Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.

Tax tips and developments relating to individuals

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.

One Big Beautiful Bill Tax Provisions Effective After 2025

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  • mike   

President Trump signed the One Big, Beautiful Bill Act of 2025 (OBBBA), H.R. 1, Public Law 119-21, on July 4, 2025.  Republicans in Congress responded to President Trump’s request for urgency, enacting it mid-year.  Usually, major tax laws are passed at the end of the year.  The Act was narrowly approved, 51-50 in the Senate and 218-214 in the House of Representatives.

The principal part of the Act was to extend most of the cuts in the Tax Cuts and Jobs Act of 2017.

The Act is huge – over 900 pages.  In order to make it more digestible, I previously sent a summary of provisions effective 2025. This article will mostly focus on the provisions taking effect after 2025.

Remember these are federal tax changes.  Check whether your state will conform to them.

You can access the complete law at https://www.congress.gov/bill/119th-congress/house-bill/1/text.

  1. Tax rates extended.  Permanently effective for tax years beginning after December 31, 2025, OBBBA extends the individual income tax rates adopted in the Tax Cuts and Jobs Act of 2017.  The maximum federal income tax rate for individuals, estates and trusts, scheduled to increase to 39.6%, is 37%.  The threshold for the 20% maximum long-term capital gains rate is also extended, indexed for inflation.

The Act adds an additional year inflation adjustment for the 22% tax bracket by adjusting the base year.  (Act § 70101.)

2. Increased standard deduction made permanent.  The standard deduction is slightly increased effective 2026 to $15,750 for singles, $23,625 for heads of households, and $31,500 for married, filing joint returns, indexed for inflation in future years.  (Act § 70102.)

3. Estate and gift tax lifetime exemption made permanent.  The estate and gift tax lifetime exemption is increased to $15 million effective 2026 and indexed for inflation for subsequent years.  (Act § 70106.)

4. Alternative minimum tax exemption and phaseout amounts modified and made permanent.  Effective for tax years beginning after December 31, 2025, the alternative minimum tax (AMT) exemptions adopted for individuals in the Tax Cuts and Jobs Act of 2017 are extended, with annual inflation adjustments slightly modified, using different base years.  (The Tax Cuts and Jobs Act of 2017 didn’t change the AMT exemptions and phaseouts for estates and trusts.)

The thresholds for phasing out the exemptions are reduced from $1,252,700 for married, filing joint and surviving spouses for 2025 to $1,000,000 for 2026, indexed for inflation, thereafter and from $626,350 for singles and heads of households for 2025 to $500,000 for 2026, indexed for inflation thereafter.

The exemption phaseout rate is increased from 25% to 50%, so the exemption is phased out twice as fast under the new law.  (Act § 70107.)

5. Section 529 (Qualified Tuition Programs) changes.  Effective for tax years beginning after December 31, 2025, the annual limit for distributions for a beneficiary from § 529 plans is increased from $10,000 to $20,000. (Act § 70413.)

See item 2 of the article about changes effective 2025 about additional expenses qualifying for the exclusion and postsecondary credentialing expenses.

6. Qualified residence interest.  Effective for tax years beginning after December 31, 2025, the limit for deducting qualified residence interest is permanently $750,000 of acquisition indebtedness.  Home equity indebtedness (other than acquisition indebtedness) doesn’t qualify as qualified residence interest.

Effective for tax years beginning after December 31, 2025, mortgage insurance premiums (previously deductible for 2018 through 2021) are treated as interest on acquisition indebtedness.  The deduction relating to mortgage insurance premiums is phased out for taxpayers with adjusted gross income above $100,000 ($50,000 for married, filing separate returns by $100 for each $1,000 ($500 for married, filing separate returns) in excess of the threshold amounts.  (Act § 70108.)

7. Miscellaneous itemized deductions repealed, except for educator expenses.  Effective for tax years beginning after December 31, 2025, the deduction for miscellaneous itemized deductions is permanently repealed, and unreimbursed employee expenses for eligible educators is removed from the list of miscellaneous itemized deductions.

Expenses of an eligible educator are tax deductible.  An eligible educator is an individual who is a kindergarten through grade 12 teacher, instructor, counselor, interscholastic sports administrator or coach, principal or aide in a school for at least 900 hours during a school year.

Unreimbursed employee expenses for eligible educators include expenses for books, supplies, computer equipment and supplementary materials used by eligible educators as part of instructional activity.  (Act § 70110.)

8. Overall limit on the benefit of itemized deductions.  The “Pease limitation” on itemized deductions that was scheduled to be restored after December 31, 2025 is permanently repealed and replaced with a new limitation, effective for tax years beginning after December 31, 2025.

Under the new limitation, itemized deductions, after applying other limitations, are reduced by 2/32 of the lesser of (1) the amount of itemized deductions; or (2) the amount of taxable income, before itemized deductions over the threshold for the 37% tax bracket.  (Act § 70111.)

9. Gambling loss limit.  Effective for tax years beginning after December 31, 2025, a temporary rule, expiring at the end of 2025, limiting wagering losses has been replaced with a stricter rule.  Under the temporary rule, “losses from wagering transactions” include any deduction otherwise allowable under the Internal Revenue Code in carrying on such transactions.  That rule prevented professional gamblers from using travel expenses, tournament fees and other expenses to generate losses from their gambling businesses.

OBBBA makes that rule permanent, and also adopts another permanent rule limiting “losses from wagering transactions” to the lesser of wagering gains or 90% of the amount of wagering losses.  (Act § 70114.)

10. Extension and modification of exclusion for discharges of student loans.  Effective for discharges after December 31, 2025, the Tax Cuts and Jobs Act allowing the exclusion of income of student loans discharged because of an individual’s death or permanent disability has been extended permanently.  The exclusion applies for a student loan or a private education loan.  In order to qualify for the exclusion, the taxpayer must provide a work-eligible Social Security number.

An American Rescue Plan Act provision extending the exclusion to all student loan discharges is allowed to expire as of December 31, 2025.  (Act § 70119.)

11. Trump savings account and contribution pilot program.  Effective January 1, 2026, parents of any child under age eight may open a Trump account for their child.  The first contribution can’t be made until six months after July 4, 2025.  The accounts may receive contributions from parents, relatives and other taxable entities and from other non-profit and government entities facilitated by the Treasury Department.  To be eligible for an account, the child must be a U.S. citizen and at least one parent must provide their work-eligible Social Security number.

Trump accounts are a kind of traditional IRA that must be invested in a diversified fund that tracks an established index of U.S. equities.  No margin is permitted for account investments.  Contributions to Trump accounts don’t count for the contribution limits for other retirement accounts and the account isn’t aggregated with other IRAs for the purpose of determining required minimum distributions or the taxability of distributions.

Taxable entities may make aggregate contributions up to $5,000 annually of after-tax dollars to a Trump account.  Contributions from tax-exempt entities aren’t subject to the $5,000 annual limit.  The limit will be indexed for inflation after 2027.  Contributions aren’t counted for determining the tax basis of the account.

Contributions from unrelated third parties must be provided to all children within a qualified group – for example, all children in a state, a specific school district or educational institution.

Employers may contribute up to $2,500 to an employee’s child’s Trump account and the contribution isn’t included in the employee’s taxable income.  The limit will be indexed for inflation after 2027.

No contributions can be made to a Trump account after the beneficiary reaches age 18.

The account may be transferred tax-free to a different custodian using a trustee-to-trustee transfer.

Trump account holders may not take distributions until they reach age 18.  From age 18 to 24, account holders may access up to 50% of funds for higher education, training programs, small business loans, or first-time home purchases.  At age 25, account holders may withdraw any amount, up to the full balance, for those limited purposes.  At age 30, account holders may withdraw up to the full balance of the account for any purpose.

Distributions taken for qualified purposes are taxed as long-term capital gains.  Distributions taken for any other purpose are taxed as ordinary income.

If the beneficiary of the account dies before the year that includes their 18th birthday, (1) if the successor to the account is not an estate, the successor will be taxed on the account balance for the year of death; (2) if the successor to the account is an estate, the account balance will be taxed on the final income tax return of the account beneficiary.

(Remember most distributions from Section 529 plans (Qualified Tuition Plans) used for qualified education expenses are tax-free, which might be a better alternative for family savings plans.)

As a pilot program, for U.S. citizens born from January 1, 2024 and December 31, 2028, the federal government will contribute $1,000 per child into every eligible account.  Parents or guardians of newborn children may open an account and receive the $1,000 contribution.  To be eligible for the $1,000 contribution, the child must be a U.S. citizen at birth and both parents must provide work-eligible Social Security numbers.  If the Secretary of the Treasury (the IRS) determines that an eligible individual doesn’t have an account by the first tax return where the parents claim the child credit, the Secretary shall establish an account.  If possible, the account will be opened with the parents’ preferred custodian and investment fund.  Parents have the options to opt out of the account.  (Act § 70204.)

12. Dependent Care Assistance program.  Effective for tax years beginning after December 31, 2025, the exclusion for employer-provided dependent care assistance is increased from up to $5,000 annually ($2,500 for married, filing a separate return) to $7,500 annually ($3,750 for married, filing a separate return.)  (Act § 70404.)

13. Child and Dependent Care Credit.  Effective for tax years beginning after December 31, 2025, the maximum child and dependent care credit rate is increased from 35% to 50%, reduced by 1% for each $2,000 or fraction thereof by which the taxpayer’s adjusted gross income exceeds $15,000.  For adjusted gross income between $43,001 and $75,000 ($86,001 and $150,000 for married filing joint,) the credit rate is 35%.  For adjusted gross income between $75,001 and $105,000 ($150,001 and $210,000 for married, filing joint,) the credit is phased down to 20% by 1% for each $2,000 ($4,000 for married, filing joint) in excess of $75,000 ($150,000 for married, filing joint.) (Act § 70405.)

14. Health Savings Account enhancements.  Effective for months beginning after December, 31, 2025, individuals with high-deductible health plans also will be able to enroll in direct primary care (DPC) arrangements and maintain their health savings account (HSA.)  Up to $150 per month for individuals and $300 per month, adjusted annually for inflation, of HSA funds may be used to pay for DPC services.  (Act §71308.)

Effective for months beginning after December 31, 2025, all bronze and catastrophic health plans on the Exchange are eligible plans for the purpose of making HSA contributions.  (Act § 71307.)

15. Charitable contributions for individuals.  Effective for tax years beginning after December 31, 2025, taxpayers who don’t itemize deductions may claim a permanent deduction of up to $1,000 for single filers, $2,000 for married, filing jointly.  The donations must be made in cash and the charity can’t be a donor advised fund.  (Act §70424.)

Also effective for tax years beginning after December 31, 2025, for taxpayers who itemize deductions, the charitable contributions deduction before other limits is reduced by 0.5% (1/2 %) of the taxpayer’s contribution base for the tax year (adjusted gross income (AGI) without regard to any net operating loss carryback.)  The disallowed deduction due to this limitation is added to the charitable contributions carryforward only when the remaining donations exceed the other AGI limits.  There is an ordering rule for which limitation group the 0.5% reduction relates to. 

The 60% of AGI limitation for cash contributions, scheduled to expire after 2025, is made permanent.  (Act §70425.)

16. Casualty loss changes for individuals.  Effective for tax years beginning after December 31, 2025, the limitation to deduct casualty losses to federally-declared disasters is permanently extended.  In addition, state-declared disasters (including U.S. Territories) and mayor-declared disasters for the District of Columbia are eligible for the deduction.  (Act § 70109.)

17. Other Individual Provisions.

  • Effective for tax years beginning after December 31, 2025, permanently extended the termination of personal exemptions (except the new $6,000 deduction for seniors.)  (Act § 70103.)
  • Effective for tax years beginning after December 31, 2025, permanently repealed the qualified bicycle commuting reimbursement and provides an additional year of inflation adjustment for other qualified transportation fringe benefits.  (Act § 70112.)
  • Effective for tax years beginning after December 31, 2025, permanently extends the provision including ABLE account contributions made by an account’s designated beneficiary as eligible contributions for the saver’s credit.  (Act § 70116.)
  • Effective for tax years beginning after December 31, 2025, permanently extends the increased limit on contributions to ABLE accounts and provides an additional year of inflation adjustment for the base amount of the contribution limit.  (Act § 70117.)
  • Effective January 1, 2026, permanently lists the Sinai Peninsula and other areas as qualified hazard duty areas.  (Act § 70117.)
  • Effective for tax years beginning after December 31, 2026, permanently extends the exclusion for employer payments of student loans and provides an inflation adjustment of the $5,250 maximum exclusion.  (Act § 70412.)

18. Qualified business income deduction extended.  Effective for tax years beginning after December 31, 2025, the 20% qualified business income (QBI) deduction under Section 199A is permanently extended.

The “phase in” threshold where limitations are applied to the deduction are increased from $50,000 to $75,000 for non-joint returns and $100,000 to $150,000 for joint returns.

A new minimum deduction is adopted of $400 for taxpayers with at least $1,000 of QBI from one or more active trades or businesses that the taxpayer materially participates in.  (Act § 70105.)

19. Enhancement of Employer-Provided Child Tax Credit. Effective for tax years beginning after December 31, 2025, the maximum employer-provided child care credit is increased from $150,000 to $500,000, and the percentage of child care expenses covered is increased from 25% to 40%.  (A business that spends at least $1.25 million could receive the full credit.)

Eligible small businesses may receive a $600,000 maximum credit, with 50% of child care expenses covered.  (A qualified small business that spends at least $1.2 million on child care expenses could receive the full credit.)  An eligible small business meets an average annual gross receipts test (it would be $31 million for 2025), based on the 5-year period (instead of the 3-year period) preceding the tax year.  The gross receipts threshold is adjusted annually for inflation.

The $500,000 and $600,000 thresholds are indexed for inflation after 2026. 

Small businesses may pool resources to provide childcare to their employees and businesses may use a third-party intermediary to facilitate childcare services.  (Act § 70401.)

20. Extension and enhancement of Paid Family Leave and Medical Leave Credit.  Effective for tax years beginning after December 31, 2025, the Paid Family and Medical Leave Credit for wages paid to qualifying employees for leave under the Family and Medical Leave Act is extended permanently with three changes.

  • It modifies the credit to allow it to be claimed for an applicable percentage of premiums paid or incurred by an eligible employer during a tax year for insurance policies that provide paid family and medical leave for qualified employees.
  • It makes the credit available in all states.
  • It reduces the minimum employee work requirement from one year to six months.

The applicable percentage starts at 12.5% wages and increases to 25% for each percentage point the payment rate for leave exceeds 50% of wages.  A maximum of 12 weeks of leave for each employee is eligible for the credit. No tax deduction is allowed for expenses for which the credit is claimed.  (Act §70304.)

21. Renewal and enhancement of Opportunity Zones.  A permanent Opportunity Zone (OZ) policy is established built on the original structure.  Rolling ten-year OZ designations are created beginning on January 1, 2027.  The existing designation process is modified to update the definition of a Low-Income Community (ILC) and eliminating the ability for contiguous tracts that are not LICs to be designated as OZs,

The definition of a “low-income community” is reduced to census tracts that have a poverty rate of at least 20% or a median family income that does not exceed 70% of the area median income.  A guardrail is also added to ensure the term “low-income community” does not include any census tract where the median family income is 125% or greater of the area median family income.

The taxpayer benefits are changed so that investors receive incremental reduction in gain starting on the first anniversary of the investment.  Investors will be required to realize their initial gains, reduced by any step-up in basis in the seventh year of the designation window.  For each year that an investor is invested in the fund, their basis will be increased (1) 1% for years 1-3; (2) 2% for years 4-5; and (3) 3% for year 6.

In addition, a new type of Qualified Opportunity Fund (QOF) is created that invests solely in rural areas.  Investments in these “qualified rural opportunity funds” will receive triple the step-up in basis.  A special rule is also created that lowers the “substantial improvement” threshold of existing structures from 100% to 50% in rural areas. 

Additional reporting requirements are adopted for the OZ program and the IRS is given funding to carry out the reporting requirements.  (Act § 70421.)

22. 1% floor for corporate Charitable Donations.  Effective for tax years beginning after December 31, 2025, C corporations may only deduct charitable contributions that exceed 1% of taxable income (1% floor) and don’t exceed 10% of taxable income.  Charitable contributions disallowed because of the 1% floor may be carried forward (up to 5 years) provided the 10% of taxable income threshold is exceeded.

Current year contributions are applied first for the 10% limit.

Charitable contributions carryforwards are reduced to the extent they would increase a net operating loss.  (Act § 70426.)

23. Increased thresholds for filing Forms 1099-MISC and 1099-NEC.  Effective for payments made after December 31, 2025, the threshold for payments for which Form 1099-MISC and Form 1099-NEC is required to be filed is increased from $600 to $2,000, indexed for inflation for tax years beginning after December 31, 2026.  (Act § 70433.)

24. Extension and modification of Limit on Excess Business Losses of Noncorporate Taxpayers.  Effective for tax years beginning after December 31, 2026, the limit for excess business losses of noncorporate taxpayers is made permanent.

Effective for tax years beginning after December 31, 2025, the inflation adjustment for the $250,000 ($500,000 for married, filing joint) threshold for excess business losses will apply to years beginning after December 31, 2025.  The base year for cost of living adjustments will be 2024.  (Act § 70601.)

25. Intangible Drilling and Development Costs for computing Adjusted Financial Statement Income.  Effective for tax years beginning after December 31, 2025, adjusted financial statement income (AFSI) for computing the corporate alternative minimum tax is (1) reduced by any expenses under Internal Revenue Code §263(c) for intangible drilling costs for oil and gas wells and geothermal wells for the amount deducted to compute taxable income for the year and (2) adjusted to disregard any amount of depletion expense reported on the taxpayer’s applicable financial statement for the intangible drilling and development costs of the property.  (Act § 70523.)

26. Income from Hydrogen Storage, Carbon Capture, Advanced Nuclear, Hydropower, and Geothermal Energy added to Qualifying Income of Certain Publicly Traded Partnerships.  Effective after December 31, 2025, activities categorized as qualifying income for publicly traded partnerships to be treated as partnerships for tax purposes is expanded to include the transportation or storage of liquified hydrogen or compressed hydrogen, production of electricity from hydropower, generation of electricity or capture of carbon dioxide at a direct air capture facility, generation of electricity from geothermal deposits or hydropower, and operation of property to produce, distribute or use energy from a geothermal deposit or property that uses the ground or ground water as a thermal energy source or thermal energy sink.  (Act § 70524.)

27. Other provisions for businesses and nonprofits.

  • Effective for tax years beginning after December 31, 2025, the rate of investment tax credit for investments in qualified manufacturing facilities is increased from 25% to 35%.  (Act §70308.)
  • Effective for amounts paid or incurred after December 31, 2025, meals provided on fishing boats and certain U.S. fishing processing facilities aren’t subject to the limitation on tax deductions for business meals.  (Act § 70305.)
  • Effective for calendar years ending after December 31, 2025, the low-income housing credit state allocation ceiling is increased by 12% and, effective for buildings placed in service after December 31, 2025, the bond-financing threshold is reduced to 25%.  For any building for which expenditures are treated as a separate new building under Internal Revenue Code § 42(e), both the rehabilitation expenditures and the original building are treated as placed in service on the date the expenditures are treated as placed in service under § 42(e)(4).  (Act § 70422.)
  • The new markets credit is permanently extended for calendar years beginning after December 31, 2025.  (Act § 70423.)
  • Effective for tax years beginning after December 31, 2025, the charitable contributions deduction threshold for expenses of an individual recognized by the Alaska Eskimo Whaling Commission as a whaling captain carrying on sanctioned whaling activities in Alaska is increased from $10,000 to $50,000.  (Act § 70429.)
  • Effective for tax years beginning after December 31, 2025, the quarterly asset test as qualification as a REIT is changed from not more than 20% to not more than 25% of the assets of the REIT represented by securities of one or more taxable REIT subsidiaries.  (Act § 70439.)
  • Effective for tax years beginning after December 31, 2025, the executive compensation of an employee of a publicly traded member of a controlled group is an allocated portion of $1,000,000.  (An overall $1,000,000 deduction limit applies for the group.)  (Act § 70603.)
  • Effective for tax years beginning after December 31, 2025, the excise tax for investment income of certain private colleges and universities is modified.  The excise tax ranges from 1.5% to 8%.  The tax applies for colleges and university with at least 3,000 tuition-paying students for the previous year, at least 50% located in the United States, and an average endowment, other than assets used to carry out the institution’s exempt purpose, exceeding $500,000 per student. Student loan interest isn’t included in investment income. (Act §70415.)
  • Effective for taxable years beginning after December 31, 2025, the excise tax on excess compensation paid to highly-compensated employees by tax-exempt organizations is expanded to include any employee of an applicable tax-exempt organization (or predecessor) or any former employee employed by the organization during any year beginning after December 31, 2016.  (Act § 70416.)
  • Effective for distilled spirits imported to the United States after December 31, 2025, the cover over of tax on distilled spirits is permanently increased from $10.50 to $13.25.  (Act § 70427.)

28. Clean Energy Provisions repealed by accelerated sunsetting after 2025, accelerated sunsetting after 2025.

  • The § 30C alternative fuel vehicle refueling property credit is terminated for property placed in service after June 30, 2026.  (Act § 70504.)
  • The § 179D energy efficient commercial buildings deduction is terminated for property for which construction begins after June 30, 2026.  (Act § 70507.)
  • The § 45L energy efficient home credit is terminated for homes acquired after June 30, 2026.  (Act § 70508.)
  • The § 45V clean hydrogen production credit is terminated for facilities for which construction begins on or after January 1, 2028.  (Act § 70511.)

29. Termination and Restrictions on Clean Electricity Production Credit.  The §45Y clean electricity production credit is generally terminated for wind or solar facilities placed in service after December 31, 2027, except for wind and solar facilities that begin by July 4, 2026.

For other facilities, the existing phaseout timeline provided at § 45Y(d) (75% for 2034, 50% for 2035, and zero thereafter) applies.

Effective for tax years beginning after July 4, 2025, no credit is allowed for wind or solar property if the taxpayer rents or leases the property to a third party.

Effective for any facility for which construction is begun after December 31, 2025, the facility doesn’t qualify for the credit if a prohibited foreign entity provides material assistance with the construction of the facility.

The credit may not be transferred to a prohibited foreign entity.   (Act § 70512.)

The IRS has issued Notice 2025-42 with guidelines for determining the beginning of construction for Wind and Solar facilities for determining whether a facility qualifies for energy credits.  https://www.irs.gov/pub/irs-drop/n-25-42.pdf

30. Termination and Restrictions on Clean Electricity Investment Credit.  The §48E clean electricity investment credit is generally terminated for wind or solar facilities placed in service after December 31, 2027, except for wind and solar facilities that begin by July 4, 2026.  The credit for energy storage technology facilities is not terminated. 

For other facilities, the existing phaseout timeline provided at § 45Y(d) (75% for 2034, 50% for 2035, and zero thereafter) applies.

Effective for any facility for which construction is begun after December 31, 2025, the facility doesn’t qualify for the credit if a prohibited foreign entity provides material assistance with the construction of the facility.

A prohibited foreign entity or a foreign influenced entity doesn’t qualify for the credit.  (Act § 70513.)

31. Phaseout and Restrictions on Advanced Manufacturing Production Credit.  The §45X advanced manufacturing production credit for producing critical minerals is phased out to 75% of the credit allowed in 2031, 50% for 2032, 25% for 2033 and no credit beginning in 2034. 

The credit for wind components produced and sold after December 31, 2027 is also terminated.

Effective for components sold during tax years beginning after December 31, 2026, a person shall be treated as having sold an eligible component to an unrelated person if— (1) such component (referred to in this paragraph as the ‘primary component’) is integrated, incorporated, or assembled into another eligible component (referred to in this paragraph as the ‘secondary component’) produced within the same manufacturing facility as the primary component, and (2) the secondary component is sold to an unrelated person.

Effective for taxable years beginning after July 4, 2025, the term ‘eligible component’ shall not include any property which includes any material assistance from a prohibited foreign entity.

Specified foreign entities and foreign-influenced entities aren’t eligible for the credit.  (Act § 70514.)

32. Extension and Modification of Clean Fuel Production Credit.  The § 45Z Clean Fuel Production Credit is extended through December 31, 2029. 

Effective for transportation fuel produced after December 31, 2029, only fuel made from feedstocks produced in the United States, Mexico and Canada qualifies for the credit.  (Act § 70521.)

33. Foreign Tax Credit modification.  Effective for tax years beginning after December 31, 2025, the allocation and apportionment of deduction rules are modified for global intangible low-taxed income (GILTI) for determining the foreign tax credit (FTC.)  The rules are also modified about GILTI inclusion in gross income for domestic corporations, to increase the allowance from 80% to 90%.  (Act § 70311.)

Solely for the purposes of the FTC limitation, if a U.S. person maintains an office or other fixed place of business in a foreign country, the portion of taxable income from the sale of exchange outside the United States of inventory property produced in the United States and which is attributable to the foreign office or other fixed place of business is treated as foreign-source taxable income.  The amount treated as foreign-source income can’t exceed 50% of the total taxable income from the sale or exchange of the inventory property.  (Act §70313.)

34. Foreign-Derived Deduction Eligible Income and Net CFC Tested Income.  Effective for tax years beginning after December 31, 2025, the Internal Revenue Code § 250 deduction percentage for foreign-derived intangible income (FDII) and global intangible low-tax income (GILTI) is 33.34% for FDII and 40% for GILTI.  After these deductions, the effective tax rate will be 14% for both FDII and GILTI.

The definition of foreign-derived deduction eligible income is also modified and the deemed tangible income return currently used to determine a domestic corporation’s FDII and the net deemed tangible income return currently used in determining a U.S. shareholder’s GILTI inclusion are eliminated.  (Act § 70312.)

35. Base Erosion Minimum Tax.  Effective for tax years beginning after December 31, 2025, the base erosion minimum tax percentage for the Internal Revenue Code §59A base erosion minimum tax is increased from 10% to 10.5% of modified taxable income over adjusted regular tax liability.  (Act § 70331.)

36. Business Interest Limitation.  Effective for tax years beginning after December 31, 2025, Internal Revenue Code §163(j) is amended to provide that the business interest limitation is calculated before applying any interest capitalization provision, defined as any provision under which interest is (1) required to be charged to a capital account or (2) may be deducted or charged to a capital account.

Any interest which is capitalized under Internal Revenue Code §§263(g) or 263A(f) is not treated as business interest for Internal Revenue Code § 163(j).  The amount of business interest allowed after applying the limitation is applied first to amounts which would be capitalized and the remainder, if any, to amounts which would be deducted.

No portion of any business interest carried forward is treated as business interest to which interest capitalization applies. (Act § 70341.)

37. Other International Tax Reforms effective for tax years beginning after December 31, 2025.

  • Permanent extension of the Internal Revenue Code § 954(c)(6) look-through rule for related controlled corporations.  (Act § 70351.)
  • Restore Internal Revenue Code §958(b) limitation on downward attribution of stock ownership for applying constructive ownership rules.  (Act § 70353.)
  • Modify the pro-rata share rules in Internal Revenue Code § 951(a).  (Act § 70354.)

38. Remittance Transfer Tax.  Effective for transfers made after December 31, 2025, a 1% excise tax is imposed for transfers of funds outside the United States.

The tax applies to funds transferred using a service provider other than a bank, such as Western Union.  The tax applies for cash, money orders, cashier’s checks or any other similar physical instrument.  The service provider collects the tax and pays it to the federal government quarterly.

Remittance transfer tax doesn’t apply to transfers via banks, including payments using credit cards or debit cards.

U.S. citizens who provide proof of citizenship may claim a refund or credit for any remittance transfer tax that they pay.

Noncitizens aren’t entitled to a refund.

Effectively, immigrants and expatriates are penalized for using non-bank money services.  (Act § 70604.)

“Big, Beautiful Bill” isn’t a slam-dunk

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  • mike   

The House Ways and Means Committee has released “The One Big Beautiful Bill” that includes a “wish list” of President Trump’s tax legislation proposals. On Friday, May 16, conservative Republicans joined Democrats on the House Budget Committee to block the legislation, 16 voting in favor and 21 against, from reaching the House floor for a general vote.

The bill would extend most the tax cuts enacted in the Tax Cuts and Jobs Act of 2017 that would otherwise expire after 2025. In addition, the bill includes tax breaks for some tips, overtime and Social Security for four years. The Social Security break would be a $4,000 tax deduction for seniors making less than $75,000 per year.

The bill would also restore 100% bonus depreciation and the expense election for research and experimentation expenses.

In order to partially compensate for the tax cuts, the bill includes about $715 billion in cuts to Medicaid and the Affordable Care Act. States would implement work requirements in 2029 for childless adults on Medicaid who don’t have a disability, requiring them to work for 80 hours per month. Beneficiaries who earn above the federal poverty limit would make co-payments of up to $35 for doctor visits.

The Congressional Budget Office estimates about 8.6 million people could lose their insurance coverage.

Other compensating items include repealing Biden’s student loan forgiveness plans, so more student loan borrowers would be required to repay their loans, and repealing energy incentives (including the $7,500 credit for certain new electric vehicles), enacted under the Biden Administration.

Ironically, conservative Republicans on the House Budget Committee voted against the proposal because they wanted bigger cuts for Medicaid, joining Democrats, who oppose the Medicaid cuts.

Representatives from states that impose income taxes and those from states that don’t impose income taxes are also arguing about how much the ceiling for the itemized deduction for state taxes should be. The limit would be increased from $10,000 to $30,000 under the Ways and Means Committee proposal.

Remember tax legislation is a negotiation with some constraints. House representatives will continue to negotiate the details of the “One Big Beautiful Bill”. None of the Republicans want the 2017 tax cuts to expire, so it’s likely tax legislation will be enacted this year.

Write your representatives in Congress to let them know your concerns for the tax and budget process. https://www.congress.gov/members/find-your-member

Stock Market’s Down! Convert to Roth Now?

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  • mike   

The weak stock market might be an opportunity for taxpayers who want to convert their taxable traditional retirement accounts to tax-free Roth accounts.

On Monday, April 21, 2025, the S&P 500 sank 2.4%. The index at the center of many 401(k) accounts has retreated 16% below its record set two months ago.

The other stock market indexes, bond prices (including U.S. Treasury bonds) and the dollar have also fallen.

Reasons for the market weakness might be uncertainty as a result of President Trump’s imposition of tariffs of 145% to 245% on imports from China, broad-based 10% tariffs on other imports, and more tariffs on imports from other countries after a 90-day pause, together with his threat to fire Federal Reserve Chair Jerome Powell. Firing Chairman Powell threatens the independence of the Federal Reserve, which helps stabilize world financial markets.

With securities prices down, this could be a great time to make a Roth conversion.

What if securities prices fall even more? Timing financial decisions is problematic. Securities prices could fall even more if Trump actually fires Chairman Powell and goes ahead with many of Trump’s proposed tariffs that have been “paused.” Securities prices could improve if Trump reconsiders these threats and proposals and decides to not go ahead with them. Or, something else could happen. We just don’t know what will happen in the future.

We do know prices have already fallen, creating a potential opportunity to save taxes with a Roth conversion.

Why make a Roth conversion?

  1. After a short waiting period, most earnings and appreciation inside a Roth account are tax-free. . The earnings and appreciation inside a traditional retirement account are tax-deferred until distributions are made. (There is an exception for “unrelated business taxable income” that doesn’t apply to most taxpayers.)

2. Distributions from a Roth account after age 59 1/2 are tax-free, and so are many distributions before age 59 1/2. Distributions from a traditional retirement account in excess of any non-deductible contributions are generally taxable.

3. There are no required minimum distributions for a Roth account during the lifetime of the account owner (unless the retirement plan specifies otherwise.) Required minimum distributions generally must be made from a traditional retirement account when the account owner reaches the “applicable age”, currently age 73.

4. When the account owner dies after the required beginning date (April 1 of the year after reaching the “applicable age”), required minimum distributions must be made to the beneficiaries of a traditional retirement account. Since there is no required beginning date for Roth accounts (except Designated Roth Accounts of some employer plans), required minimum distributions don’t apply for most inherited Roth accounts. (Inherited Designated Roth Accounts can be rolled over to beneficiary Roth IRA accounts to avoid having to make required minimum distributions.) (Both traditional and Roth retirement accounts are subject to the requirement to be distributed by the end of the tenth year after the death of the account owner, with some exceptions.)

5. Distributions to beneficiaries from inherited Roth accounts are generally tax-free. Distributions to beneficiaries from inherited traditional retirement accounts are generally taxable, except for the recovery of any nondeductible contributions.

Since required minimum distributions don’t qualify for Roth conversions, taxpayers who have reached their required beginning date MUST TAKE THEIR REQUIRED MINIMUM DISTRIBUTION FOR THE YEAR BEFORE MAKING A ROTH CONVERSION.

A Roth conversion is currently taxable. Planning to have the cash available to pay the income taxes relating to the conversion is critical. You might want to consult with a tax consultant or financial planner to estimate in advance what the tax will be and decide how much to convert.

There can be other “side effects” of a conversion. For example, the additional income can reduce itemized deductions for medical expenses and can result in higher Medicare premiums. Get advice to “look before you leap.”

Now that tax return filing season is over, it’s tax planning season. Whether to make a Roth conversion during 2025 should be a topic on the agenda for a tax planning meeting for everyone who has a traditional retirement account.

Tax relief for Los Angeles fire victims

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  • mike   

The IRS has announce tax relief for individuals and businesses in Los Angeles county affected by wildfires and heavy winds that began January 7, 2025.

Their filing deadline for 2024 income tax returns has been extended to October 15, 2025.

Various tax filings and payment deadlines for returns and payments due from January 7, 2025 through October 15, 2025 have also been postponed to October 15, 2025.

Here’s a link to the news release, IR-2025-10. https://www.irs.gov/newsroom/irs-california-wildfire-victims-qualify-for-tax-relief-various-deadlines-postponed-to-oct-15

Here’s a link to the IRS tax relief in disaster situations page, including other U.S. disasters. https://www.irs.gov/newsroom/tax-relief-in-disaster-situations

Governor Newsom has announced the Franchise Tax Board will also postpone filing and payment dates for 2024 income tax returns to October 15, 2025 for taxpayers located in Los Angeles County. Here’s a link to that announcement. https://www.gov.ca.gov/2025/01/11/california-provides-tax-relief-for-those-affected-by-los-angeles-wildfires/ Here is a link to the Franchise Tax Board’s announcement. https://www.ftb.ca.gov/about-ftb/newsroom/news-releases/2025-01-emergency-tax-relief-for-los-angeles-county-fires.html

The Employment Development Department has announced a 60-day extension of time to file California state payroll tax reports and make payroll tax deposits for employers in Los Angeles and Ventura counties. The extension is not automatic; it must be requested. Here’s a link to the announcement. https://edd.ca.gov/en/about_edd/news_releases_and_announcements/california-supports-southern-california-communities-impacted-by-the-state-of-emergency-and-provides-relief-for-workers-and-businesses/

The California Department of Tax and Fee Administration (CDTFA) (sales and use tax) has also announced a 60-day extension of time to file California sales and use tax reports and make tax deposits for businesses in Los Angeles and Ventura Counties. The extension is not automatic; it must be requested. Here’s a link to the CDTFA’s tax relief page. https://www.cdtfa.ca.gov/services/state-of-emergency-tax-relief.htm

Should a surviving spouse roll over an inherited retirement account?

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  • mike   

When someone passes away is one time it's essential to consult with an estate planning lawyer, a tax advisor like a CPA or enrolled agent, and possibly a financial planner.

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Michael Gray, CPA's Blog

Tax and financial advice from the Silicon Valley expert.