|
|
Dear Client,
Welcome to this month’s tax newsletter, where we bring you the most important updates that could impact your financial decisions. From new deductions and changing limits to critical compliance rules and planning considerations, this edition is designed to keep you informed without the complexity. Whether it’s managing business obligations, navigating life events, or understanding new IRS rules, these insights will help you stay prepared and make confident choices.
|
Overview & Key Highlights
-
Affordable, transparent, and expert-led, our services are designed to help you stay compliant while keeping your tax costs under control.
-
New tax rules and deductions: Tip deduction (2025–2028), SALT cap increase, mortgage and foreign income updates
-
Compliance alerts and risks: S corporation passive income rule, insurance policy tax issues, and IRS reporting changes
-
Planning for life and business: Divorce and retirement rules, tax steps after a spouse’s death, business credits, depreciation, and missed deadline guidance
|
|
|
New IRS Rules on Tip Deduction (2025–2028)
A temporary deduction allows up to $25,000 in qualified tips for tax years 2025–2028, subject to a limit of 71 eligible occupations. Only voluntary tips qualify, and income phaseouts apply at $300,000 (joint) and $150,000 (others). Tips must be reported via W-2 or 1099 forms, with enhanced reporting rules starting in 2026. Self-employed individuals may claim the deduction only against business income.
1% Tax on Cash Remittances Abroad
A 1% tax applies to certain cash-based international remittances, including cash, money orders, and traveler’s checks. Bank transfers and card-funded transactions are exempt. The tax applies only to personal transfers and is collected by remittance providers.
|
Income Distribution Snapshot
| Income Group |
AGI Threshold |
Share of AGI |
Share of Federal Income Tax Paid |
| Top 1% |
≥ $675,602 |
20.63% |
38.4% |
| Top 5% |
≥ $272,209* |
36.42%* |
59.3% |
| Top 10% |
≥ $187,608* |
47.6%* |
70.54% |
| Bottom 50% |
< $53,801 |
— |
3.26% |
|
Key Tax Steps After a Spouse’s Death
A step-up in basis may reduce capital gains tax, partially in non-community-property states and fully in community-property states. If the home is sold within two years, up to a $500,000 exclusion may apply. A final tax return is required for the year of death. Surviving spouses can often file jointly, and qualifying widow(er) status may extend tax benefits for up to two years.
Employer & Business Tax Rules
Employers with 50+ full-time employees could face ACA penalties if they fail to provide affordable health coverage, especially when employees receive subsidies. The IRS issued formal notices that could be disputed. The Work Opportunity Tax Credit was only available to direct employers and expired after 2025 unless renewed. Married business owners could use a qualified joint venture to file separately on Schedule C if both spouses actively participated.
|
|
|
S Corporation Passive Income Warning (21% Rule)
S corporations may face a 21% penalty tax if passive income exceeds 25% of gross receipts for three consecutive years, potentially risking S-corp status. However, rental income may be treated as nonpassive if significant services or active management are provided. If you’re unsure whether this applies to your corporation, contact your SK Financial CPA representative.
Insurance Tax Issues: Policy Loans & Microcaptive Rules
Tax implications can arise when policyholders borrow excessively against life insurance policies. If a policy lapses with outstanding loans exceeding the policyholder’s basis, the excess amount may be treated as taxable income. In such cases, the income is typically reported through Form 1099-R, even if no cash distribution is received.
Foreign Earned Income Exclusion: Key Rules & IRS Scrutiny
U.S. citizens working abroad may exclude up to $132,900 of foreign-earned income in 2026 (up from $130,000 in 2025) if they meet either the bona fide residency or 330-day physical presence test and maintain a foreign tax home. This is claimed using IRS Form 2555. The IRS closely reviews these claims, especially for taxpayers with limited foreign ties. A foreign housing exclusion is also available, with a 2026 base limit of $18,606, which may be higher in expensive locations.
|
|
|
Mortgage Tax Deduction Rules (Interest, Points & PMI)
Mortgage interest is deductible for taxpayers who itemize, up to $750,000 of new loan debt (or $1M for older loans), as long as the loan is used to buy, build, or improve a home. Mortgage points, which are upfront costs to lower the interest rate, are generally deductible either in the year paid (for purchase or improvement loans) or over time for refinances. Mortgage insurance premiums (PMI) will also be deductible again starting in 2026 for itemizers, but this benefit phases out at higher income levels between $100,000 and $110,000 in AGI.
SALT Deduction Update
The state and local tax (SALT) deduction cap has been temporarily increased to $40,000 for tax years 2025 through 2029. This represents a significant increase from the previous $10,000 limitation and provides meaningful relief for many middle-income taxpayers. However, the benefit is reduced for higher-income filers. The deduction begins to phase out at modified adjusted gross income above $500,000 and is effectively reduced to $10,000 once modified adjusted gross income reaches $600,000 or more.
Divorce & Retirement Account Tax Rules
Retirement accounts in divorce must follow strict tax rules to avoid penalties. Early withdrawals before age 59½ may trigger a 10% penalty plus income tax, but 401(k)s can be divided tax-free using a Qualified Domestic Relations Order (QDRO). IRAs cannot use QDROs and must be transferred directly under divorce agreements to avoid taxes. Pension plans usually require valuation before they are divided due to their long-term structure.
|
| Tax Relief for Disaster-Affected Areas |
| State |
Disaster Type |
Extended Deadline |
| Tennessee |
Winter Storm Fern |
May 22, 2026 |
| Mississippi |
Winter storms |
June 8, 2026 |
| Hawaii |
Flooding & mudslides |
July 8, 2026 |
|
Retirement Rule Reversal & QCD Expansion
The Department of Labor has withdrawn its expanded fiduciary rule, restoring the earlier five-part test for determining investment advice fiduciary status. This reinstates a more traditional regulatory framework for retirement advisory services. For 2026, individuals aged 70½ or older may make Qualified Charitable Distributions (QCDs) of up to $111,000 directly from IRAs to qualified charities. A one-time QCD of up to $55,000 may also be made through certain charitable trusts or annuities. Donor-advised funds remain excluded, although legislative proposals may change this.
AMT Alert: More Taxpayers May Be Affected in 2026
AMT exemptions increase to $140,200 (joint) and $90,100 (single). However, phaseouts begin at $1M (joint) and $500K (single), meaning more high-income taxpayers may be affected despite higher exemptions.
Gift Tax Exclusion (2026)
The annual gift tax exclusion is $19,000 per recipient. Gifts above this require Form 709 but generally do not trigger tax unless the lifetime exemption (~$15M) is exceeded. Recipients do not pay tax.
Special Depreciation for Production Property
The Treasury and IRS have introduced new guidance allowing businesses to deduct up to 100% of the cost of qualified production property placed in service between July 2025 and 2030. This applies to nonresidential property used in activities like manufacturing, agriculture, and refining. Businesses must meet specific eligibility and election requirements, and recapture rules may apply if the property no longer qualifies.
|
|
