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Get Ready for the New 1099-DA Cryptocurrency Reporting Requirements

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The Purpose and Impact of Form 1099-DA: Form 1099-DA aims to increase tax compliance and improve reporting accuracy in the digital asset space by requiring brokers to report transactions. This standardizes reporting and can simplify tax filing for some investors but also necessitates diligent record-keeping to ensure accurate reporting.

Who Must Issue Form 1099-DA? The reporting obligation for Form 1099-DA falls on “brokers” who facilitate the sale or exchange of digital assets. The IRS’s definition of a broker is broad and includes digital asset trading platforms, payment processors, and hosted wallet providers. However, decentralized finance (DeFi) platforms and non-custodial wallets are not generally required to issue this form.

Who Will Receive Form 1099-DA? U.S. taxpayers who sell, trade, or dispose of digital assets through a qualifying broker should expect to receive a Form 1099-DA in early 2026 (for 2025 transactions). This includes individuals and businesses involved in buying, selling, trading, mining, or staking digital assets. Real estate reporting entities must also report if digital assets are used in real estate transactions.

What Information is Included on Form 1099-DA? Form 1099-DA requires brokers to report detailed information about each digital asset transaction, including:

  • Payer and Recipient Identification.
  • Transaction details like asset name, quantity, date, time, and gross proceeds.
  • Cost basis (mandatory for “covered securities” acquired after January 1, 2026). Broker reporting of basis is voluntary for the 2025 tax year.
  • Holding period.
  • Transaction type.
  • Fair Market Value (FMV).
  • Transaction fees.
  • Wash sales for tokenized securities.

The information reported on Form 1099-DA varies depending on the tax year.

  • 2025 Tax Year (forms sent in early 2026) – For 2025 transactions, brokers are required to report the gross proceeds from the sale, exchange, or other disposition of a digital asset. Reporting of the cost basis is voluntary for brokers in 2025.
  • 2026 Tax Year and beyond (forms sent in early 2027 and later) – Starting with the 2026 tax year, brokers will be required to report more comprehensive information, including gross proceeds, cost basis (for “covered securities”), acquisition and disposition dates, holding period, and transaction details like the type and quantity of the digital asset.

Understanding the Cost Basis Challenge for 2025: A significant point for the 2025 tax year is the voluntary cost basis reporting by brokers. If the cost basis is not reported on Form 1099-DA, the IRS may assume it’s zero, which could lead to tax notices for underreported income. To prevent this, taxpayers must keep detailed personal records of their digital asset transactions, including acquisition dates and costs, fees, disposition dates, and sales proceeds. These records are necessary for accurately completing Forms 8949 and Schedule D.

Special Reporting Rules for Stablecoins and Non-Fungible Token (NFTs): There are specific reporting rules for certain digital asset types.

  • Qualifying Stablecoins – For 2025 and later, brokers can report qualifying stablecoin transactions in aggregate if they exceed $10,000 annually.
  • Specified NFTs – Starting in 2025, if total sales of specified NFTs exceed $600 for the year, brokers must report them, potentially in aggregate.

How Form 1099-DA is Used File Taxes: The information on Form 1099-DA is used when preparing tax returns similar to the way stock transactions reported on Form 1099-B are transferred to Form 8949 and Schedule D. This involves reconciling the 1099-DA with a taxpayer’s records, calculating capital gains or losses, and reporting the final amount on Form 1040.

Best Practices for Crypto Investors: Given these changes, digital asset investors should maintain detailed records of all transactions, consider using crypto tax software for tracking and calculations, and be aware of potential limitations in broker reporting, especially regarding cost basis in 2025. It is also important to remember that transactions not reported on a 1099-DA must still be reported. Staying informed and consulting a tax professional can help navigate this evolving landscape.

Answering the IRS Question about Digital Assets: For the last several years, a “yes”/”no” question on Form 1040 has been: “At any time during [return year], did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” Now that brokers will be issuing Form 1099-DA for the sale or exchange of digital assets, the IRS will be able to verify how taxpayers answer the question in light of the Form 1099-DA that was filed by the broker. When signing the tax return, the taxpayer signs under penalty of perjury that the information in the return is true, correct and complete. Care needs to be taken to correctly answer the IRS’ question.

Contact the Leesburg office 703-771-1818 or the Warrenton office 540-347-5681 if you have questions or need assistance with properly including your crypto transactions on your return.

Pension Catch-up Contributions

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Individuals age 50 and over can make additional annual “catch-up” contributions to salary reduction plans including 401(k) Deferred Compensation plans, 403(b) TSA plans, 457(b) Government plans and SIMPLE plans.

Age 50+ Catch-ups: For 401(k), 403(b) and 457(b) plans, the age 50 and over catch-up contributions, for plans that offer them, has been $7,500 for years 2023 through 2025 and for SIMPLE plans $3,500. These amounts are periodically adjusted for inflation.

Age 60 through 63 Catch-ups: New for 2025, the SECURE 2.0 ACT introduced an additional catch-up contribution for taxpayers aged 60 through 63. The thought being those are the ages nearing retirement when individuals have more available income that they can contribute to their retirement nest egg.

The SECURE 2.0 Act increases the catch-up contribution limits to the greater of $10,000 or 50% more than the regular catch-up amount, which results in a maximum catch-up for 2025 of $11,250 for those aged 60 through 63.  For SIMPLE plans, the computation is somewhat different and the maximum catch-up for 2025 is $5,250 ($6,350 if there are no more than 25 employees).

Mandatory Roth Contribution for Higher Incomes: Effective January 1, 2026, for employees with wages of more than $145,000 in the prior year from the employer sponsoring the plan, catch-up contributions must be designated as Roth contributions.

  • Inflation-Adjusted: The $145,000 will be inflation-adjusted in future years.
  • Employees Under the Threshold: Other employees who are eligible to make catch-up contributions may designate their catch-up contributions as a Roth contribution.
  • Employer Doesn’t Have a Designated Roth Plan: If the employer doesn’t have a designated Roth plan, then catch-up contributions cannot be made by employees whose wages exceed the Roth catch-up wage threshold.
  • No Prior Year Employment History: An employee who worked for the employer sponsoring the plan for only part of the preceding calendar year would be subject to the Roth catch-up requirement in the current year only if the employee had wages exceeding the full Roth catch-up wage threshold from the employer for the preceding calendar year.

Key Tax Planning Opportunities: Taxpayers can leverage this amendment as a strategic way to broaden their tax planning approaches. By contributing to Roth accounts, retirees have the advantage of reducing the risks linked to fluctuating future tax rates, as they can access funds from both taxed and untaxed accounts. Roth accounts provide the benefit of tax-exempt withdrawals of both the initial contributions and the investment gains, provided specific conditions, such as the employee being age 59½ and the five-year rule, are met. This capability enhances the appeal of Roth plans as a powerful instrument for estate planning, as they do not require distributions during the original owner’s lifetime.

  • Explanation of the Five-Year Rule: A distribution will not be a qualified distribution if the distribution is made between the time of the first contribution to the plan and before five consecutive taxable years have been completed. Generally, the holding period is determined separately for each plan in which the employee participates. So, if an employee has elective deferrals made to Roth 401(k)s under two or more plans, the employee may have two or more different holding periods, depending on when the employee first had made contributions to a Roth 401(k) under each plan. Special rules apply when there have been rollovers of Roth plans. Check with this office for additional details.

Timing Considerations: Taxpayers should plan the timing of their Roth contributions wisely. Younger high-income employees could benefit from starting Roth contributions now to meet the five-year holding period before retirement, whereas those nearing retirement might need alternative strategies.

If you have questions or need assistance, please contact the Leesburg office 703-771-1818 or the Warrenton office 540-347-5681.

How to Benefit From Qualified Charitable Distributions (QCDs)

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Qualified Charitable Distributions (QCDs) are a highly effective tool in the tax planning toolkit, particularly for retirees who must take Required Minimum Distributions (RMDs) from their Individual Retirement Accounts (IRAs). By directing a portion or all of an RMD directly to a charity, taxpayers can potentially reduce their taxable income significantly, yielding multiple tax advantages.

Understanding QCDs

A QCD is a transfer of funds from an individual’s IRA, payable directly to a qualified charity. These distributions can be counted toward satisfying your RMD for the year, up to an inflation adjusted maximum amount. QCDs were first introduced as a temporary provision in 2006, but since then have become a permanent feature of the tax code.

How QCDs Work

For a distribution to be considered a QCD, it must meet specific criteria:

  • Eligible Accounts: The funds must come from a traditional IRA, and the account holder must be at least 70½ years old at the time of the donation. Distributions cannot be from SEP or SIMPLE IRAs. The QCD can come from a Roth IRA only if it is a non-taxable distribution.
  • Direct Transfer Requirement: The funds must be transferred directly from the IRA custodian to the qualified charity.
  • Qualified Charitable Organization: The recipient must be a 501(c)(3) organization, and the donor is responsible for obtaining an acknowledgment letter from the organization under the same documentation rules as if claiming an itemized deduction for a charitable donation. Generally, private foundations, donor-advised funds, or supporting organizations do not qualify. However, the SECURE 2.0 Act allows a one-time $50,000 distribution to certain charitable structures, including charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. The $50,000 maximum lifetime distribution amount is adjusted for inflation, and for 2025 is $54,000.

Tax Benefits of QCDs

  • Income Reduction: Since a QCD is not taxable, it does not increase the Adjusted Gross Income (AGI). This characteristic can be beneficial in several ways beyond just avoiding income taxes on the RMD.
  • Enhancing Income-Limited Tax Benefits: wer AGI means potentially enhanced eligibility for other tax benefits and credits that are income-limited. Here are a few examples:
    • Social Security Taxation: By not increasing your AGI, QCDs can help maintain lower-taxed tiers of Social Security benefits.
    • Medicare Premiums: Medicare Part B and Part D premiums are determined by AGI. By keeping this figure low through QCDs, you can avoid higher Medicare premiums.
    • Itemized Deductions Threshold: A lower AGI level can help with thresholds that apply to itemized deductions, thereby increasing their value.
  • Same Benefit as Charitable Contributions, Plus More: Normally, when a taxpayer makes a charitable contribution and itemizes deductions, that amount reduces taxable income. However, a QCD provides the same benefit of a charitable deduction without having to itemize, while also lowering the AGI. This is an advantage for taxpayers who take the standard deduction.

Not Just for High-Income Taxpayers

There’s a common misconception that QCDs primarily benefit high-income taxpayers because of the significant annual limit, which is $108,000 in 2025 due to inflation adjustments from the original $100,000 maximum. However, QCDs can be utilized by any eligible taxpayer meeting the age requirement to lower their taxable income and improve their tax situation. Even small donations can leverage the benefits associated with reduced AGI targets. For a married couple, the annual limit applies to each spouse who has an IRA.

The IRA Contribution Trap

While QCDs can be incredibly beneficial, it’s essential to be aware of the so-called “IRA Contribution Trap.” This issue arises because the Internal Revenue Service (IRS) treats any deductible IRA contributions made after age 70½ as a reduction in the allowable QCD amount. For instance:

  • If you contribute $6,000 to your IRA after age 70½, and simultaneously, you intend to make a $10,000 QCD, only $4,000 of that QCD will qualify for the exclusion. This rule reduces the intended tax benefit of the QCD.

Understanding this catch is crucial for retirees who are still working and might continue contributing to their IRAs while also planning to make QCDs.

Strategic Considerations

Taxpayers should consider the timing and structure of QCDs, especially in years where they may face other significant income events. Planning your QCDs in conjunction with other taxable events can help maintain lower AGI levels, thus optimizing the overall financial benefits.

For example, if a taxpayer anticipates a substantial capital gain or receives a large payment from another source, a well-timed QCD can offset the income increase, helping to manage the AGI.

Conclusion

Qualified Charitable Distributions are not merely a tool for philanthropic endeavors; they are a powerful strategy for managing taxable income and maintaining eligibility for other tax-related benefits. By understanding how QCDs work, taxpayers can strategically plan their charitable giving while maximizing their tax advantages.

In summary, QCDs offer multi-faceted benefits, including income reduction, enhancement of other tax benefits, and a simplified way to execute charitable giving. Whether you are making small donations or using the full annual limit, incorporating QCDs into your tax strategy can have far-reaching results that benefit your finances and the organizations you choose to support.

If you are retired and planning a significant contribution to your place of worship or another charitable organization, such as a donation to your faith community’s building fund, it would be prudent to explore the option of a Qualified Charitable Distribution (QCD). Please contact our Leesburg (703-771-1818) or Warrenton (540-347-5681) office for personalized assistance in evaluating how a QCD might benefit your specific situation.

Not Itemizing? Other Deductions for Tax Savings

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In the complex world of tax deductions, understanding the distinctions between above-the-line deductions, below-the-line deductions, and standard and itemized deductions is crucial for effective tax planning. Each category serves a distinct purpose within the tax code, impacting how taxable income is calculated and influencing the overall tax liability of individuals.

Above-the-line deductions, also known as “adjustments to income,” are beneficial as they can be deducted whether a taxpayer chooses to itemize their deductions or uses the standard deduction. The above-the-line deductions are a group of deductions not included as an itemized deduction. In addition, above-the-line deductions reduce a taxpayer’s gross income to produce the Adjusted Gross Income (AGI). A lowered AGI can be critical in determining your eligibility for additional tax credits and deductions, as many tax benefits are either limited or phased out based on AGI thresholds. Here is a more detailed explanation of many of the above-the-line deductions:

  • Foreign Earned Income Exclusion: The Foreign Earned Income Exclusion allows eligible U.S. citizens and resident aliens living and working abroad to exclude a specified amount of foreign earned income from their U.S. federal taxable income. For 2025, the exclusion limit is $130,000 plus a housing exclusion which are taken below-the-line.
  • Educator Expenses: This deduction allows eligible educators, including teachers, instructors, counselors, principals, and aides, to deduct up to $300 of unreimbursed expenses incurred for classroom supplies and professional development courses. This includes books, supplies, computer equipment, and other materials used in the classroom.
  • Health Savings Account (HSA) Contributions: Taxpayers who participate in a high-deductible health plan (HDHP) can contribute to an HSA, which allows for tax-free savings designated for medical expenses. Contributions can be made by the individual or their employer, and the deducted amount helps lower the taxpayer’s AGI.
  • Self-Employed Retirement Plan Contributions: Self-employed individuals can deduct contributions made to retirement plans such as SEP IRAs, SIMPLE IRAs, and qualified plans (like 401(k)s). These contributions reduce taxable income and help self-employed taxpayers save for retirement with potential tax-deferred growth. This deduction is for the retirement plan contributions made for the benefit of the self-employed individual and shouldn’t be confused with the contributions the self-employed individual makes as an employer toward a retirement plan for employees, which would be a business deduction.
  • Self-Employed Health Insurance Premiums: This deduction allows self-employed individuals to deduct health insurance premiums paid for themselves, their spouses, dependents, and any children under age 27, even if the child is not considered a dependent. The deduction is particularly beneficial as it provides relief from high healthcare costs while lowering taxable income.
  • Alimony Payments: For divorce agreements finalized before 2019, the payer can deduct alimony payments made to a former spouse. This deduction is intended to offer tax relief to the paying spouse by decreasing the taxable income. However, under the Tax Cuts and Jobs Act, this deduction is not applicable to divorces finalized after December 31, 2018.
  • Student Loan Interest: This deduction allows borrowers to deduct up to $2,500 of interest paid on qualified student loans used for higher education expenses. The deduction is phased out at higher income levels but provides substantial relief by reducing taxable income for those eligible.
  • IRA Contributions: Taxpayers who contribute to a traditional IRA are allowed a deduction of up to $7,000 ($8,000 if over age 50) per year provided they have earned income of at least as much as the amount contributed. The limit is periodically adjusted for inflation. Contributions to Roth IRAs are not deductible.
  • Military Moving Expenses: Military moving expenses refer to the costs associated with relocating service members due to a permanent change of station (PCS). These expenses can include transportation, lodging, and shipment of personal goods. For active-duty members of the Armed Forces, the unreimbursed costs incurred during a PCS move are deductible. Beginning in 2026 members of the Intelligence Community will also qualify for this deduction.
  • Early Withdrawal Penalty: Taxpayers who incur penalties for early withdrawal of savings, commonly from certificates of deposit (CDs) or similar savings instruments, can deduct these penalties. The deduction offsets the income generated from the withdrawal, reducing overall taxable income.
  • Contributions to Archer MSAs: A Medical Savings Account (MSA) is a tax-advantaged account designed to help individuals save for future medical expenses. These accounts, which were created almost 30 years ago, were intended for self-employed individuals and employees of small businesses. They have generally been supplanted by HSAs, which have less restrictive contribution and broader eligibility rules.
  • Jury Duty Pay Given to Employer: Jury duty pay is taxable, but when the employer continues an employee’s compensation when on jury duty, the employee generally will be required to turn over their jury duty pay to the employer. Without this deduction, the employee would be taxed twice on the jury duty compensation.

Below-the-line deduction is a term that has been slowly transformed by Congress. It used to predominantly refer to either the standard deduction or the itemized deduction. However, the term has taken on a new meaning as Congress has added deductions that reduce taxable income but not adjusted gross income and are available in addition to whether the taxpayer itemizes deductions or takes the standard deduction. The One Big Beautiful Bill act (OBBBA) has more doubled the number of deductions in this category. Here is a rundown of these deductions.

  • Disaster related deductions: Disaster-related deductions generally refer to casualty loss deductions that taxpayers can claim for damages or losses caused by federally declared disasters. These deductions are designed to help individuals and businesses alleviate financial burdens resulting from events like hurricanes, earthquakes, or floods. Disaster-related losses from federally declared disasters can be claimed as qualified disaster losses, which offer unique tax advantages. These losses can be deducted in addition to your standard or itemized deductions, without having to itemize other deductions on your tax return.
  • Senior Deduction: The OBBBA, has added a temporary senior deduction for years 2025 through 2028. This deduction is $6,000 for eligible single filers aged 65 and over and $12,000 for married couples filing jointly where both spouses are 65 or older. The deduction phases when AGI reaches $150,000 for married joint filers or $75,000 for others. It does not take the place of the additional standard deduction allowed to those age 65 and older.
  • Non-itemizer charitable deduction: The non-itemizer charitable deduction created by the One Big Beautiful Bill (OBBB) is available for tax years beginning in 2026. This deduction is permitted for substantiated cash only donations with a maximum deduction of $1,000 for single filers and $2,000 for married couples filing jointly. Donations to donor-advised funds and non-operating private foundations do not qualify for this deduction.
  • Car Loan Interest Deduction: The One Big Beautiful Bill Act (OBBBA) added a car loan interest deduction temporarily available for tax years 2025 through 2028. The vehicle must be new and for personal use. It must have a final assembly in the United States. The loan must be secured by the vehicle and originated after December 31, 2024. The maximum annual deduction is $10,000. The deduction begins to phase out for taxpayers with a Modified Adjusted Gross Income (MAGI) over $100,000 for single filers and $200,000 for joint filers.
  • Tips Deduction: The OBBBA tips deduction is temporary and available for the tax years 2025 through 2028. The deductible tips are limited to $25,000 annually per tax return. To be eligible, tips must have been received in an occupation that customarily and regularly received tips before December 31, 2024. The IRS is scheduled to publish a list of qualifying occupations. The deduction reduces federal income tax, but tips are still subject to Social Security and Medicare taxes (FICA). In addition, the deduction is reduced for higher-income earners, starting at a Modified Adjusted Gross Income (MAGI) of $150,000 for single filers and $300,000 for those married filing jointly.
  • Overtime Pay Deduction: Another provision in the OBBBA is an overtime pay deduction available for tax years 2025 through 2028. The maximum annual deduction is $12,500 for single filers and $25,000 for married couples filing jointly. Only the premium portion of overtime pay is deductible. For “time-and-a-half” pay, this is the “half” that exceeds your regular rate. To be eligible, the taxpayer must be a W-2 employee, and the overtime must be required by the Fair Labor Standards Act (FLSA). The deduction begins to phase out for taxpayers with a modified AGI over $150,000 for single filers or $300,000 for joint filers.

In conclusion, while itemizing deductions often garners much attention, it is essential to recognize that numerous deductions remain available even if you don’t itemize. These can significantly impact your taxable income, offering opportunities for tax savings across various situations. Whether it’s deductions for student loan interest, educator expenses, or certain retirement plan contributions, being informed about these avenues can make a substantial difference come tax season.

For taxpayers, the choice between taking the standard deduction or itemizing deductions is pivotal. The standard deduction for 2025, which was enhanced by the OBBBA, is set at $15,750 for single filers, $31,500 for married couples filing jointly, and $23,625 for heads of household. Meanwhile, itemized deductions cover areas such as medical expenses, property taxes, mortgage interest, and charitable donations. Choosing the optimal path—whether sticking with the simplicity of the standard deduction or delving into the details with itemized deductions—depends on your specific financial picture. Whichever route you take, maximizing your allowable deductions ensures that you keep more of what you earn.

Contact our Leesburg or Warrenton office with any questions. 703-771-1818 or 540-347-5681.

How the ‘One Big Beautiful Bill Act’ (OBBBA) Applies to You

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As we approach the closing chapters of the Tax Cuts and Jobs Act (TCJA), implemented during President Trump’s first term, taxpayers find themselves at a crossroads. With many of the TCJA’s provisions set to expire after 2025, the introduction of the One Big Beautiful Bill Act (OBBBA) offers timely extensions and nuanced modifications to these sunsetting policies. Acting as both a continuation and a re-envisioning of prior legislation, the OBBBA not only extends key tenets of the TCJA—such as individual tax rates and business deductions—but also introduces innovative changes that reflect the evolving economic landscape. By addressing emerging challenges while capitalizing on the TCJA’s foundational successes, the OBBBA aims to solidify a path toward a more sustainable and inclusive fiscal future, ensuring relief and opportunity across all levels of the American taxpayer spectrum.

On July 4th, President Trump signed OBBBA into law, introducing myriad changes to the tax landscape. Some of the changes will impact the current year, 2025, and other subsequent years.

This article focuses specifically on the provisions of the OBBBA that directly impact individual taxpayers, small businesses, and family-oriented tax benefits, deliberately omitting the changes and extensions that pertain solely to large corporations and big business. This approach ensures that the content remains highly relevant and applicable to the everyday decisions of individual taxpayers and small business owners, who often navigate their financial responsibilities without the same resources that large corporations possess.

By concentrating on these facets, this article provides a tailored snapshot of the OBBBA’s impact, ensuring that readers are equipped with information that is not only pertinent but also actionable within their tax planning and financial management strategies. This focus allows individual taxpayers to comprehend and leverage the changes that matter most to them, without being overwhelmed by the complexities inherent to provisions designed for big business.

These reforms are aimed at offering widespread relief and financial improvements to millions of taxpayers. Below, we provide an in-depth look at the various key elements of the Act, essential for understanding its impact and implications.

NOTE: MAGI (Modified Adjusted Gross Income) is referred to multiple times in this article. For most taxpayers it is the same as the AGI. MAGI is AGI with foreign and territory excluded income added to the AGI.

Individual Tax Rates – OBBBA prolongs and enhances reduced individual tax rates, which are now extended beyond January 1, 2026. The Act aims to continue the legacy of lower rates initially brought in with past resolutions, thereby mitigating tax burdens for middle-income families. Tax bracket adjustments linked to inflation will apply from taxable years after December 31, 2025. The extensions of the TCJA rates favors the wealthy by continuing the elimination of the 39.6% tax bracket.

Standard Deductions – OBBBA extends, increases and makes permanent the higher TCJA standard deductions. The 2025 standard deductions, the last year under TCJA, were originally scheduled to be $15,000 for single and married filing separate taxpayer, $22,500 for heads of household, and $30,000 for married taxpayers filing jointly. However, OBBBA also makes an inflation adjustment to the 2025 rate using a different prior-year base that will significantly increase in the standard deductions for 2025. We will have to wait for the IRS to make that calculation and release the updated amounts for 2025.

Senior Tax Deduction – A temporary additional deduction for seniors aged 65 and older has been introduced, allowing a $6,000 deduction per qualified individual. This is phased out with higher income levels, beginning for taxable years before January 1, 2029. However, it only applies to taxpayers with a MAGI less than $75,000 ($150,000 for married couples filing jointly) which limits applicability. This deduction is in place of Trump’s campaign promise to eliminate the tax on Social Security. This provision becomes effective in 2025.

Child Tax Credit – OBBBA enhances support for families by increasing Child Tax Credit from $2,000 to $2,200 per qualifying child, beginning in 2025 and inflation adjusting the credit in subsequent years. The modifications also include some strict Social Security number requirements for children and parents. The credit phases out for higher income taxpayers beginning at a MAGI of $400,000 married taxpayers jointly and surviving spouse and $200,000 for others.

Qualified Business Income (QBI) Deduction – The QBI deduction receives a boost, with increased phase-in amounts from $50,000 to $75,000 for individuals and $100,000 to $150,000 for joint filings ensuing after December 31, 2025.

Qualified Small Business Stock (QSBS) – C Corporation shareholders can exclude gains from the sale of QSBS, and for QSBS acquired after July 4, 2025, the exclusion rates are 50% after three years, 75% after four years, and 100% after five years of holding the stock. The exclusion cap is raised to $15 million, and the corporation’s asset limit is increased to $75 million, both of which will be adjusted for inflation after 2026. More restrictive exclusions apply to QSBS acquired before July 5, 2025, the most recent being for the period September 28, 2010, through July 4, 2025, providing 100% exclusion for stock held for more than 5 years.

Minimum QBI Deduction – OBBBA creates a new, inflation-adjusted, minimum deduction of $400 for taxpayers who have at least $1,000 of QBI from one or more active trades or businesses in which the taxpayer materially participates. This ensures small business owners with a certain QBI level are entitled to an enhanced baseline deduction. Both the $400 and $1,000 are inflation adjusted to the nearest $5.

Sec 529 Plans Qualified Funds Usage – Effective for distributions after July 4, 2025, OBBBA expands the use of Section 529 plans, allowing funds to cover expenses associated with elementary and secondary school and postsecondary credentialing programs. This includes costs related to tuition, fees, books, and other educational expenses for both school levels, as well as expenses for obtaining professional certificates and licenses at the postsecondary level. By broadening the scope of qualified expenses, the OBBBA enhances the flexibility and utility of 529 plans, making them a more versatile tool for families planning educational investments across various stages of learning.

Estate and Gift Tax Exemption – OBBBA permanently extends the estate and lifetime gift tax exemption, increases the exemption amount to $15 million for single filers ($30 million for married filing jointly) effective in 2026, and indexes the exemption amount for inflation going forward. That is up from $13.99 million in 2025. This change serves to preserve more wealth within families.

Alternative Minimum Tax (AMT) – Enhancements in AMT exemptions and phaseout thresholds continue, preventing middle-income taxpayers from undue burdens under the AMT system starting January 1, 2026.

Gambling Losses – The new law permanently continues the current provision that limits gambling loss to gambling income. In addition, beginning in 2026, the deduction for gambling losses is limited to 90% of the actual losses.

Mortgage Interest -OBBBA makes permanent the $750,000 ($375,000 in for married taxpayers filing separate). However, OBBBA also restores the deduction for certain mortgage insurance premiums that sunset back in 2021 on home acquisition indebtedness and treats the premiums as qualified residence interest but also included as part of the $750,000/$375,000 limits.

No Tax on Tips – OBBBA permits a deduction up $25,000 for tips received by an individual in an occupation, other than a “specified trade or business”, which customarily and regularly receives tips including tip sharing. The tips must be voluntary, not subject to any consequence for non-payment, not negotiable, and the amount determined by the payer.

No Tax on Overtime – There also is a new deduction for overtime. However, for this provision overtime pay is the difference between the workers regular pay rate and the overtime pay rate not the entire amount for working overtime. The maximum amount that can be deducted is $12,500 ($25,000 for a married couple).

The Following Applies to Both the Tips and Overtime Deductions
• The deduction begins to phase out for when the taxpayers MAGI exceed $150,000 ($300,000 for married couples filing jointly).
• The deduction is temporary and only allowed 2025 through 2028.
• Married Couples must file joint to claim the deduction.

Car Loan Interest – The new tax bill includes a temporary interest deduction, 2025 through 2028, for qualified passenger vehicles including cars, minivans, vans, SUV, pickup trucks, or motorcycles. Does not include campers or recreational vehicles. The $10,000 maximum deduction begins to phase out for when the taxpayer’s MAGI exceed $100,000 ($200,000 for married couples filing jointly) and is fully phased out at $150,000 ($250,000 for married couples filing jointly. The loan cannot be with a related party; the vehicle must be assembled in the U.S. and must weigh 14,000 pounds or less.

Trump Accounts – The legislation introduces “Trump accounts,” tax-advantaged savings accounts for children born between 2025 and 2028, with a $1,000 initial federal deposit. U.S. citizen children can receive up to $5,000 annually from parents and $2,500 from employers, invested in a diversified U.S. stock index fund. Earnings grow tax-deferred, with qualified withdrawals taxed as long-term capital gains. Some experts prefer 529 college plans due to their higher contribution limits and tax benefits. The individual must not have reached the age of 18 by the end of the calendar to establish a Trump account.

State and Local Tax (SALT) Deduction – OBBBA imposes new limits on the SALT deduction, initially capping it at $40,000 starting in 2025. The cap is increased a small amount for each subsequent year until it reaches $41,624 in 2029. Then in 2030 reverts to the $10,000. One-half of those amounts for married taxpayers filing separate. The deduction is also subject to a MAGI inflation adjusted phaseout threshold of $500,000 for 2025, at which point the annual SALT limit is reduced by 30% of the difference between the threshold and the actual AGI but not less than $10,000.

Casualty Loss Deduction – Under TCJA casualty loss deductions were suspended except for those encountered in federally declared disaster area. OBBBA continues and makes permanent that limitation with one exception. The scope of the casualty loss deduction is expanded to include both state-declared and federally declared disasters.

Pease Limitation – Prior to 2018 there was limitation on itemized deductions that impacted higher income taxpayers. TCJA suspended that limitation through 2025. Effective for tax years after 2025, OBBBA permanently repeals the Pease limitation and replaces it with a new overall limitation on itemized deductions that impacts taxpayers in the 37% (the highest) tax bracket.

Adoption Credit – OBBBA makes $5,000 of the adoption credit refundable effective for taxable years after 2025.

Dependent Care Assistance – OBBBA amends the existing limit for dependent care assistance, increasing it from $5,000 to $7,500. For taxpayers filing separately, it increases from $2,500 to $3,750.

Bonus Depreciation – Primarily applies to tangible property with a recovery period of 20 years or less. OBBBA restores 100% bonus depreciation after January 19, 2025.

Energy Credit Terminations – Under prior law, clean vehicle and associated tax credits didn’t sunset (terminate) until after 2032. OBBBA accelerates the sunsets.
• Previously Owned Clean Vehicle Credit: September 30, 2025
• Clean Vehicle Credit: September 30, 2025
• Qualified Commercial Clean Vehicle Credit: September 30, 2025
• Alternative Fuel Vehicle Refueling Property Credit: June 30, 2026
• Energy Efficient Home Improvement Credit: After December 31, 2025
• Residential Clean Energy (includes solar): After December 31, 2025

Contributions To Scholarship Granting Organizations – OBBBA creates a tax credit (dollar for dollar) up to a maximum $1,700 for contributions to qualified organizations granting scholarships to eligible students. Unused credit can be carried forward 5 years. Includes qualifications for scholarship recipients and organizations granting scholarships. Effective for tax years beginning after 2025.

Charitable Contribution Non-itemizers – The new law allows non-itemizers to claim cash contributions to qualifying charities of up to $1,000 ($2,000 for joint filers). Effective tax years beginning after 2025.

The One Big Beautiful Bill Act introduces a range of important provisions that can significantly impact individuals and small businesses. Understanding these changes is crucial to optimizing your tax strategy and ensuring compliance. As these provisions unfold, it’s important to stay informed about how they may specifically affect your financial situation.

We encourage you to contact our Leesburg or Warrenton office should you have any questions or wish to schedule a planning appointment, 703-771-1818 or 540-347-5681. Our team is here to guide you through this evolving landscape, helping you navigate the complexities of tax regulations with confidence and clarity.

Self-Employed? Tips Individuals Should Know About Self-Employment Tax

Posted on by UMMC

Self-employment tax plays a crucial role in the life of every entrepreneur, freelancer, and business owner. Understanding this tax is essential for anyone who makes their living other than as an employee. In this article, we will delve into the components of self-employment tax, how it compares with payroll taxes, who is exempt, and other related issues.

What is Self-Employment Tax?

Self-employment tax is the Social Security and Medicare taxes for individuals working for themselves. The portion of the individual’s SE earnings subject to this tax is 92.35% of their net business profit. It encompasses two parts determined as a percentage of the adjusted business net profit: a 12.4% Social Security tax and a 2.9% Medicare tax, with the 12.4% rate applying to net earnings up to $168,000 for 2024 ($176,100 in 2025), and no cap on the amount of net SE earnings subject to the 2.9% Medicare tax. This SE tax is analogous to the Federal Insurance Contributions Act (FICA) taxes that employees, through withholding, and their employers pay, but the self-employed individual must cover both the employer and employee portions.

Net Earnings Subject to Self-Employment Tax

As mentioned previously, self-employment tax is a percentage of 92.35% of the net earnings from self-employment. Unlike employees, self-employed individuals can deduct their business expenses from their gross income to determine their net income. Although there are others, here are some key deductions commonly available to self-employed individuals:

Home Office Deduction: If you use a part of your home exclusively and regularly for business purposes, you can deduct related expenses. This can include a portion of your rent or mortgage interest, utilities, and home maintenance.

Cost of Goods Sold: The cost of goods sold (COGS) is an accounting term that refers to the direct costs incurred in the production of goods that a company sells. It includes expenses such as the cost of materials and direct labor involved in manufacturing the product. COGS is typically one of the largest expenses of a self-employed individual in a retail business. and is deducted from revenue to determine the gross profit.

Mileage and Vehicle Expenses: Self-employed individuals can deduct the cost of using a vehicle for business purposes. This can be calculated either using the standard mileage rate, which varies from year to year, or the actual expenses incurred, prorated based on the percentage the vehicle is used for business.

Office Supplies and Expenses: The cost of supplies and materials used for running the business, such as paper, printer ink, and office furniture, can be deducted.

Professional and Legal Fees: Fees paid to accountants, lawyers, or other professionals for services related to the business operations are deductible.

Advertising and Marketing: Expenses related to marketing and advertising the business, such as website costs, business cards, and ads, are deductible.

Travel and Meals: Business travel expenses and 50% of the cost of business meals can be deductible if they are necessary for conducting business.

Business Insurance: Premiums paid for business insurance can be claimed as a deductible expense.

Education and Training: Expenses for courses, seminars, or workshops related to maintaining or enhancing your business skills can be deductible.

It’s important to keep accurate records and receipts for all expenses claimed as deductions, and it can be beneficial to consult with a tax professional to ensure compliance and maximize deductions.

Comparison: Employee vs. Self-Employment

Self-employment is primarily based on the concept of individuals earning income through independent activities rather than as employees within a company. This form of employment is characterized by autonomy, flexibility, and direct engagement in business activities. Here are some core aspects upon which self-employment is based:

Independent Business Operation: Self-employed individuals run their own businesses, offering goods or services on their terms. They are responsible for business decisions, marketing, client interactions, and managing operational aspects.

Income Generation Without Employer: Unlike employees who receive wages or salaries, self-employed individuals earn income directly from their business activities. This could include revenue from selling products, consulting fees, freelance work, or any professional service.

Tax Obligations: Self-employed persons are responsible for handling their taxes, which includes calculating and paying self-employment tax, which covers Social Security and Medicare taxes. They must estimate their taxes quarterly and report them annually using IRS schedules and forms.

Self-Employed Health Insurance Deduction: As a self-employed individual, you may deduct premiums paid for your health insurance as an “above-the-line” deduction, which reduces your adjusted gross income, but isn’t an expense when figuring the business’ net profit for SE tax purposes. Premiums paid for the spouse and children of the SE individual also generally are deductible.

Retirement Contributions: Contributions to the business owner’s retirement plan such as a SEP IRA, SIMPLE IRA, Solo 401(k), or traditional IRA can be deducted, allowing self-employed individuals to save for retirement while reducing taxable income. Again, these are above-the-line deductions, but not an expense for calculating the profit on which SE tax is paid. However, if the SE individual has employees, and makes contributions to the employees’ retirement plans, this would be a business expense deductible when computing the business’s net profit, and the SE tax of the business owner.

Financial Risk and Reward: Self-employment involves taking financial risks, relying on personal skills, industry demand, and market conditions to generate revenue. Conversely, it offers the potential for greater financial reward if the business thrives.

Regulatory Compliance: Independent workers must comply with local, state, and federal regulations, which might include licensing, zoning laws, or specific industry standards.

Customer Base Development: Building and maintaining a client base is crucial for sustaining a self-employed business, often requiring significant marketing and networking efforts.

Professional Growth: Self-employment allows for personal and professional growth as individuals navigate challenges, innovate, and develop skills across various business facets.

Ultimately, self-employment is grounded in the principles of entrepreneurship and personal responsibility.

Prepayment and Estimation of Federal and State Taxes

Self-employed persons must estimate and remit taxes quarterly, using IRS Form 1040-ES, often adding complexity and risk of penalties. This contrasts with being an employee where payroll taxes are automatically withdrawn from each paycheck.

Exemptions from Self-Employment Tax

Certain groups and income types are exempt from self-employment tax:

  1. Shareholders of an S Corporation’s taxable income
  2. Fees from notary public services
  3. Non-resident aliens
  4. Rental income from real estate, unless specified as business property
  5. Statutory employees (e.g., some delivery drivers)
  6. Clergy under vows of poverty
  7. Crop-share rental income
  8. Certain insurance company payments
  9. Fiduciary of an estate on an isolated basis
  10. Commissions allowed by the probate court
  11. Limited partners
  12. Miscellaneous income from an occasional act or transaction

Understanding these exemptions can offer significant tax relief and strategic planning opportunities.

Issues and Challenges

Quarterly Payments: Regular payment schedules can strain cash flow. Many new self-employed individuals face difficulty adjusting to this system, especially if they were previously salaried employees.

Deductions and Safe Harbors: Self-employed people can deduct half of their SE tax from their taxable income, offering some relief. Using “safe harbor” methods based on previous year’s tax liabilities also helps manage quarterly tax payments but requires careful planning.

Record Keeping and Reporting: Maintaining precise records is essential, as income fluctuations might require adjustments to avoid penalties. Mishandling this aspect can lead to stressful audits or financial issues.

Legal and Regulatory Changes: Tax laws can change, impacting rates and thresholds. Staying informed and potentially hiring a tax professional can be crucial strategies for managing tax liability.

Influence on Business Operations: Business structure decisions, like choosing an LLC (limited liability company) or S Corporation, can directly affect tax obligations. Understanding these implications helps business owners decide the most advantageous form to adopt, aligning tax strategy with business growth and personal finance goals.

Additional Medicare Tax: For individuals with higher income levels ($200,000 for singles/$250,000 for married couples), an additional 0.9% Medicare tax further complicates calculations.

Self-employment comes with many freedoms and opportunities but also substantial responsibilities, especially concerning taxes. Understanding the intricacies of self-employment tax, comparing it with payroll taxes, knowing potential exemptions, and addressing related issues forms the backbone of sustainable self-managed work.

New and seasoned entrepreneurs alike stand to benefit from keeping abreast of regulatory changes and might consider consulting tax professionals to navigate the complexities of self-employment tax. Long-term success in self-employment often hinges on the adept management of financial obligations, balancing the excitement and creative freedom being your own boss entails.

Contact our Leesburg or Warrenton office with questions or assistance, 703-771-1818 or 540-347-5681.

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