Dear Client

As 2025 winds down, important changes in tax rules, expiring credits, and new planning opportunities could directly affect your next return and your 2026 strategy. Staying ahead now can help you maximize savings, avoid surprises, and make smarter decisions before the year ends. In this edition, we break down the key updates and what they mean for you.

IRS Opportunity Zones—Long-Term Capital Gains Planning

The Opportunity Zone (OZ) program is now permanent, allowing taxpayers to defer and potentially reduce capital gains taxes by investing in Qualified Opportunity Funds (QOFs) that support low-income communities.

Key Highlights

Eligible investors: individuals, corporations, partnerships, and REITs
You must reinvest capital gains into a QOF within 180 days of the sale
Capital gains are deferred until the earlier of 5 years or the sale of the QOF interest
Holding a QOF investment:
- 5 years → 10% increase in basis
- 10+ years → step-up to fair market value (no tax on appreciation)
Qualified Rural Opportunity Funds (QROFs) offer a 30% basis increase after 5 years
Gains realized in 2025–2026 receive reduced benefits; for large gains, waiting until 2027 may be more advantageous

IRS First-Time Penalty Abatement (FTA) – Major Change Ahead

Taxpayers who are normally compliant may qualify for penalty relief if they file or pay late.

Current Rules

Applies to late-filing and late-payment penalties (including S corps, partnerships, and payroll taxes)
You must be compliant for the prior 3 years
You must request the abatement (not automatic)
Estimated tax penalties do not qualify

Important Update

Beginning with 2025 tax returns, the IRS will automatically apply FTA for eligible taxpayers
Expected to benefit ~1 million taxpayers per year

Earned Income Tax Credit (EITC) – Compliance Matters

The EITC can be valuable, but it remains a high audit-risk credit, often reviewed through correspondence audits.

Eligibility Reminders

Qualifying child must live with you more than half the year
Age limits apply (under 19, under 24 if a student, or any age if permanently disabled)
Each child must have a valid Social Security number
Claims involving disabled adult relatives require strong documentation (not testimony alone)

Upcoming Change

Starting with 2026 returns, the IRS plans to deny EITC and other refundable credits to undocumented individuals (legal challenges expected)

Tip: Maintain documentation and verify eligibility before filing.

Life Insurance Sales – IRS Reporting Rules

Selling a life insurance policy triggers IRS reporting:

Buyers issue Form 1099-LS
Insurers issue Forms 1099-SB and 1099-R

Planning Note

Heavy borrowing against a policy can trigger unexpected taxable income
Always reconcile reported forms carefully

Work Opportunity Tax Credit (WOTC) – Expiration Risk

The One Big Beautiful Bill (OBBB) did not renew the WOTC.

Current Status

Credit up to $2,400 per eligible employee (higher for veterans)
Expires December 31, 2025
Bipartisan efforts may extend or expand the credit

Action: Monitor year-end legislation closely.

Court Case Update – Charitable Deduction Disallowed

An LLC lost a $22 million conservation easement deduction because it was claimed in the wrong year. The donation occurred while the LLC was a single-member entity, meaning the owner, not the LLC, should have claimed the deduction

Cryptocurrency Sales – New IRS Form 1099-DA

Beginning with 2025 crypto transactions (reported in 2026):

Brokers must issue Form 1099-DA for crypto sales
Reporting initially includes gross proceeds
Basis and gain/loss characterization reporting begins next year
DeFi platforms are excluded

The IRS has issued 14 FAQs to clarify broker reporting responsibilities.

Government Funding & Health Care Subsidies

The federal government reopened after a 43-day shutdown, but funding only lasts through January 31, 2026.

Health Care Impact

Expanded Premium Tax Credits (PTCs) expire after 2025
Starting in 2026, eligibility is limited to incomes between 100%–400% of the poverty level
Many taxpayers may face higher premiums or loss of coverage

Outlook

Democrats favor permanent extensions
Some Republicans support short-term extensions
A temporary bipartisan deal is possible

Medicare Part B & Part D Premiums – 2026

Higher-income beneficiaries may pay additional Medicare premiums based on Modified Adjusted Gross Income (MAGI).

Joint Filers

Modified AGI

Part B

Part D

$218,001–$274,000

$284.10

$14.50

$274,001–$342,000

$405.80

$37.50

$342,001–$410,000

$527.50

$60.40

$410,001–$499,999

$649.20

$83.30

$500,000+

$689.90

$91.00

Single Filers

Modified AGI

Part B

Part D

$109,001–$137,000

$284.10

$14.50

$137,001–$171,000

$405.80

$37.50

$171,001–$205,000

$527.50

$60.40

$205,001–$499,999

$649.20

$83.30

$500,000+

$689.90

$91.00

Relief Available:
Life-changing events may qualify for surcharge waivers using Form SSA-44.

Health & Dependent Care FSAs – Year-End Reminder

Health FSA
- Use funds by Dec. 31 unless your plan offers a grace period or carryover
- 2026 contribution limit: $3,400
Dependent Care FSA
- 2026 contribution limit increases to $7,500

Tariff Stimulus Checks—Federal vs. State

Federal: Proposed $2,000 checks are not guaranteed and require Congressional approval

State: Some states with budget surpluses are issuing payments (e.g., Georgia, Virginia, New York)

Employer & IRS Rule Changes for 2025

Tips & Overtime Deductions
- Up to $25,000 (tips) and $12,500 (overtime) deductible
- Employers are not required to separately report on W-2s
S Corporation Income
- Owners are taxed on income even if no distributions are received
Health Insurance Excise Tax
- $3.84 per covered life (reported on Form 720)

Higher FUTA Taxes in 2025

California: Up to $84 more per employee
Virgin Islands: Up to $315 more per employee

Applies to jurisdictions with unpaid federal unemployment loans.

Pension & Retirement Plan Changes for 2026

PBGC Premiums
- Flat rate: $111 per participant
- Variable rate: $52 per $1,000 (capped at $751)
401(k) Plans
- Contribution limit: $24,500
- Enhanced catch-ups for ages 60–63
IRAs
- Contribution limit: $7,500 (+ $1,100 catch-up)
Qualified Charitable Distributions
- Limit rises to $111,000
Saver’s Credit
- Expanded eligibility for low-income savers

New & Upcoming Federal Tax Credits

Scholarship Granting Organizations (Effective 2027)

Nonrefundable credit up to $1,700
Applies only to state-approved SGOs
States may opt in beginning in 2026

Health Savings Accounts (OBBB)

Telehealth remains HSA-eligible
Bronze and catastrophic plans become HSA-compatible in 2026
Direct Primary Care fees become eligible

Adoption Tax Credit (2025)

Maximum credit: $17,280 per child
Up to $5,000 refundable
Reported on Form 8839

Trump Accounts (New Child IRA)

Eligible children under 18
$1,000 federal seed contribution (pilot program)
Funds invested in U.S. equity index funds
Withdrawals generally restricted until age 18

From all of us at SK Financial CPA, we wish you a Merry Christmas and a Happy New Year! Please note that our offices will be closed on December 25 and January 1, but we’re available to assist you on all other days. For ongoing guidance, tips, and the latest tax updates, follow us on our social media channels, where we share insights to help you stay informed and prepared.

SK Financial CPA

2210 Ashley Oaks Cir #101, Wesley Chapel, FL 33544, US

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