Tax News
Important 2025 Tax Dates
January 15: 4th quarter estimated tax payment for 2024 due.
January 31: W2s and 1099s due to employees/contractors.
February 15: Brokerage and financial documents due to account holders.
March 17: 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 16: 2nd quarter estimated taxes due.
September 15: 3rd quarter estimated taxes due
October 15: Individual returns on extension due.
January 15, 2026: 4th quarter estimated taxes for 2024 due.
Important Tax Changes
For 2024 tax filing, other than adjustments made for inflation, there are few changes compared to 2023.
The 2024 social security wage cap (amount of wages subject to SS tax) is $168,600 and increases to $176,100 for 2025.
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!
Farther into the future (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. If the employer does not offer a Roth retirement option in their 401K/403b plan, catch-up contributions will not be allowed. California conforms to this change.
With the Secure Act 2.0 employers are now allowed to make 401K matching contributions directly into employee Roth 401Ks. Caution: These company matches will be taxable income to the employee, but once in the Roth, future distributions of the money and earnings is tax-free.
Looking ahead, the incoming Trump Administration has made several statements regarding an intention to extend or make permanent the Tax Cut & Jobs Act changes currently in effect. (Most of these changes were to sunset in 2025, reverting in 2026 to the tax rules in place in 2017).
On the campaign trail, President Trump proposed excluding tips and social security from taxable income. He spoke of a tax credit to offset in-home health care expenses. He also spoke of eliminating some of the tax aspects of the Inflation Reduction Act, Build Back Better Act, and Secure Act dealing mostly with energy credits. With Republicans in control of the House and Senate it is possible some of these proposals will take effect in 2025.
Now if I can only figure a way to turn my professional fees for service into tips ...
In terms of state taxes, we focus on California for obvious reasons, but it is interesting to note that Iowa, Indiana, Mississippi, Nebraska, New Mexico, North Carolina and West Virginia lowered their individual tax rates for 2025. New Hampshire repealed its tax on interest and dividends. Hawaii widened the brackets, placing more income in lower rates. Florida, Georgia and Minnesota increased property tax exemption amounts. On the downside Vermont and Wisconsin will begin taxing EV infrastructure, and Kentucky raises its EV and plug-in hybrid fee to $126 per vehicle.
While not a direct tax, California's new 2025 Carbon Offset Regulations are expected to increase gas prices 30-35 cents per gallon.
Tax Rates, Income and Deductions
Standard deductions for 2024 are $14,600 for single filers, $29,200 married filers, and $21,900 for head of household filers. In 2025 these increase to $15,000 single, $30,000 married, and $22,500 for head of households. 65+ 2024 add-on deduction is $1,850 single, $1,500 joint increasing to $1,950 and $1,550 respectively.
The Inflation Reduction Act instituted a new 15% minimum tax on corporations, but individuals were spared changes to the tax brackets. There remain 7 - 10%, 12%, 22%, 24%, 32%, 35% and 37%. Per 2018 TCJA the bracket dollar amounts are adjusted for inflation and will increase approximately 5.4%. 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 $3,200 for 2024 and to $3,300 for 2025. 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 $4,150 for 2024, increasing to $4,300 in 2025 (maximum $8,300/$8,600 per family). Individuals over 55 can contribute an additional $1,000.
Unreimbursed employee expenses, legal fees, investment advisor fees and other miscellaneous itemized expenses remain non-deductible on the Federal return through 12/31/2025 (see TCJA above). Since California did not conform to the TCJA, we still keep an eye on these potential deductions for State purposes.
Energy Credits
Beginning in 2023 the maximum electric vehicle credit increased back to $7,500 but with some significant caviats. EVs that do not meet these requirements are subject to the previous maximums and phase-outs. All EVs sold must be accompanied by IRS form 15400, completed by the dealer, which should clear up a lot of the confusion on auto eligibility. (Consumer Reports also has a list of EVs that currently qualify or may qualify).
There are new price and income restrictions as well: Passenger vehicles must sell for under $55,000 and SUVs, vans and trucks for under $80,000. MFJ taxpayer income must be less than $300,000 ($150,000 single). Furthermore, there is a new option whereby the car buyer can reassign the credit to the dealer as part of the vehicle downpayment, if they can attest to qualifying under the income limits. For higher earners leasing an EV may prove a better option as the dealer is eligible for the credit and may pass it on in some fashion to lower the lease payment.
The used EV credit is 30% of the purchase price (up to $4,000) for vehicles sold for under $25,000, older than 2 years, is first resale of the vehicle, and is bought from a dealer (making private party sales ineligible). The income limits for the used EV credit are stricter: $150,000 for MFJ and $75,000 for Single filers.
The 30% credit for EV charging stations was restored and extended through 2032.
The solar energy panel and battery storage tax credit is raised back up to 30% of the cost of panels and batteries, including labor for installation. This credit is also extended through 2032.
Beginning in 2023 the residential energy credits for insulation, windows, doors, and furnaces were set at an annual max of $1,200-$3,200 allowance (with nesting maximum credit for the individual categories). This credit is in place through 2034. Beginning in 2025 a Product Identification Number provided by the manufacturer/supplier must be included on Form 5695 in order to qualify for the credit.
2024 saw a new rebate program funded by Washington, administered by the states, for the above energy efficiencies as well as for various appliances. For example, California initiated a $4,000-$8,000 rebate for installation of heat pumps. The rebate list is extensive and too detailed to include here but the information is available online.
Note: Anyone can take advantage of the energy tax credits, but the rebate program is means tested, so higher earners will not be eligible.
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 2024 is $2,000 per child up to age 16 and $500 per older dependent (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 2025 will be 2.5%.
Qualified Charitable Distributions (direct transfers from an IRA to a charity) are $105,000 for 2024 and $108,000 for 2025. 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.
2024 401K/403b salary deferral is $23,000 increasing in 2025 to $23,500. The "catch-up" for those ages 50+ remains $7,500 but starting 2025 there is a "super catch-up" for employees aged 60 to 63 of $11,250. California does not conform.
Regular IRA contributions rise to $7,000 for 2024 and unchanged in 2025. The additional $1,000 "catch-up" for those 50+ is unchanged. Even with the $500 bump, deductible IRA amounts have been so low for so long, all the modifications under the Secure 2.0 Act are pretty laughable.
The gift tax exclusion is $18,000 for 2024 and increases in 2025 to $19,000.
The 2024 $13.6 million per person base unified credit exclusion amount for estate taxes increases to $13.99 million in 2025. Unless the TCJA is extended or made permanent the exclusion is set to return to approximately $6 million person in 2026.
Secure 2.0 Act
This legislation modified significant aspects of retirement funding and distributions, many not coming online until 2025 or 2026 (unless repealed by the Trump Administration and Congress). Below are some of the major changes in effect at this time:
Business owners/self-employed individuals can now establish Roth-SEP IRAs. Like all Roths, these accounts are funded with after-tax dollars.
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.
Business & Self Employed
Business meals remain 50% deductible. "Entertainment" expenses remain non-deductible through 2025.
The 2024 standard business mile deduction rate is 67 cents and rises in 2025 to 70 cents.
Section 179 expense limitations stand at $1,220,000/$1,250,000 for 2024/2025 ($30,500/$31,300 for SUVs). California does not conform and 179 limits remain at $25,000 (unchanged since 2003).
Maximum 2024 401K/SoloK/Roth 401K salary deferral is $23,000 (with an additional $7,500 catch-up allowed for ages 50+). In 2025 max 401K etc. contributions increase to $23,500 ($30,500 age 50+ and $34,750 age 60-63). Maximum 2024 SEP contribution is $69,000 and increases to $70,000 for 2025.
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.
Beneficial Ownership Reporting For Businesses
NOTE: AS OF A 23 JANUARY 2025 COURT RULING THIS REQUIREMENT IS NOT BEING ENFORCED. IT IS CONSIDERED "VOLUNTARY". LIKE A VAMPIRE, HOWEVER, THIS REQUIREMENT CONTINUES TO RISE FROM THE DEAD SO UNTIL THE FINAL STAKE IS NAILED THRU ITS HEART, I'LL KEEP THE RULES POSTED:
As part of the Corporate Transparency Act of 2023, all newly formed businesses must report information on their "beneficial owners" within 30 days. Filing is done online through the FinCEN website, and unless there are changes to the information, just the one time. Sole proprietors, general partnerships, and charitable organizations are exempt from reporting.
What information is being reported? Personal information on individuals with a 25%+ ownership interest in the business, senior officers (CEO, CFO, COO), and individuals with "substantial controlling authority" (e.g. board members). In community property states, like California, where there is an "undivided interest" between married persons, reporting information may be required of spouses as well, but no one seems to know for sure yet.
The penalty for non-reporting is $500 per day with no maximum! The government is obviously taking this seriously.
If you have a business that seems to fall into the above discussion, or will be forming one, or are not sure -- we should talk.
Cashless Transactions
The new requirement for apps/services such as Venmo, PayPal, Cash, Apple Pay, eBay etc. to issue 1099Ks (suspended for 2023) is now in effect, with a $5,000 or 250 transaction reporting threshold. The threshold is set to decline to $2,500 in 2025 and then to (the ridiculous) $600 in 2026.
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 89.2% of all income taxes collected in 2021; they also earned 72.1% of all the reported income
(to be in top 25% your 2021 adjusted gross income exceeded $94,440)
The top 10% of all taxpayers paid 75.8% of all income taxes collected
($169,880 puts you in the top 10)
The top 5% of all taxpayers paid 65.6% of all income taxes collected
(top 5% means rich, right? Well, $252,840 put you in such rarified air)
The top 1% of all taxpayers paid 45.8% of all income taxes
(the oft maligned 1%ers, with income of $682,527+ are obviously doing okay)
Taxpayers reporting AGI under $94,440 in 2021 paid 10.8% of all income taxes collected, and those reporting under $46,637 (nearly half of all tax returns filed) paid 2.3%
(taxfoundation.org) latest IRS compiled data is from 2021
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, 2024.
Medicare and Medicaid – $1.5 trillion
Social Security – $1.5 trillion
Interest on Federal Debt – $950 billion
Defense – $850 billion
Veterans Benefits – $140 billion
Transportation – $130 billion
Education and Social Services – $120 billion
Income Security (various welfare) – $105 billion
Everything Else – $1.5 billion
Fiscal year 2024 Federal tax receipts total $4.9 trillion (individual and corporate income taxes, payroll taxes, excise taxes). The above expenses total ~$6.75 trillion, or another annual deficit of ~$1.85 trillion added to our current $36.5 trillion national debt (+/- a few rounding tens of billions).
This is why when you hear a cost-cutting proposal like "reduce PBS/NPR funding" the counter-argument is often "$400 million is nothing, a drop in the total Federal spending bucket."
I'm no expert – (wait, I am sorta an expert) – but eventually we all must come to grips with the fact somethings gotta give. Republicans and Democrats alike say Social Security and Medicare/Medicaid are off the table. The Federal debt interest (now 19% of the total debt) must be paid to maintain fiscal solvency. There are 68 million Americans enrolled in Medicare/Medicaid and 73 million are receiving monthly Social Security retirement, disability, or survivors benefits. About 2.3 million people work for the US goverment, active military accounts for an additional 1.3 million, and adding up all these people, their salaries and benefits accounts for 4% of the Federal budget.
So, what do you cut?
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' life holding steady?
According to the annual data study by the US Census, California has jumped from #9 on the list of outbound migration in 2022 to #2 in 2023, with a net population loss of .9%. A glance at the map below indicates many outbound Californians are still likely trekking to Idaho (#7 inbound), Texas (#9) and Montana (#6). In the East and Midwest #1 outbound New York and #4 Illinois residents seem attracted to South Carolina (#1 inbound) and Delaware (#2), with #5 Florida likely being high on the list of all interstate movers. Hawaii and Alaska jumped up from the middle ranks in 2022 to #3 and #4 outbound in 2023, likely driven by inflation in these high-cost states. Where these folks went is less clear.
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.