Tax News
Important 2026 Tax Dates
January 15: 4th quarter estimated tax payment for 2025 due.
January 31: W2s and 1099s due to employees/contractors.
February 15: Brokerage and financial documents due to account holders.
March 16: Calendar year partnership and S corporation returns due.
April 15: Individual and C corporation tax returns due.
April 15: 1st quarter estimated taxes due.
June 15: 2nd quarter estimated taxes due.
September 15: 3rd quarter estimated taxes due
October 15: Individual returns on extension due.
January 15, 2027: 4th quarter estimated taxes for 2026 due.
Important Tax Changes
For 2025 tax filing, we get all the thrills and excitement of the "One Big Beautiful Bill Act" (OBBBA) making permanent many of the 2017 TCJA provisions and eliminating many credits and other provisions enacted or extended during the Biden Administration.
The 2025 social security wage cap (amount of wages subject to SS tax) is $176,100 and increases to $184,500 for 2026, a 4.77% increase.
There is a new $6,000 standard deduction "bonus" in addition to the usual $1,850 bump for those aged 65+ with incomes under $100,000 single/$200,000 MFJ.
In 2025 the "catch-up" 401K/403b contribution for employees aged 60-63 increases from $7,500 to $11,250 making the maximum salary deferral $34,750. California does not currently conform and the additional $3,750 will be taxable California wages in the year of contribution, and future 401K distributions will carry a separate California after-tax basis for calculating taxable California income. Not looking forward to that! For all others 50+ the catch-up contribution is $8,000.
Beginning in 2026 all catch-up contributions for those earning wages over $145,000 must be made to an after-tax Roth account. In other words, the catch-up portion will be considered taxable income, but future distribution of these contribution amounts, along with associated earnings, will be tax-free. California conforms to this change.
Reinstates a charitable cash deduction of up to $150 single and $300 MFJ for non-itemizers.
There is a new above-the-line deduction of up to $25,000 in wages and overtime pay from 2025-2028. This must be separately stated on a W2 or other employer supplied documentation.
New above the line deduction on up to $10,000 of auto loan interest (income under $200,000 MFJ/$100,000 Single) for autos with final assembly in the US.
California passed a new conformity bill bringing it into alignment with most Federal tax law as of January 2025. But due to specific on-going non-conformity choices, many of the TJCA and OBBBA provisions will not be followed in California (see below).
Tax Rates, Income and Deductions
Standard deductions for 2025 are $15,000 for single filers, $31,500 married filers, and $23,625 for head of household filers. In 2026 these increase to $16,100 single, $32,200 married, and $24,150 for head of households.
The OBBBA makes permanent the current tax brackets 10%, 12%, 22%, 24%, 32%, 35% and 37%. You can see the brackets here. California standard deduction and tax rates can be seen here.
Maximum individual pre-tax FSA contribution for medical expenses rises to $3,300 for 2025 and to $3,400 for 2026. FSA contributions for dependent care remains unchanged at $5,000.
The Schedule A deduction for medical expenses AGI threshold remains at 7.5% for those itemizing.
Maximum individual HSA contributions are $4,300 for 2025, increasing to $4,400 in 2026 (maximum $8,600/$8,750 per family). Individuals over 55 can still contribute an additional $1,000.
Unreimbursed employee expenses, legal fees, investment advisor fees and other 2% miscellaneous itemized expenses remain non-deductible on the Federal return. Since California still does not conform to this, we keep an eye on these potential deductions for State purposes.
Energy Credits
Sayonara. All EV credits and home energy efficiency credits expire as of 12/31/2025.
Children & Dependents
The maximum pre-tax dependent care FSA contribution for 2024 remains $5,000. Child & Dependent Care Expenses (Form 2441) remains $3,000 for one child and $6,000 for two or more children. These are the expenses paid for pre-K childcare, Kindergarten, or after-school and summer activities for children until their 13th birthday.
The Child Tax Credit for 2025 increases to $2,200 per child up to age 16 and the "other dependents credit" of $500 per older dependent is now permanent. (phased-out for higher earners).
Up to $5,000 may be withdrawn from a retirement plan without penalty for up to one year after birth or adoption of a child.
You may now withdraw up to $10,000 from a 529 plan during your lifetime to repay student loans of an account beneficiary (or their siblings) without tax or penalty. Additionally, a 529 may now be used tax-free to pay for an approved apprenticeship program. Starting in 2024 up to $35,000 in 529 funds remaining after 15 years from account formation can be rolled over to a Roth IRA; this is capped annually at the current contribution limit (e.g. $7,500 max each year). This is a fantastic opportunity for tax-free growth using surplus college savings with one caveat -- California does not conform; the earnings portion calculated in the roll over is taxed and also subject to a 2.5% penalty.
Retirement/Estate Planning
In 2020 the age for required minimum IRA distributions was raised to 72. Beginning in 2024 RMDs begin at age 73 for those born in 1951 through 1958 and then at age 75 for those born after 1958. RMDs will no longer be required from Roth 401Ks.
The Social Security cost of living increase for 2026 will be 2.8%.
Earnings distributed in association with correcting excess contributions to IRA plans will still be taxed as before, but will not be subject to the 10% early withdrawal penalty. The list of exceptions to the 10% early withdrawal penalty on retirement distributions has nearly doubled, including an allowance for a $1,000 withdrawal for "personal emergencies" that requires no third party certification.
Qualified Charitable Distributions (direct transfers from an IRA to a charity) are $108,000 for 2025 and $115,000 for 2026. You must be 70-1/2 years or older to make a QCD.
IRAs inherited from people other than your spouse must now be distributed within 10 years of death. This does not affect IRAs inherited before 2020.
Stipends and fellowships are now considered income for IRA contributions.
2025 401K/403b salary deferral is $23,500 increasing in 2026 to $24,500. The "catch-up" for those ages 50+ is $8,000 with a "super catch-up" for employees aged 60 to 63 of $11,250. California does not conform.
Regular IRA contributions for 2025 remained $7,000 and will rise to $7,500 in 2026. The additional $1,000 "catch-up" for those 50+ rises to $1,100 in 2026.
The gift tax exclusion is $19,000 for 2025 and will remain the same in 2026.
The base unified credit exclusion amount for estate taxes increases to $13.99 million in 2025 and to $15 million in 2026.
Business & Self Employed
Business meals remain 50% deductible and "entertainment" expenses remain non-deductible.
The 2025 standard business mile deduction rate is 70 cents rising to 72.5 cents in 2026.
Business owners/self-employed individuals can now establish Roth-SEP IRAs. Like all Roths, these accounts are funded with after-tax dollars.
Section 179 expense limitations will be $1,250,000 for 2025 and then jumps to $2,560,000 in 2026. Max $31,300 for SUVs/luxury cars. California does not conform and 179 limits remain at $25,000 (unchanged since 2003).
Maximum 2025 SEP contribution is $70,000 and increases to $72,000 for 2026.
Beginning in 2026 reporting threshold for payments to non-employees (1099-NEC/1099-MISC) increases from $600 to $2,000.
Reminder: SEP and SoloK contributions depend on net self employment income; I advise holding off on contributions until your tax return is complete to avoid possible over-funding. Contributions can be made for the preceeding calendar year through the tax filing due date, and in the case of SEPs, up through the October extended filing due date.
Reminder: If a California business does not offer a retirement plan to its employees, it must be registered with the mandatory CalSavers program to avoid possible penalties. Businesses with no employees (other than a single owner) are exempt from CalSavers.
Cashless Transactions
Apps/services such as Venmo, PayPal, Cash, Apple Pay, eBay etc. will now issue 1099Ks to individuals/businesses with $20,000 in sales or 200 transactions.
New Crypto Reporting Rules & Form
Beginning with tax year 2025 crypto exchanges will issue the new IRS Form 1099-DA (digal assets), containing information for completing Forms 8949 and Schedule D. Also beginning in 2025 each crypto wallet must be treated like a separate "broker account" is treated; digital assets can no longer be treated as one universal holding across wallets.
Your Annual Tax Journey
As the "road map" below highlights, preparing a tax return is just the first step in what can be a long process once it hits the IRS.
Who Pays Income Taxes Anyway?
The top 25% of all taxpayer earners paid 87.2% of all income taxes collected in 2022; they also earned 70% of all the reported income
(to be in top 25% your 2022 adjusted gross income exceeded $99,857)
The top 10% of all taxpayers paid 72% of all income taxes collected
($178,611 puts you in the top 10)
The top 5% of all taxpayers paid 61% of all income taxes collected
(top 5% means rich, right? Well, $261,591 put you in such rarified air)
The top 1% of all taxpayers paid 40.4% of all income taxes
(the oft maligned 1%ers, with incomes of $663,164+ are obviously doing okay)
Taxpayers reporting AGI under $99,857 in 2022 paid 12.8% of all income taxes collected, and those reporting under $50,399 (nearly half of all tax returns filed) paid 3%
(taxfoundation.org) latest IRS compiled data is from 2022
So, who pays the fairest share?
Where Does All The Money Go Anyway?
The figures below (I did round them) are provided by the US Congressional Budget Office for the fiscal year ending September 30, 2025.
Medicare and Medicaid – $1.7 trillion
Social Security – $1.6 trillion
Interest on Federal Debt – $1.2 trillion
Defense – $868 billion
Income Security (various welfare) – $759 billion
Veterans Benefits – $377 billion
Education – $221 billion
Transportation – $197 billion
Everything Else – $1 trillion
California Here I Come ... or go?
There's a lot of talk of the exodus from our increasingly crowded, expensive, drought-ridden, charred, sky-high taxes of a State. But does the data bear that out? Or is the ingress of the young and tech-savvy, Hollywood-hopefuls, and sun-seekers of the California Dreamin' lifestyle holding steady?
Analysis of moving data from Atlas Van Lines shows California moves to be 54% outbound and 46% inbound in 2025, slightly more balanced than 2024. As in prior years, Idaho Washington and Nevada continue to show strong in-bound moves. Texas and Forida, two top 2024 interstate move-to destinations are now about neutral (perhaps a lot of the earlier inbound movers have decided to move on). #1 2024 outbound state New York has stabilized somewhat now with 53% movers outbound/47% inbound. Hawaii and Alaska, two net outbound states in recent years, have moved to the inbound side, with Hawaii now again near the top for inbound moves (60/40, on par with Tennessee). Top state for inbound moves (by percentage of that state's moves)? Arkansas with 69% inbound vs. 31% outbound. Surprised me, too.
Obviously, taxes play only a part of why people move, but there is no denying a strong correlation between low-tax, low-cost states and their population growth compared with high-tax, high-cost states.
Donating to Charity on the California Tax Return
If you look at Page 4 of the California Form 540, the entire page is dedicated to a list of approved charities you can donate to via the tax return. Donations made will reduce your overpayment/refund and the Franchise Tax Board will remit the donation to the Fund immediately. It is quick and easy and, if you itemize, tax deductible on your next year's Federal and California return (i.e. contributions are calendar based; those made on your 2023 tax return filed in 2024 are deductible on your 2024 tax return filed in 2025). Keep in mind the donation is irreversible; it cannot be changed or revoked once the return is filed, even if the return is later amended.
Here is a list of the Form 540 charities and the amounts donated to them for tax year 2023 through taxpayer returns:
Alzheimers Disease Fund – $467,000
Breast Cancer Research Fund – $365,000
Cancer Research Fund – $362,500
California Firefighters Memorial Fund – $152,000
California Peace Officers Memorial Fund – $100,500
California Sea Otter Fund – $254,500
California Senior Advocacy Fund – $98,500
Emergency Food for Families Fund – $464,500
Keep Arts in School Fund – $243,500
Mental Health Crisis Fund - $321,000
Native Wildlife Rehabilitation Fund – $288,500
Protect Our Coasts and Oceans – $255,000
Rape Kit Backlog Fund – $292,000
Rare and Endangered Species Fund – $370,000
School Supplies for Homeless Children Fund – $520,000
State Parks Protection Fund – $485,000
Suicide Prevention Fund – $226,000
IRS Identity Protection
The IRS is encouraging taxpayers to apply for a PIN to reduce risk of identity theft and prevent anyone from filing a fradulent tax return under your name/SSN. The easiest way to apply is to use this IRS link. A new PIN is needed each calendar year and is good only for returns filed in that year (i.e. cannot get one mid-year for next year's filing). So if you are interested, my recommendation is to get your PIN in mid-January. You have to set-up an IRS online account and verify your identity first; this can be done at any time. You only need to sign up once; your annual PIN will be assigned automatically (you will need to log in to your account to retrieve it). And of course I need your PIN to enter for efiling! More information available on IRS Publication 5367.
Who's Preparing Your Taxes?
Do you realize that in 47 states there is no oversight, minimum or continuing education standards, nor any proof of competency required of anyone charging to prepare tax returns (the "paid preparer"). My prior hair stylist had to demonstrate more competency in order to be licensed than tax preparers in most states, and her mistakes grew back!
Of course, for those of you who engage the services of an enrolled agent, this has never been an issue. EAs have already passed an extremely comprehensive three part examination on the tax code and regulations, ethics, tax calculations and application for individuals, businesses and any other entity with a filing requirement. Furthermore, we must complete no less than 72 hours of ongoing education every three years (90 hours for NAEA/CSEA members). The IRS recognizes "Enrolled Agent" as the only designation with proven expertise in ALL areas of taxation.
Fighting An IRS Audit: You're On The Clock
There's nothing worse than seeing a letter in the mail box from the IRS. Actually there is something worse — doing nothing. One very important thing you should be aware of: When the IRS sends out a notice to you, the clock is ticking. Failure to respond escalates matters and, eventually, it's like not showing up in court ... BAM! Guilty! You have rights to dispute IRS claims, but they must be used within very specific timeframe's. Here's a LINK to an old but great article discussing the IRS timeline for its notices and collections processes (none of this has really changed in the last decade). Remember: Anything from the IRS in the mailbox means call your enrolled agent today.