Filed under: Uncategorized — Amanda Perry @ 10:53 pm
The IRS has issued new guidance regarding Trump Accounts, including the release of Notice on Trump Accounts, draft Form 4547, and related draft instructions. As this new program continues to take shape, staying informed will be essential for families and advisors preparing for its implementation.
To help taxpayers and practitioners monitor developments, the IRS has also introduced a new resource outlining a timeline of released guidance, along with key insights into how the program is expected to function once effective.
Overview of Trump Accounts
Trump Accounts are designed to support long-term savings for eligible children, with federal “seed” contributions initiating each account. While final regulations are still forthcoming, the IRS has signaled several important features and planning considerations.
Program Availability
The Trump Account program is expected to become available in mid-2026, with federal contributions scheduled to begin on July 4, 2026.
Eligibility is limited to:
Eligible Beneficiaries
Eligibility for Trump Accounts is limited to children who have not yet reached age 18 by the end of the calendar year and who have a valid Social Security Number. Each qualifying child may have only one funded Trump Account.
Account Setup
Accounts will be established by an authorized individual, which may include:
A parent
A legal guardian
An adult sibling
A grandparent
The authorized individual will serve as the trustee during the child’s minority, overseeing the account throughout its designated “growth period.”
Setup will be completed using IRS Form 4547 or via an expected online portal, according to the draft instructions released in December 2025.
Planning Considerations
As with any federally funded savings program, there are potential planning opportunities.
Once the initial governmental seed money is deposited, families may want to evaluate the benefits of completing a 100% trustee-to-trustee transfer to a qualified financial institution of their choosing. This strategy may provide greater flexibility in managing the account, depending on final regulations and custodial options.
Advisors should monitor forthcoming regulatory updates to ensure proper handling and compliance once transfers are permitted.
What Comes Next?
The IRS has announced a notice of intent to issue regulations interpreting Section 530A, which governs Trump Accounts. Final instructions for Form 4547 and updated rules for account administration are expected as we approach the program’s launch.
Our firm will continue to review new releases as they become available and provide timely updates to keep you informed.
The qualified business income (QBI) deduction was a centerpiece of the Tax Cuts and Jobs Act, which went into effect in 2018. Initially, it was only available through 2025, but the write-off was made permanent in a law enacted on July 4, 2025, and it’s available to eligible individuals.
The QBI deduction can be up to 20% of:
QBI earned from a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for federal income tax purposes, plus,
QBI from a pass-through business entity, meaning a partnership, an LLC that’s treated as a partnership for federal income tax purposes or an S corporation.
Pass-through businesses report their federal income tax items to their owners, who then take them into account on their owner-level returns. The QBI deduction, when allowed, is then written off at the owner level, and it can potentially be a big tax-saver.
Deduction Basics
QBI means qualified income and gains from an eligible business reduced by related deductions and losses. According to the IRS, QBI from a business is reduced by:
The allocable deduction for a contribution to a self-employed retirement plan,
The allocable deduction for 50% of your self-employment tax bill, and
The allocable deduction for self-employed health insurance premiums.
Income from the business of being an employee doesn’t count as QBI. The same is true of guaranteed payments received by a partner or an LLC member treated as a partner for tax purposes for services rendered to a partnership or LLC (often called partner salaries). Salary collected by an S corporation shareholder-employee does not count as QBI, nor does salary collected by a C corporation shareholder-employee.
On your Form 1040, the QBI deduction doesn’t reduce adjusted gross income (AGI). In effect, it’s treated the same as an allowable itemized deduction.
Unfortunately, the QBI deduction also doesn’t reduce your net earnings from self-employment for purposes of the self-employment tax nor does it reduce your net investment income for purposes of the 3.8% net investment income tax (NIIT) that can hit higher-income individuals.
Deduction Limitations
At higher income levels, unfavorable QBI deduction limitations come into play. For 2025, the limitations begin to phase in when taxable income (calculated before any QBI deduction) exceeds $201,750 ($403,500 if you’re a married joint filer). These amounts are up from $197,300 and $394,600, respectively, in 2025.
If your income exceeds the applicable phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the tax year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.
The limitation based on the UBIA of qualified property is intended to benefit capital-intensive businesses like manufacturing or hotel operations. Qualified property means depreciable tangible property (including real estate) that’s owned by a qualified business and used by that business for the production of QBI. The UBIA of qualified property generally equals its original cost when it was first put to use in your business.
Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain amount (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).
Unfavorable Rules for Specified Service Trades or Businesses
If your operation is a specified service trade or business (SSTB), QBI deductions begin to be phased out when your taxable income (calculated before any QBI deduction) exceeds an applicable threshold. See the right-hand box for what counts as an SSTB.
Bottom Line: If your taxable income exceeds the applicable complete phase-out number, you’re not allowed to claim any QBI deduction based on income from any SSTB.
Aggregating Businesses
Aggregating businesses can allow an individual with taxable income high enough to be affected by the limitations based on W-2 wages and the UBIA of qualified property to claim a bigger QBI deduction than if the businesses were considered separately.
For example, say you are a high-income individual who owns an interest in one business with lots of QBI but little or no W-2 wages and an interest in a second business with minimal QBI but lots of W-2 wages. Aggregating the two businesses can result in a healthy QBI deduction while keeping them separate could result in a lower deduction or maybe no deduction. However, you must pass tests set forth in IRS regulations to be allowed to aggregate businesses.
Key Point: You can’t aggregate a SSTB with any other business, including another SSTB.
Maximize the Benefits
The QBI deduction rules are explained in detail in IRS regulations that are lengthy and complex. Your tax professional can advise you on how to get the best QBI deduction results and the best overall federal tax results in your specific circumstances.
Connecticut has enacted a new First-Time Home Buyer Savings Program designed to help residents save for homeownership while offering meaningful tax incentives to individuals and employers. The program was established under Act 25-1 (H.B. 8002), passed during the November 2025 Special Session, and becomes effective January 1, 2026.
Overview of the Program
Beginning with the 2027 tax year, eligible Connecticut residents will be able to deduct qualified contributions, interest, and certain withdrawals from a designated First-Time Home Buyer Savings Account. Additionally, employers who contribute to their employees’ accounts may qualify for a new business tax credit.
The program is intended to support first-time home buyers amid rising housing costs and encourage employers to participate in helping their workforce achieve homeownership.
Key Tax Benefits for Individuals
Individuals who open and contribute to a First-Time Home Buyer Savings Account may begin claiming tax deductions in the 2027 tax year. However, the program allows the 2027 deduction to include eligible contributions made as early as the 2026 tax year.
To qualify, account holders must meet federal adjusted gross income (AGI) limits:
Single filers: AGI below $125,000
Joint filers: AGI below $250,000
Eligible individuals may deduct:
Annual contributions to the account, up to $2,500 for single filers or $5,000 for joint filers
Accrued interest earned on the account
Qualified withdrawals used by the account holder/beneficiary to pay or reimburse eligible first-time home buyer costs
Employer Tax Credits
Starting in the 2027 tax or income year, employers may receive a corporate business tax or personal income tax credit (excluding withholding tax) when they contribute to their employees’ First-Time Home Buyer Savings Accounts.
The credit equals 10% of employer contributions,
Capped at $2,500 per employee per year
This incentive provides employers an opportunity to support employee financial well-being while also benefiting from a state tax credit.
When Benefits Begin
Although the program is effective January 1, 2026, both deductions and credits first apply in the 2027 tax year. Importantly, contributions made in the 2026 tax or income year may still be counted toward the 2027 deduction or credit.
What This Means for Connecticut Residents and Employers
The First-Time Home Buyer Savings Program represents a significant step in supporting future homeowners and strengthening Connecticut’s workforce benefits landscape.
Individuals planning to purchase their first home can begin contributing to these accounts as early as 2026 to maximize future deductions. Employers may also wish to consider incorporating contributions into their benefits packages starting in 2026 to take full advantage of the 2027 credit.
Our team at Beers, Hamerman, Cohen & Burger, P.C. is available to help individuals and employers evaluate eligibility and plan ahead for these new opportunities. If you have questions about how this program may impact your tax planning, please contact us.
One could say that there are only two key milestones in retirement planning: the day you begin participating in a retirement savings account and the day you begin drawing money from it. But, of course, there are others as well.
One is the day you turn 50 years old. Why? Because those age 50 or older on December 31 of any given year can start making “catch-up” contributions to their employer-sponsored retirement plans by that date. These are additional contributions to certain retirement accounts beyond the regular annual limits.
Maybe you haven’t yet saved as much for retirement as you’d like to. Or perhaps you’d just like to make the most of tax-advantaged savings opportunities. Whatever the case may be, let’s get caught up with the latest catch-up contribution amounts.
401(k)s and SIMPLEs
Under 2026 limits for 401(k)s, if you’re age 50 or older, after you’ve reached the $24,500 maximum limit for all employees, you can contribute an extra $8,000, for a total of $32,500. (In 2025, the contribution limit was $23,500 with a $7,500 catch-up contribution for those age 50 or older.)
If your employer offers a Savings Incentive Match Plan for Employees (SIMPLE) instead, your regular contribution maxes out at $17,000 in 2026 (up from $16,500 in 2025). If you’re 50 or older, you’re allowed to contribute an additional $4,000 in 2026 (up from $3,500 in 2025). That means if you’re eligible for catch-up contributions in 2026, you can contribute $21,000 in total for the year.
But check with your employer because, while most 401(k) plans and SIMPLEs offer catch-up contributions, not all do.
Self-Employed Plans
If you’re self-employed, retirement plans such as an individual 401(k) — or solo 401(k) — also allow catch-up contributions. A solo 401(k) is a plan for those with no other employees. You can defer 100% of your self-employment income or compensation, up to the limit of $24,500 in 2026, plus an $8,000 catch-up contribution. These amounts are up from $23,500 in 2025, plus a $7,500 catch-up contribution.
Keep in mind that this is just the employee salary deferral portion of the contribution. You can also make an “employer” contribution of up to 20% of self-employment income or 25% of compensation.
IRAs, Too
Catch-up contributions to a traditional (non-Roth) account not only can enlarge your retirement nest egg but also may reduce your tax liability. And keep in mind that catch-up contributions are available for IRAs, too, and the deadline for 2026 contributions is April 15, 2027. The amount you can contribute to a traditional or Roth IRA in 2026 is $7,500 with a $1,100 catch-up contribution (up from $7,000 and $1,000, respectively, for 2025. If you have questions about catch-up contributions or other retirement saving strategies, contact your tax advisor.
As we approach the end of the 2025 tax year, we want to bring to your attention a valuable tax planning strategy known as “bunching” itemized deductions. For 2025, the standard deduction amounts have increased to $31,500 for married filing jointly, $23,625 for head of household, and $15,750 for single or married filing separately. These amounts are adjusted annually for inflation.
Recent legislation has temporarily increased the State and Local Tax (SALT) deduction limit for individuals who itemize deductions on Schedule A (Form 1040). For 2025, the maximum SALT deduction is $40,000 ($20,000 if married filing separately). This limit applies to state and local income taxes, general sales taxes (if elected instead of income taxes), real property taxes, and personal property taxes.
Please note, if your modified adjusted gross income (AGI) exceeds $500,000 ($250,000 if married filing separately), the deduction begins to phase out but cannot be reduced below $10,000 ($5,000 if married filing separately). If your annual itemized deductions are close to the standard deduction, you may benefit by timing certain deductible expenses—such as charitable contributions, medical expenses, or state and local taxes—so that they are concentrated in one year. This can allow you to exceed the standard deduction in that year and itemize, while taking the standard deduction in alternate years. This approach may help maximize your overall tax savings over multiple years. Careful planning is needed, especially for taxpayers who may be subject to the alternative minimum tax (AMT), as certain itemized deductions do not reduce AMT liability.
Additionally, for tax years beginning after 2025, high-income taxpayers may face a phaseout of itemized deductions. If your adjusted gross income (AGI) exceeds a certain threshold, your allowable itemized deductions may be reduced, which can limit the effectiveness of bunching deductions.
We recommend reviewing your anticipated deductible expenses for 2025 and 2026 to determine if bunching could be advantageous for you.
Beers, Hamerman, Cohen & Burger, PC would like to wish you and your family a very Happy Thanksgiving. Both offices will close early on Wednesday November 26th and resume normal business orders on Monday December 1st.
Connecticut residents now have access to a groundbreaking student loan reimbursement program designed to ease the financial burden faced by many college graduates. As of January 1, 2025, eligible participants may receive up to $5,000 per year for a maximum of four years, totaling up to $20,000 in student loan forgiveness. The program is funded with $6 million in the current budget cycle and awards are being distributed on a first-come, first-served basis.
This initiative—led by legislative efforts in Hartford—marks the first program of its kind in the country and reflects a collaborative, bipartisan commitment to strengthening the state’s workforce and economy.
Eligibility Requirements
The Office of Higher Education (OHE) may approve applicants who meet the following criteria:
Educational Requirement Graduated from a Connecticut public or private college or university with a bachelor’s or associate degree, or earned an occupational/professional license or certificate. Individuals who left a Connecticut institution in good standing and received a hardship waiver from OHE may also qualify.
Residency Must have been a Connecticut resident for at least five years.
Income Qualifications
Single filers: Connecticut adjusted gross income of $125,000 or less and must file as unmarried.
Married or head-of-household filers: Connecticut adjusted gross income of $175,000 or less and must file as head of household, married filing jointly, or surviving spouse.
Loan Status Must have an outstanding student loan balance and have made payments in 2024 toward one or more of the following: Federal Direct Loans, Federal Direct PLUS Loans, Federal Perkins Loans, CHESLA loans, other state-sponsored student loans, or private student loans.
Service Requirement Must have completed at least 50 volunteer hours after January 1, 2024, at a Connecticut nonprofit registered with the Department of Consumer Protection, a municipal government, a nonprofit Board of Directors, or through military service.
This reimbursement program represents an important investment in Connecticut’s future by supporting graduates who contribute to the local community and economy.
As a Partner at Beers, Hamerman, Cohen & Burger, Shari specializes in tax services, providing clients with strategic consulting, planning, and compliance guidance. Beyond client work, she is deeply committed to supporting the growth and success of her team and the firm. She strives to foster collaboration, mentor emerging professionals, and contribute to an environment where everyone can thrive both personally and professionally.
What inspired you to pursue the CPA career path? My interest in accounting began in high school, when I took my first accounting class and discovered how much I enjoyed the logic and structure of the subject. Encouraged by my father, I decided to pursue a degree in accounting and began working for a small CPA firm after college. That early experience confirmed my passion for the profession and set me on the path toward a rewarding and dynamic career as a CPA.
What professional accomplishment are you most proud of? I am most proud of becoming one of the first female equity partners at Beers, Hamerman, Cohen & Burger, alongside two other accomplished women. This milestone represents not only a personal achievement, but also meaningful progress toward greater representation and leadership opportunities for women in our firm and within the accounting profession.
What is your next major goal? My next major goal is to contribute to the continued growth and success of Beers, Hamerman, Cohen & Burger. I am passionate about helping the firm expand its client relationships, strengthen its culture of excellence, and support the next generation of professionals as they develop their skills and leadership potential.
What is your favorite thing to do outside of work? Outside of work, I love spending time with my family, golfing, playing pickleball, reading, and traveling. These activities help me recharge, stay balanced, and bring fresh energy and perspective to my professional life.
Among its numerous tax provisions, the One Big Beautiful Bill Act (OBBBA) reinstated immediate deductions for research and experimental (R&E) expenditures under Internal Revenue Code Section 174, beginning in 2025. The IRS has recently issued transitional guidance (Revenue Procedure 2025-28) on how this change will be implemented.
The guidance addresses several critical issues. Here’s what businesses of all sizes need to know.
The reinstatement
R&E expenditures generally refer to research and development costs in the experimental or laboratory sense. They include costs related to activities intended to discover information that would eliminate uncertainty about the development or improvement of a product.
Since 2022, the Tax Cuts and Jobs Act (TCJA) has required businesses to amortize domestic R&E costs over five years, with foreign costs amortized over 15 years. The OBBBA permanently reinstates the pre-TCJA treatment of domestic R&E costs, allowing their deduction for expenses incurred or paid in tax years beginning after 2024.
The OBBBA also permits small businesses that satisfy a gross receipts test to claim the R&E deduction retroactively to 2022. (For 2025, average annual gross receipts for the previous three years must be $31 million or less.) And any business that incurred domestic R&E expenses in 2022 through 2024 may elect to accelerate the remaining deductions for those expenditures over either a one- or two-year period.
The immediate deduction of qualified R&E expenses isn’t mandatory. Depending on a variety of factors, in some situations, claiming it may not be advisable. Taxpayers generally can instead elect to capitalize and amortize such expenses paid in a tax year after 2024 over at least 60 months. The election must be made by the due date, with extensions, of the original tax return for the first tax year to which the election applies. For 2025, a taxpayer that makes an accounting method change to capitalize and amortize R&E expenses will be deemed to have made the election.
Retroactive deductions for small businesses
As noted, eligible small businesses can elect to treat the changes to Sec. 174 as if they took effect for tax years beginning after 2021, rather than after 2024. How to do this depends in part on whether the taxpayer has already filed a 2024 tax return.
If the taxpayer filed a 2024 return before August 28, 2025, an automatic extension to supersede that return to include the new guidance is available. However, the taxpayer must file that replacement return by the extended deadline (typically September 15 or October 15). Alternatively, the taxpayer can file an amended 2024 return, following one of the two options discussed below.
If the taxpayer didn’t file a 2024 return by August 28, the taxpayer can file by the applicable extended deadline and either:
Elect to expense eligible R&E expenses under the new guidance, which would also require filing amended returns for 2022 and 2023, or
Do an automatic method of accounting change and a “true-up” adjustment on the 2024 return for the 2022 and 2023 R&E expenses.
Elections must be made by the earlier of July 6, 2026, or the applicable deadline for filing a claim for a credit or refund for the tax year (generally, three years from filing the return).
Accelerated deductions for all businesses
Businesses with unamortized domestic R&E expenses under the TCJA can elect to fully recover those remaining expenses on their 2025 income tax returns or over their 2025 and 2026 returns.
Notably, the IRS guidance states that taxpayers “may elect to amortize any remaining unamortized amount” of such expenses. This language suggests that the deduction will be considered an amortization expense. This is significant in light of changes the OBBBA made to the business interest expense deduction.
The business interest deduction generally is limited to 30% of the taxpayer’s adjusted taxable income (ATI). (Taxpayers that meet the same annual gross receipts test discussed earlier are exempt from the limitation.) Under the OBBBA, beginning in 2025, ATI for purposes of the interest deduction is calculated without deductions for depreciation, amortization or depletion. So amortization deductions are “added back,” potentially increasing the ATI and the allowable business interest deduction. If R&E expenses aren’t treated as an amortization deduction, they could reduce the allowable business interest deduction.
The interplay with the research credit
The Sec. 41 research tax credit is also available for certain research-related expenses, and you can’t claim both the credit and the deduction for the same expense. A tax deduction reduces the amount of income that’s taxed, while a tax credit reduces the actual tax you owe dollar-for-dollar, providing much more tax savings than a deduction of an equal amount. But the types of expenses that qualify for the credit are narrower than those that qualify for the deduction.
The OBBBA changes a TCJA provision so that the amount deducted or charged to a capital account for research expenses is reduced by the full amount of the research credit, as opposed to being subject to a more complex calculation that had been in effect under the TCJA. The amount that’s capitalized is reduced by the amount of the credit claimed. For example, suppose the allowed credit is $20,000. The capitalized amount for the year would be reduced by $20,000.
The OBBBA continues, however, to allow taxpayers to elect to take a reduced research credit, rather than reducing their R&E deduction. The OBBBA also allows certain small businesses (generally determined by the gross receipts test mentioned above) to make late elections to reduce their research credit — or to revoke prior elections to reduce the credit. The late elections generally are available for tax years for which the original return was filed before September 15, 2025, and must be made by the earlier of July 6, 2026, or the deadline for filing a claim for a credit or refund for the tax year, on an amended return or an administrative adjustment request (AAR).
Reduced uncertainty
The IRS guidance also provides automatic IRS consent to applications to change accounting methods for domestic R&E expenses under the TCJA, the OBBBA, the small business retroactive method and the recovery of unamortized method — reducing uncertainty. We can help address any questions you have about the tax treatment of R&E expenses.
The One Big Beautiful Bill Act (OBBBA) shifts the landscape for federal income tax deductions for state and local taxes (SALT), albeit temporarily. If you have high SALT expenses, the changes could significantly reduce your federal income tax liability. But it requires careful planning to maximize the benefits — and avoid potential traps that could increase your effective tax rate.
A little background
Less than a decade ago, eligible SALT expenses were generally 100% deductible on federal income tax returns if an individual itemized deductions. This provided substantial tax savings to many taxpayers in locations with higher income or property tax rates (or higher home values).
Beginning in 2018, the Tax Cuts and Jobs Act (TCJA) put a $10,000 limit on the deduction ($5,000 for married couples filing separately). This SALT cap was scheduled to expire after 2025.
What’s new?
Rather than letting the $10,000 cap expire or immediately making it permanent, Congress included a provision in the OBBBA that temporarily quadruples the limit. Beginning in 2025, taxpayers can deduct up to $40,000 ($20,000 for separate filers), with 1% increases each subsequent year. Then in 2030, the OBBBA reinstates the $10,000 cap.
While the higher limit is in place, it’s reduced for taxpayers with incomes above a certain level. The allowable deduction drops by 30% of the amount by which modified adjusted gross income (MAGI) exceeds a threshold amount. For 2025, the threshold is $500,000; when MAGI reaches $600,000, the previous $10,000 cap applies. (These amounts are halved for separate filers.) The MAGI threshold will also increase 1% each year through 2029.
Deductible SALT expenses include property taxes (for homes, vehicles and boats) and either income tax or sales tax, but not both. If you live in a state without income taxes or opt for the sales tax route for another reason, you don’t have to save all your receipts for the year and manually calculate your sales tax; you can use the IRS Sales Tax Deduction Calculator to determine the amount of sales tax you can claim. (It includes the ability to add actual sales tax paid on certain big-ticket items, such as a vehicle.) The increased SALT cap could lead to major tax savings compared with the $10,000 cap. For example, a single taxpayer in the 35% tax bracket with $40,000 in SALT expenses and MAGI below the threshold amount would save an additional $10,500 [35% × ($40,000 − $10,000)].
The calculation would be different if the taxpayer’s MAGI exceeded the threshold. Let’s say MAGI is $560,000, which is $60,000 over the 2025 threshold. The cap would be reduced by $18,000 (30% × $60,000), leaving a maximum SALT deduction of $22,000 ($40,000 − $18,000). Even reduced, that’s more than twice what would be permitted under the $10,000 cap.
The itemization decision
The SALT deduction is available only to taxpayers who itemize their deductions. The TCJA nearly doubled the standard deduction. As a result of that change and the $10,000 SALT cap, the number of taxpayers who itemize dropped substantially. And, under the OBBBA, the standard deduction is even higher — for 2025, it’s $15,750 for single and separate filers, $23,625 for heads of household filers, and $31,500 for joint filers.
But the higher SALT cap might make it worthwhile for some taxpayers who’ve been claiming the standard deduction post-TCJA to start itemizing again. Consider, for example, a taxpayer who pays high state income tax. If that amount combined with other itemized deductions (generally, certain medical and dental expenses, home mortgage interest, qualified casualty and theft losses, and charitable contributions) exceeds the applicable standard deduction, the taxpayer will save more tax by itemizing.
Beware the “SALT torpedo”
Taxpayers whose MAGI falls between $500,000 and $600,000 and who have large SALT expenses should be aware of what some are calling the “SALT torpedo.” As your income climbs into this range, you don’t just add income. You also lose part of the SALT deduction, increasing your taxable income further.
Let’s say your MAGI is $600,000, you have $40,000 in SALT expenses and you have $35,000 in other itemized deductions. The $100,000 increase in income from $500,000 actually raises your taxable income by $130,000:
MAGI
$500,000
$600,000
SALT deduction
$40,000
$10,000
Other itemized deductions
$35,000
$35,000
Total itemized deductions
$75,000
$45,000
Taxable income
$425,000
$555,000
At a marginal tax rate of 35%, you’ll pay $45,500 (35% × $130,000) in additional taxes, for an effective tax rate of 45.5%.
In this scenario, even with your SALT deduction reduced to $10,000, you’d benefit from itemizing. But if your $10,000 SALT deduction plus your other itemized deductions didn’t exceed your standard deduction, the standard deduction would save you more tax.
Tax planning tips
Your MAGI plays a large role in the amount of your SALT deduction. If it’s nearing the threshold that would reduce your deduction or already over it, you can take steps to stay out of the danger zone. For example, you could make or increase (up to applicable limits) pre-tax 401(k) plan and Health Savings Account contributions to reduce your MAGI. If you’re self-employed, you may be able to set up or increase contributions to a retirement plan that allows you to make even larger contributions than you could as an employee, which also would reduce your MAGI.
Likewise, you want to avoid moves that increase your MAGI, like Roth IRA conversions, nonrequired traditional retirement plan distributions and asset sales that result in large capital gains. Bonuses, deferred compensation and equity compensation could push you over the MAGI threshold, too. Exchange-traded funds may be preferable to mutual funds because they don’t make annual distributions.
At the same time, because the higher cap is temporary, you may want to try to maximize the SALT deduction every year it’s available. If your SALT expenses are less than $40,000 and your MAGI is below the reduction threshold for 2025, for example, you might pre-pay your 2026 property tax bill this year. (This assumes the amount has been assessed — you can’t pre-pay based only on your estimate.)
Uncertainty over PTETs
In response to the TCJA’s $10,000 SALT cap, 36 states enacted pass-through entity tax (PTET) laws to help the owners of pass-through entities, who tend to pay greater amounts of state income tax. The laws vary but typically allow these businesses to pay state income tax at the entity level, where an unlimited amount can be deducted as a business expense, rather than at the owner level, where a deduction would be limited by the SALT cap.
The OBBBA preserves these PTET workarounds, and PTET elections may remain worthwhile for some pass-through entities. An election could reduce an owner’s share of self-employment income or allow an owner to take the standard deduction.
Bear in mind, though, that some states’ PTET laws are scheduled to expire after 2025, when the TCJA’s $10,000 cap was set to expire absent congressional action. There’s no guarantee these states will renew their PTETs in their current form, or at all.
SALT deduction and the AMT
It’s worth noting that SALT expenses aren’t deductible for purposes of the alternative minimum tax (AMT). A hefty SALT deduction could have the unintended effect of triggering the AMT, particularly after 2025.
Individual taxpayers are required to calculate their tax liability under both the regular federal income tax and the AMT and pay the higher amount. Your AMT liability generally is calculated by adding back about two dozen “preference and adjustment items” to your regular taxable income, including the SALT deduction.
The TCJA increased the AMT exemption amounts, as well as the income levels for the phaseout of the exemptions. For 2025, the exemption amount for singles and heads of households is $88,100; it begins to phase out when AMT income reaches $626,350. For joint filers for 2025, the exemption amount is $137,000 and begins to phase out at $1,252,700 of AMT income.
The OBBBA makes these higher exemptions permanent, but for joint filers it sets the phaseout threshold back to its lower 2018 level beginning in 2026 — $1 million, adjusted annually for inflation going forward. (It doesn’t call for this change for other filers, which might be a drafting error. A technical correction could be released that would also return the phaseout thresholds to 2018 levels for other filers.)
The OBBBA also doubles the rate at which the exemptions phase out. These changes could make high-income taxpayers more vulnerable to the AMT, especially if they have large SALT deductions.
Navigating new ground
The OBBBA’s changes to the SALT deduction cap, and other individual tax provisions, may require you to revise your tax planning. We can help you chart the best course to minimize your tax liability.
For one reason or another, you may need to take some money out of an IRA before reaching retirement. You can withdraw money from an IRA at any time and for any reason, but it’s important to keep in mind that most IRA withdrawals are at least partially taxable. In other words, you’ll owe regular income tax on the amount. In addition, the taxable portion of a withdrawal taken before age 59 1/2, which is called an “early withdrawal,” will be hit with a 10% penalty — unless you qualify for an exception.
The exceptions apply to traditional IRAs, SEP-IRAs and SIMPLE-IRAs. (However, some early withdrawals from SIMPLE-IRAs are hit with a 25% penalty rather than the standard 10% penalty. For simplicity, the rest of this article will ignore that higher 25% rate.)
Also, be aware that different rules apply to withdrawals from Roth IRAs and qualified plans, such as 401(k) plans.
Exceptions to the Penalty
So what are the exceptions to the 10% early withdrawal penalty? Let’s take a look:
1. Withdrawals for medical expenses. If you have qualified medical expenses in excess of 7.5% of your adjusted gross income (AGI) early IRA withdrawals up to the amount of that excess are exempt from the 10% penalty. To take advantage of this exception, you don’t need to trace the withdrawn amount to the medical expenses. However, those expenses must be paid in the same year during which you take the early withdrawal.
2. Substantially equal periodic payments (SEPPs). These are annual annuity-like withdrawals that must be taken for at least five years or until you reach age 59 1/2, whichever comes later. The rules for SEPPs are complicated, so you may want to get your tax advisor involved to avoid pitfalls.
3. Withdrawals after death. Amounts withdrawn from an IRA after the IRA owner’s death are always free of the 10% penalty. However, this exception isn’t available for funds rolled over into a surviving spouse’s IRA or if the surviving spouse elects to treat the inherited IRA as his or her own account. If the surviving spouse needs some of the inherited funds, they should be left in the inherited IRA (in other words, the one set up for the deceased spouse). Then, the surviving spouse can withdraw the needed funds from the inherited IRA without any 10% penalty.
4. Withdrawals after disability. This exception applies to amounts paid to an IRA owner who is found to be physically or mentally disabled to the extent that he or she cannot engage in his or her customary paid job or a comparable one. In addition, the disability must be expected to:
Lead to death, or
Be of long or indefinite duration. However, it doesn’t need to be expected to be permanent.
5. Withdrawals for first-time home purchases (up to a lifetime limit). This exception allows penalty-free IRA withdrawals to the extent the money is spent by the IRA owner within 120 days to pay for qualified acquisition costs for a principal residence. However, there’s a lifetime $10,000 limit on this exception. The principal residence can be acquired by:
The IRA owner or the IRA owner’s spouse,
The IRA owner’s child, grandchild or grandparent, or
The spouse’s child, grandchild or grandparent.
The buyer of the principal residence (and the spouse if the buyer is married) must not have owned a present interest in a principal residence within the two-year period that ends on the acquisition date. Qualified acquisition costs are defined as costs to acquire, construct or reconstruct a principal residence — including closing costs.
6. Withdrawals for qualified higher education expenses. Early IRA withdrawals are penalty-free to the extent of qualified higher education expenses paid during the same year. The qualified expenses must be for the education of:
The IRA owner or the IRA owner’s spouse, or
A child, stepchild or adopted child of the IRA owner or the IRA owner’s spouse.
7. Withdrawals for health insurance during unemployment. This exception is available to an IRA owner who has received unemployment compensation payments for 12 consecutive weeks under any federal or state unemployment compensation law during the year in question or the preceding year. If this condition is satisfied, the IRA owner’s early withdrawals during the year in question are penalty-free up to the amount paid during that year for health insurance premiums to cover the IRA owner and his or her spouse and dependents. However, early withdrawals after the IRA owner has regained employment for at least 60 days don’t qualify for this exception.
8. Withdrawals by military reservists called to active duty. This exception applies to certain early IRA withdrawals taken by military reserve members who are called to active duty for at least 180 days or for an indefinite period.
9. Withdrawals for IRS levies. This exception applies to early IRA withdrawals taken to pay IRS levies against the account. However, this exception is not available when the IRS levies against the IRA owner (as opposed to the IRA itself), and the owner then withdraws IRA funds to pay the levy.
Before and After a Withdrawal
With some exceptions, IRA owners who make IRA withdrawals before age 59 1/2 must file a form with their tax returns. Specifically, they must file Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.”
If you think you qualify for an exception to the 10% penalty on early traditional IRA withdrawals, consider involving your tax pro before making a big early withdrawal. You want to be sure that you do indeed qualify. Better safe than sorry!
Early Withdrawal Downsides
Even if you qualify for an exception to the 10% early withdrawal penalty, remember that you still have to pay regular income tax on the amount. And you’ll lose out on the benefit of future tax-deferred compounding growth on the withdrawn funds.
If you like what you’ve seen so far, we’d love to hear from you! Reach out to us today and discover how we can work together to achieve your financial goals. Our team is excited to connect with you and provide the exceptional service and expertise that sets BHCB apart.
