The Tax Advantage January 2026
2025 proved to be a monumental year when it came to tax law changes. The biggest legislation passed is known as
the One Big Beautiful Bill Act (OBBBA), which included many significant updates affecting most individuals. Many
taxpayers will see a reduction to their tax bill, others could see an increase:
The deadlines for 2025 returns filed in 2026 are as follows:
February 2 – Businesses must provide W-2s and/or 1099-NECs to employees, other income recipients, and the IRS
February 28 – Businesses must provide 1099-MISCs to impacted parties
March 16 – Partnership (1065) and S-corporation (1120-S) returns due. Also the deadline to make an S-corp election
April 15 – Form 1040 deadline for individuals / Form 1120 deadline for regular corporations
September 15 – Deadline for Partnerships and S-corps where an extension was filed
October 15 - Deadline for individual 1040s where an extension was filed
No tax on qualified tips. This provision provides a deduction of up to $25,000 (per tax return, not per taxpayer) for tips
provided to taxpayers in certain professions. The IRS has published a list of occupations that customarily and regularly
receive tips, and your occupation must be on the list to qualify. It is not a full exclusion - the qualifying tips are still
subject to Social Security and Medicare tax. The tips must be included in the gross amounts reported on a W-2 or 1099
in order to be eligible. The full deduction is not available for taxpayers making over $150,000 ($300,000 for joint
filers). This provision is effective for tax years 2025 through 2028 only. For 2025, employers are not required to report
the amounts separately on your W-2, but if they do not, they should give you some sort of report that shows what part
of your income pertains to tips.
No tax on overtime pay. The new bill allows you to take a deduction of up to $12,500 ($25,000 for joint filers)
in qualified overtime pay from your federal taxable income. The excludable amount is the “half” if you are paid time
and a half for the overtime. Similar to the tips provision, the overtime is still subject to payroll taxes, has the same
income phase-out limitations, and is effective for tax years 2025 through 2028. Employers should either report the
overtime separately on your W-2, or give you a separate statement showing the correct amount.
New $6,000 Senior Deduction for those who have reached age 65 by the end of the tax year. This is in addition to the
standard or itemized deduction, and is available for tax years 2025 through 2028. The phase-outs begin at $75,000 of
adjusted gross income for single taxpayers and $150,000 for those filing joint. The new deduction is not available for
those married filing separately.
Increased child tax credit. Families with children less than age 17 will see an increase to the former $2,000 child tax
credit. The new credit for 2025 and 2026 is $2,200, and could increase after that based on inflation. No expiration date
is specified for this credit, however it does phase out for higher earners ($200K for single / $400K for married filing
joint).
New car loan interest now deductible for certain cars. Up to $10,000 in interest is now deductible (tax years 2025
through 2028) for new passenger vehicles where the final assembly occurred in the United States. The VIN must be
reported on the tax return, and the phase out begins with adjusted gross incomes over $100K ($200K joint returns).
Your lender should send you a 1098 with the amount of interest paid during the year.
The SALT (State and Local Tax) deduction has been increased. The former $10,000 SALT limitation has been
increased to $40,000 for 2025 and increases by 1% each year until it reverts back to the $10K in 2030. This will benefit
those who itemize deductions and pay a lot in state income and property tax. A phase-out applies for those making over
$500K.
Home solar credit. The 30% solar credit expired on 12/31/2025. If your system was not up and running by this date,
you will get no credit.
Energy efficient home improvement credit. This credit also expired December 31, 2025.
Clean vehicle credit. The credit for electric vehicles expired on October 1, 2025.
1099-K reporting thresholds. A payment app, online marketplace, or other third party settlement organizations (Paypal,
Stubhub, Venmo, E-bay, etc) is required to give you (and report to the IRS) a 1099-K if the total is over $20,000 and
more than 200 transactions. They can issue the 1099-K for less, regardless all income you receive is required to be
reported on your tax return. In some cases (such as the selling of personal property at a loss or getting reimbursed for a
non-business expense), the income can be backed out.
TCJA (Tax Cuts and Jobs Act). Most of the provisions from the 2017 TCJA are now permanent. This includes the tax
rates and brackets, the increased standard deduction amounts, the elimination of many itemized deductions, Section
199A, etc.
Gamblers beware. Beginning with the 2026 tax year, only 90% of gambling losses incurred (up to the amount of
winnings) will be deductible, and you must itemize in order to deduct the losses. That means even if you lose money
gambling, you will still pay tax on 10% of the winnings (and it may increase the taxable part of your social security).
Mortgage insurance premiums (MIP). Starting with 2026 (returns filed in 2027), MIP will be deductible for some
taxpayers (similar to pre-2022 tax years).
Changes to charitable contributions for 2026 tax year. Next year, non-itemizers can deduct charitable cash gifts of up
to $1,000 ($2,000 for joint filers). Itemizers claiming donations will only be able to deduct the portion that exceeds
.5% of their adjusted gross income.
Educator Expenses. Teachers and other educators can deduct up to $350 for their out-of-pocket expenses in 2026. The
deduction cap is $700 if both spouses are teachers. The max for 2025 tax year was $300/$600. An eligible educator is a
K through 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during the
year.
Trump accounts. These are a new type of tax-advantaged savings account that starts on July 4, 2026. They can be set
up for children under age 18 and you can contribute up to $5,000 per year. The government will also put in $1,000 for
each child born 2025-2028. The contributions are not deductible, and the money can not be withdrawn while the child
is under age 18. After that, the distributions are taxed like a traditional IRA. Private philanthropists also plan on kicking
in another $250 for certain children. The funds in the accounts must be invested in certain mutual funds or exchange-
traded funds that track the S&P 500 or another index of primarily American equities. You must sign up for your child
to receive the seed money, either by filing a form with your tax return or at the trumpaccounts.gov website.
1099 reporting. The filing threshold for 1099-NEC and 1099-NEC filing threshold rises from $600 to $2,000 beginning
with forms sent out in 2027. It is anticipated that the $2,000 will also apply to W2-G reporting of slot and keno
winnings.
The breaks for child and dependent care increase for tax year 2026. The maximum child care credit increases to
$1,500 for one dependent (up from $1,200) and $3,000 for two or more (up from $2,400). If you have a dependent care
flexible spending plan at work, you can contribute up to $7,500.
Dollar limitations on retirement plans and IRAs are higher in 2026. The maximum 401(k) limit is $24,500, those
born before 1977 can put in another $8,000 (see restriction next). The catch up for those age 60-63 is $11,250. The
contribution cap for IRAs increases to $7,500, plus $1,100 for those 50 and older. There are IRA phaseouts for those
making over certain amounts.
A new rule applies to catch-up contributions to 401(k)s in 2026. The catch up for those with wages over $150K must
make the contribution to a Roth 401(k).
There is a new exception to the 10% early withdrawal penalty in 2026. You can take $2,600 of pre-59 ½
distributions per year to pay long term care premiums.
Beginning in 2026, more money can be taken out of 529 plans to fund K-12 education. You can withdrawal up to
$20K per year and now more expenses qualify. There is no limit on 529 payouts for college expenses. 529 funds can
also now be used for certain professional continuing education expenses.
The annual gift tax exclusion remains at $19,000. That is the amount you give to each person without having to file a
gift tax return. The lifetime exemption for 2026 rises to $15 million.
The Social Security annual wage base for 2026 is $184,500 (up from $176,100). That is the maximum amount of
wages subject to the 6.2% rate. There is no cap on the 1.45% Medicare tax. A 0.9% surtax applies to individuals
making over $200K and couples making over $250K.
The Net Investment Income Tax Rate is 3.8%. If your adjusted gross income is over $200K ($250K for joint filers),
you will pay a 3.8% surtax on your investment income. That includes interest, dividends and capital gains.
Health Savings Accounts (HSAs). The annual contribution limit for 2025 of $4,300 is going up to $4,400 in 2026. The
$8,550 limit for family coverage will increase to $8,750. There is a $1,000 catch up for those 55 and older (no increase
in that).
Interest on Student Loans. Up to $2,500 in student loan interest can be deductible if you are under the income
limitations. For 2025, the phaseout applies to incomes $85-100K ($170-200 for joint filers). The phaseout increases
slightly for 2026.
Increased Standard Deduction Amounts. The Standard Deduction for 2025 is now $15,750 for singles, $31,500 for
joint filers and $23,625 for head of household filers. For those 65 and older or blind, the deduction increases by $1,600-
$2,000. These amounts all increase slightly for 2026.
Qualified Business Income Deduction (QBI). The QBI deduction (aka Section 199A deduction) of 20% is now
“permanent”. This deduction applies to eligible owners of businesses such as sole proprietorships, partnerships, S-
Corps. More changes are coming in 2026 to QBI.
Mortgage Interest Limitations. The amount of interest you can deduct on your home mortgage is limited to the interest
on up to $750,000. If your mortgage was obtained prior to 2018, the limit is $1,000,000. California has different rules
than the feds, so an adjustment is sometimes needed for CA. Home equity debt is now only deductible if the proceeds
were used to purchase or improve your home, and is subject to the limits.
Retirement Savings Contributions Credit. There is a credit available for those that contribute towards retirement plans
such as 401(k)s or IRAs. The credit of 10-50% is available to those with an AGI of less than $39,500 ($79,000 for joint
filers). The maximum credit is $1,000.
Brokers are now required to provide a 1099-DA for digital asset sales. If you sold digital assets (bitcoin, etc) in 2025,
it will be reported to the IRS and you should receive the 1099 by 2/17/2026. The broker will not always report the
basis, so you should be sure to keep track of it yourself.
IRS Individual Online Account / Identity Protection PIN. The IRS recommends that you set up an online account and
apply for an identity protection PIN at https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin .
The IP PIN is a six digit number assigned to you to prevent someone else from filing a fraudulent tax return using your
social. The PIN is valid for one year only. You must first apply for a “ID.ME” userid if you do not already have one.
The ID.ME account does not expire, and the online account also useful in obtaining other information from the IRS,
such as balances due and copies of your tax return transcripts and other information returns.
The IRS has stopped issuing checks for refunds. You must now receive your refund by direct deposit or other
electronic method. Electronic refunds are much safer and faster, and are part of the government’s cost-savings and
fraud prevention efforts. The IRS will still accept checks for now, but that could be on the way out in the not to distant
future.
Effective 1/20/2025, certain business property can be 100% expensed. For property purchased 1/1/25 through 1/19/25,
the maximum bonus depreciation is 40%. This generally applies to property with a recovery period of 20 years or less
and does not apply to passenger automobiles.
Standard Mileage Rates. The 2025 rate for business driving was 70 cents per mile (72.5 for 2026). The rate for
medical travel was 21 cents (20.5 cents for 2026), the charitable driving rate is fixed by law at 14 cents per mile.
Capital Gains. Tax rates on long-term capital gains and qualified dividends have not changed, but the income
thresholds change each year. For 2025, the 0% rate applies at taxable incomes up to $48,350 for singles and $96,700
for joint filers. The 20% rate starts at $533,400 for singles and $600,050 for joint. The 15% rate applies for those in
between.
Non-citizens are not eligible for certain tax benefits. If you are a lawful non-citizen and your work permit has expired,
you are not eligible for the earned income credit, the child tax credit, the AOTC credit, nor the tips/overtime deduction.
Make sure your work permit is valid if you are eligible for any of these credits.
Scammers have upped their efforts since the pandemic, using fake phone calls, emails, and other social media. The
criminals many times impersonate IRS employees and try to trick you into providing personal information. The first
IRS contact with taxpayers is almost always through the mail. If you receive such a call, email, or other scam, do not
give out any information to them or send money. Report the incident to the Treasury Inspector General at
www.tigta.gov , and to your local police.
If you are the charitable type, donations made directly to a qualified charity from a traditional IRA can save taxes.
Taxpayers over 70 ½ can transfer up to $111K for 2026 from IRAs directly to the charity. The qualified charitable
distributions can count as RMDs, but they are not taxable. You don’t get a deduction on Schedule A, but the strategy
can be beneficial due to the higher standard deduction.
Although the feds won’t penalize you for not having medical insurance, California will. The penalty for not having
coverage for the entire year will be at least $800 per adult and $400 for dependents, unless you qualify for one of the
limited exceptions. Many taxpayers receive full or partial subsidies by getting insurance through Covered California.
The sale of your primary home can be partially tax-free if you have owned and used the property as your principal
residence for at least two out of the last five years before the sale. Individual taxpayers can exclude $250,000 of gain,
while married filing joint can exclude up to $500,000. The gain is the difference between the net sales price (total sales
price less commissions and other fees) and the basis (cost plus improvements). A gain greater than these amounts are
taxed at capital gains rates. Losses from sales of primary home are not deductible, and there are different rules if you
ever rented out or used the home for business purposes.
Beware of firms that promise to settle your IRS debts for pennies on the dollar. The IRS calls many of the firms that
offer these types of tax debt relief plans “offer-in-compromise mills.” Many of them charge big upfront fees and churn
out relief applications that most can’t even qualify for. If you are able to pay your tax debt, even a little each month, the
IRS will rarely accept an offer-in-compromise.
Medical expenses can be deductible, however they must be significant enough to exceed both your standard
deduction (see below) AND 7.5% of your income. Deductible expenses can not include expenses paid with any sort of
tax-deferred plan, such as an HSA or FSA. Medical care expenses must be primarily to alleviate or prevent a physical
or mental disability or illness. They do not include expenses that are merely beneficial to general health, such as
vitamins, health clubs, vacations, etc. Long-term care insurance premiums are deductible, subject to certain limitations.
In some cases, the self-employed can deduct insurance premiums directly on Form 1040 without having to meet the
rigid threshold requirements.
The rules regarding inherited IRAs recently changed. If you inherit an IRA from your spouse, you are still able to
treat the IRA as your own and stretch the distributions over your lifetime. However, most non-spouse inherited IRAs
must be distributed within ten years. Beneficiaries who are chronically ill, disabled, minor children, or those not more
than ten years younger than the deceased IRA owner can use the more generous spousal rules.
The IRS and the Justice Department are serious about undisclosed foreign accounts. They are devoting more time
and money to get taxpayers to report foreign accounts when the value exceeds $10,000 at any time during the year. The
penalties for not reporting are steep - $10,000 apiece for non-willful violations, $100,000 for willful violations. Foreign
banks are forced to provide the names of U.S. account owners to the US government.
Like many other businesses, the IRS has been negatively impacted by the pandemic. Along with the pandemic, the
numerous law changes, new relief programs, years of budget cuts, antiquated computer systems, and a shrunken
workforce, have all caused a huge decline in service. There are still millions of tax returns currently at the IRS that
require processing, mostly amended and prior year returns. Getting through to the IRS by phone is rarely successful.
They are hiring thousands of new employees to assist in the backlog, and also to perform more audits. Callback
technology is available for certain IRS departments, allowing callers to leave a phone number for a call back, instead of
waiting on hold, or being asked to call back later.
Tax breaks for upper education continue to benefit many taxpayers. The American Opportunity Tax Credit (AOTC)
is worth up to $2,500 per student for each of the first four years of college. The AOTC phases out if your income is
over $80,000 for single and head of household filers, $160,000 for married filing jointly. The Lifetime Learning Credit
can benefit part time students and those that have exhausted the AOTC. Other educational tax breaks include 529 plans,
student loan interest deductions, the savings bonds interest exclusion, and Coverdell accounts.
The “kiddie tax” is still around, but it does have less bite for 2025. The first $1,350 of unearned income of a child
under age 19 (or under age 24 if a full-time student) is tax free. The next $1,350 is taxed at the child’s rate. Anything
over that is taxed at the parents’ rate. Unearned income includes interest and dividends, unemployment income, capital
gains, etc.
I am often asked the question, how long should I keep my records? The answer, like most tax questions, is “it
depends”. You want to keep all records for at least 4 years after filing, since that is the audit limitation period for most
returns in California. However, if you have records pertaining to an asset or improving an asset, you should keep those
records for four years after you dispose of that asset. An asset could include your personal residence, a rental property,
investments, or business property. I would recommend you keep the actual tax return itself indefinitely, since you can
probably fit a whole lifetime of returns in one box. If your tax situation is complicated or you just don’t have the space
for one more box, digital storage is always an option – but be sure you use some sort of encrypted storage media.
Car Donations. If you are considering donating an old vehicle to charity, here are a few things to know. First, make
sure that the charity is an IRS registered 501(c)(3) organization. After the charity sells the car, they will send you a
document that shows what the sales price is. Don’t be surprised if the sales price is less than what you expected, since
most charities sell them at dealer auctions for wholesale prices (or less). The sales price is what you may be able to take
a deduction for. If it is sold for less than $500, they may not send you anything and if so $500 (or fair market value if
less) is what you can deduct. In order to benefit you, your total deductions must be greater than the standard deduction
(discussed earlier) otherwise the donation will not reduce your taxes. In many cases, it might be better to sell the car
and donate the cash.
Other items to note:
An adoption tax credit is available for the expenses of adopting a child.
Employers can provide employees up to $325 per month in parking or mass transit benefits, tax free
U.S. taxpayers working abroad may be able to exclude up to $130,000 per year from their income in 2025
Disclaimer: This newsletter contains only general information and should not be considered tax advice. All tax matters
should be discussed directly with us or another tax professional before taking any action. All information is subject to
change and we are not responsible for any mis-information or typos.
the One Big Beautiful Bill Act (OBBBA), which included many significant updates affecting most individuals. Many
taxpayers will see a reduction to their tax bill, others could see an increase:
The deadlines for 2025 returns filed in 2026 are as follows:
February 2 – Businesses must provide W-2s and/or 1099-NECs to employees, other income recipients, and the IRS
February 28 – Businesses must provide 1099-MISCs to impacted parties
March 16 – Partnership (1065) and S-corporation (1120-S) returns due. Also the deadline to make an S-corp election
April 15 – Form 1040 deadline for individuals / Form 1120 deadline for regular corporations
September 15 – Deadline for Partnerships and S-corps where an extension was filed
October 15 - Deadline for individual 1040s where an extension was filed
No tax on qualified tips. This provision provides a deduction of up to $25,000 (per tax return, not per taxpayer) for tips
provided to taxpayers in certain professions. The IRS has published a list of occupations that customarily and regularly
receive tips, and your occupation must be on the list to qualify. It is not a full exclusion - the qualifying tips are still
subject to Social Security and Medicare tax. The tips must be included in the gross amounts reported on a W-2 or 1099
in order to be eligible. The full deduction is not available for taxpayers making over $150,000 ($300,000 for joint
filers). This provision is effective for tax years 2025 through 2028 only. For 2025, employers are not required to report
the amounts separately on your W-2, but if they do not, they should give you some sort of report that shows what part
of your income pertains to tips.
No tax on overtime pay. The new bill allows you to take a deduction of up to $12,500 ($25,000 for joint filers)
in qualified overtime pay from your federal taxable income. The excludable amount is the “half” if you are paid time
and a half for the overtime. Similar to the tips provision, the overtime is still subject to payroll taxes, has the same
income phase-out limitations, and is effective for tax years 2025 through 2028. Employers should either report the
overtime separately on your W-2, or give you a separate statement showing the correct amount.
New $6,000 Senior Deduction for those who have reached age 65 by the end of the tax year. This is in addition to the
standard or itemized deduction, and is available for tax years 2025 through 2028. The phase-outs begin at $75,000 of
adjusted gross income for single taxpayers and $150,000 for those filing joint. The new deduction is not available for
those married filing separately.
Increased child tax credit. Families with children less than age 17 will see an increase to the former $2,000 child tax
credit. The new credit for 2025 and 2026 is $2,200, and could increase after that based on inflation. No expiration date
is specified for this credit, however it does phase out for higher earners ($200K for single / $400K for married filing
joint).
New car loan interest now deductible for certain cars. Up to $10,000 in interest is now deductible (tax years 2025
through 2028) for new passenger vehicles where the final assembly occurred in the United States. The VIN must be
reported on the tax return, and the phase out begins with adjusted gross incomes over $100K ($200K joint returns).
Your lender should send you a 1098 with the amount of interest paid during the year.
The SALT (State and Local Tax) deduction has been increased. The former $10,000 SALT limitation has been
increased to $40,000 for 2025 and increases by 1% each year until it reverts back to the $10K in 2030. This will benefit
those who itemize deductions and pay a lot in state income and property tax. A phase-out applies for those making over
$500K.
Home solar credit. The 30% solar credit expired on 12/31/2025. If your system was not up and running by this date,
you will get no credit.
Energy efficient home improvement credit. This credit also expired December 31, 2025.
Clean vehicle credit. The credit for electric vehicles expired on October 1, 2025.
1099-K reporting thresholds. A payment app, online marketplace, or other third party settlement organizations (Paypal,
Stubhub, Venmo, E-bay, etc) is required to give you (and report to the IRS) a 1099-K if the total is over $20,000 and
more than 200 transactions. They can issue the 1099-K for less, regardless all income you receive is required to be
reported on your tax return. In some cases (such as the selling of personal property at a loss or getting reimbursed for a
non-business expense), the income can be backed out.
TCJA (Tax Cuts and Jobs Act). Most of the provisions from the 2017 TCJA are now permanent. This includes the tax
rates and brackets, the increased standard deduction amounts, the elimination of many itemized deductions, Section
199A, etc.
Gamblers beware. Beginning with the 2026 tax year, only 90% of gambling losses incurred (up to the amount of
winnings) will be deductible, and you must itemize in order to deduct the losses. That means even if you lose money
gambling, you will still pay tax on 10% of the winnings (and it may increase the taxable part of your social security).
Mortgage insurance premiums (MIP). Starting with 2026 (returns filed in 2027), MIP will be deductible for some
taxpayers (similar to pre-2022 tax years).
Changes to charitable contributions for 2026 tax year. Next year, non-itemizers can deduct charitable cash gifts of up
to $1,000 ($2,000 for joint filers). Itemizers claiming donations will only be able to deduct the portion that exceeds
.5% of their adjusted gross income.
Educator Expenses. Teachers and other educators can deduct up to $350 for their out-of-pocket expenses in 2026. The
deduction cap is $700 if both spouses are teachers. The max for 2025 tax year was $300/$600. An eligible educator is a
K through 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during the
year.
Trump accounts. These are a new type of tax-advantaged savings account that starts on July 4, 2026. They can be set
up for children under age 18 and you can contribute up to $5,000 per year. The government will also put in $1,000 for
each child born 2025-2028. The contributions are not deductible, and the money can not be withdrawn while the child
is under age 18. After that, the distributions are taxed like a traditional IRA. Private philanthropists also plan on kicking
in another $250 for certain children. The funds in the accounts must be invested in certain mutual funds or exchange-
traded funds that track the S&P 500 or another index of primarily American equities. You must sign up for your child
to receive the seed money, either by filing a form with your tax return or at the trumpaccounts.gov website.
1099 reporting. The filing threshold for 1099-NEC and 1099-NEC filing threshold rises from $600 to $2,000 beginning
with forms sent out in 2027. It is anticipated that the $2,000 will also apply to W2-G reporting of slot and keno
winnings.
The breaks for child and dependent care increase for tax year 2026. The maximum child care credit increases to
$1,500 for one dependent (up from $1,200) and $3,000 for two or more (up from $2,400). If you have a dependent care
flexible spending plan at work, you can contribute up to $7,500.
Dollar limitations on retirement plans and IRAs are higher in 2026. The maximum 401(k) limit is $24,500, those
born before 1977 can put in another $8,000 (see restriction next). The catch up for those age 60-63 is $11,250. The
contribution cap for IRAs increases to $7,500, plus $1,100 for those 50 and older. There are IRA phaseouts for those
making over certain amounts.
A new rule applies to catch-up contributions to 401(k)s in 2026. The catch up for those with wages over $150K must
make the contribution to a Roth 401(k).
There is a new exception to the 10% early withdrawal penalty in 2026. You can take $2,600 of pre-59 ½
distributions per year to pay long term care premiums.
Beginning in 2026, more money can be taken out of 529 plans to fund K-12 education. You can withdrawal up to
$20K per year and now more expenses qualify. There is no limit on 529 payouts for college expenses. 529 funds can
also now be used for certain professional continuing education expenses.
The annual gift tax exclusion remains at $19,000. That is the amount you give to each person without having to file a
gift tax return. The lifetime exemption for 2026 rises to $15 million.
The Social Security annual wage base for 2026 is $184,500 (up from $176,100). That is the maximum amount of
wages subject to the 6.2% rate. There is no cap on the 1.45% Medicare tax. A 0.9% surtax applies to individuals
making over $200K and couples making over $250K.
The Net Investment Income Tax Rate is 3.8%. If your adjusted gross income is over $200K ($250K for joint filers),
you will pay a 3.8% surtax on your investment income. That includes interest, dividends and capital gains.
Health Savings Accounts (HSAs). The annual contribution limit for 2025 of $4,300 is going up to $4,400 in 2026. The
$8,550 limit for family coverage will increase to $8,750. There is a $1,000 catch up for those 55 and older (no increase
in that).
Interest on Student Loans. Up to $2,500 in student loan interest can be deductible if you are under the income
limitations. For 2025, the phaseout applies to incomes $85-100K ($170-200 for joint filers). The phaseout increases
slightly for 2026.
Increased Standard Deduction Amounts. The Standard Deduction for 2025 is now $15,750 for singles, $31,500 for
joint filers and $23,625 for head of household filers. For those 65 and older or blind, the deduction increases by $1,600-
$2,000. These amounts all increase slightly for 2026.
Qualified Business Income Deduction (QBI). The QBI deduction (aka Section 199A deduction) of 20% is now
“permanent”. This deduction applies to eligible owners of businesses such as sole proprietorships, partnerships, S-
Corps. More changes are coming in 2026 to QBI.
Mortgage Interest Limitations. The amount of interest you can deduct on your home mortgage is limited to the interest
on up to $750,000. If your mortgage was obtained prior to 2018, the limit is $1,000,000. California has different rules
than the feds, so an adjustment is sometimes needed for CA. Home equity debt is now only deductible if the proceeds
were used to purchase or improve your home, and is subject to the limits.
Retirement Savings Contributions Credit. There is a credit available for those that contribute towards retirement plans
such as 401(k)s or IRAs. The credit of 10-50% is available to those with an AGI of less than $39,500 ($79,000 for joint
filers). The maximum credit is $1,000.
Brokers are now required to provide a 1099-DA for digital asset sales. If you sold digital assets (bitcoin, etc) in 2025,
it will be reported to the IRS and you should receive the 1099 by 2/17/2026. The broker will not always report the
basis, so you should be sure to keep track of it yourself.
IRS Individual Online Account / Identity Protection PIN. The IRS recommends that you set up an online account and
apply for an identity protection PIN at https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin .
The IP PIN is a six digit number assigned to you to prevent someone else from filing a fraudulent tax return using your
social. The PIN is valid for one year only. You must first apply for a “ID.ME” userid if you do not already have one.
The ID.ME account does not expire, and the online account also useful in obtaining other information from the IRS,
such as balances due and copies of your tax return transcripts and other information returns.
The IRS has stopped issuing checks for refunds. You must now receive your refund by direct deposit or other
electronic method. Electronic refunds are much safer and faster, and are part of the government’s cost-savings and
fraud prevention efforts. The IRS will still accept checks for now, but that could be on the way out in the not to distant
future.
Effective 1/20/2025, certain business property can be 100% expensed. For property purchased 1/1/25 through 1/19/25,
the maximum bonus depreciation is 40%. This generally applies to property with a recovery period of 20 years or less
and does not apply to passenger automobiles.
Standard Mileage Rates. The 2025 rate for business driving was 70 cents per mile (72.5 for 2026). The rate for
medical travel was 21 cents (20.5 cents for 2026), the charitable driving rate is fixed by law at 14 cents per mile.
Capital Gains. Tax rates on long-term capital gains and qualified dividends have not changed, but the income
thresholds change each year. For 2025, the 0% rate applies at taxable incomes up to $48,350 for singles and $96,700
for joint filers. The 20% rate starts at $533,400 for singles and $600,050 for joint. The 15% rate applies for those in
between.
Non-citizens are not eligible for certain tax benefits. If you are a lawful non-citizen and your work permit has expired,
you are not eligible for the earned income credit, the child tax credit, the AOTC credit, nor the tips/overtime deduction.
Make sure your work permit is valid if you are eligible for any of these credits.
Scammers have upped their efforts since the pandemic, using fake phone calls, emails, and other social media. The
criminals many times impersonate IRS employees and try to trick you into providing personal information. The first
IRS contact with taxpayers is almost always through the mail. If you receive such a call, email, or other scam, do not
give out any information to them or send money. Report the incident to the Treasury Inspector General at
www.tigta.gov , and to your local police.
If you are the charitable type, donations made directly to a qualified charity from a traditional IRA can save taxes.
Taxpayers over 70 ½ can transfer up to $111K for 2026 from IRAs directly to the charity. The qualified charitable
distributions can count as RMDs, but they are not taxable. You don’t get a deduction on Schedule A, but the strategy
can be beneficial due to the higher standard deduction.
Although the feds won’t penalize you for not having medical insurance, California will. The penalty for not having
coverage for the entire year will be at least $800 per adult and $400 for dependents, unless you qualify for one of the
limited exceptions. Many taxpayers receive full or partial subsidies by getting insurance through Covered California.
The sale of your primary home can be partially tax-free if you have owned and used the property as your principal
residence for at least two out of the last five years before the sale. Individual taxpayers can exclude $250,000 of gain,
while married filing joint can exclude up to $500,000. The gain is the difference between the net sales price (total sales
price less commissions and other fees) and the basis (cost plus improvements). A gain greater than these amounts are
taxed at capital gains rates. Losses from sales of primary home are not deductible, and there are different rules if you
ever rented out or used the home for business purposes.
Beware of firms that promise to settle your IRS debts for pennies on the dollar. The IRS calls many of the firms that
offer these types of tax debt relief plans “offer-in-compromise mills.” Many of them charge big upfront fees and churn
out relief applications that most can’t even qualify for. If you are able to pay your tax debt, even a little each month, the
IRS will rarely accept an offer-in-compromise.
Medical expenses can be deductible, however they must be significant enough to exceed both your standard
deduction (see below) AND 7.5% of your income. Deductible expenses can not include expenses paid with any sort of
tax-deferred plan, such as an HSA or FSA. Medical care expenses must be primarily to alleviate or prevent a physical
or mental disability or illness. They do not include expenses that are merely beneficial to general health, such as
vitamins, health clubs, vacations, etc. Long-term care insurance premiums are deductible, subject to certain limitations.
In some cases, the self-employed can deduct insurance premiums directly on Form 1040 without having to meet the
rigid threshold requirements.
The rules regarding inherited IRAs recently changed. If you inherit an IRA from your spouse, you are still able to
treat the IRA as your own and stretch the distributions over your lifetime. However, most non-spouse inherited IRAs
must be distributed within ten years. Beneficiaries who are chronically ill, disabled, minor children, or those not more
than ten years younger than the deceased IRA owner can use the more generous spousal rules.
The IRS and the Justice Department are serious about undisclosed foreign accounts. They are devoting more time
and money to get taxpayers to report foreign accounts when the value exceeds $10,000 at any time during the year. The
penalties for not reporting are steep - $10,000 apiece for non-willful violations, $100,000 for willful violations. Foreign
banks are forced to provide the names of U.S. account owners to the US government.
Like many other businesses, the IRS has been negatively impacted by the pandemic. Along with the pandemic, the
numerous law changes, new relief programs, years of budget cuts, antiquated computer systems, and a shrunken
workforce, have all caused a huge decline in service. There are still millions of tax returns currently at the IRS that
require processing, mostly amended and prior year returns. Getting through to the IRS by phone is rarely successful.
They are hiring thousands of new employees to assist in the backlog, and also to perform more audits. Callback
technology is available for certain IRS departments, allowing callers to leave a phone number for a call back, instead of
waiting on hold, or being asked to call back later.
Tax breaks for upper education continue to benefit many taxpayers. The American Opportunity Tax Credit (AOTC)
is worth up to $2,500 per student for each of the first four years of college. The AOTC phases out if your income is
over $80,000 for single and head of household filers, $160,000 for married filing jointly. The Lifetime Learning Credit
can benefit part time students and those that have exhausted the AOTC. Other educational tax breaks include 529 plans,
student loan interest deductions, the savings bonds interest exclusion, and Coverdell accounts.
The “kiddie tax” is still around, but it does have less bite for 2025. The first $1,350 of unearned income of a child
under age 19 (or under age 24 if a full-time student) is tax free. The next $1,350 is taxed at the child’s rate. Anything
over that is taxed at the parents’ rate. Unearned income includes interest and dividends, unemployment income, capital
gains, etc.
I am often asked the question, how long should I keep my records? The answer, like most tax questions, is “it
depends”. You want to keep all records for at least 4 years after filing, since that is the audit limitation period for most
returns in California. However, if you have records pertaining to an asset or improving an asset, you should keep those
records for four years after you dispose of that asset. An asset could include your personal residence, a rental property,
investments, or business property. I would recommend you keep the actual tax return itself indefinitely, since you can
probably fit a whole lifetime of returns in one box. If your tax situation is complicated or you just don’t have the space
for one more box, digital storage is always an option – but be sure you use some sort of encrypted storage media.
Car Donations. If you are considering donating an old vehicle to charity, here are a few things to know. First, make
sure that the charity is an IRS registered 501(c)(3) organization. After the charity sells the car, they will send you a
document that shows what the sales price is. Don’t be surprised if the sales price is less than what you expected, since
most charities sell them at dealer auctions for wholesale prices (or less). The sales price is what you may be able to take
a deduction for. If it is sold for less than $500, they may not send you anything and if so $500 (or fair market value if
less) is what you can deduct. In order to benefit you, your total deductions must be greater than the standard deduction
(discussed earlier) otherwise the donation will not reduce your taxes. In many cases, it might be better to sell the car
and donate the cash.
Other items to note:
An adoption tax credit is available for the expenses of adopting a child.
Employers can provide employees up to $325 per month in parking or mass transit benefits, tax free
U.S. taxpayers working abroad may be able to exclude up to $130,000 per year from their income in 2025
Disclaimer: This newsletter contains only general information and should not be considered tax advice. All tax matters
should be discussed directly with us or another tax professional before taking any action. All information is subject to
change and we are not responsible for any mis-information or typos.
Phone: (925)754-9299 or (925)685-2137
Email: [email protected]
Email: [email protected]
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