, well, if I go and do all that, let's say it's an S Corp, I amend the S Corp, I amend the 1040, how long is it going to take to get the refund? And I can't give you an answer on that. And probably no one can either. So hopefully it's quick, but you never know. Right.
00:43:24
Speaker
And so I've had clients that say, you know what? I don't want to go through the process of amending. And I would say is that you can't pick and choose the years in the amendment. You either got to do all three years. or whatever years you have qualified R&D for those three years or none.
00:43:38
Speaker
So if you're going to amend, you got to do it all. okay Or you you do what large businesses can only do. And that is you take those three previous years and you make an election and you expense it all in 2025.
00:43:51
Speaker
which is a great option, or you make an election and he expense 50% 25, 50% in 26. So there's some planning here to be thinking through and modeling with our clients. So we first went on determine, do I have domestic R&E for the previous years?
00:44:05
Speaker
One, am I a large business or small business? If I'm small, do I go back and amend? If I do so, I can do all three years. And if not, I go and make an election for 25 to expense or 25, 26. Very important pieces to this.
00:44:18
Speaker
Just make sure you're aware of the rules and start planning with your clients appropriately. um And I think these are things that we'll continue to see evolve and um we'll see people want to get their hands around and do more with.
00:44:34
Speaker
um And I'm excited about it because I know I have a lot of big, the questions on this have just been and crazy with clients and just trying to get to the right things. Another piece, Chris, that think is important is the pass through entity tax, P-TED as I call it.
00:44:49
Speaker
This is where you know the original workaround of the $10,000 salt cap, but you know a number of states, I think there's 36 of them, have implemented workaround. And that was, hey, if we make this election,
00:45:02
Speaker
The flow through entity, the S-Corp partnership can pay the state and local shareholder partner tax at the business and essentially get a ordinary deduction on the federal S-Corp partnership return, reducing that based on the effective tax rate the taxpayers in at the federal level. And at the state level, they're just basically prepaying their state income tax based on that flow through entities income and it's in an ad back. So you're not getting a double dip there, but the reality is it's just another way to pay the tax. And I still think even with the individual salt cap going to 40,000, this is a great win and you're still gonna wanna maximize this and utilize it.
00:45:42
Speaker
If you haven't done a lot with this, and it's not going away. so So get up to speed and really start to model this out. And this is a great win for your clients. So let's take advantage of it. I always tell people, clients, when you meet with them, where they want to know, how do I pay the least amount of tax possible, right?
00:45:58
Speaker
Some of them want to pay no tax, but they want to figure out those things. These are all levers that we get to use and implement, you know, to help them get there. And I think that's very important and things that we need to be quite aware of.
00:46:11
Speaker
Another great provision, um I think that's just is 189 CAFE has been made permanent. I mean, this is something that's important. We've seen it since 2018, but a couple of things, it still remains at 20%.
00:46:23
Speaker
um But also the phase out range has expanded. And I think that's very important. So for married filing jointly by a hundred thousand and 50,000 for single. um And even starting in 26,
00:46:37
Speaker
There'll be a new minimum $400 deduction for taxpayers with at least $1,000 of QBI. So maybe they got a Schedule C or something. So again, something so everyone can get a benefit of. And I think very, very important.
00:46:49
Speaker
Now, like I would be remiss if I don't mention this. And that is this. We've talked a lot about a lot of great business provisions that all can create losses. Hey, I got bonus depreciation at 100%.
00:47:00
Speaker
or 179. I got one seventy four a where I can write off those R&E costs. I've got pass through entity tax. So I'm creating these deductions, which are all great things. But what happens if that loss, those deductions create a loss for the for the flow through entity? My ask for partnership.
00:47:18
Speaker
The shareholder partner then, they got something they got to deal with that we've had we've had been dealing with since 2018 called the 461L excess business loss deduction.
00:47:29
Speaker
And again, this is still in place. I think for 2025, if you're married, you're limited to $626,461 out loss. And I think for single, $313,000. But these are important things. So when you think, hey, my client is going to write off a million dollars of 174A costs and maybe take 100% bonus appreciation,
00:47:51
Speaker
Let's plan it out and see, is that is that just reducing taxable income or is sending taxable income into a loss? And if it's a loss, what is that partner or shareholders portion of that loss?
00:48:01
Speaker
And are they limited under 461L? Now 461L doesn't, you don't lose it. So if i if I'm limited to the to the amount, The excess then carries forward into future years as a net operating loss.
00:48:14
Speaker
But remember, net operating losses, you can only utilize 80% of taxable income on that future year. So it may take longer to utilize. So if a client says, hey, I got a two and a half million dollar loss now and you're doing all this stuff, I'm not going any tax.
00:48:28
Speaker
Well, ah puts his ugly head in there and potentially doesn't give them the full loss and then maybe they pay some tax. So this could be a rude awakening. So we'll make sure we're modeling it, communicating it and helping our clients get to a point where it makes a lot of sense in the process.
00:48:44
Speaker
1202 is a great provision. you know Like I said before, it's taxpayers don't want to pay tax. One of the best ways to not pay tax on a potential stock sale transaction is 1202 of the code, the qualified small business stock.
00:48:58
Speaker
And again, this applies to specific entity, C-Corps, and it has to be originally issued stock and has to be originally issued from the date of the bill enactment. But what is, and it's been around, and the key there is that Under HR1, they've expanded it now.
00:49:15
Speaker
So for originally issued stock after the enactment of this bill, July 4th of 2025, you hold that stock for three years, you can get a 50% exclusion on that gain.
00:49:26
Speaker
For four years, it's 75% exclusion. And for five years or more, it's 100% exclusion. and the exclusion amount on 1202 was 10 million, the greater of 10 million or 10 times your basis. Now it's going to 15 million or 10 times your basis.
00:49:41
Speaker
So they've expanded that. And then the other provision I think that's worth mentioning is that when the original issue stock gets issued, The corporate aggregate gross assets of the company used to be 50 million.
00:49:55
Speaker
Now it goes to 75 million. So again, there's a lot of great things there. Again, it's not for everybody, but I think this is something that you, when you put some you know ideas in your toolkit to take to your clients, make sure they understand that.
00:50:09
Speaker
Yeah, and that 10 to 15 and 70 or 50 to 75, that's similar to the the rules in that it applies only for the stock issued after July 4th. Is that correct?
00:50:21
Speaker
That's correct. That's correct. Anything before that, before that, why to the old rules? so Old rules. Yeah. Yeah. yeah um Another thing that's been a thorn in people's side, and it doesn't affect every taxpayer, so I get it, but 163J, the business interest limitation.
00:50:37
Speaker
And so when it got put in place in 2018, it limited the deduction the taxpayer could get um on their interest. And it was a calculation of 30% of their adjusted taxable income. And ATI is basically EBITDA to some level. And then starting in 22, just like 174 reared its head in,
00:50:55
Speaker
One CC3J said, hey, 30% of ATI, your EBITDA calculation, we're taking off the DNA, the depreciation amortization add back. So it's just 30% of EBIT. Okay. Well, they've now put the depreciation amortization back in. So it's 30% of your EBITDA. And that is a good thing. Now, remember,
00:51:14
Speaker
Who does this apply to? the you know One, you know if you're a small business, like we defined before, is average gross receipts for the three previous years of 31 million or less, it doesn't apply to you.
00:51:25
Speaker
So it's for people above that. However, there are exceptions where certain people will fall into that. And one of them that I all always like to mention is tax shelters. I got a real estate... Rental partnership, you know they got $100,000 in rent and some expenses, and everybody in there, for the most part, is a passive investor. Well, you have a tax shelter by definition, and ah that $31 million doesn't apply. so therefore, 163J could apply. And so these are things you just need to be aware of, and I think are important in the process of understanding this.
00:51:59
Speaker
um And i'd say I just had one last business piece I think that's important, Chris, and that is opportunity zones. lot of This came out two thousand and twenty i'm sorry two thousand in 2017 with the Tax Cuts and Jobs Act, and you saw people being able to invest capital gains. Hey, I sold a stock. I got a million dollars of capital gain. I'm going invest that million dollars into a qualified opportunity zone.
00:52:23
Speaker
And they got a deferral on that. And then if they did it in 18, they didn't have to pay tax on that deferral until 2026. So next year, and they basically got a 10% step up in the basis if they held it.
00:52:37
Speaker
So instead of paying tax on the million, they got to pay tax on $900,000, right? um And then the nice thing is once you invested in that opportunity zone, if you held it for 10 years or more, that appreciation is tax-free.
00:52:50
Speaker
So it's it's a good thing, but I think a lot of people haven't really focused on it too much. And again, they now that we've seen more and more people get into it, So they kind of came out with um Opportunity Zone 2.0 that will kick in starting in 2027, a new 10-year rolling average of this to defer and really help people. So I bring it up because I think this is an area that starting in 27, more and more people are going to be interested in maybe doing something with or investing in. So I just want everyone to be aware of that in the process.
00:53:22
Speaker
Now, shifting gears to international, don't know how many people will work in the international world, and that's fine, but there are some provisions that are important. And I will say this, from an international perspective, more importantly, reporting and understanding what your clients have to do is important because there's huge penalties when you're not compliant in the international world. And unfortunately, we don't want anyone to be in trouble.
00:53:45
Speaker
But one of the things that came out ah out of this is some name changes. One is the foreign-derived intangible income. I call it FIDI, and the Global Intangible Low Taxable Income, GILTI, have all been renamed. So GILTI has been renamed to the net CFC-tested income, so the net controlled foreign corporation-tested income.
00:54:07
Speaker
And the foreign-derived intangible income, FIDI, has been renamed to the Foreign-Derived Deduction Eligible Income, FDDEI. um So important pieces there. They've also reduced the amount of deduction and there's some changes that will be impacting taxpayers in this.
00:54:24
Speaker
So I think things that, you know, you may not understand all of this and that's okay. But I think just be aware that there are some changes and that we just need to be aware of the the different things along the way.
00:54:36
Speaker
I will also say is part of this, the there has been changes to the foreign tax credit utilization that are important through this. And you're just going to understand where those haircuts kick in, whether you're using GILTI you're using all these different things.
00:54:50
Speaker
Very important. So we make sure that if our client does have foreign taxes and we think we're getting the full benefit of it, understand where those new limitations kick in so we can utilize it properly in the process.
00:55:02
Speaker
um Now, beyond this, I think there's some really important things here that um come into play. Energy. So we saw the Inflation Reduction Act come out a number of years ago and create all these great energy credits that impact taxpayers, and we've seen people taking advantage of it.
00:55:17
Speaker
But with H.R.1, they've kind of scaled back a lot of this in order to pay for it. So one of them is Section 179 CAPD, better known as the Energy Efficient Commercial Building Deduction.
00:55:30
Speaker
This terminates, this deduction terminates for a property that begins construction after June 30th of 2026, so next June. So if you have clients, contractors, or people in HVAC, HVAC or electrical or are doing building that have benefited from this or should, you want to get on it right away or bring the experts in because it goes away June 30th, 26th. So very important there.
00:55:56
Speaker
There's a slew of other energy credits that have kind of gone away already, and they kind of cut off on September 30th to 25, so they're already out of the equation. That's, you know, stuff on credits on previously owned clean vehicle credits, on new energy credits for new electric cars, alternative fuel refueling credits.
00:56:17
Speaker
Also, at the end of this year is the exp expiration of the energy efficient home improvement credit. That's important. Also expiration under section 25D, the residential clean energy credits. I'll think of home solar credits. So you have until December 31st of 25 for that.
00:56:36
Speaker
um And even bigger than that, maybe a business wants to put some solar on there. They have under this until December 31st of 27. But again, it's but again it's really important that we we look at what's going on and take advantage of that. So some really important things that I think come into play that we're just going to have to make sure we advise our clients properly on.
00:56:59
Speaker
So I think with that, um i think what we'll do now is we will Kind of stop there for this session. And i think we've covered a lot of great points that have happened in HR1 and some big updates. And we'll come back in in our second segment and talk further about planning and even move into tariffs and some other great things that are happening at the IRS that i think everyone needs to be aware of.