Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.

Tax tips and developments relating to individuals

Section 529 Qualified Tuition Plans v. Trump Accounts

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  • mike   

Section 529 Qualified Tuition Plans (QTPs) and Trump accounts are two important education savings tools. Some families might want to use both. I’m going to compare highlights of these two alternatives here.

Note that I’m not covering all of the details for these accounts. You can find more details at https://trumpaccounts.gov/ and, including more education tax benefits, in Publication 970 (https://www.irs.gov/pub/irs-pdf/p970.pdf).

Note that state income tax rules for these accounts might be different from the federal tax rules discussed here. Consult with a tax advisor familiar with the state’s rules or otherwise find out the rules that apply for your state.

Trump accounts were created in the One Big Beautiful Bill Act enacted July 4, 2025. They were the fulfillment of a campaign promise for the U.S. government to set up a $1,000 education savings account for newborn children born in the United States. Trump accounts were created to receive those payments with many more features.

The name “Trump accounts” may be a turn-off for many, but they should hold their noses and consider having them for their children, anyway.

QTPs have been with us for a while and have significant advantages compared to Trump accounts.

What is a Trump account? A Trump account is a special type of IRA that can be set up for an individual who has not attained age 18 before the end of the calendar year in which an election to set up a Trump account is made and for whom a social security card was issued before the election was made. The child is the owner of the account (who I’m calling the beneficiary) and an authorized individual, usually a parent, is the custodian before the beneficiary reaches age 18. Unlike other traditional IRAs, contributions to the account aren’t based on earned income. The account grows tax-deferred and then converts to a traditional IRA when the beneficiary reaches age 18. No distributions from the account are allowed until the beneficiary reaches age 18. At age 18, the beneficiary becomes the owner of the account. Investments are limited to certain index funds or exchange traded index funds.

What is a Qualified Tuition Plan (QTP)? A QTP is a program established by a state or an eligible education institution to prepay a student’s qualified education expenses or accumulate funds on a tax-deferred basis to pay a student’s qualified education expenses.

Trump account Pilot program

Trump accounts are the only accounts that can receive the $1,000 “pilot program” contribution from the federal government. An authorized individual must elect to open an initial Trump account to receive it, using Form 4547. An eligible child is a qualifying child who is born during the 2025, 2026, 2027 or 2028 calendar years, has had no previous pilot program election made by any individual, and is a United States citizen. If nothing else, there is no reason not to accept this “gift” from the U.S. government.

Number of accounts

A child can only have one Trump account. The balance can be rolled over, but only one Trump account can hold funds for a beneficiary at any time.

There can be multiple QTPs for a beneficiary. They are not generally aggregated. They are accounted for separately. However, there is an overall limit to the amount QTP accounts can hold, which is the amount required to fund the beneficiary’s expected education expenses. For example, a student at Stanford University has expected annual education expenses of $96,513. A California resident student at UC Berkeley has expected annual education expenses of $45,053 while a California nonresident student has expected annual education expenses of $62,611.

Who can set up an account?

An initial Trump account is set up by the Secretary of the Treasury (via the IRS) based on the election using Form 4546 filed by an authorized person. You can find a link to set up an account online at www.irs.gov. Under a proposed ordering rule, the authorized individual would be, in order of priority, a legal guardian, parent adult sibling, or grandparent of the eligible individual.

Apparently, anyone can set up a QTP for a beneficiary to pay their qualified education expenses. Whoever sets up or contributes to an account should coordinate with other donors to avoid excess contributions.

What are the maximum contributions for an account?

Contributions from the pilot program, qualified general contributions (such as from a state government), or qualified rollover contributions to a Trump account aren’t subject to an annual contribution limit. The total of other contributions before the beneficiary reaches age 18, including from employer contributions and contributions by parents and relatives, are subject to an annual limit of $5,000 (subject to cost of living adjustments after 2027.)

The IRS has issued a transfer tax safe harbor (Rev. Proc. 2026-25) that excludes most contributions to a Trump account from federal gift tax reporting, as gifts of a present interest. Taxpayers who make present interest gifts exceeding $19,000 for a donee are still required federal gift tax returns, Form 709. Since beneficiaries don’t have access to the funds until they reach age 18, there was a concern the contributions should be considered future interests.

Contributions to a QTP are treated as present interests, eligible for the $19,000 annual exclusion. If a contribution exceeds $19,000 for 2026, the donor may elect to have it treated as made over a five-year period, so a husband and wife could each contribute up to $95,000 ($190,000 for both) for a student for 2026. THIS IS A MAJOR ADVANTAGE OF QTPs. When that election is made, federal gift tax returns must be filed for each of the five years. Any amount that hasn’t been reported on a federal gift tax return when a donor dies is included in the donor’s taxable estate.

Otherwise, as I said before, the total amounts accumulated in QTPs for a beneficiary can’t exceed their expected education expenses.

Employer contributions to Trump accounts

Employers may set up employee benefit plans, including cash or deferred arrangements, for payments to a dependent’s Trump account, to make contributions of up to $2,500 per employee per year (subject to cost of living adjustments after 2027) to their employees’ dependents’ Trump accounts. (See Proposed Regulations at REG-101355-26.) This is an employee benefit that is excluded from the employee’s taxable income. The employer must have a written plan that doesn’t discriminate in favor of highly-compensated employees.

The term employee does not include a self-employed individual within the meaning of section 401(c)(1), such as a partner in a partnership, a sole proprietor, a director solely by reason of service as a director, or a 2-percent shareholder of an S corporation within the meaning of section 1372(b). Therefore, these individuals aren’t eligible to participate in the plan and are disqualified from the $2,500 exclusion from income.

There is no employee benefit plan for contributions to a QTP. Any employer contributions to a QTP of an employee’s dependent would be included in the employee’s taxable wages.

Qualified Education Expenses

When a Trump account beneficiary reaches age 18, the account converts to a traditional IRA and the beneficiary gets control of the account as an owner. Amounts withdrawn from the account are allocated to taxable ordinary income and nontaxable return of capital to recover nondeductible contributions to the account. Employer contributions on behalf of dependents of their employees are not included as capital, so they are included in ordinary income when they are distributed. The income is taxable to the beneficiary/owner.

Distributions from an IRA, including any taxable amounts distributed from a Roth IRA, before reaching age 59 1/2 are generally subject to a 10% of taxable IRA income early distribution penalty. Distributions that are used to pay qualified education expenses aren’t subject to the early distribution penalty.

Distributions from a QTP that are used to pay qualified education expenses are exempt from federal income tax. THIS IS A MAJOR ADVANTAGE OF QTPs. Qualified education expenses that are used to compute an American Opportunity Credit or Lifetime Learning Credit aren’t eligible for the exclusion. The portion of distributions in excess of qualified education expenses that is accumulated untaxed income is ordinary taxable income. The income is taxable to the individual(s) who set up the account, not the designated beneficiary of the account. A 10% penalty applies to the taxable income, with certain exceptions, such as amounts reimbursed from a tax-free scholarship or fellowship grant.

The definition of qualified education expenses is the same for IRAs and QTPs. They are referred to in the Internal Revenue Code and IRS publications as “qualified higher education expenses”.

They include tuition, fees, books, supplies and equipment required for the enrollment or attendance of a designated beneficiary at an eligible education institution, expenses for special needs services for a special needs beneficiary which are incurred in connection with such enrollment or attendance, and expenses for the purchase of computer or peripheral equipment, computer software, or internet access and related service when the equipment, software and services are used primarily by the beneficiary (not family members) during the years the beneficiary is enrolled at an eligible educational institution. Room and board are included only when the student/beneficiary attends the institution at least half time. Qualified expenses are reduced by tax-free education benefits (such as scholarships and employer-provided education assistance) plus the amount of qualifying expenses counted for computing an education credit.

A cumulative amount up to $10,000 of payments for principal or interest for a qualified student loan for either the beneficiary or their sibling is a qualified education expense. Interest paid using QTP funds doesn’t qualify for the student loan interest tax deduction.

An eligible educational institution is generally an accredited college or university, or an eligible elementary or secondary school.

Up to $20,000 of qualified elementary and secondary education expenses of a designated beneficiary also are eligible for distributions from a QTP that are excluded from taxable income. Qualified expenses include tuition, curriculum and curricular materials, books or other instructional materials, online educational materials, tuition for tutoring or educational classes outside of the home when the tutor isn’t related to the student, fees for nationally standardized norm-referenced achievement tests, advanced placement examinations, or any examination related to college or university admission, fees for dual enrollment in an institution of higher education, and educational therapies for students with disabilities provided by a licensed or accredited practitioner or provider, including occupational, behavioral, physical, and speech-language therapies.

Effective for distributions after July 4, 2025, qualified postsecondary credentialing expenses, including tuition, fees, books, supplies, equipment and other expenses, also qualify, and testing fees required to obtain or maintain the credential and continuing education fees required to maintain the credential are qualified education expenses. (Helps those with professional designations.)

Transferability

The rules for transferability of traditional IRA accounts apply to Trump accounts, so they generally can’t be transferred to someone else during the beneficiary/account owner’s lifetime. A remainder beneficiary can be named for who will inherit the account after the account owner’s death, including possibly naming a trust as the remainder beneficiary.

Unlike IRAs, the designated beneficiary of a QTP can be changed during lifetime or after death to a member of the designated beneficiary’s family, including the beneficiary’s (1) spouse; (2) child, stepchild, foster child, adopted child or other descendant; (3) brother, sister, half brother, half sister, stepbrother or stepsister; (4) father, mother, or ancestor of either; (5) stepfather or stepmother; (6) son or daughter of a brother, sister, half brother or half sister; (7) brother or sister of father or mother; (8) son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law; (9) the spouse of any of the previously-listed people; or (10) first cousin.

This gives a lot of flexibility for unused balances in a QTP or for if the designated beneficiary decides not to pursue further education. The person who set up the account generally retains the right to designate another beneficiary. THIS IS A MAJOR ADVANTAGE OF QTPs.

Roth conversion

When the beneficiary/owner of a Trump account reaches age 18, he or she may elect to rollover or convert the account to a Roth IRA account. Reasons to do this include changing the account so that any distributions in the future (after a five-year waiting period) will be tax-free, the account owner will not be subject to the requirement to take required minimum distributions during his or her lifetime, and distributions to his or her successors after death will be income tax-free. The conversion can be done over several years to minimize or avoid any income tax liability for the conversion.

Up to a lifetime cap of $35,000 for a designated beneficiary, QTPs may be rolled over to a Roth IRA, subject to these requirements: (1) The QTP must have been maintained for the same designated beneficiary for at least 15 years; (2) The Roth IRA must be owned by the designated beneficiary of the QTP, not another account owner; (3) Amounts attributable to contributions to the QTP during the preceding five years, plus earnings on those contributions, aren’t eligible to roll over; (4) The rollover counts as part or all of the designated beneficiary’s annual Roth IRA contribution limit, and can’t exceed the designated beneficiary’s earned income for the year. A rollover from a QTP also reduces the limit for any other Roth IRA or traditional IRA contributions for the year.

The best way to make the transfer is a trustee-to-trustee transfer.

ABLE account rollovers

Achieving a Better Life Experience (ABLE) accounts are a way to grow tax-deferred savings for individuals who are blind or disabled under the social security disability insurance program or have a disability certification that was filed with the IRS for the tax year, and (effective 2026) the blindness or disability occurred before the individual reached age 46. The accounts are maintained by a state agency and an individual can only have one ABLE account.

Distributions from an ABLE for qualified disability expenses are tax-free, and qualified disability expenses are fairly liberally defined.

For 2026 the annual contribution is limited to $20,000 plus an additional contribution amount for disabled individuals who work equal to the lesser of the individual’s earned income or the federal poverty line of $15,650.

For more information, here is the URL for the Social Security website about ABLE accounts. https://secure.ssa.gov/poms.nsf/lnx/0501130740

Trump accounts aren’t eligible for rollovers to an ABLE account.

Distributions from a QTP may be rolled over tax free (including a trustee-to-trustee transfer) to an ABLE, provided they are transferred within 60 days to an ABLE of the same designated beneficiary or a member of the family of the designated beneficiary. The rollover is limited to the annual limit for contributions to an ABLE, and reduces the ability for other contributions to the ABLE account.

A member of the family includes the same individuals listed above for changing the beneficiary of a QTP.

Which is better?

A QTP is clearly a better vehicle for investing to provide for a student’s education than a Trump account.

QTPs have more investment flexibility than Trump accounts.

Distributions from QTPs to pay qualified education expenses are tax-free. Distributions from Trump accounts (converted to traditional IRAs), except capital recovery for certain contributions, are taxable. Distributions from traditional IRAs for qualified education expenses before age 59 1/2 aren’t subject to early distribution penalties.

QTPs can make limited distributions for elementary school and secondary school expenses. Trump accounts are prohibited from making distributions before age 18.

Potential gift-tax free contributions to QTPs are much greater than for Trump accounts, creating a bigger fund to grow tax-deferred and potentially tax-free to fund an expensive education. (Consider the election to have contributions to a QTP reported as gifts over a five-year period.)

The designated beneficiary of a QTP can be changed to another family member if excess funds remain after a designated beneficiary graduates from university or decides not to pursue higher education.

Other choices to avoid taxation for excess funds in a QTP include limited tax-free rollovers to a Roth IRA or an ABLE account.

Initially, a Trump account must be created to receive a $1,000 federal “gift” for qualifying children born during 2025-2028.

A Trump account can be a way to start building a retirement account for a child without requiring earned income for contributions.

When the child who is the beneficiary/owner of the Trump account reaches age 18, the account converts to a traditional IRA that is eligible to be converted to a Roth account, resulting in current taxable income and future tax-free growth.

Families that can afford it should consider having both QTPs and Trump accounts for their children. Remember, present interest gifts of contributions to QTPs and Trump accounts might exceed the $19,000 limit (for 2026) for the annual gift tax exclusion, but the lifetime estate and gift tax exemption for U.S. residents is $15 million for an individual.

Make your Section 83(b) election online

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  • mike   

Employees or service providers who receive restricted or unvested property, such as employer stock, as compensation should consider making a Section 83(b) election online. A Section 83(b) election is used to accelerate the taxation for unvested property received as compensation.

The most common situation where we see it in Silicon Valley is when a nonqualified stock option has an early exercise privilege (isn’t vested). For example, when an employee exercises a nonqualified stock option that has an early exercise privilege doesn’t work a certain number of years, the unvested stock is forfeited back to the employer.

When a vested nonqualified stock option is exercised, the excess of the fair market value of the stock over the option price is taxed as ordinary compensation income. When a nonvested nonqualified stock option is exercised, the ordinary income event is when the stock vests. When a Section 83(b) election is made, the exercise is treated “as if” the stock was vested. The option holder makes the election because he or she expects the price of the stock to grow in the future.

Similar rules apply for restricted/nonvested stock grants, but not for restricted stock units (RSUs).

In addition, the holding period for the stock for qualification for long-term capital gains is generally measured from the later of the exercise date or the vesting date. Since a Section 83(b) election results in vesting being disregarded, the holding period when the election is made starts on the exercise date.

For incentive stock options, a Section 83(b) election is only effective for the alternative minimum tax. Incentive stock option benefits from holding the stock more than two years after the grant date and more than one year after exercise only apply for regular tax reporting, and the incentive stock option rules superscede Section 83 when an incentive stock option is exercised.

During April, 2025, the IRS issued new Form 15620 for making a Section 83(b) election. The election can still be made with alternative written election language.

According to the instructions for the paper Form 15620, the employee or service provider should “Submit this completed and signed Form 15620 to the IRS via mail with the IRS office with which the person who performs the services files a federal income tax return.”

The IRS also (quietly) allows Form 15620 to be submitted online using its idME portal. According to the instructions on the idME site, Form 15620 may be submitted “either online (preferred), or by mail, but not both.” The Section 83(b) election may only be submitted using Form 15620 when it is submitted online using the idME portal.

To my knowledge, the IRS has made no public announcement of this alternative.

Here is a link for the IRS’s “mobile-friendly form”. https://tinyurl.com/83online

You need an IRS idME online account to file the form online and you can do it using the above URL if you don’t already have one.

An advantage of filing online is you are assured the IRS has received it and shouldn’t misplace it.

The IRS prefers electronic filing because it’s far more efficient for the IRS to process electronic forms. They call paper forms “kryptonite”.

To be effective, a Section 83(b) election must be filed within 30 days after the option is exercised or restricted/unvested stock is granted.

A signed copy of the election must also be submitted to the transferee of the property and the person/company for whom services were performed.

A Section 83(b) election is generally irrevocable — you can’t change your mind later.

Employees or service providers who receive a nonqualified stock option with an early exercise privilege or a restricted stock grant should consult with a tax advisor who knows these rules.

Tax advisors should alert their clients who issue or receive stock-based compensation of this choice for making a Section 83(b) election.

Take mailed estimated tax payments to a USPS retail counter

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  • mike   

On November 24, 2025, the U.S. Postal Service published a notice in the Federal Register clarifying its postmark policies, effective December 24, 2025. https://www.federalregister.gov/documents/2025/11/24/2025-20740/postmarks-and-postal-possession

The new policy is also explained in this article from the USPS Newsroom. https://about.usps.com/newsroom/statements/010226-postmarking-myths-and-facts.htm

Instead of dating the postmark when an item of mail is accepted by the USPS, the postmark is generally dated when the item is processed at its automated processing facility, which might be several days after its accepted.

This might cause an issue for items mailed, but not postmarked, by a critical due date, such as a tax filing due date or voting day for a mail-in ballot.

Here are three ways to ensure a postmark showing the date of delivery:

  1. Request a Manual Postmark. Take the mailpiece to a USPS retail counter and request a “manual (local) postmark”. The postmark will be applied when the item is accepted. There is no additional charge for this service.
  2. Postage Validation Imprint (PVI). When postage is purchased at a retail counter and a PVI label is printed, the label will indicate the date of acceptance.
  3. Certificates of Mailing. A customer may purchase a Certificate of Mailing, or use Registered or Certified Mail, to get a receipt serving as evidence of the date the item was presented for mailing.

Note that the date on customer-applied pre-printed labels, such as from self-service kiosks, Click-N-Ship, or postage meters is not evidence of the mailing date or when the USPS accepted the item.

So, when you’re mailing a tax form, such as the next estimated tax payment due on January 15, 2026, or sending a mail-in ballot close to the deadline, take the item to a USPS retail counter and request a manual postmark, a Postage Validation Imprint, or a Certificate of Mailing.

Very high-income taxpayers should probably accelerate donations to 2025

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  • mike   

Not all of the tax law changes in the One Big Beautiful Bill Act (OBBBA) enacted July 4, 2025 favor high-income taxpayers.

For example, effective for tax years beginning after 2025, under Section 70425 of the Act, the charitable contributions tax deduction for individuals is reduced by 0.5% of the taxpayer’s contribution base for the taxable year.

The contribution base is the taxpayer’s adjusted gross income, computed without regard to any net operating loss carryback to the taxable year.

For most taxpayers, this reduction might not seem significant. For example, if John has adjusted gross income of $1,000,000, the reduction would be $5,000.

Taxpayers with much higher income are hit harder. For example, if Jane has adjusted gross income of $20 million, the reduction would be $100,000. Jane would be in the 37% marginal federal income tax bracket plus 3.8% for the net investment income tax, or 40.8%, so this tax law change could increase Jane’s federal income tax liability by $40,800 for 2026 compared to 2025. If Jane makes $100,000 of charitable contributions each year, she should consider accelerating the contributions she would normally make during 2026 to 2025.

Charitable contributions disallowed because of the 0.5% of contribution base reduction are added to the charitable contributions carryover amount that might be deductible during the 5 subsequent tax years. They are only added to the charitable contributions carryover if the deduction ceiling amount is exceeded, such as 60% of the contribution base for cash contributions to qualifying charities. Otherwise, the deduction for the disallowed charitable contributions are lost. In the example above, if Jane made $100,000 of charitable contributions for 2026, the 60% limitation would be $12 million, so the tax deduction for $100,000 would not be added to the charitable contributions carryover and would be lost.

Another OBBBA change effective after 2025 reduces the tax benefit of itemized deductions by 2/37 (about 5.4%) of the lesser of (1) itemized deductions before the “haircut”, or (2) the taxable income of the the taxpayer, before itemized deductions, that exceeds the threshold for the 37% tax bracket. Note this “haircut” applies to itemized deductions after the 0.5% reduction of charitable contributions.

For example, Jane has taxable income for 2026, before itemized deductions, of $20 million, and itemized deductions before the “haircut” of $1,000,000. The 2026 threshold for the 37% tax bracket for a single person is $640,600. The taxable income, before itemized deductions, exceeding the threshold is $20 million – $640,600 = $19,359,400. The “haircut” would be $1,000,000 X 2/37 = $54,054.

Note that taxpayers age 70 1/2 or older may make qualified charitable distributions (QCDs) from a traditional IRA of up to $108,000 for 2025 and $111,000 for 2026. QCDs aren’t taxable and aren’t subject to the contribution base limits that apply for other charitable contributions. QCDs also “count” for satisfying required minimum distribution (RMD) requirements for traditional IRAs that currently apply for taxpayers who reached age 73 during 2025 or the ages when RMDs applied for earlier years.

Taxpayers who haven’t decided where to donate their charitable contributions yet can “park” the funds in a donor advised fund, community foundation or a private foundation. Lower maximum deduction thresholds might apply.

The 0.5% reduction of the charitable contributions deduction and the 2/37 “haircut” of itemized deductions are only two of the significant changes in OBBBA that are making tax planning more complicated, with many different effective dates and thresholds. Taxpayers should consult with tax advisors who work with tax planning software that incorporates these changes and understand the rules for charitable planning.

Should a parent or the student claim the American Opportunity Tax Credit?

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  • mike   

Did you know the American Opportunity Tax Credit (AOTC) can be claimed either on the income tax return of a parent or the student who is their dependent?

The AOTC is an important tax benefit to help defray education expenses of full-time college students.

The IRS has provided an explanation of Tax Benefits for Education in Publication 970, available at the IRS web site, www.irs.gov.

The credit is for the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of expenses, or a maximum of $2,500 per year for the first four years of qualified post-secondary education. (The credit can’t be claimed for more than four tax years.)

The student must be enrolled at least half-time for at least one academic period that begins during the tax year, or the first three months of the next tax year when qualified expenses were paid during the previous tax year. The student must also be enrolled in a program that leads to a degree, certificate, or other recognized academic credential.

Only tuition and certain related expenses, including books, supplies and equipment needed for a course of study, are included in qualified education expenses for the credit. Room and board don’t qualify for the credit.

When a parent claims the AOTC, amounts paid by the student can be included to compute the credit on the parent’s income tax return. When a dependent child claims the AOTC, amounts paid by parent(s) can be included to compute the credit on the child’s income tax return.

Amounts reimbursed using tax-free funds, such as employer-paid expenses, tax-free scholarships, or tax-free distributions from Section 529 plans (qualified tuition arrangements), don’t qualify for the credit.

The AOTC is phased out when the taxpayer’s modified adjusted gross income (MAGI) is between $80,000 and $90,000 for single persons, or $160,000 and $180,000 for married taxpayers filing a joint return. Married persons who file a separate return and individuals claimed as a dependent by another taxpayer aren’t eligible for the credit.

The income of the parents might exceed the phaseout limitation, or a parent might file a separate return, so the parents might get no tax benefit from the credit. In that case, the student can claim the credit. (IRC Section 25A(f)(1)(A)(iii), Pub. 970, page 20.) The parent(s) may not claim the student as a dependent on their income tax return when the student claims the credit.

Since dependent exemptions have been repealed by the One, Big, Beautiful Bill Act (OBBBA), the main impact on the parents’ income tax return may be whether they can claim the child credit or the credit for other dependents. Since a child must be under age 17 to qualify for the child credit, it won’t apply for most college students. The credit for other dependents is $500 and phases out for married taxpayers who file a joint return with adjusted gross income exceeding $400,000 and other taxpayers with adjusted gross income exceeding $200,000.

40% of the AOTC is a refundable credit. Taxpayers who are subject to the “kiddie tax” aren’t eligible for the refundable credit, so most students who claim the credit on their income tax returns won’t get the refundable credit. (Mostly this applies when the student doesn’t provide more than half of his or her support. See the Instructions for Form 8615.)

Here are some additional rules to be aware of.

A person who qualifies as a dependent of someone else can’t claim himself or herself as a dependent. (A dependent student can’t claim himself or herself as a dependent, even when a parent doesn’t claim them as a dependent.) (IRC Section 152(b)(1).)

Accident and Health plans and HSAs are allowed for medical expenses of individuals qualifying as dependents, not based on whether the dependent exemption was claimed. (IRC Sections 105(b) and 223(d)(2)(A).)

The Kiddie Tax on unearned income of dependents still applies, because a parent is living. (Section 1(g).)

The standard deduction for 2025 is limited for a single person eligible to be claimed as a dependent to the greater of $500 or the sum of $250 plus the individual’s earned income, limited to $15,750. (IRC Section 63(c)(2) and (5).)

There might be state income tax considerations not discussed here for deciding whether to claim the AOTC on the federal income tax return of the parent or the student.

Families should determine whether claiming the AOTC on the federal income tax return of the parent(s) or the student provides the maximum tax benefit. Tax planning computations have become much more complicated under OBBBA. Consider using tax projection software that has been updated for the new tax law.

IRS issues rules for Roth 401(k) catch-up requirement

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  • mike   

On September 16, 2025, the IRS published final regulations relating to catch-up contributions to 401(k) and other elective contribution employer accounts. IR-2025-91. https://www.irs.gov/newsroom/treasury-irs-issue-final-regulations-on-new-roth-catch-up-rule-other-secure-2point0-act-provisions

The SECURE 2.0 Act of 2022 included some important changes for catch-up contributions to 401(k) accounts and other elective contribution employer accounts.

Effective for taxable years beginning after December 31, 2023, catch-up contributions by individuals who have $145,000 (subject to cost of living adjustments) or more of wages for the prior year could only be made to a Roth account, disallowing the exclusion from federal income taxes for that contribution.

In August, 2023, the IRS issued Notice 2023-62, which postponed the effective date for two years, until taxable years beginning after December 31, 2025.

The final regulations include the requirement that catch-up contributions for 401(k) plans must be designated as Roth contributions. Although the final regulations aren’t effective until taxable years beginning after December 31, 2026, the requirement in the tax law hasn’t been further postponed, so the requirement also applies for 2026.

Also note Roth contributions can’t be made unless the plan provides for them, so employees of companies whose plans don’t provide for Roth contributions can’t make catch-up contributions.

The catch-up contribution for employees who reach age 50 by the end of the tax year is generally limited to $7,500 for 2025, to be adjusted for inflation for future years. For taxable years beginning after 2024, plan participants who attain ages 60 through 63 have a higher catch-up contribution limit of 150% of the limit for other employees, or $11,250 for 2025, to be adjusted for inflation in future years.

The final regulations also include rules for other retirement plans, such as SIMPLE plans.

Employers and their plan administrators should meet with their tax advisors and legal counsel about updating their retirement plans for the new final regulations.

Do you qualify for the new federal tips deduction?

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  • mike   

The IRS has issued proposed regulations for what tips qualify for the new federal tips deduction. (IR-2025-92, Prop. Reg. 110032-25, published September 22, 2025. https://www.federalregister.gov/documents/2025/09/22/2025-18278/occupations-that-customarily-and-regularly-received-tips-definition-of-qualified-tips

The deduction is up to $25,000 of qualifying tips received by an individual or a married couple. It’s not an itemized deduction. The social security number of the individual or individuals claiming the deduction must be reported on the income tax return. Married persons must file a joint return to claim the deduction.

The deduction for qualified tips phases out by $100 for each $1,000 over $150,000 of modified adjusted gross income ($300,000 for joint returns.)

The deduction applies for 2025 through 2028.

The deduction applies for employees who receive Form W-2, independent contractors receiving Forms 1099-K or 1099-NEC, and certain business owners.

Qualifying tips must be voluntary and determined by the payor. For example, an automatic tip specified by a restaurant without expressly providing an option to disregard or modify the amount doesn’t qualify for the deduction. Any tip paid in excess of the automatic amount qualifies for the deduction. (Some restaurants might have to segregate accounting for tips that qualify and those that don’t.) When a customer must choose from a list of tip percentages that doesn’t include “no tip”, that tip doesn’t qualify for the deduction.

The proposed regulations include a list of occupations that might qualify for the deduction.

One of the listed occupations is “digital content creator”, so a person who produces a video podcast might qualify to claim the tips deduction.

The services may not be performed in a “specified service trade or business”, as defined for the Qualified Business Income Deduction at Internal Revenue Code Section 199A(d)(2). For a self-employed person, the “specified service trade or business test” is determined based on that person’s occupation. For an employee, the “specified service trade or business test” is determined based on the business of the employer.

For example, a self-employed comedian who receives tips for performing doesn’t qualify for the tips deduction, despite being on the list of qualifying occupations, because “performing arts” is a specified service trade or business.

A pianist who receives tips as an employee of a hotel when playing in the hotel lobby does qualify for the tips deduction, because a hotel isn’t a specified service trade or business.

The IRS has issued a draft Form 1-A for claiming the tips deduction. https://www.irs.gov/pub/irs-dft/f1040s1a–dft.pdf

Remember, the income tax laws of many states, such as California’s, haven’t conformed to this new tax law.

There are many deductions with different phaseouts under the One Big Beautiful Bill Act as well as other limitations under the Internal Revenue Code. I suggest that tax planning computations be made by a tax consultant who is familiar with the new rules using tax planning software that has been updated for recent tax law changes.

Research expensing and 2024 income tax returns

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  • mike   

Technology companies have finally achieved tax relief for domestic research and experimentation (R & E) expenses. Certain “small businesses” can elect to currently deduct them on their extended or superseding 2024 income tax returns and amending or filing an administrative adjustment request for their 2022 – 2023 return.

In order to achieve budget goals, the Tax Cuts and Jobs Act of 2017 included a provision requiring that research and experimental expenses incurred after December 31, 2021 be capitalized and amortized over a 60-month period. The plan was for the amortization requirement to be repealed before it became effective. From that time, technology companies have been lobbying Congress to restore the election to currently expense R & E expenses.

Finally, the expense election was restored for domestic R & E expenses by Section 70302 of the One Big, Beautiful Bill Act of 2025 (OBBBA), effective for tax years beginning after December 31, 2024. https://www.congress.gov/bill/119th-congress/house-bill/1

Most corporations may elect to deduct the unamortized balance of domestic R & E expenses that were previously capitalized for 2022 through 2024 over a one- or two-year period, starting for 2025. (OBBBA Section 70302(f)(2).)

Alternatively, certain small businesses that have average gross receipts of $31,000,000 or less for a taxable year beginning in 2025 may elect to amend their tax returns for 2022 – 2024 and currently deduct amounts that were previously capitalized and amortized. The election must be made by Monday, July 6, 2026. (Note the due date for filing an amended return supersedes that date. For example, a corporation that timely filed its 2022 income tax return, with no extension filed, on April 15, 2023 may not file an amended income tax return after April 15, 2026.) (OBBBA Section 70302(f)(1), Revenue Procedure 2025-28, Sections 3.02(1) and 3.03(3).) (Instead of filing amended income tax returns, partnerships file administrative adjustment requests (AARs).)

According to OBBBA Section 70302(f)(1)(A), the small business expense election should be made on an amended income tax return or an AAR. Many corporations still haven’t filed their 2024 income tax returns, with an extended due date of October 15, 2025. The American Institute of Certified Public Accountants and technology companies asked the IRS to allow them to make the election for 2024 on an originally-filed income tax return.

On August 28, 2025, the IRS issued Revenue Procedure 2025-28. https://www.irs.gov/pub/irs-drop/rp-25-28.pdf According to the Revenue Procedure, certain small business taxpayers may make the election to currently deduct R & E expenses on an originally-filed income tax return. (Rev. Proc. 2025-28, Section 3.03.) In addition, the IRS said that a six-month automatic extension of time to file is granted to any business that didn’t previously request one, and a business that previously filed a 2024 income tax return without electing to currently deduct R & E expenses may make the election by timely filing a superseding income tax return that includes the election. (Rev. Proc. 2025-28, Section 8.)

A business that deducts domestic R & E expenses on an original federal income tax return and complies with the requirements of Rev. Proc. 2025-28, Section 3.03 for all other applicable tax years will be deemed to have made a current-expense election. (Rev. Proc. 2025-28, Section 3.03(4).)

Instead of filing a change of accounting Form 3115, the taxpayer should attach a statement to the income tax return with similar information specified in the Revenue Procedure. (Rev. Proc. 2025-28, Sections 3.03(2) and 3.04.)

Taxpayers should consider the cost of preparing amended income tax returns and AARs, and that the IRS takes about a year to process them, when making the decision whether take to amended return/AAR route, including deducting the expenses currently on the 2024 income tax return, or simply deducting unamortized domestic R & E expenses on their 2025, or 2025 and 2026, income tax returns.

I highly recommend consulting with a qualified tax return preparer when implementing this change.

Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.