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Reveal the Identity of Securities Sales  

Best method for favorable tax results

Suppose you acquired shares of the same stock or mutual fund at various times over the last few years. Due to the recent stock market volatility, you may want to sell some shares to offset earlier gains or losses.

But which shares are you selling? In the normal course of events, the IRS falls back on the “first-in, first-out” (FIFO) method as a default. In other words, the first shares you acquired are treated as the first shares you sold, regardless of the price of the shares. However, you may fare better from a tax perspective by “specifically identifying” other shares as the ones that you sold.

Background: When you sell securities stocks or mutual funds, you generally recognize a gain or loss for tax purposes based on the difference between the sales price and your “basis.” Your basis is your initial investment cost plus certain adjustments. The financial institution can provide the necessary information.

• If you realize a gain on a sale and you have owned the securities for more than one year, the maximum tax rate on your long-term gain is only 15% (or 20% for certain high-income investors). Conversely, for securities owned for a year or less, a short-term gain is taxed at ordinary income tax rates. Currently, the maximum tax rate is 37%. In addition, this may also trigger the 3.8% “net investment income tax” (NIIT) for certain investors.

• If you realize a loss on a sale, it can offset capital gains plus up to $3,000 of ordinary income. This can be especially valuable if you previously realized high-taxed short-term gains. Any excess loss is carried over to next year.

The tax treatment can be relatively straightforward if you sell all the shares of a particular stock or mutual fund. However, things get tricky if you own multiple shares of the same security bought at different times. For instance, if the default method is used, it could increase a taxable gain or limit a deductible loss. Fortunately, with the specific ID method, you may decide your own tax fate.

Simplified example: You bought 1,000 shares of mutual fund at $10 a share in January. Then you bought 1,000 more shares of the same mutual fund in February at $20 a share. But the price of the mutual fund has dropped to $12 a share in May.

If you sell 1,000 shares of the mutual fund now, the IRS will assume that the first block of shares you bought is the one you are selling. As a result, you will owe ordinary income tax on your gain of $2,000. However, if you ID the shares you are selling as the second block of shares, you will realize an $8,000 loss.

Reminder: When you arrange the sale, you must notify your broker regarding which shares you are selling. Choose the method that is best for your personal situation. Finally, make sure you obtain a written or electronic confirmation of the transaction.

Section 530 Relief to the Rescue

Safe-harbor rule for payroll taxes

If an employer labels a worker as an independent contractor, rather than an employee, the employer does not have to pay its fair share of federal payroll taxes for the worker, nor does it have to provide costly fringe benefits available to other employees. This can result in significant savings for employers, but such classifications are often challenged by the IRS.

Fortunately, a little-known safe-harbor rule might bail you out. Thanks to Section 530 relief—named for a provision in a decades-old law, not an Internal Revenue Code section— you may be able to avoid any dire tax consequences.

Background: FICA tax, the main federal payroll tax for employers and employees, is comprised of Social Security tax and Medicare tax. For 2025, the Social Security tax portion is 6.2% of first $176,1000 of an employee’s wages, while the 1.45% tax for the Medicare tax portion applies to all their wages. Thus, if an employee earns $100,000 a year, the employer’s share on just that one employee is $7,650. This could easily run into tens of thousands of dollars—or more—for some small-to-mid sized firms.

Much has been written and spoken about the distinctions between independent contractors and employees, but it essentially boils down to the degree of control the employer exerts over the worker. If the employer dictates how the worker performs the job, they are generally treated as an employee. On the other hand, if the worker is basically operating on their own, they may qualify as an independent contractor.

Section 530 relief may come into play when a business is assessed back taxes and penalties for misclassifying workers as independent contractors. Briefly stated, if the employer can show it meets the Section 530 standards for treating workers as independent contractors, the additional taxes and penalties may be waived.

To qualify for Section 530 relief, your business must meet the following three requirements.

1. Reasonable basis: You must have a reasonable basis for not treating workers as independent contractors. This might be established by one of the following:

• A related court case or IRS ruling.
• A prior IRS audit involving examination of payroll taxes at a time when you treated similar workers as independent contractors and there was no IRS reclassification of these workers.
• A significant segment of your industry treats similar workers as independent contractors.
• You are relying on some other reasonable authority (e.g., the opinion of an attorney or CPA familiar with the business operation).

2. Employment status consistency:In the past, the employer has always, without exception, treated these workers and any similar workers as independent contractors.
3. Reporting consistency: At all times, you have consistently filed all federal tax returns treating the workers as independent contractors. For instance, your business must have provided workers with Form 1099s. If you had W-2s prepared for some of the workers in the group, your claim will be denied.

Be aware that your all three requirements must be met. Otherwise, this last-ditch effort for obtaining relief is not available.

Practical advice: Do not take any chances on a costly misclassification. Consult with your professional tax advisors concerning borderline cases.

Meeting Five Economic Challenges

How to cope with uncertainty

In these uncertain economic times, it may be difficult to maintain a comfortable lifestyle without cracking your nest egg wide open. But you do not have to hide in a cave or move to a deserted island to cope with rising prices or financial setbacks. Here are five practical suggestions for weathering an economic downturn.

1. Adjust your monthly budget. At the risk of sounding like a broken record, creating a budget is often the best way to manage your monthly finances. Break down expenses and income so you can easily track what is coming in and what is going out. Carefully review your monthly financial statements. If you already have constructed a budget, modify it regularly to reflect changing circumstances.

2. Tighten your belt. Take control of your finances by scaling back the amount you spend on luxuries like expensive vacations, frequent dinners out and the latest electronic gadgets. Avoid spending sprees you may have indulged in the past. On a smaller level, you could cancel subscriptions for services like premium streaming services or cable channels Similarly, you might investigate how to reduce premiums for cellphone plans and other services.

3. Comparison shop ‘til you drop. Most of us are “creatures of habit,” so we buy goods and services from the same sources without giving it a second thought. But it may not be practical to stick with the status quo, especially if prices are going through the roof. Consider alternatives that will still provide relatively high quality at a reasonable cost. When possible, compare “apples to apples” to make the best decisions.

4. It does not hurt to ask. Do not assume you cannot negotiate with goods and service providers. Just because a price is stated in writing does not mean it is concrete for all eternity. Salespeople may be receptive to budging on price to keep you as a customer. When you are negotiating a price, let the provider do most of the talking. This will usually work out to your benefit. Be prepared to leave a message for a call-back.

5. Up your game. The flip side of spending less money is earning more money. Investigate ways you can pull down a bigger paycheck at your full-time job. If there is little room for growth, it may be time to move onto greener pastures. Or you may want to become involved in a side gig that can supplement your current earnings. Be receptive to new opportunities on the horizon.

These are just five potential ways to cope with stressful economic conditions persisting today. Some of these ideas or others may be appropriate for your situation. Rely on guidance from your professional advisors to steer you in the right direction.

Welcome Five Tax Bundles of Joy

Timely tax breaks for new parents

Congratulations! There is a new addition to the family. To make the occasion even sweeter, the tax law provides several tax benefits to parents, including the following five tax-saving opportunities for 2025.

1. Child Tax Credit: The Child Tax Credit (CTC) is a partially refundable tax credit available to parents with dependent children under age 17. A baby born before the end of the year qualifies for the full credit. For 2025, the CTC is $2,000 per qualifying child if modified adjusted gross income (MAGI) is $200,000 or less for single filers or $400,000 for joint filers. But the credit begins to phase out above those levels. Currently, the maximum refundable portion is $1,700.

2. Dependent care credit: The dependent care credit can be claimed for costs of caring for under-age-13 children, including newborns, while you (and your spouse, if married) work or search for work. The credit for parents with an adjusted gross income (AGI) above $43,000 is 20% for the first $3,000 of qualified expenses for one child or $6,000 for two or more children. Thus, the maximum credit is $600 or $1,200, respectively.

3. Adoption expense credit: For 2025, parents can claim a maximum credit of $17,280 for qualified expenses incurred to adopt an eligible child. An eligible child is one who is under age 18 or physically or mentally incapable of self-care. The credit phases out for taxpayers with a modified adjusted gross (MAGI) above $259,190. Once your MAGI exceeds this level, the credit is reduced until it hits zero at $299,190. Other special rules may come into play.

4. Section 529 plans: As soon as your child is born, you can set up a Section 529 plan for the infant. The contributions, usually subject to generous state limits, are invested and can grow within the account on a tax-deferred basis. There is no tax due until distributions are made in the future. And, if the money is used to pay for qualified expenses like tuition, those withdrawals are exempt from tax.

5. Dependent care assistance programs: Eligible employees may use a version of a flexible spending account (FSA), the dependent care assistance FSA, to pay for childcare costs. Like a health expense FSA, amounts are withheld from employee wages on a pre-tax basis. Then withdrawals made for qualified expenses are exempt from tax. The maximum deferral for a dependent care FSA is $5,000. (This is not indexed for inflation.)

These are just five possible tax-savers for new parents. Down the road, you may qualify for other family-based tax breaks, including higher education credits and deductions for student loan interest. Try to maximize the tax benefits of raising a family with assistance from your professional tax advisors.

Tax Rewards at Charitable Conventions

Are you planning to attend a charitable convention at a distant location this summer? You may be in line for a big tax deduction.

Basic rules: If you incur unreimbursed expenses on behalf of a charity, the costs are deductible if you itemize on your return. This includes airfare, lodging, meals, local transportation and other incidentals at a charitable convention. To qualify, you must officially be designated as a representative of the charity.

It is OK to mix in a little recreation or sightseeing at or near the convention site. But expenses attributable to these activities are nondeductible personal expenses.

Facts and Figures

Timely points of particular interest

Forming Alliances—Countries are not the only entities that can make strategic alliances. One possible way of growing your business in 2025 is to form a business alliance with others. This is a formal business arrangement between two or more organizations to achieve shared business objectives. For instance, an alliance may include various joint ventures, franchising, cross-licensing and cross-marketing activities. There are numerous pros and cons to consider, so obtain expert advice.

Foreign Intrigue—The filing deadline for 2024 federal income tax returns—April 15, 2025—has passed for most U. S. taxpayers. But the IRS is reminding taxpayers living and working abroad that a special tax filing deadline is approaching. Both U.S. citizens and resident aliens abroad have until June 16, 2025, to file their 2024 returns. (The usual due date of June 15 falls on a Sunday.) As with other taxpayers, you may obtain an automatic filing extension of six months, but this is an extension to file—not to pay tax.

April 2025

Know Tax Angles to Investments

Consider all tax repercussions  

If you are a savvy investor, you may have a diversified portfolio that includes various types of assets ranging from stocks and bonds to Certificates of Deposit (CDs) and bank accounts. What are the tax implications? The rules are complex, but following is a basic overview.

Stocks: Sales of securities like stocks result in capital gains and losses that can offset each other. Generally, short-term gains are taxed at ordinary income rates topping out at 37%, while long-term gains for stocks owned longer than one year are taxed at a maximum 15% rate (20% for high-income investors). Excess capital losses offset up to $3,000 of ordinary income before being carried over to the next year.

Stock dividends are currently taxable even if they are reinvested. Qualified dividends (most ordinary dividends) are taxed at the favorable long-term capital gain rates

Mutual funds: Mutual funds, which generally provide greater diversification than stocks, are essentially taxed in the same manner. Typically, a mutual fund pays out taxable capital gains and dividends during the year. These distributions are subject to current tax even if the amounts are reinvested. Taxable gains or losses may be realized from sales of mutual fund shares.

Exchange-traded funds: Unlike mutual funds, few capital gains are generally realized through ownership of exchange-traded funds (ETFs). Thus, they are considered more tax-efficient, although some annual dividends are still paid out and subject to tax. Qualified dividends are taxed at long-term capital gain rates. Otherwise, ordinary income rates apply. Sales of ETFs may result in short- or long-term capital gains.

Bonds: Interest earned by bonds is generally taxable annually even if the bond has not matured. There are several types of bonds, including—

• Corporate bonds: They typically offer a higher rate of return than other bonds at a greater risk. The interest is taxable as ordinary income.
• Municipal bonds: The interest on bonds issued by certain government entities is exempt from federal income tax.
• S. Treasury bonds: These bonds are backed by the full faith and credit of the U.S. government. Generally, interest accrues and is taxed when amounts are withdrawn or the bonds mature.

Real estate: The basic capital gain and loss rules apply to sales of investment real estate. However, homeowners may realize a tax-exempt gain of up to $250,000 ($500,000 for joint filers) on the sale of a qualified principal residence. In addition, investors can exchange like-kind properties without any current tax if certain conditions are met. Other special rules may come into play for rental real estate activities.

Cryptocurrency: Although the law is still evolving, the IRS treats cryptocurrency as property comparable to securities for federal income tax purposes. Thus, if you sold Bitcoin or some other cryptocurrency in 2024, your return will reflect a short-term or long-term capital gain or loss, depending on the holding period.

Precious metals: Sales of precious metals like gold and silver result in gains or losses. Unlike most capital assets, however, any long-term gains are taxed at the 28% rate for “collectibles,” as opposed to the usual 15% or 20% rate. Similar rules apply to other collectibles like antiques, stamps, coins and sports memorabilia.

CDs and banks accounts: You may have acquired CDs from banks or credit unions and keep various accounts at these financial institutions. Annual interest earned by checking and savings accounts is currently taxable. Similarly, CD interest is taxable in the year it accrues. Thus, if you buy a five-year CD, the tax is spread over five years unless you cash it in early.

This is only an outline of several basic tax rules relating to investments. Coordinate your investment strategies with your professional tax advisor.

IRS Pinpoints Dirty Dozen Tax Scams

Watch out for these common schemes

Shortly before the 2024 tax return deadline of April 15, the IRS listed its annual “Dirty “Dozen” list of tax scams. Taxpayers are advised to steer clear of these sophisticated schemes and cons. Following is an overview.

1. Email phishing scams:Taxpayers and tax professionals should be alert to fake communications from entities posing as legitimate organizations in the tax and financial community, including the IRS, state tax agencies and tax software companies. These messages arrive in the form of unsolicited texts or emails. There are two main types:

• Phishing is an email meant to look like it originated at the IRS. It may offer a phony refund or threaten to send you to prison.
• Shmishing is a type of text states a problem—such as “Your account has been hacked”—and offers a bogus solution.

Reminder: Don’t click on phishing or shmishing emails.

2. Bad social media advice:Social media platforms routinely circulate inaccurate or misleading tax information, including on TikTok where people often share wildly inaccurate tax advice. Some involve urging people to misuse common tax documents like Form W-2.
3. IRS Individual Online Account help:Crooks can pose as a “helpful” third party and offer to help create a taxpayer’s Individual Online Account. But they are only trying to steal your personal information.
4. Fake charities:This problem often occurs whenever a crisis or natural disaster strikes. Scammers try to benefit from the public’s generosity.
5. False Fuel Tax Credit claims:Taxpayers may be misled into believing they were eligible for the Fuel Tax Credit. But the credit is limited to off-highway business and farming use and is not available to most taxpayers.
6. Credits for Sick Leave and Family Leave:This specialized credit is available for self-employed individuals for 2020 and 2021 during the pandemic. But it cannot be claimed for later tax years, as some promotors pitch.
7. Bogus self-employment tax credit: Social media continues to circulate false info about a nonexistent “Self-Employment Tax Credit.” Promoters market it as a way for self-employeds and gig workers to get big payments relating to the COVID-19 pandemic.
8. Improper household employment taxes:Taxpayers “invent” fictional household employees to claim a refund based on false sick and family medical leave wages they never paid.
9. Overstated withholding scam:This new scheme circulating on social media encourages people to fill out Form W-2 and 1099s with false income and withholding information. Then they request large refunds on their tax returns.
10. Misleading Offers in Compromise:The Offers in Compromise (OIC) program is an important program that helps people settle their federal tax debts when they are unable to pay in full. But “mills” can aggressively promote Offers in Compromise to people who clearly do not meet the qualifications, frequently costing taxpayers thousands of dollars.
11. Ghost tax return preparers:Most tax preparers provide outstanding and professional service. However, people should be careful of shady tax professionals and watch for common warning signs, including charging a fee based on the size of the refund. Another major red flag is when the tax preparer is unwilling to sign the return.
12. New client scams and spear phishing:Cybercriminals impersonate new, potential clients to trick tax professionals and other businesses into responding to their emails. Once the tax pro responds, the scammer sends a malicious attachment or URL that can compromise the preparer’s computer systems.

Clearly, no one is immune to attempts by scammers. Remain vigilant.

New Travels Rules Are for REAL
Identification required for travelers

It is time for Americans to get REAL. Really!

The REAL ID Act, signed into law way back in 2005, sets standards for verifying identification of individuals, including requirements for drivers’ licenses. The initial law was modified in 2018. If the updated standards are not met, an individual traveler will not be allowed to board commercial aircraft, beginning May 7, 2025.

In other words, if you do not have valid REAL ID in your possession, you generally cannot board a plane to your desired destination. Travelers will be stopped before they procced through the security section. This could lead to longer lines and flight delays, not to mention disgruntled passengers.

All states, as well as the District of Columbia and five U.S. territories, are compliant with REAL ID rules. If you have not yet obtained REAL ID, visit your state’s driver’s licensing agency website to find out exactly what documentation is required. At a minimum, you must provide evidence of the following five items:

• 1. Full legal name
• 2. Date of birth
• 3. Social Security Number (SSN)
• 4. Two proofs of address of principal residence
• 5. Lawful status

States may impose additional requirements, so check with your state’s driver’s licensing agency website for guidance.

REAL ID-compliant cards have a special marking on the upper top portion of the card such as a star or a star within a circle. If the card does not have one of these markings, it is not REAL ID-compliant and cannot be accepted as proof of identity for purposes of boarding commercial aircraft.

But a REAL ID card is not the only acceptable form of identification. Technically, you still may be able to board a plane for a domestic flight if you produce one of the following:

• Real ID-compliant state driver’s license or other state photo identity card;
• S. passport or passport card;
• DHS-trusted traveler card (Global Entry, NEXUS, SENTRI, FAST);
• S. Department of Defense ID, including those issued to dependents;
• Permanent U.S. resident card;
• S. border crossing card;
• State-issued enhanced driver’s license;
• Federally recognized, tribal-issued photo ID;
• HSPD-12 PIV card;
• Foreign government-issued passport;
• Canadian provincial driver’s license or Indian and Northern Affairs Canada card;
• Transportation worker identification credentials;
• S. Citizenship and Immigration Services Employment Authorization Card (I-766);
• S. Merchant Mariner Credentials; or
• Veteran Health Identification Card.

Note that children under age 18 are not required to provide identification when traveling with a companion within the U.S. The companion, however, will need acceptable identification.

Finally, be mindful that a REAL ID is not a replacement for a passport. You still need a passport to travel internationally even if you have REAL ID card. (But a passport may be an acceptable alternative to REAL ID for domestic travel.)

Caution: These are the current rules applicable to U.S. travel. Stay alert to any future changes.

Tax Keys to Home Office Deductions

Be wary of special recapture rule

If you are like many members of the gig economy or self-employed individuals pursuing a personal passion, you may qualify for generous home office deductions on your 2024 tax return. But the question is: should you claim the maximum deduction? Despite your knee-jerk reaction, it may not be a slam-dunk.

Background: You are eligible to claim home office deductions only if you use part of the home regularly and exclusively as (1) your principal place of business or (2) a place where you meet or deal with customers, clients or patients in the normal course of trade or business. For example, you may have set up a bedroom as the sole location of your self-employed consulting or freelance writing business.

Similarly, if you have no single fixed place of business and provide services at a multitude of different locations, you may still write off home office deductions if you handle administrative matters at home. This often applies to self-employed individuals such as interior designers, lawn care providers and other local businesses.

However, you cannot deduct any home office expenses if the work area is used more than incidentally for other purposes. For example, you do not qualify if you stick a work desk in a finished basement where your kids play with their toys. On the other hand, if a specific part of the basement is allocated exclusively to business use, you still may qualify for deductions.

If you deduct actual expenses, the list includes expenses directly related to your home office plus a portion of the home’s overall expenses based on the percentage of business use of the home. Therefore, if you use 10% of your home for an office, you may deduct 100% of the cost of painting the office plus 10% of your mortgage interest, property taxes, utilities, repairs, home security, etc. (If you itemize deductions, you may otherwise qualify for mortgage interest and property tax deductions.) Finally, you may also claim a depreciation allowance for the home office, computed under IRS tables.

Alternatively, you may use a “simplified” deduction method equal to $5 per square foot of the area used as a business office, up to a maximum of $1,500, in lieu of deducting actual expenses. All home office expenses, including depreciation, are “built into” the simplified deduction.

Although the actual expense method usually produces a bigger overall deduction—sometime much bigger—there is one major hitch.

Special rule: If you subsequently sell the home, you must “recapture” any depreciation attributable to the home office after May 6, 1997, at the 25% tax rate. This can result in an unpleasant tax surprise on the tax return for the year of the home sale.

The best approach is to examine your current situation. If you have just set up a home office and expect to move soon, you might bypass the home office deduction. Or you may opt for a smaller deduction through the simplified method that does not require depreciation recapture.

Final point: Fortunately, you do not have to go it alone. Your professional tax advisor can provide the necessary guidance.

Tax Respite for CD Penalty

Suppose you closed out a bank Certificate of Deposit (CD) before maturity. Not only do you owe income tax on the accrued interest, but you probably were also hit with an early withdrawal penalty.

Saving grace: The penalty for an early CD withdrawal can be deducted on your personal 2024 return. So, at least you salvage some tax benefit. What’s more, the deduction is available whether you itemize or take the standard deduction.

This deduction can easily fall through the cracks, so check your records.

Facts and Figures

Timely points of particular interest

 For Late Filers—If you are still scrambling to collect all the information needed to file your 2024 tax return, do not panic. The IRs allows you to obtain an automatic six-month extension—no questions asked—just by filing the proper form. This gives you until October 15, 2025, to complete your 2024 return. Reminder: An extension to file is not an extension to pay tax. You still must make a good faith estimate payment by April 15. Be careful to avoid an estimated tax liability for the year.

Beneficial Ownership Rule—On March 26, 2025, the Financial Crimes Enforcement Network (FinCEN) issued an interim final rule effectively eliminating the new requirement for U.S. companies and individuals to report “beneficial ownership information” (BOI) under the Corporate Transparency Act (CTA). The final rule clarifies and revises certain definitions included in the CTA. Bottom line:  All entities created in the U.S. and their beneficial owners are exempt from the requirement to report BOI to FinCEN.

 

March 2025

Roundup of Five Top Tax Credits

Tax savings on personal returns

 What would you rather have—a tax deduction or a tax credit? In most cases, the answer is the tax credit. Reason: A credit reduces tax liability on a dollar-for-dollar basis, while a deduction offsets income based on your tax bracket. For instance, a $1,000 deduction is worth $370 to someone in the top 37% bracket, but a $1,000 tax credit is worth $1,000.

Accordingly, following is a summary of five popular credits that may be claimed by individual taxpayers on 2024 returns.

1. Higher education credits: You may be able to take advantage of either one of two tax credits (but generally not both) for higher education expenses: The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

• • AOTC: The maximum credit of $2,500 per eligible student can be claimed in each of the first four years of college study. The credit begins to phase out for single filers with a modified adjusted gross income (MAGI) above $80,000 and joint filers above $160,000.
  • LLC: The maximum credit of $2,000 per taxpayer can be claimed in any year of undergraduate, graduate or professional degree study. The credit begins to phase out at the same MAGI thresholds as the AOTC. Because of the higher maximum credit, the AOTC is usually preferable to the LLC.

2. Child Tax Credit: A $2,000 credit is available for every qualifying child under age 17 whom you claim as a dependent. However, the tax benefits of the Child Tax Credit (CTC) are phased out on 2024 returns for single filers with a MAGI above $200,000 for single filers and $400,000 for joint filers. The allowable credit is reduced by $50 for every $1,000 (or fraction thereof) above the threshold.
3. Dependent care credit: You may claim the dependent care credit—sometimes called the “child care credit”—for the cost of caring for a child under age 13 or another dependent incapable of self-care. To qualify, the expenses must be incurred to be “gainfully employed” or to be looking for work. The credit is generally equal to 20% of the first $3,000 of qualified expenses for one dependent and $6,000 for two or more dependents.
4. Adoption credit: Parents who adopt a child may be entitled to some tax relief. The adoption credit can be claimed for up to $16,810 of qualified adoption expenses, including costs for reasonable and necessary adoption fees, attorney fees and other related expenses. However, the tax benefits of the adoption credit are phased out for both single and joint filers with a MAGI above $252,150.
5. Retirement Savings Contribution Credit: Some taxpayers are in line for a little-known tax credit for making elective contributions of up to $2,000 to qualified retirement plans ($4,000 for joint filers). This includes contributions to 401(k), 403(b), 457(b), SIMPLE and SEP plans as well as traditional IRAs and Roth IRAs. A taxpayer may also claim the credit for voluntary after-tax contributions to qualified plans. The credit percentage ranges from 50% to 10% depending on AGI.

Beginning in 2027, this credit will be replaced by a “matching” provision paid by the federal government.

Finally, other credits— such as the foreign tax credit and an extra credit for caring for the elderly or disabled—are also available to some taxpayers on their 2024 returns. Obtain more details from your professional tax advisors.

New Law Provides Disaster Tax Relief

Tax breaks salvaged on 2024 returns

What a year it was for natural disasters. Five hurricanes made landfall in the U.S. Floods, tornadoes and severe storms. And then wildfires raged on the West Coast. Millions of victims suffered damage to homes and other personal property.

At least there is a tax ray of hope. Under new legislation passed in the waning days of 2024—the Federal Disaster Tax Relief Act (FDTRA)—individuals may qualify for enhanced tax relief.

Background: Prior to the Tax Cuts and Jobs Act (TCJA), an itemizer could deduct losses to personal property that were caused by a “sudden, unexpected, or unusual” event. Typically, this included damage or destruction from natural disasters, but also applied to, say, an automobile collision or water pipes bursting during a winter freeze.

The amount of deductible loss, which was reduced by any insurance reimbursements you received, was further limited by these two rules.

• Only the excess above 10% of your adjusted gross income (AGI) was deductible.
• The amount of the loss had to be reduced by $100 for each event.

For instance, if your AGI was $100,000 and you incurred an $11,000 unreimbursed loss, your deduction was only $900.

However, the TCJA suspended the casualty loss deduction rules for 2018 through 2025, with an exception for losses in federally-designated disaster areas. In those situations, you could still deduct casualty losses to personal property, subject to the prevailing limits.

Tax update: The FDTRA allows you to deduct a loss in a federal disaster area without imposing the usual 10%-of-AGI threshold. What’s more, the deduction is available whether you itemize or not. Therefore, you can also benefit from a reduction in AGI for other tax purposes. On the downside, the amount per casualty you must subtract is increased from $100 to $500.

Let us go back to our previous example where you have an AGI of $100,000 and a $11,000 casualty loss in 2024. Under the new law, you can deduct $10,500 instead of $900—or $9,600 more.

As things stand now, the new law applies to losses in qualified disaster areas from December 28, 2019, through December 12, 2024, and ending no later than January 11, 2025. But this may be revised to include losses due to the California wildfires that started after the end date. In any event, some taxpayers may benefit by filing amended returns for prior years.

Special rule: Generally, a casualty loss is claimed on the tax return for the year in which the casualty occurred. However, a special election is available for losses in a federally designated disaster area. You can choose to deduct the loss on the tax return for the year preceding the actual event.

For example, if you suffered a loss in January this year, you do not have to wait until you file your 2025 return in 2026 to deduct the loss. Instead, you can obtain faster tax relief by claiming the loss on your 2024 return.

Final words: If you have any questions regarding your personal situation, do not hesitate to contact your professional tax advisors.

Avoiding Estate Tax on Life Insurance

Planning ahead for your family’s future

Typically, if you are one of the main breadwinners in your household, you may seek to protect the rest of the family by securing adequate life insurance. But what about federal estate tax consequences? If you are not careful, these tricky rules can dilute the benefits.

Fortunately, with the proper planning, your beneficiaries should be able to receive the life insurance proceeds without any tax erosion.

Background: Your gross estate includes the proceeds from a life insurance policy on your life if those proceeds are payable to the estate (or are received by someone else for the benefit of the estate). Obviously, it is relatively easy to avoid a potential problem by designating beneficiaries other than the estate and giving them full control over the proceeds. In other words, this condition is satisfied if you simply name a spouse or child as a beneficiary with the freedom to use the funds as they see fit. But that is only part of the story.

Even if the proceeds are not receivable by the estate, they are included in the insured person’s taxable estate if the insured possessed an “incident of ownership” in the policy on the date of death. This also applies to any incident of ownership transferred within three years of death.

What is an “incident of ownership”? The term does not just mean technical legal ownership. It refers to the right to the economic benefits of a policy. The list of incidents of ownership includes such items as the power to—

• Change beneficiaries;
• Revoke an assignment;
• Obtain a loan against the cash value;
• Pledge the policy for a loan; and
• Surrender or cancel the policy.

The estate tax problem may be avoided by establishing an irrevocable life insurance trust (ILIT) as the owner of the policy. With an ILIT, you give up incidents of ownership rights under the direction of a trustee you appoint. But there is no going back when ownership rights are transferred to the ILIT.

Caution: If you acquire a life insurance policy on your life and you transfer all incidents of ownership in your policy within three years before your death, the proceeds are still included in your taxable estate. In addition, the transfer is subject to gift tax, but the overall tax bite generally is much lower than the estate tax that would be imposed if you had retained the policy. Furthermore, the transfer may be sheltered from gift tax by the annual gift tax exclusion ($19,000 per recipient in 2025) and the unified estate and gift exemption ($13.99 million in 2025).

Obviously, this setup requires careful planning and coordination between financial and tax aspects. Seek professional assistance when it is appropriate.

Seek Tax Shelter on Home Sale

Keys to unlock big tax break

Has the value of your home skyrocketed in the past few years? You may think this is a good time to sell and either upgrade or downsize. If you do, you will be eligible for one of the “biggest and best” tax breaks on the books: the home sale exclusion.

Under this long-standing tax law provision, a taxpayer can exclude from federal income tax up to $250,000 of gain from the sale of a home if certain requirements are met. The exclusion is doubled to $500,000 for couples that file a joint return. So, if you and your spouse are careful, you can pocket up to half a million dollars tax-free!

Background: To qualify for the home sale exclusion, the home must have been owned by you and used as your “principal residence” at least two of the five years prior to the sale. This special tax exclusion does not apply, however, if you sold another qualified principal residence within the last two years. (Theoretically, you could qualify for the home sale exclusion every two years.)

Keeping that in mind, here are several key points to know about the home sale exclusion:

• The home must be used as your principal residence for any two of the previous five years, but the years do not have to be consecutive. Furthermore, you can meet the “use” and “ownership” requirements in different tax years.
• If you file a joint return, you can claim the maximum exclusion if (1) either spouse meets the two-year ownership test, (2) each spouse meets the two-year use test and (3) neither spouse has elected the exclusion within the last two years. This is particularly important to remember if you have recently divorced or remarried.
• To meet the “use” requirement, you must physically occupy the home, but short absences do not work against you. On the other hand, a longer absence, such as a one-year sabbatical by a college professor, does not count as time that the home is being used as your principal residence.
• If you own two homes and live in both places during the year, the home where you stay for most of the year is generally treated as your principal residence. For instance, if you spend seven months at a winter home and five months at a summer home, the winter home is considered to be your principal residence. Be careful to document your stays.
• To the extent that the home has been used for business rental or use—including using a portion of the residence as a home office—you must recapture depreciation deductions attributable to the period after May 6, 1997. The recaptured income is taxable at the 25% rate.
• In some cases, you may qualify for a partial exclusion without meeting the usual two-year rule if you sell the home sooner due to a change in employment, health reasons or other unforeseen circumstances.

Reminder: Of course, this is only a brief overview of the tax exclusion for the sale of a principal residence. It is recommended that you consult with a professional tax advisor concerning all the tax ramifications of home ownership, including tax benefits that may be available on your 2024 return.

Tax Breaks for a New Business

Generally, a new business can deduct up to $5,000 of its start-up costs on a 2024 return, subject to a phase-out above $50,000. The remainder is amortized over 180 months.

But certain other expenses in the first year of operation may be deductible. This includes:

• Incorporation expenses;
• Expenses for interest, real estate and research and development (R&D); and
• Costs attributable to the acquisition of property eligible for depreciation or other cost recovery provisions.

Special rules and limits are likely to come into play. Obtain expert tax guidance.

Facts and Figures

Timely points of particular interest

Get a Fresh Start—Under the IRS “Fresh Start” initiative, individuals who owe back taxes to the IRS—including interest and penalties—may be able to settle or pay down the debts through installment agreements, the Offer-in-Compromise (OIC) program or similar plans. But there is some movement in the federal government to reduce the availability of the Fresh Start and OIC programs or eliminate them altogether. If these plans would provide benefits for someone in your family, have them contact a tax professional sooner rather than later.

Catch-Up Contributions—The IRS recently issued new proposed regulations relating in part to catch-up contributions made to 401(k) and certain other qualified plans. Under new rules taking effect in 2025, “super” catch-up contributions may be made to eligible plans by employees age 60 through 63. The limit for these super catch-up contributions is $11,250 for 2025. Super catch-up contributions can be made in addition to regular contributions. We will provide more information on the new rules in an upcoming issue.

 

February 2025

Don’t Miss These Five Tax Deductions

Tax breaks for itemizers on ’24 returns

When you file your 2024 federal income tax return, you claim the higher of your itemized deductions, subject to certain special rules, or the standard deduction. Previously, you may have itemized, but recent tax legislation—most prominently, the Tax Cuts and Jobs Act (TCJA)—has resulted in more taxpayers taking the standard deduction. The standard deduction for 2024 returns is $14,600 for single filers and $29,200 for joint filers.

Nevertheless, comb your records to ensure you are not missing any deductible expenses that could make a difference. Here are five examples.

1. Charitable gifts of property: If you cleaned out your garage or basement last year, you may have found items in good condition that you donated to charity. Generally, the deduction is limited to the property’s value on the donation date. Conversely, if you donated property that has appreciated in value—say, artwork or collectibles—the deduction is limited to your cost. Tax bonus: For appreciated property owned longer than one year, the full fair market value (FMV) is deductible.
2. Mortgage interest: Currently, you can write off mortgage interest paid on the first $750,000 of new “acquisition debt,” down from $1 million. This includes mortgage interest paid to “buy, build or substantially improve” your principal residence and one other home. But the deduction for interest paid on the first $100,000 of home equity debt is suspended until 2026. Caveat: If you incurred a home equity debt in 2024 and used the proceeds for a major home improvement, like installing an in-ground swimming pool, the interest is deductible as acquisition debt (subject to the usual limits).
3. Disaster-area losses: Prior to the Tax Cuts and Jobs Act (TCJA), you could deduct casualty and theft losses above 10% of adjusted gross income (AGI) after subtracting $100 per event. This provision is suspended through 2025. But new legislation allows deductions for losses in most federal disaster areas in 2024 without the 10%-of-AGI limit after subtracting $500, even if you do not itemize. Note: You can elect to deduct a disaster-area loss on the tax return for the year prior to the year of the event. So, a loss suffered early in 2025 may be deducted on your upcoming 2024 return.
4. State and local taxes: The TCJA currently limits the deduction for state and local tax (SALT) payments to $10,000 a year. This includes (a) property tax payments and (b) income tax payments OR sales tax payments. Use the combination that provides the highest deduction amount up to the $10,000 limit. Tax return option: In lieu of your actual sales tax expenses based on receipts, you may use a simplified IRS table and add on the sales tax paid for certain “big-ticket items” like cars and boats.
5. Unreimbursed charitable expenses: The tax law allows you to deduct your out-of-pocket costs incurred on behalf of a qualified charitable organization. This includes both long-distance travel expenses—airfare, meals and lodging and transportation to and from the airport, etc.—as well as local travel expenses. If you travel by car, you can deduct either your actual expenses attributable to charitable functions or 14 cents per mile (plus tolls and parking fees).

Finally, be aware that certain deductions can be claimed whether you itemize or take the standard deduction. These include early withdrawal penalties for investment accounts, IRA contributions, student loan interest and others, subject to special rules and limits. Bottom line: Consult with your professional tax advisors concerning your situation.

The QBI Deduction Is Still in Play

Big write-off for small businesses

Are you the owner of a pass-through business entity—such as a partnership, S corporation or limited liability company (LLC)—or a self-employed individual? The 2025 tax year may be the last year you are entitled to claim the “qualified business interest” (QBI) deduction. The write-off may be as high as 20% of your QBI.

The QBI deduction was created by the Tax Cuts and Jobs Act (TCJA). It is scheduled to expire after 2025 unless Congress takes further action. So, the deduction is still available on your 2024 return as well as the return for next year.

Background: For these purposes, QBI is generally defined as your net income from the business less compensation. The TCJA also adds special rules for those who provide personal services. The “specified service trade or business” (SSTB) group includes attorneys, physicians, accountants, financial planners and others who typically offer services to the public.

Next, the following rules are applied:

• If the total taxable income on your 2024 return does not exceed $191,950 as a single filer or $383,900 as a joint filer, you are entitled to the full 20% QBI deduction—period. It does not matter if you are in the SSTB group or not.
• If the total taxable income on your 2024 return exceeds $241,950 as a single filer or $483,900 as a joint filer, you get no deduction if you are an SSTB owner. For other owners above these thresholds, your deduction is limited and possibly eliminated.
• If the total taxable income on your 2024 return falls between the thresholds stated above, your deduction may be reduced, regardless of whether you are in the SSTB group or not.

Note that these thresholds are indexed for inflation. For simplicity, we have referred to the figures for 2024 tax returns. The figures for 2025 are slightly higher.

Key point: In the event you are an SSTB owner who files a joint return, the amount of your QBI is phased-out on a pro-rata basis until it disappears completely when total taxable income exceeds $483,900. For all other taxpayers above the upper threshold, the deduction is limited by the greater of either (1) 50% of the wages the business paid its employees or (2) 25% of wages plus 2.5% of the basis of the qualified property owned by the business. After comparing this limited deduction to the 20% deduction of QBI, you may deduct the smaller of the two.

As you might imagine, the calculations for the QBI deduction for sole proprietors and owners of pass-through entities are often complex. In addition, depending on your situation, it may make sense to file separate returns if you are married, due to the way the tax brackets work. Of course, filing separately will have other repercussions and may actually increase your overall tax liability.

Clearly, this is not a do-it-yourself proposition. Your professional tax advisors can provide the necessary assistance.

Final words: The current Congress may extend, modify or make permanent the QBI provision as part of a major tax legislation package this year. We will keep you updated on any significant developments.

Should You Consolidate Your IRAs?

Reasons to consider this approach 

If you are like many long-time retirement savers, you may have several IRAs you started up in years gone by. This usually results in a flood of financial statements to your mailbox or email at the end of the year. But you can cut down on the paperwork or digital communications—as well as simplifying your life—by consolidating your IRAs in one place.

Before we go any further, remember that all IRAs are not created equal. For instance, you cannot mix and match traditional IRAs with Roth IRAs. However, you can keep accounts for both traditional and Roth IRAs at the same financial institution.

Background: A traditional IRA may include tax-deductible contributions from the time when you were eligible for IRA deductions. The distributions from these IRAs are subject to tax at ordinary income rates. In contrast, contributions to a Roth IRA are never tax-deductible, but future distributions may be completely tax-free if the Roth has been in existence at least five years.

Similarly, you may forfeit tax benefits if you combine the funds in an IRA you have inherited with your own IRAs. Be aware of these critical differences.

Nevertheless, assuming you have several traditional IRAs that may be combined without any adverse tax consequences, consider these possible reasons for consolidation.

• It is difficult to coordinate your retirement planning strategies if you’re spread out all over the place. Consolidating enables you to focus on your goals and plans—for example, taking a more conservative approach—by taking your current circumstances into account.
• One or more of your IRAs may be providing a better return on investment than the others. By moving assets into a single IRA, you can eliminate the IRAs that are not performing as well.
• Administrative costs can erode your nest egg. Thus, you may save money in fees overall by consolidating IRA assets, especially if you are eligible for lower fees for a large account.
• It is easier and more convenient to keep track of your investments. Instead of multiple statements, you will receive just one statement covering all your IRA investments.
• You must begin required minimum distributions (RMD)s after reaching a specified age. Currently, the threshold is age 73, although it is scheduled to increase to age 75 in 2033. The RMD amounts are based on the values on December 31 of the prior year in all your accounts. Therefore, taking the RMDs from one account will be a simpler process.

In summary: Of course, you may not want to consolidate your IRAs to maintain greater diversity or for other personal preferences. Discuss your options with your professional advisors before you make any moves.

Filing a Deceased Person’s Return

Meet obligations of an executor

It is never easy losing a loved one dear to your heart, but that is not the end of the story. If you are a close family member acting as executor—perhaps you are a surviving spouse or a child—you must ensure that a federal income tax return is filed on the behalf of the deceased individual. Comparable rules apply in situations where state income tax is imposed.

Background: The responsibility for filing the federal income tax return rests with the executor or a personal representative appointed by the court. The return requires information relating to income and deductions in the deceased person’s last year of life.

If your spouse passed away, you are treated as having been married for the entire year (assuming you did not remarry). This annual return includes income received by your deceased spouse up until the time of death, such as capital gains from securities sales. In addition, if a deceased spouse realized losses, they may offset your joint collective income. After offsetting capital gains and up to $3,000 of ordinary income, any capital loss carried over to the next year is limited to the portion attributable to your ownership interest.

Key tax break: Notably, a surviving spouse with a dependent child living at home can elect to use the “qualifying widow or widower” tax filing status for up to two years after the deceased spouse’s death. Accordingly, if your spouse passed away last year, you may benefit from favorable joint return rates on your 2024, 2025 and 2026 returns. This will generally result in less tax for those three years than you would owe as an unmarried filer.

Otherwise, if the deceased person was unmarried, the return is filed on their behalf as a single filer. Note: In some cases, a deceased taxpayer who was the parent of dependent children may qualify for the beneficial “head of household” filing status.

Do not take the task of executor lightly. If an income tax return is not filed for the deceased person, the IRS will send a notice to their last known address. If the deceased person was due a refund, it will be forfeited after three years if no return is filed. On the other hand, if a tax liability exists, the IRS may pursue payment from the executor or even the decedent’s heirs by filing a lien against the estate.

To add insult to injury, the IRS may add interest and penalties to the back taxes. This could turn into a tax disaster if you are not careful. Your professional advisors can provide guidance.

Final words: Note that you can obtain an automatic six-month filing extension if you need more time to collect information. This is not, however, an extension to pay tax. The request for an extension for a 2024 return must be filed by April 15, 2025.

Tax Verdict on Jury Duty

Suppose you served on a jury in 2024. What are the tax consequences?

Basic rules: Normally, this payment for doing your civic duty is taxable. However, if your employer provides your regular wages while requesting the jury duty payment in return, you can deduct this payment to offset the tax liability. Of course, your regular wages remain taxable.

Also, reimbursements received for transportation, parking fees and meals are generally exempt from tax.

Facts and Figures

Timely points of particular interest

Thoroughly Modern IRS—The 2025 tax filing season (for 2024 returns) officially kicked off on January 27. The IRS is touting several of its modernization efforts this year. Since last tax season, it has made improvements such as more access to tax account information from text and voice virtual assistants, expanded features on the IRS Individual Online Account, greater access to dozens of tax forms through cell phones and tablets and increased alerts for scams and schemes that threaten taxpayers, among other upgrades. The IRS says it expects more than 140 million returns to be filed by April 15.

Missing In Action—Did you or someone you know miss out on an “Economic Impact Payment” (EIP) during the pandemic? The IRS has announced it is automatically distributing these “stimulus payments” to one million eligible recipients who did not properly request them when 2021 returns were filed or did not receive them for some other reason. The unclaimed EIPs are expected to total about $2.4 billion with a maximum payment of $1,400 per recipient.

Five Financial Resolutions for 2025

Planning today for the future

 What is your financial status as 2025 gets underway? This is a good time to make “New Year’s resolutions” that may improve your outlook. Here are five common possibilities.

1. Cut down debt. This is often the first and most important financial resolution for people. A molehill of debt can turn into a mountain in a short period of time. Now you can start chipping away.

First, reduce unnecessary spending, like buying all the latest electronic devices or dining out nightly at trendy restaurants. Then use available resources to pay off the debts that have the highest interest rates. If possible, you might consolidate debts into a single loan at a reasonable rate.

2. Work out a monthly budget. It is difficult to accomplish the goal of reducing debt without having a firm grasp of your income and expenses. Spending more than what you earn is how you get in trouble in the first place.

Do not forget to account in the budget for increases in costs as well as fixed costs, like the rent or mortgage. Use a spreadsheet, ledger or other device to keep track of income and expenses —even a simple notepad may do.

3. Save more for retirement. Financial planning covers more than just one year. Figure out how much you will need to save to sustain a comfortable lifestyle through your golden years.

Typically, you may bulk up retirement savings by deferring part of your salary to a 401(k) plan or other company plan. For 2025, the limit on 401(k) deferrals is $23,500, plus another $7,500 if you are age 50 or older. Employers may also add matching contributions up to a stated percentage of compensation. New for 2025: Employees age 60-63 can kick in an extra $11,250 instead of $7,500.

To supplement these contributions, you may contribute up to $7,000 to an IRA in 2025 or $8,000 if you are age 50 or older. Have your professional advisors explain the key differences between traditional and Roth IRAs.

4. Adjust your portfolio. Although the stock market was booming throughout much of 2024, there are no guarantees that the trend will continue, given the inherent volatility of equities. You may hedge your bets by continuing to rely on basic principles of diversification and asset allocation.

• Diversification means spreading out investments among different asset classes to reduce your overall risk
• Asset allocation is the practice of investing in various categories—such as stocks, bonds, real estate and cash — based on a set percentage.

Of course, there are other factors to consider, including your personal tolerance for risk and the tax implications of transactions and holdings.

5. Create or update your will. If you do not have a will in place, make this a top priority. Without a legally-binding will, state law governs the disposition of assets and custody of young children, regardless of your intentions.

But do not assume you are “done” just because you have a will. It may need to be revised to reflect significant life events like births, deaths, divorces, marriages or remarriages; loss of a job or retirement; changes in the tax laws; and other events affecting the family.

Fortunately, this does not have to be a do-it-yourself proposition. Your professional advisors can help you meet your main objectives for 2025.

IRS Eases into Third-Party Reporting

New transitional rule affects payments

 Recent tax legislation was intended to crack down on workers in the gig economy and others who may skirt the usual tax rules for reporting income. Under the American Rescue Plan Act (ARPA), entities known as third-party settlement organizations (TPSOs)—including apps like Venmo, Zelle and PayPal and online marketplaces—are required to report more transactions to the IRS.

But the new rules have been postponed twice. Now the IRS has announced a transitional rule that will affect reporting by TPSOs for 2024 and 2025 before the final requirements take full effect in 2026.

Background: The IRS requires certain entities to send annual tax forms to individuals receiving payments during the tax year. For example, if you have invested in mutual funds that pay capital gains and dividends, you receive Forms 1099-B before you file your annual tax return. The IRS also receives copies of these forms so its computers can cross-check tax return entries.

Similarly, a Form 1099-K is sent to recipients of payments made for good or services during the year. Prior to ARPA, TPSOs were required to distribute Forms 1099-K to any business that had more than 200 transactions during the year AND the total amount of the transactions exceeded $20,000. Under ARPA, however, the requirement for the number of transactions was eliminated and the dollar threshold was knocked all the way down to $600. These changes were scheduled to go into effect in 2022.

But then the IRS jumped in. First, it postponed the new requirements for one year to enable TPSOs to establish reporting procedures. Subsequently, it granted a second reprieve for another year. Finally, the new transitional rule gradually eases TPSOs into the tax reporting requirements.

New limits: The IRS is phasing in the $600 threshold over three years, but there is still no exception based on the number of transactions. The schedule for TPSOs to send 1099-Ks to businesses is as follows:

• For 2024, reporting is required for transactions totaling more than $5,000.
• For 2025, reporting is required for transactions totaling more than $2,500.
• For 2026, reporting is required for transactions totaling more than $600.

Note that the changes do not affect casual transactions between friends like payments for settling a restaurant or bar bill or participating in a Fantasy football league. There is no reporting required for these types of personal payments.

The new rules are expected to increase compliance by taxpayers, like many gig economy workers who receive payments for goods and services through TPSOs and have previously treated their activities as a mere hobby. Of course, as self-employed individuals, gig economy workers may be entitled to claim offsetting deductions for qualified business expenses, subject to certain limits.

Practical approach: Gather all the required information before your 2024 tax return is prepared. Your professional tax advisors can help you maximize the tax benefits and minimize the tax damages.

Faster Deductions for Building Components

Cost segregation study for a business

 Bad news: It takes almost four decades to fully recoup the cost of a business building through regular depreciation deductions. Good news: Your business may benefit from faster write-offs if it conducts a “cost segregation study.” In effect, the study separates certain building components so that some costs can be deducted over a shorter time.

To sweeten the pot, the favorable tax treatment available with a cost segregation study may be complemented by recent tax law changes, although one benefit is being gradually written off the books.

Background: Normally, the cost of a building is recovered through depreciation deductions over a period of 39 years, as required by the Modified Adjusted Cost Recovery System (MACRS). Conversely, personal property may be written off over shorter time periods based on a “useful life” of, say, five, seven or 15 years. The IRS regulations define “personal property” as tangible depreciable property (other than buildings and their structural components) used in transportation, communications and certain other industries.

A cost segregation study identifies those components that are eligible for faster write-offs. It then reclassifies those assets as personal property assets and enables business building owners to depreciate the components in less time than the 39-year recovery period for the overall building.

Caution: The IRS may challenge these deductions and has frequently done so in the past. In several cases, the courts have ruled that parts of a commercial building may be treated like personal property only if they relate to the equipment used in a business located in the building. This may include components such as HVAC systems, plumbing systems in restaurant kitchens and removable carpeting.

Typically, the cost segregation study will rely on engineering reports, mechanical and electrical plans and architectural drawings in compliance with IRS guidelines. Because the write-off periods for components often depend on the use of the building, taxpayers are generally advised to enlist the services of a qualified professional experienced in their particular industry. When it is handled properly, the cost segregation study should measure up to IRS standards.

Furthermore, tax legislation recently clarified that the cost of “qualified improvement property” (QIP) is eligible for a 15-year write-off. For these purposes, QIP includes qualified leasehold improvements, qualified retail improvements and qualified restaurant property. This change in the law has proven to be a boon for many business owners.

On the downside, 100% first-year bonus depreciation for qualified business property placed in service during the year is being gradually phased out. The deduction for 2025 is only 40% of the cost (down from 60% in 2024). This deduction will disappear completely after 2026 unless Congress modifies the rules.

Final words: In any event, a cost segregation study can provide valuable tax savings. Make sure you work with experts in the field to realize the optimal results for your business.

Stretching Flexible Spending Accounts 

How to avoid loss of funds  

An important deadline is coming up for participants in flexible spending accounts (FSAs). For healthcare FSAs that allow a grace period, you have until March 17, 2025, to withdraw any leftovers before you forfeit the money.

Background: An FSA is funded with pre-tax dollars, so there are significant income and employment tax savings for employees. Furthermore, the employer does not have to pay employment taxes on amounts contributed to FSAs, either. This benefit may offset some or all of the administrative costs of the plan. Thus, FSAs can be a “win-win situation” for employers and employees.

There are two types of FSAs. One is for healthcare expenses and the other is for dependent care expenses.

1. Healthcare FSAs: In brief, you arrange to have amounts deducted from your paycheck and deposited in your personal account. Then you use the money throughout the year to pay for qualified healthcare expenses as needs arise. The FSA covers expenses of an employee, spouse and dependents age 26 or younger. For instance, the money may be used to pay for LASIK surgery or braces for your kids.

The annual contribution limit for healthcare FSAs is $2,500, indexed for inflation. For 2025, the limit is $3,300 (up from $3,200 in 2024).

2. Dependent care FSAs: With a dependent care FSA, funds may cover expenses of caring for a child under age 13 or a dependent physically or mentally incapable of self-care (e.g., an elderly relative with Alzheimer’s disease).

The annual limit for contributions is $5,000. (This figure is not indexed for inflation.) However, unlike healthcare expenses, which are usually not easy to predict, you will often have a good idea of your annual dependent care expenses, such as fees for day care or pre-school.

Timing is everything: At the start of the year, employees must decide how much of their wages to allocate to their FSAs. Usually, this decision requires some advance planning, especially when you factor in the “use-it-or-lose it” rule. How it works: If an employee does not withdraw the funds remaining in the FSA before the end of the year, this amount is forfeited. However, if the employer has authorized a grace period, employees have an extra 2½ months to use up their FSA funds. Therefore, the effective deadline for the 2024 plan year may be March 17, 2025. (March 15 falls on a Saturday.)

Alternatively, an employer may allow an employee to carry over up to $500 of unused healthcare FSA funds to the next year ($640 from 2024 to 2025). However, employers cannot allow employees to benefit from permit both the grace period and the carryover rule— it must be one or the other. Also, the carryover option is not available with a dependent care FSA.

Tax prescription: Check the balance in your healthcare FSA. If you have unused funds that will be forfeited after March 17, consider expenditures you might make at this time, such as contact lenses or first-aid kits. The money is yours, at least for now, so you may as well spend it. Finally, consider choices for the 2025 plan year.

Tax Breaks for Foster Parents

Are you thinking about becoming a foster parent of a young child? Your generosity may be rewarded with several tax breaks, including the following.

• You may be able to claim a Child Tax Credit (CTC) of up to $2,000 subject to a phase-out based on adjusted gross income (AGI).
• The cost of caring for a child under age 13 so you (and your spouse, if married) can work qualifies for a dependent care credit.
• Medical expenses paid on behalf of the child count toward the 7.5%-of-AGI threshold for medical expense deductions.
• You may be eligible for a charitable deduction for out-of-pocket costs for feeding, clothing and caring for a foster child if this benefits a tax-exempt charity.

Finally, tax breaks may also be available on the state income tax level.

Facts and Figures

Timely points of particular interest

Working It Out—Is it better for your company’s employees to go to the office each day, work remotely from home or use some sort of hybrid structure? It depends on the job, the industry and the worker. In the past, employers often worried about employees “goofing off” or missing face-to-face interaction, but technology has alleviated many concerns. In addition, recent studies have shown employees working at home can be as productive, or even more productive, than on-site workers, although the results are not universal. Find the best fit for your business.

New Mileage Rates—The IRS has just announced the new standard mileage rates for 2025. These rates can be used in lieu of deducting actual expenses. The rate for business driving is 70 cents per mile (up three cents from 2024), the rate for medical purpose trips is 21 cents per mile (the same as 2024) and the moving expense rate for active-duty military personnel is 21 cents per mile (the same as 2024). The charitable travel rate is statutorily set at 14 cents per mile. You can add fees to all the standard rates for related parking and tolls.