Increased Standard deduction for 2025

• Single and Married Filing Separately $15,750
• Married Filing Jointly $31,500
• Head of Household $23,625

State and Local Tax Deduction (SALT).

The maximum SALT deduction for all filing statuses (except MFS) is increased to $40,000 for 2025.  It is reduced if your income is greater than $500,000

Increased Child Tax Credit

The child tax credit is increased to $2,200 and is indexed to inflation.  The phases out thresholds are $200,000 ($400,000 for MFJ).  The $500 credit for dependents age 17+ is made permanent

Tip Income and Overtime Income Deduction

The tip income and overtime income deduction have some similar requirements:

• Married taxpayers must file a joint return to claim the deduction (married filing separately do not qualify).
• They both are limited: the overtime deduction is $12,500 for a single taxpayer and $25,000 on a joint return. The tip deduction is limited to $25,000 for all filing statuses.
• The modified adjusted gross income (MAGI) phases out the deduction if your income as a single filer is greater than $150,000 or $300,000 for those filing a married filing jointly return.
• These are both temporary deductions that will expire at the end of 2028
• Since these are both retroactive provisions, the IRS will be providing transitional guidance for claiming these deductions in 2025.
• The 2025 Form W-2 will not be changed to reflect these deductions, the employer will be required to provide additional information with the Form W-2 to assist the employee in claiming these deductions. A new 2026 Form W-2 has been issued by the IRS which will be available in January 2027.

Tip Income Deduction

To be deductible as qualified tips, the tips must be earned in an occupation on the list of occupations that customarily and regularly receive tips. The tips must be paid in cash or an equivalent medium. Industries classified as a specified Service, Trade or Business (SSTB) are not eligible, nor are their employees. Tips received from customers through a mandatory or voluntary tip-sharing arrangement, the tip will also qualify. Tips that are part of automatic service charges or automatic gratuities (such as hotel banquet checks) for which the customer has no discretion to either modify or disregard are not eligible for deduction.

Those workers who receive tips outside of payroll, such as the self-employed, must report those tips on Form 4137, Social Security and Medicare Tax on Unreported Tip Income, in order to qualify for the deduction.

A comprehensive list of eligible occupations is available through our office. The short list is:

• 100s – Beverage and food
• 200s- Entertainment and events
• 300s- Hospitality and guest services
• 400s- Home Services
• 500s- Personal services
• 600s- Personal appearance and wellness
• 700s- Recreation and instruction
• 800s –Transportation and delivery

Overtime Income Deduction

The deductible amount is the amount that exceeds your regular rate of pay—the “half” portion of “time-and-a-half” compensation. As with tips, to qualify, the overtime pay must be reported on a Form W-2, Form 1099, or other specified statement furnished to the taxpayer. For the overtime deduction, the IRS notes two criteria from the outset: (1) It only applies if you received overtime, and (2) you and/or your spouse who received qualified tips must have a valid Social Security number to claim the deduction.

This deduction generally only applies to employees, unless an independent contractor is subject to the FSLA rules. Or if the worker is incorrectly classified as an independent contractor, when they are in fact an employee.

Car Loan Interest Deduction

The new deduction for car interest applies to the tax years 2025 through 2028 and allows you to deduct interest paid on a loan used to purchase a qualified vehicle. It can be claimed regardless of whether or not you itemize deductions.  To qualify for the deduction, the interest must be paid on a loan that originates after December 31, 2024, to purchase a vehicle (leased vehicles do not qualify). The original use of the vehicle must start with you (used vehicles do not qualify). The deduction applies to interest paid on a loan for a personal use vehicle (not for business or commercial use) and must be secured by a lien on the vehicle. The maximum deduction available is $10,000. With this provision, the deduction phases out if your modified adjusted gross income is over $100,000 ($200,000 for joint filers).  The final assembly of the vehicle must have occurred within the United States.

Accounts named after the current president

OB3 establishes T Accounts, which are tax-favored saving options that start with newborns. Under a pilot program for T Accounts, parents can make an income tax election on behalf of their newborn who is born as a U.S. citizen in 2025 through 2028. The newborn must have a social security number.

Once the election is made, the Treasury will enroll your newborn in the pilot program and fund a T Account with $1,000. Further guidance will be provided by the IRS on how to make the election.

• Contributions to T Accounts may only be made beginning 12 months after enactment of the Big Beautiful Bill, and only until the child beneficiary reaches age 18.
• T Accounts grow tax-deferred until the beneficiary withdraws the money.
• withdrawals are generally not permitted until the beneficiary reaches age 18
• Accounts are required to be invested in a mutual fund or exchange traded fund which tracks a US stock index and does not have annual fees and expenses of more than 0.1%.

Starting July 4, 2026, parents will be able to make annual contributions of up to $5,000 into the account until the year your child turns 18 years old. Your employer can also make up to a $2,500 contribution to the account—but then the parents can only deposit up to the difference of $5,000. In other words, the most that can go into the account annually is $5,000 but the employer can provide up to $2,500 of that amount and take a business deduction.

No distributions can be taken from the T Account before the year your child turns 18. Until then, the T Account balance grows tax-deferred until withdrawn.

Starting with the year your child turns 18, the T Account transitions into a traditional IRA subject to the same rules governing contributions to and distributions from the traditional IRA.

The Educator Expenses Deduction Can Help Offset Out-of-Pocket Classroom Costs

The Educator Expense Deduction lets eligible teachers and administrators deduct part of the cost of technology, supplies and training from their taxes. They can claim this deduction only for expenses that were not reimbursed by their employer, a grant or other sources. Who is an eligible educator? The taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide. They must also work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law. Things to know about this deduction Educators can deduct up to $300 of certain trade or business expenses that weren’t reimbursed. If two married educators are filing a joint return, the limit rises to $600. These taxpayers cannot deduct more than $300 each. Qualified expenses are amounts the taxpayer paid themselves during the tax year.

Some of the expenses an educator can deduct include:

• Professional development course fees
• Books and supplies
• Other equipment and materials used in the classroom
• Computer equipment, including related software and services
• COVID-19 protective items to stop the spread of the disease in the classroom

IP Pins

The IRS strongly encouraged all individuals to sign up for an Identity Protection PIN (IP PIN) for the 2025 tax season to help protect against tax-related identity theft. An IP PIN is a six-digit number known only to the taxpayer and the IRS that is used to verify one’s identity when filing tax returns.  The IRS maintains an FAQ page about IP PINs.  Taxpayers can obtain their IP PIN through their Individual Online Account. However, the IP PIN application will be down for maintenance starting November 23, 2024 through early January 2025.  If you wish to obtain an IP Pin, you will be able to do that early in 2025.  If you already have an IP Pin due to previous identity theft, you do not need to apply again.  The IRS will send you the new pin in early 2026.

2025 investment income

I am seeing that many funds again had very large Capital Gains for 2025.  You can check with your investment advisor or look at your accounts online to see the projected capital gains that were paid in December 2025.  This increased income  will result in higher tax for 2025.  You may want to make an estimated payment before January 15, 2026 to avoid underpayment penalties.

Required Minimum Distributions (RMD)

If you turn 73 in 2025, you need to start taking distributions from your traditional IRA, 401k, TSP, or other defined benefit plan.  You can wait until April 1, 2026 to take the first distribution.  However, if you do that, then you will have to take two distributions in 2026.  You are not required  to take distributions from Roth IRAs or other Roth defined benefit plans.

If you inherited an IRA after 2019, you are subject to the new 10 year rule.  The IRA must be fully distributed  by the 10^th year after the individuals death.  The Secure Act was ambiguous as to if annual distributions were required.  In July of 2024, the IRS issued Final regulations  to address the RMD issue. In general, the  RMD requirement are:

• If the deceased had been taking required RMDs, then the beneficiary must continue to take annual distributions.  The balance of the account must be distributed by the 10^th anniversary of death
• If the deceased had not yet been required to take distributions, then the beneficiary can wait until the 10^th year after the death of the deceased.

The IRS has waived the penalty for the years 2020- 2024 if the beneficiary has not been taking annual distributions. You must start taking distributions in 2025.  You will want to contact the trustee of the IRA to set up the distribution for the coming year.

There are different rules if the beneficiary is a minor, surviving spouse or is not more than ten years younger than the deceased.

Keep in mind that if you have the entire IRA distributed in the tenth year, it could create a significant tax liability for you.  Generally the distributions from these plans are fully taxable.  The advantage to leaving the funds in the IRA as long as possible is that there is more time for tax deferred growth.  But the downside is that a large IRA could push you into a higher tax bracket.  You will want to plan what strategy is best for your own tax situation.

The 10 year rule only applies to IRAs inherited after 2019.  If you have an IRA that you inherited prior to 2020, you will continue to take distributions based on the schedule set up when you inherited it.

 

529 Plan conversions to Roth IRA

• 529 account holders can transfer up to a lifetime limit of $35,000 to a Roth IRA for a beneficiary.
• The 529 plan must have been open for the designated beneficiary for at least 15 years. (The Roth IRA also must be established in the name of the designated beneficiary of the 529 account.)
• The amount transferred from a 529 account to a Roth IRA in the applicable year, together with all other contributions in the year to IRAs for the same beneficiary, must not exceed the Roth IRA annual contribution limit applicable to the beneficiary.
• Additionally, the transfer amount must come from contributions made to the 529 account at least 5 years prior to the transfer date and the aggregate amounts transferred from 529 accounts to all Roth IRAs must not exceed $35,000 per beneficiary.

Residential Energy Credit

the residential energy credits were cancelled with the new tax law in 2025.  There are no credits Energy improvements after 12/31/2025.

IRS Issues New RMD Tables . . . for 2022!

You can look forward to somewhat smaller required minimum distributions (RMDs) from your IRA and company retirement savings plan beginning in 2022. That’s because, on November 6, the IRS released new life expectancy tables that are used to calculate RMDs. The new tables are not effective until 2022. RMDs are waived for 2020, and RMDs for 2021 will be calculated under the current tables.

Kiddie Tax   The SECURE Act (Division O, Page 647 of the Appropriations Act) provides relief for kiddie tax. For tax years beginning after Dec. 31, 2019, the unearned income of certain children is again taxed at the parents’ tax rate. In 2018 and 2019, the Tax Cuts and Jobs Act taxed the unearned income of children using the much higher trust tax rates. The law is changed to allow a taxpayer to elect (at such time and in such manner as the IRS may provide) for the change to also apply to taxable years beginning in 2018, 2019, or both (as specified by the taxpayer in his or her election).

New tax-related retirement options: The Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, is a major part of this bill.

Provisions which are now law, include:

• Part-time workers can participate in 401(k) plans.
• Required minimum distributions (RMDs) no longer kick in at age 70½. The age for required distributions out of a tax-deferred retirement account can now wait until you turn 72.
• Contributions could be made to traditional IRA contributions by those older than 70½.
• New parents, including adoptive moms and dads, could make penalty-free retirement plan withdrawals from qualified retirement plans.
• Some home health care workers can contribute to a defined contribution plan or IRA.
• Inherited IRAs, instead of being stretched out tax-deferred over beneficiaries' lifetimes, now must be drawn down completely within 10 years.
• Small employers can apply for a new tax credit of up to $500 per year to help defray startup costs for new 401(k) and SIMPLE IRA plans that include automatic employee enrollment.

 

Click here for Highlights of  the Tax Cuts and Jobs Act

For the complete IRS publication go to:   https://www.irs.gov/pub/irs-pdf/p5307.pdf