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 To take advantage of this exception, you don’t need to trace the withdrawn amount to the medical expenses.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 Amounts withdrawn from an IRA after the IRA owner’s death are always free of the 10% penalty.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.

Are you ready to move and want to sell your home, but you’re worried about a slowing real estate market? You’re not alone. Many homeowners want to move up to a bigger home or downsize to a smaller one. However, they’re currently unable to sell their homes for the price they want. Fortunately, selling isn’t your only option. The current market could be an opportunity to rethink your next step, especially when you take the tax implications into account.

Basic Home Sale Rules

First, let’s review the tax implications if you do sell your home. You may owe capital gains tax on the profit. Fortunately, many homeowners qualify for a capital gains exclusion.

If the home was your primary residence for at least two of the last five years, you may generally exclude gain up to:

• $250,000 if single, or
• $500,000 if married and filing jointly.

This means you won’t owe tax on gains below that threshold. Above that amount, you could owe up to 20% capital gains tax, depending on your income, if you owned the house for more than a year. (See “Proposal in Washington to Eliminate Capital Gains Taxes on Home Sales” for information about a bill introduced in Congress that could change the rules.) Different rules apply in the case of a divorce or when a homeowner is on qualified military duty. And you may be eligible for a partial capital gains tax exclusion in certain situations when you don’t meet the two-out-of-five-year rule.

What happens if you need to sell quickly for a loss — perhaps due to relocation, health issues or financial reasons? Unfortunately, a capital loss for personal-use property like a home isn’t deductible on your tax return. Only losses on investment property are deductible under specific rules.

Other Routes to Consider

With the basic home sale tax rules in mind, here are four options to consider if your home isn’t selling, along with the tax issues involved:

1. Rent out the property. If your home isn’t generating acceptable offers, turning it into a rental property may provide steady income while you wait for the market to rebound. This approach can help offset mortgage, tax and maintenance costs — and may even offer tax benefits.

For tax purposes, once your home becomes a rental, it’s treated as an investment property. That means:

• You’ll report rental income on your tax return.
• You can deduct related expenses, such as mortgage interest, property taxes, insurance, repairs and depreciation.
• You may lose the ability to exclude capital gains under the $250,000/$500,000 primary residence exclusion if you eventually sell. If you rent for too long, you may forfeit that benefit. Consult with your tax advisor to determine how long you can rent without losing eligibility for this exclusion.

Important: The tax rules differ if you rent out your home for 14 days or less during the year. In that case, the rental income is tax-free. You don’t have to report it on your tax return, but you can’t deduct any rental-related expenses (such as cleaning or advertising) for those days.

2. Offer seller financing. In a seller-financed sale, you act as the lender and receive payments from the buyer over time instead of receiving the full purchase price upfront. In a slow market, this might attract buyers who don’t qualify for traditional loans or prefer different terms.

For tax purposes, you may qualify to report the gain over time using the IRS installment sale method, spreading out the capital gains tax liability across the payment schedule. You must report the interest portion of each payment as ordinary income on your tax return.

Of course, there’s potential risk. If the buyer defaults, you may face repossession issues and complex tax treatment depending on how much gain was previously recognized.

3. Make strategic improvements. If your home isn’t attracting offers, the problem might not be related to the market alone — it could be the property’s condition, layout or features. Investing in key updates could improve your resale value or help it sell faster.

Capital improvements made while the property is your primary residence can increase your tax basis, which reduces your taxable gain when you sell. Qualifying improvements must add value, prolong the property’s useful life or adapt the home for new uses. Keep detailed records and receipts to prove the basis for capital improvements. Regular maintenance doesn’t qualify as an improvement for tax purposes.

However, not all upgrades are equal. A real estate agent can identify improvements with a high rate of return on investment, and your tax pro can assess how these costs would impact your eventual capital gains calculation.

4. Engage in a rent-to-own agreement. This arrangement allows the tenant to rent the home with the option to buy it later. A portion of the rent may go toward the eventual purchase price.

For tax purposes, you’ll report all rent as rental income until the sale occurs. You won’t recognize a capital gain until the option is exercised and the sale is finalized. What if the tenant pays an upfront option fee? It’s typically treated as advance rent (taxable income) until the sale occurs — or potentially nonrefundable income if the tenant doesn’t exercise the option.

This structure may affect your ability to claim the primary residence exclusion. Timing is critical. If you rent the property for too long before the sale, you may no longer meet the two-out-of-five-year rule.

Moving Forward

Figuring out what to do if your home isn’t selling is frustrating, especially if your financial plans hinge on the sale. But by understanding your options, you can make a well-informed decision that helps support your financial goals and takes advantage of potential federal tax breaks. State taxes may also apply. Consult with your tax advisor before deciding on the optimal strategy for your situation.

Proposal in Washington to Eliminate Capital Gains Taxes on Home Sales

If a new bill gains traction, there could be good news ahead for homeowners looking to sell their homes. Currently, qualified sellers can exclude up to $250,000 in capital gains from the sale of a primary residence ($500,000 for married couples filing jointly). This limit was set in 1997. U.S. Rep. Marjorie Taylor Greene (R-GA) has introduced a bill to raise or eliminate that exclusion, calling the current threshold “an outdated, unfair burden,” particularly in today’s high-priced housing market. She says the change could boost the housing supply by removing a financial barrier to selling. The “No Tax on Home Sales Act” is still in its early stages so it’s unclear whether it could be enacted. But it has caught the attention of President Trump who said he’s “thinking about no tax on capital gains on houses.”

On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (OBBBA), a reconciliation package that includes a broad array of tax provisions affecting individuals, businesses and international taxpayers.

We want to highlight the key provisions and offer preliminary insights into how they may affect your tax planning. Please contact us at your earliest convenience to discuss your situation so we can develop a customized plan. We will continue to closely monitor any potential regulatory guidance as it’s developed from the IRS and update you accordingly.

Individual income tax provisions

• Permanent extension of lower tax rates and brackets: The OBBBA generally makes the tax rates enacted in 2017 in the Tax Cuts and Jobs Act (TCJA) permanent. An additional year of inflation adjustment is added for determining the dollar amounts at which the 12% rate bracket ends and the 22% rate bracket begins. 
• Standard deduction: The nearly doubled standard deduction would be made permanent.  Effective for 2025, the amounts are as follows: 

Single & Married Filing Separately (MFS): $15,750 (indexed)
Head of Household (HoH): $23,625 (indexed)
Married Filing Jointly (MFJ): $31,500 (indexed)

• Child Tax Credit: The nonrefundable child tax credit increases to $2,200 per child beginning in 2025 and the credit amount is indexed for inflation. 
• Estate and gift tax exemption: The increased exemption is made permanent and raised to $15 million per individual ($30 million for married couples) in 2026, indexed for inflation.
• SALT deduction cap: The state and local tax (SALT) deduction cap is increased to $40,000 per household and would be phased out for taxpayers with modified adjusted gross income (MAGI) over $500,000. In 2030, the deduction will revert to $10,000.
• Charitable deduction for non-itemizers: An above-the-line deduction is added for charitable contributions that starts in 2026 ($1,000 for single filers, $2,000 for joint filers).
• No tax on tips and overtime: For 2025–2028, above-the-line deductions are created for qualified tips (in certain occupations) and for overtime premium pay, subject to income and occupation limitations.
• Enhanced deduction for seniors: For 2025–2028, a $6,000 deduction is available for seniors (age 65+) with income below $75,000 ($150,000 for joint filers).
• Car loan interest deduction: For 2025–2028, up to $10,000 of interest on loans for U.S.-assembled passenger vehicles may be deducted, subject to income phaseouts.
• Moving expense deduction: The deduction is permanently terminated except for those in the Armed Forces. 
• Home mortgage interest and insurance premiums: The $750,000 limit on the treatment of mortgage insurance premiums as qualified residence interest is made permanent. The exclusion of home-equity indebtedness from the definition of qualified residence interest is also now permanent. 
• Casualty loss deduction for personal casualties: The limitation on personal casualty loss deductions is made permanent, however a provision is added to include state-declared disasters.
• Other deductions and credits: Several other deductions and credits, including the adoption credit, employer-provided childcare credit, paid family and medical leave credit, and education-related benefits are made permanent. 

Business tax provisions

• QBI deduction: The qualified business income (QBI) deduction is made permanent and the deductible amount for each qualified business would remain at 20%. 
• Bonus depreciation: 100% expensing (bonus depreciation) for qualified property is restored for property placed in service after Jan. 19, 2025.
• Sec. 179 expensing: The maximum amount a business may expense for qualifying expenses is increased to $2.5 million, with the phaseout threshold raised to $4 million, both indexed for inflation after 2025.
• R&E expenditures: Immediate deduction of domestic research or experimental expenses paid or incurred in 2025 is allowed. However, research or experimental expenses attributable to research that is conducted outside the United States will continue to be capitalized and amortized over 15 years.  
• Excess business loss permanency: The excess business loss limitation is made permanent, and the existing treatment of loss carryforwards is maintained. 
• Business interest deduction: The interest expense limitation is calculated using earnings before interest, taxes, depreciation and amortization (EBITDA), rather than earnings before interest and taxes (EBIT).
• FDII and GILTI: Beginning in 2026, the deduction percentage is reduced to 33.34% for foreign-derived intangible income (FDII) and 40% for global intangible low-taxed income (GILTI). 
• BEAT: The base-erosion and anti-abuse tax (BEAT) rate is increased from 10% to 10.5%.
• Third-party network transaction reporting threshold: Form 1099-K, Payment Card and Third Party Network Transactions, reporting reverts back to previous rules where reporting is required if transactions exceed $20,000 and the aggregate number of transactions exceeds 200.
• Form 1099 reporting threshold: The information reporting threshold for payments for services increases to $2,000 in a calendar year (up from $600) in 2026, and the threshold amount will be indexed annually for inflation starting in 2027. 
• Renewed Opportunity Zones: Opportunity zones provisions are made permanent, but with several changes, including narrowing the definition of “low-income community.” The changes will generally take effect in 2027.
• Clean energy and IRS credits: Several clean energy credits from the Inflation Reduction Act (IRA) are terminated. 

How can you prepare?
A phased approach to planning will align with the timing and impact of this legislative development. This approach allows us to support you with timely strategies tailored to each stage of implementation:

• Short-term planning will focus on immediate actions and compliance considerations for tax provisions already in effect or taking effect soon.
• Mid-term planning will address transitional provisions and opportunities that emerge over the next 12–18 months.
• Long-term planning will help position you for sustained success by anticipating future changes and aligning your financial goals with the broader tax policy environment.

We’ll continue to monitor developments closely and provide updates and guidance as new details become available. Our goal is to ensure you’re informed, prepared, and supported — every step of the way.

We’re here to help
Our team is available to discuss how these provisions may impact your personal or business tax situation and to help you plan accordingly.

Please don’t hesitate to contact us with any questions or to schedule a consultation.

The federal government has announced a major change that will affect how numerous Americans receive their tax refunds and federal benefit payments. The U.S. Treasury Department, the IRS and the Social Security Administration (SSA) will soon stop issuing paper checks. This transition is designed to increase efficiency, reduce fraud and lower administrative costs — but it also means that taxpayers must prepare for an all-electronic system.

Background information

Many taxpayers still receive paper checks for tax refunds. This is also the case with some Social Security benefits and other federal payments. Under an executive order (EO) signed by President Trump, paper checks will no longer be an option, effective September 30, 2025. Direct deposit will become the default (and only) method of payment, unless the government extends the deadline or provides exceptions.

In the EO, President Trump cites several reasons for eliminating paper checks. One is to reduce the risk of fraud. “Historically, Department of the Treasury checks are 16 times more likely to be reported lost or stolen, returned undeliverable, or altered than an electronic funds transfer,” the EO states.

Taxpayers without bank accounts

One significant challenge to making the transition away from paper checks is the “unbanked” population. These are people who don’t have traditional bank accounts. According to the FDIC, millions of Americans remain unbanked for various reasons, including lack of access, mistrust of banks or high fees.

The government may solve this challenge by issuing refunds on debit cards or encouraging financial institutions to offer free or low-fee accounts for affected taxpayers. Taxpayers without bank accounts should take steps now to open them to avoid delays in receiving their refunds.

Key implications

Some people may opt to request paper refund checks when filing their tax returns for reasons other than not having bank accounts. In some cases, they may have security or privacy concerns about providing account information to the IRS. Or perhaps they don’t know where they want to deposit their refunds when their tax returns are being prepared.

Here are three ways you may be affected after the federal government completes the transition from paper checks to an all-electronic system:

1. A bank account will be required. Taxpayers must have U.S.-based bank accounts or credit union accounts to receive their refunds.
2. There will be no more delays due to the mail. Direct deposit is faster than mailing paper checks, resulting in reduced wait times.
3. The risk of lost or stolen checks will be eliminated. Electronic transfers will eliminate fraud and identity theft associated with paper checks.

Special considerations for U.S. citizens abroad

Americans living overseas may encounter problems receiving electronic refunds. The IRS typically requires a U.S. bank account for direct deposit. Foreign accounts generally don’t work with the IRS refund system.

To address this issue, the government may offer exceptions or alternative payment methods for individuals outside the United States, but the details are still unclear. Expats should stay informed and plan ahead. The elimination of paper checks could necessitate setting up a U.S.-based bank account or using financial services that provide U.S. banking solutions.

Impact on other taxpayers

The American Institute of CPAs (AICPA) has provided feedback to the Treasury Department about the change. While the AICPA is generally in favor of eliminating paper checks, it raised some issues about taxpayers who may encounter problems with the change.

For example, executors and trustees must fill out forms that currently don’t have a place on them to enter direct deposit information. In addition, the name on an estate checking account won’t match the name on a deceased person’s final tax return. This violates an electronic refund requirement that the name on a tax return must match the name on a bank account into which a refund is to be deposited.

For these and other situations, the AICPA has recommended that the government provide exceptions or extensions of the deadline for certain taxpayers. The group would also like the IRS to provide more guidance on how to proceed in specific situations.

Social Security beneficiaries

The SSA reports that fewer than 1% of beneficiaries currently receive paper checks. If you’re one of them, visit the SSA to change your payment information to include a bank account or enroll in an option to receive your benefits with a Direct Express® prepaid debit card.

Bottom line

The elimination of paper checks is a significant shift in how federal payments are made. While this move will likely result in faster and more secure transactions, it also means taxpayers need to be prepared well before the September 30 deadline. The IRS and SSA will likely release additional guidance and outreach campaigns in the coming months.

If you have questions about how this change will affect filing your tax returns, contact us.

The One, Big, Beautiful Bill Act (OBBBA) includes, among many other things, numerous provisions that can affect an individual’s taxes. The new law makes some changes to existing tax breaks that will be significant to many, but not all, taxpayers. It also creates new breaks that, again, will be significant to certain taxpayers. Finally, it makes permanent the tax rate reductions and most of the changes to deductions and credits made by the Tax Cuts and Jobs Act (TCJA), with occasional tweaks.

State and local tax deduction

The OBBBA increases the limit on the state and local tax (SALT) deduction through 2029. Beginning in 2025, eligible taxpayers can deduct up to $40,000 ($20,000 for married couples filing separately) of SALT, including property tax and either income tax or sales tax, with a 1% annual increase thereafter. However, in 2030, the previous limit of $10,000 ($5,000 for separate filers) will resume.

When modified adjusted gross income (MAGI) exceeds $500,000 ($250,000 for separate filers), the cap is reduced by 30% of the amount by which MAGI exceeds the threshold — but not below $10,000 ($5,000 for separate filers). If you expect to be near or over the threshold, taking steps to reduce your MAGI (for example, increasing retirement plan contributions or making IRA qualified charitable distributions) could help you secure the full SALT deduction.

Child Tax Credit

The $2,000 Child Tax Credit (CTC) for children under age 17 was slated to return to $1,000 per child after 2025, with the income phaseout levels subject to lower thresholds. Also, the $500 Credit for Other Dependents (COD) was scheduled to expire at that time. The COD is available for each qualifying dependent other than a qualifying child (such as a dependent child over the age limit or a dependent elderly parent).

The OBBBA makes the doubled CTC permanent, with an increase to $2,200 starting this year and annual inflation adjustments to follow. It also makes permanent the $1,400 refundable portion of the CTC, adjusted for inflation ($1,700 in 2025), and the $500 nonrefundable COD. And it makes permanent the income phaseout thresholds of $200,000, or $400,000 for joint filers.

Education-related breaks

The OBBBA expands the definition of qualified expenses that can be paid for with tax-free distributions from Section 529 plans. For example, tax-free distributions can now cover qualified post-secondary credentialing expenses. In addition, tax-free elementary and secondary school distributions are no longer limited to paying tuition; they can also pay for books and other instructional materials, online educational materials, tutoring or educational classes outside the home, and certain testing fees.

The OBBBA also increases the annual limit on tax-free distributions for qualified elementary and secondary school expenses from $10,000 to $20,000 beginning in 2026.

In addition, the law creates a tax credit of up to $1,700 for contributions to organizations that provide scholarships to elementary and secondary school students. Students who benefit from the scholarships must be part of a household with an income that doesn’t exceed 300% of the area’s median gross income and be eligible to enroll in a public elementary or secondary school.

The OBBBA also makes some tax law changes related to student loans:

Employer-paid student loan debt. If your employer pays some of your student loan debt, you may be eligible to exclude up to $5,250 from income. The OBBBA makes this break permanent, and the limit will be annually adjusted for inflation after 2026.

Forgiven student loan debt. Forgiven debt is typically treated as taxable income, but tax-free treatment is available for student loan debt forgiven after December 31, 2020, and before January 1, 2026. Under the OBBBA, beginning in 2026, only student loan debt that’s forgiven due to the death or total and permanent disability of the student will be excluded from income, but this exclusion is permanent. Warning: Some states may tax forgiven debt that’s excluded for federal tax purposes.

Charitable deductions

Generally, donations to qualified charities are fully deductible up to certain adjusted gross income (AGI)-based limits if you itemize deductions. The OBBBA creates a nonitemized charitable deduction of up to $1,000, or $2,000 for joint filers, which goes into effect in 2026.

Also beginning in 2026, a 0.5% floor will apply to itemized charitable deductions. This generally means that only charitable donations in excess of 0.5% of your AGI will be deductible if you itemize deductions. So, if your AGI is $100,000, your first $500 of charitable donations for the year won’t be deductible.

Qualified small business stock

Generally, taxpayers selling qualified small business (QSB) stock are allowed to exclude up to 100% of their gain if they’ve held the stock for more than five years. (The exclusion is less for stock acquired before September 28, 2010.) Under pre-OBBBA law, to be a QSB, a business must be engaged in an active trade or business and must not have assets that exceed $50 million, among other requirements.

The OBBBA provides new, but smaller exclusions for QSB stock held for shorter periods. Specifically, it provides a 75% exclusion for QSB stock held for four years and a 50% exclusion for QSB stock held for three years. These exclusions go into effect for QSB stock acquired after July 4, 2025. The law also increases the asset ceiling for QSBs to $75 million (adjusted for inflation after 2026) for stock issued after July 4, 2025.

Affordable Care Act’s Premium Tax Credits

The OBBBA imposes new requirements for Premium Tax Credit (PTC) recipients. For example, beginning in 2028, eligible individuals must annually verify information such as household income, immigration status and place of residence. Previously, many insureds were allowed to automatically re-enroll annually.

Beginning in 2026, individuals who receive excess advanced PTCs based on estimated annual income must return the entire excess unless actual income is less than 100% of the federal poverty limit. Currently, individuals with incomes below 400% of the limit are required to make only partial repayments.

Temporary tax deductions

On the campaign trail in 2024, President Trump promised to eliminate taxes on tips, overtime and Social Security benefits and to make auto loan interest deductible. The OBBBA makes a dent in these promises but doesn’t completely fulfill them. Instead, it creates partial deductions that apply for 2025 through 2028. They’re available to both itemizers and nonitemizers:

Tips. Employees and independent contractors generally can claim a deduction of up to $25,000 for qualified tips received if they’re in an occupation that customarily and regularly received tips before 2025. (The eligible occupations will be determined by the IRS and are expected to be released by October 2, 2025.) The tips must be reported on a Form W-2, Form 1099 or other specified statement furnished to the individual or reported directly by the individual on Form 4137. The deduction begins to phase out when a taxpayer’s MAGI exceeds $150,000, or $300,000 for joint filers.

Overtime. Qualified overtime pay generally is deductible up to $12,500, or $25,000 for joint filers. It includes only the excess over the regular pay rate. For example, if a taxpayer is normally paid $20 per hour and is paid “time and a half” for overtime, only the extra $10 per hour for overtime counts as qualified overtime pay. The overtime pay must be reported separately on a taxpayer’s W-2 form, Form 1099 or other specified statement furnished to the individual. This deduction also starts phasing out when MAGI exceeds $150,000, or $300,000 for joint filers.

Deductible tips and overtime pay remain subject to federal payroll taxes and any applicable state income and payroll taxes.

Auto loan interest. Interest on qualified passenger vehicle loans originated after December 31, 2024, generally is deductible up to $10,000, though few vehicles come with that much annual interest. Qualified vehicles include cars, minivans, vans, SUVs, pickup trucks and motorcycles with gross vehicle weight ratings of less than 14,000 pounds that undergo final assembly in the United States. The deduction begins to phase out when MAGI exceeds $100,000, or $200,000 for joint filers.

“Senior” deduction. While the OBBBA doesn’t eliminate taxes on Social Security benefits, it does include a new deduction of $6,000 for taxpayers age 65 or older by December 31 of the tax year — regardless of whether they’re receiving Social Security benefits. The deduction begins phasing out when MAGI exceeds $75,000, or $150,000 for joint filers. Social Security benefits, however, are still taxable to the extent that they were before the OBBBA.

Finally, be aware that additional rules and limits apply to these new tax breaks. In many cases, the IRS will be publishing additional guidance and will provide transition relief for 2025 to eligible taxpayers and those subject to information reporting requirements.

Trump Accounts

Beginning in 2026, Trump Accounts will provide families with a new way to build savings for children. An account can be set up for anyone under age 18 at the end of the tax year who has a Social Security number.

Annual contributions of up to $5,000 can be made until the year the beneficiary turns age 18. In addition, U.S. citizen children born after December 31, 2024, and before January 1, 2029, with at least one U.S. citizen parent can potentially qualify for an initial $1,000 government-funded deposit.

Contributions aren’t deductible, but earnings grow tax-deferred as long as they’re in the account. The account generally must be invested in exchange-traded funds or mutual funds that track the return of a qualified index and meet certain other requirements. Withdrawals generally can’t be taken until the child turns age 18.

TCJA provisions

The OBBBA also makes permanent many TCJA provisions that were scheduled to expire after 2025, including:

• Reduced individual income tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%,
• Higher standard deduction (for 2025, the OBBBA also slightly raises the deduction to $15,570 for singles, $23,625 for heads of households and $31,500 for joint filers),
• The elimination of personal exemptions,
• Higher alternative minimum tax exemptions,
• The reduction of the limit on the mortgage debt deduction to the first $750,000 ($375,000 for separate filers) — but the law makes certain mortgage insurance premiums eligible for the deduction after 2025,
• The elimination of the home equity interest deduction for debt that wouldn’t qualify for the home mortgage interest deduction, such as home equity debt used to pay off credit card debt,
• The limit of the personal casualty deduction to losses resulting from federally declared disasters — but the OBBBA expands the limit to include certain state-declared disasters,
• The elimination of miscellaneous itemized deductions (except for eligible unreimbursed educator expenses), and
• The elimination of the moving expense deduction (except for members of the military and their families in certain circumstances and, beginning in 2026, certain employees or new appointees of the intelligence community).

The permanency of these provisions should provide some helpful clarity for tax planning. However, keep in mind that “permanent” simply means that the provisions have no expiration date. It’s still possible that lawmakers could make changes to them in the future.

Time to reassess

We’ve covered many of the most significant provisions affecting individual taxpayers, but there are other changes that also might affect you. For example, the OBBBA adds a new limitation on itemized deductions for taxpayers in the 37% tax bracket beginning in 2026. It also imposes a new limit on the deduction for gambling losses beginning next year. And sole proprietors and owners of pass-through businesses will also be directly affected by OBBBA tax law changes affecting businesses.

Given all of these and other tax law changes, now is a good time to review your tax situation and update your tax planning strategies. Turn to us to help you take full advantage of the new — or newly permanent — tax breaks.

Federal taxes are a major consideration when determining how to structure your business, and many business owners choose to operate as S corporations for their tax advantages. One upside of S corporation status is keeping Social Security and Medicare taxes at manageable levels.

An S corporation owner isn’t subject to self-employment (SE) tax on his or her share of the company’s income. However, Social Security and Medicare taxes still apply to salary compensation paid to shareholder-employees. In light of this, many S corporations seek to manage their payroll tax liability by paying only modest salaries to shareholder-employees and paying out most or all of the remaining corporate cash flow in the form of payroll-tax-exempt cash distributions.

If an S corporation is audited by the IRS, the tax agency will likely pay close attention to whether salaries paid to the shareholder-employees appear to be unreasonably low to minimize federal payroll taxes. The IRS could recharacterize a portion of distributions paid to shareholder-employees as wages. It might then bill the S corporation for underpaid payroll taxes and interest — and possibly even assess penalties. Here are answers to some common questions to help you avoid this unfavorable outcome.

How Much FICA Tax Is Owed on Shareholder-Employees’ Compensation?

Social Security and Medicare (FICA) taxes on salary compensation paid to S corporation shareholder-employees are split equally between the shareholder-employees and the company (the employer). Specifically, both must pay:

1. The 6.2% Social Security tax on earned income up to the Social Security tax wage ceiling, and
2. The 1.45% Medicare tax on all salary income.

For 2025, the Social Security tax wage ceiling is $176,100. This ceiling is adjusted annually for inflation.

The combined total Social Security tax rate is 12.4% (6.2% withheld from salary paid to a shareholder-employee and 6.2% paid by the S corporation). The combined total Medicare tax rate is 2.9% (1.45% withheld from salary paid to a shareholder-employee and 1.45% paid by the S corporation). So, the total combined FICA tax rate on salary income up to the Social Security tax wage ceiling is 15.3% (12.4% for Social Security tax and 2.9% for Medicare tax).

A higher-income shareholder-employee must also pay the 0.9% additional Medicare tax on salary income above the applicable threshold. (There’s no employer portion of this tax.) The 0.9% additional Medicare tax generally kicks in when an individual’s salary exceeds the following:

• $200,000 for single people,
• $250,000 for married couples filing jointly, and
• $125,000 for married individuals filing separately.

S corporations that pay relatively modest, but still reasonable, salaries will keep their FICA tax obligations at a manageable level. Then, they can distribute all or part of the remaining corporate cash flow to shareholder-employees without incurring FICA tax.

For example, Barry is the sole shareholder of an S corporation. Before paying himself a salary, the company reports taxable income of $250,000. Barry decides to pay himself a modest, but reasonable, salary of $80,000. The total FICA tax obligation would be $12,240 ($80,000 times 15.3%). But FICA tax applies only to an S corporation shareholder-employee’s wages. An individual’s income from other types of pass-through business entities is subject to SE tax, which can be significantly more costly for profitable businesses. (See “FICA vs. SE Tax: What’s the Big Difference?” below.)

What’s a Reasonable Salary for an S Corporation Shareholder-Employee?

Reasonableness is in the eye of the beholder, and S corporation owners and the IRS often disagree on this issue. To avoid IRS scrutiny, S corporations must pay shareholder-employees reasonable FICA wages (including salaries and bonuses) for the services they provide to the business.

To meet the IRS reasonableness standards, start by benchmarking to learn how S corporations of similar size and financial performance in your industry and geographic region are paying their shareholder-employees. In addition, the IRS will closely examine specific factors that may be relevant. These include:

• Background, education, skills and experience,
• Specific responsibilities,
• Work hours and length of service,
• Professional reputation, and
• Customer relationships.

Other things being equal, the more these factors come into play, the higher the salary should be in the eyes of the IRS. Shareholder-employee salaries should generally be consistent from year to year, without dramatic raises or cuts. For more information, including access to market-based compensation data, contact your tax advisor.

Are There Any Side Effects from Limiting Shareholder-Employees’ Salary Compensation?     

Social Security benefits are based on FICA wages. Therefore, minimizing an S corporation shareholder-employee’s salary during his or her working years will result in lower federal benefits in retirement.

Another potentially unfavorable side effect of paying a modest salary to an S corporation shareholder-employee is limitations on contributions to certain tax-favored retirement accounts. Specifically, if your S corporation has a Simplified Employee Pension (SEP) or corporate profit-sharing plan, the maximum annual deductible contribution is limited to 25% of your salary. The lower your salary, the lower the maximum contribution. However, if the S corporation sets up a 401(k) plan, paying yourself a modest salary won’t preclude making relatively generous annual deductible retirement account contributions.

Should I Convert My Unincorporated Business into an S Corporation?

S corporations offer some tax advantages compared to other unincorporated business structures, including:

• Sole proprietorships,
• Single-member limited liability companies (LLCs) that are treated as sole proprietorships for tax purposes,
• Partnerships, and
• Multimember LLCs that are treated as partnerships for tax purposes.

Operating as an S corporation can potentially reduce your overall tax obligation by reducing your Social Security and Medicare tax bills. But before electing S status, you should fully evaluate the pros and cons. For example, operating as an S corporation involves some additional administrative chores, including:

• The corporation must file annual federal income tax returns and state income tax returns (if applicable).
• You must carefully structure transactions between S corporations and shareholders, including shareholder loans and transfers of business assets to the corporation.
• You must follow state-law corporation requirements, such as conducting board meetings and keeping corporate minutes.

There may also be legal issues to consider, so always consult your legal advisor when deciding how to structure your business.

If you decide that S corp status is right for you, follow these three steps:

1. Form a corporation under applicable state law,
2. Transfer business assets to the new corporation, if applicable, and
3. Make an S election for the new corporation by filing Form 2553, “Election by a Small Business Corporation.”

Calendar-year corporations must file Form 2553 by March 15 of the conversion year. The deadline to make an S election for calendar-year 2025 is behind us, but you can still make the election for 2026 and beyond.

Make an Informed Decision

Converting an existing unincorporated small business into an S corporation to manage Social Security and Medicare taxes can be a smart move under the right circumstances. But this isn’t a do-it-yourself project. Before implementing this strategy, consult your tax and legal advisors to evaluate all the relevant angles.

On July 4, President Trump signed into law the far-reaching legislation known as the One, Big, Beautiful Bill Act (OBBBA). As promised, the tax portion of the 870-page bill extends many of the provisions of the Tax Cuts and Jobs Act (TCJA), the sweeping tax legislation enacted during the first Trump administration. It also incorporates several of President Trump’s campaign pledges, although many on a temporary basis, and pulls back many clean-energy-related tax breaks.

While the OBBBA makes permanent numerous tax breaks, it also eliminates several others, including some that had been scheduled to resume after 2025. Here’s a rundown of some of the key changes affecting individual and business taxpayers. Except where noted, these changes are effective for tax years beginning in 2025.

Key changes affecting individuals

• Makes permanent the TCJA’s individual tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%
• Makes permanent the near doubling of the standard deduction. For 2025, the standard deduction increases to $15,750 for single filers, $23,625 for heads of households and $31,500 for joint filers, with annual inflation adjustments going forward
• Makes permanent the elimination of personal exemptions
• Permanently increases the child tax credit to $2,200, with annual inflation adjustments going forward
• Temporarily increases the limit on the deduction for state and local taxes (the SALT cap) to $40,000, with a 1% increase each year through 2029, after which the $10,000 limit will return
• Permanently reduces the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers) but includes mortgage insurance premiums as deductible interest
• Permanently eliminates the deduction for interest on home equity debt
• Permanently limits the personal casualty deduction for losses resulting from federally declared disasters and certain state declared disasters
• Permanently eliminates miscellaneous itemized deductions except for unreimbursed educator expenses
• Permanently eliminates the moving expense deduction (with an exception for members of the military and their families in certain circumstances)
• Expands the allowable expenses that can be paid with tax-free Section 529 plan distributions
• Makes permanent the TCJA’s increased individual alternative minimum tax (AMT) exemption amounts
• Permanently increases the federal gift and estate tax exemption amount to $15 million for individuals and $30 million for married couples beginning in 2026, with annual inflation adjustments going forward
• For 2025–2028, creates an above-the-line deduction (meaning it’s available regardless of whether a taxpayer itemizes deductions) of up to $25,000 for tip income in certain industries, with income-based phaseouts (payroll taxes still apply)
• For 2025–2028, creates an above-the-line deduction of up to $12,500 for single filers or $25,000 for joint filers for qualified overtime pay, with income-based phaseouts (payroll taxes still apply)
• For 2025–2028, creates an above-the-line deduction of up to $10,000 for qualified passenger vehicle loan interest on the purchase of certain American-made vehicles, with income-based phaseouts
• For 2025–2028, creates a bonus deduction of up to $6,000 for taxpayers age 65 or older, with income-based phaseouts
• Limits itemized deductions for taxpayers in the top 37% income bracket, beginning in 2026
• Establishes tax-favored “Trump Accounts,” which will provide eligible newborns with $1,000 in seed money, beginning in 2026
• Makes the adoption tax credit partially refundable up to $5,000, with annual inflation adjustments (no carryforwards allowed)
• Eliminates several clean energy tax credits, generally after 2025, including the clean vehicle, energy-efficient home improvement and residential clean energy credits
• Permanently eliminates the qualified bicycle commuting reimbursement exclusion
• Restricts eligibility for the Affordable Care Act’s premium tax credits
• Creates a permanent charitable contribution deduction for non-itemizers of up to $1,000 for single filers and $2,000 for joint filers, beginning in 2026
• Imposes a 0.5% floor on charitable contributions for itemizers, beginning in 2026

Key changes affecting businesses

• Makes permanent and expands the 20% qualified business income (QBI) deduction for owners of pass-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships
• Makes permanent 100% bonus depreciation for the cost of qualified new and used assets, for property acquired after January 19, 2025
• Creates a 100% deduction for the cost of “qualified production property” for qualified property placed into service after July 4, 2025, and before 2031
• Increases the Sec. 179 expensing limit to $2.5 million and the expensing phaseout threshold to $4 million for 2025, with annual inflation adjustments going forward
• Increases the cap on the business interest deduction by excluding depreciation, amortization and depletion from the calculation of “adjusted taxable income”
• Permanently allows the immediate deduction of domestic research and experimentation expenses (retroactive to 2022 for eligible small businesses)
• Makes permanent the excess business loss limit
• Prohibits the IRS from issuing refunds for certain Employee Retention Tax Credit claims that were filed after January 31, 2024
• Eliminates clean energy tax incentives, including the qualified commercial clean vehicle credit, the alternative fuel vehicle refueling property credit and the Sec. 179D deduction for energy-efficient commercial buildings
• Permanently renews and enhances the Qualified Opportunity Zone program
• Permanently extends the New Markets Tax Credit
• Permanently increases the maximum employer-provided child care credit to $500,000 ($600,000 for small businesses), with annual inflation adjustments
• Makes permanent and modifies the employer credit for paid family and medical leave
• Makes permanent the exclusion for employer payments of student loans, with annual inflation adjustments to the maximum exclusion beginning in 2027
• Makes permanent the foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) deductions and the minimum base erosion and anti-abuse tax (BEAT)
• Expands the qualified small business stock gain exclusion for stock issued after the date of enactment

Buckle up

We’ve only briefly covered some of the most significant OBBBA provisions here. There are additional rules and limits that apply. Note, too, that the OBBBA will require a multitude of new implementing regulations. Turn to us for help navigating the new law and its far-reaching implications to minimize your tax liability.

At Beers Hamerman Cohen & Burger PC we are proud to sponsor the Orange Little League each year. Supporting young athletes as they build confidence teamwork and friendships is something we value deeply as part of our commitment to the community.

This season was extra special with our partner Jennifer Schempp serving as coach for the team which also includes her son. Through the dedication of all the players coaches and families the team worked hard and made it all the way to the playoffs. We are proud to support such an incredible group and celebrate their hard work and success.

Managing payroll can be a major challenge for small business owners, especially as state and federal payroll tax regulations continue to evolve. Missteps in this area aren’t just minor hiccups — they can lead to significant financial penalties and operational disruptions. Below are some common payroll compliance pitfalls and ways to avoid them.

Misclassifying Workers

Businesses often prefer to treat workers as independent contractors (rather than employees) to lower costs and administrative burdens. However, the IRS, the U.S. Department of Labor, various state agencies and even workers themselves may challenge worker classifications.

Properly classifying a worker as an independent contractor is beneficial because the business doesn’t have to worry about employment tax issues or provide expensive fringe benefits. However, when a business mistakenly treats an employee as an independent contractor, the employer could owe unpaid employment taxes, penalties and interest. The employer also may be liable for employee benefits, such as health insurance and retirement plan contributions, that should have been provided but weren’t. So, it’s important to get worker classification right.

Beware: IRS and DOL rules can differ from state and local rules. That said, worker classification is generally based on the degree of control the employer has over the person and their work product.

Another misclassification error happens when an employer misinterprets an exemption from overtime pay. Most salaried executives and many other employers are exempt from overtime pay requirements under the Fair Labor Standards Act (FLSA). However, the FLSA includes several key exceptions reflecting earnings thresholds.

Miscalculating Pay

Inaccurate earnings calculations can cause headaches for employers and hardship for workers. For instance, shorted employees may have to scramble to pay their bills. Examples of mistakes involving employee compensation include:

• Overpayment or underpayment,
• Errors relating to new hires and employees on disability or leave,
• Inaccurate retroactive payments, and
• Incorrect deductions for fringe benefits.

If you make a mistake when compensating an employee, resolve the issue immediately and take steps to prevent it from happening again. Being transparent and responsive helps retain valued workers and maintain morale and productivity.  

Tracking Time Improperly

Accurately tracking time for hourly employees can be challenging. Employers may unintentionally overlook compensable time, such as meal or rest breaks, travel to off-site assignments, or participation in company-sponsored events.

Under the FLSA, nonexempt employees — typically paid hourly — must receive overtime pay at 1.5 times their regular rate for any hours worked beyond 40 in a workweek. Improper time tracking can lead to two unfavorable outcomes: 1) underpayment, where employees aren’t properly compensated for overtime, or 2) overpayment, which may require repayment or adjustments to future wages. Either scenario can cause frustration, damage morale, and potentially expose the employer to legal risk.

Failing to Report All Sources of Income

Compensation includes more than just salaries and hourly pay. Examples of alternative pay sources are:

• Overtime,
• Bonuses, and
• Commissions.

Some lesser-known income items may also come into play. For instance, some employers may offer incentive stock options (ISOs) or other rights, gift cards, employee awards, and other fringe benefits, such as the use of company-owned vehicles.

Payroll and income taxes must be paid on these items, too. Failing to include the value of awards, bonuses and fringe benefits (when required) in employees’ taxable incomes can lead to substantial underreporting penalties for employers.

Missing Deadlines

The IRS and state tax agencies expect your business to deposit federal payroll taxes on time. That means your organization must deposit amounts withheld for income tax, Social Security and Medicare taxes (FICA) and Federal Unemployment Tax Act taxes (FUTA) throughout the year. It’s critical to follow the IRS schedule for depositing payroll payments. Deposit frequency depends on your total tax liability. Most small businesses must deposit payroll taxes by the 15^th of the following month. However, some may be required to make semiweekly deposits.

In addition, small businesses must generally report wages and tax withholding quarterly. The due dates for calendar-year businesses’ quarterly reports are as follows:

Note: If a due date falls on a weekend or legal holiday, the deadline moves to the next business day.

When cash is tight, business owners may be tempted to borrow money from withheld payroll taxes. This is never a good idea. Missed deadlines or underpaying the IRS could cost more taxes (plus penalties and interest). Additionally, an officer, business owner and/or other employee responsible for meeting payroll tax obligations on behalf of your organization could be held personally liable for the full amount of the unpaid taxes under Section 6672 of the Internal Revenue Code.

Issuing Inaccurate W-2s

Form W-2, “Wage and Tax Statement,” is the only payroll tax form that goes directly from an employer to its employees. It provides the following tax information:

• Gross income,
• Taxable income, and
• Payroll withholding for fringe benefits and retirement account contributions.

Reporting these items correctly is critical. Mistakes on an employee’s W-2 can have a domino effect throughout the company. It can lead to penalties for errors, extra paperwork and disgruntled employees.

Relying on Manual Recordkeeping

It might be relatively easy for a small business owner to handle payroll matters for a handful of employees. But as your business grows, payroll tasks become more complicated. Reliance on paper processes, manual data entries and spreadsheets to track employees’ hours can lead to miscalculations in pay. For example, manual processes can lead to misplaced worksheets and missed payments.

Furthermore, when the person in charge of processing payroll is out of the office, his or her designated replacement may not be fully prepared for the responsibilities. This situation can cause payroll entries to fall through the cracks or be misrepresented.

Consider investing in an automated payroll system integrates with your accounting system and other digital tools, such as customer relationship management platforms, project management tools, cloud storage and communication apps. Potential benefits include simplified payroll processing, improved oversight and fewer payroll errors. 

Get It Right

Payroll-related laws and regulations aren’t written in stone. Payroll practices should take into account any changes applicable to your business and government requirements. For example, some procedures were paused or postponed during the pandemic, and new laws and rulings may require updates to your payroll management system. This requires continuous vigilance.

If you feel overwhelmed by payroll tasks, it may be time to shift payroll management responsibilities to an external payroll provider. Professionals who specialize in payroll processing can help you avoid costly mistakes. Contact your professional advisors for more information.

We are pleased to announce that Ryan Parent, CPA, has been named Managing Partner of Beers, Hamerman, Cohen & Burger, P.C.

Ryan joined BHCB in 2012 after earning his bachelor’s degree in accounting from Quinnipiac University. Since then, he has built a reputation for thoughtful leadership and technical expertise, specializing in accounting and auditing services for multi-employer union benefit plans, senior living communities, and a variety of for-profit organizations, as well as providing tax services to high-net worth individuals.

He earned his master’s degree in accounting and taxation from the University of Hartford and became a licensed CPA in 2017. Ryan is an active member of the Connecticut Society of Certified Public Accountants (CTCPA) and is committed to serving the broader community. He currently serves as a board member and Supervisory Committee member for the New Haven County Credit Union, on the Board of Governors for New Haven Country Club, and is a director of Goodwill of Southern New England.

Outside of work, Ryan enjoys golfing, supporting community initiatives and spending time with his family. We look forward to his continued leadership as he takes on this new role.