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Year-end Tax Planning

By Contributor
Features

Recent Tax Legislation Complicates Matters as 2026 Approaches

By Kristina Drzal Houghton, CPA, MST

 

The end of the year is often an optimal time for tax planning for both individuals and small business owners. Traditionally, the conventional tax wisdom is to accelerate tax deductions into the current year and defer taxable income until the next year. However, new tax legislation enacted in 2025 significantly complicates matters.

The One Big Beautiful Bill Act (OBBBA) — signed on the Fourth of July — is a follow-up to the Tax Cuts and Jobs Act (TCJA) enacted during President Trump’s first term. Many of the provisions included in the TCJA, particularly those affecting individuals and families, went into effect in 2018 and were scheduled to expire after 2025. The OBBBA extends most of those tax provisions, with certain modifications, and often makes them a permanent part of the tax code.

Kristina Drzal Houghton“The tax law allows you to deduct charitable donations within generous limits. However, the OBBBA adds several tax complications.”

In addition, the new law creates brand-new tax-saving opportunities, while also posing potential tax pitfalls for the unwary. In some cases, the OBBBA provisions are effective in 2025, but others do not kick in until 2026 or a later date.

This article is divided into two sections: Individual Tax Planning and Business Tax Planning.

 

INDIVIDUAL TAX PLANNING

Itemized Deductions

The TCJA suspended several itemized deductions for 2018 through 2025 while boosting the standard deduction. The OBBBA generally extends these rules with some modifications.

If you expect to itemize deductions on your 2025 tax return, take advantage of several key deductions that can lower your tax bill. Consider the following:

• Donate cash or property to a qualified charitable organization (see more below).

• Pay deductible mortgage interest if it makes sense for your situation. This includes interest on acquisition debt up to $750,000 for your principal residence and one other home.

• Make state and local tax (SALT) payments up to the annual deduction limit. Under the OBBBA, the SALT cap is quadrupled from $10,000 to $40,000 for 2025, subject to a phase-out for high-income taxpayers. The cap increases by 1% annually through 2029 before expiring.

 

Charitable Donations

The tax law allows you to deduct charitable donations within generous limits. However, the OBBBA adds several tax complications.

For the first time ever, the OBBBA imposes a floor of 0.5% of adjusted gross income (AGI) before you can claim any charitable deduction, effective in 2026. This new rule may be especially important if you are planning to donate appreciated long-term-gain property, such as stock, that would qualify for a deduction equal to the property’s fair market value. The deduction for property is limited to 30% of AGI, but any excess may be carried over for up to five years.

The OBBBA also allows a deduction of up to $1,000 for non-itemizers, beginning in 2026. The maximum deduction is doubled to $2,000 on a joint return.

Consider bunching charitable donations in a year in which you expect to itemize. For instance, if you are itemizing in 2025, you may step up charitable gift giving before Jan. 1. As long as you make a donation this year, it is deductible in 2025 — even if you charge it in December 2025 and pay it in 2026.

 

Home Energy Credits

If you own your principal residence, you may benefit from two types of home energy tax credits on your 2025 return.

Make energy-saving installations before the end of the year to secure credits for qualified improvements. Under the OBBBA, both credits will expire after 2025 and are not expected to be renewed.

The two credits still available before 2026 are as follows:

• Energy Efficient Home Improvement Credit: This is a 30% credit for qualified expenses like insulation, central air conditioners, water heaters, furnaces, heat pumps, biomass stoves and boilers, and home energy audits, up to a maximum of $3,200.

• Residential Clean Energy Credit: This is a 30% credit for the cost of new qualified clean energy property like solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage technology.

 

401(k) Plan Savings

Contributions to a 401(k) plan are made by employees on a pre-tax basis and can earn tax-deferred income until withdrawals are made. Plus, your company may provide matching contributions based on a percentage of salary.

For 2025, the regular contribution limit is $23,500, but if you are 50 or older, you can add a ‘catch contribution’ of $7,500 for a total of $31,000. Even better: under SECURE 2.0, those ages 60-63 can make a ‘super catch-up contribution’ of $11,250 for a total of $34,750.

Beginning in 2026, if individuals age 50 and over earned more than $145,000 in the prior year, any of their 401(k) catch-up contributions must be made to a Roth-type account. The Roth version of the 401(k) imposes tax on amounts contributed in 2025, but future payments are generally exempt from tax.

 

Required Minimum Distributions

Generally, you must begin taking required minimum distributions (RMDs) from qualified retirement plans, like 401(k) plans, and IRAs after a specified age. Under SECURE 2.0, the age threshold has been raised to 73 (scheduled to increase to 75 in 2033). The amount of the RMD is based on IRS life expectancy tables and your account balance at the end of last year.

Assess your obligations. If you can postpone RMDs longer, you can continue to benefit from tax-deferred growth. Otherwise, make arrangements to receive RMDs before Jan. 1, 2026 to avoid any penalties.

 

Family Tax Breaks

If you are a parent with young children, you may be entitled to several tax breaks designed to reduce your family’s tax burden.

For 2025, parents may claim a Child Tax Credit (CTC) of $2,200 for each qualifying child, subject to a phase-out beginning at $200,000 for single filers and $400,000 for joint filers.

The dependent care credit is enhanced for certain taxpayers with a modified adjusted gross income (MAGI) below specified levels. For high-income taxpayers, the maximum credit remains $600 for one child and $1,200 for two or more children.

Under the TCJA, parents could withdraw up to $10,000 tax-free from a Section 529 plan for higher education to pay a child’s tuition at a qualified elementary or secondary school. The OBBBA doubles the cap to $20,000, beginning in 2026.

 

Other Tax Breaks

Under the new law, employees can annually deduct part of overtime pay, up to $12,500 for single filers and $25,000 for joint filers, retroactive to Jan. 1, 2025. But the deduction is available only for the ‘premium’ of part overtime pay based on the time-and-a-half rate mandated by the Fair Labor Standards Act.

In addition, the deduction is phased out based on MAGI. The phase-out begins at $150,000 of MAGI for single filers and $300,000 for joint filers.

Similarly, the OBBBA creates a new deduction for up to $25,000 of tips received by an employee in a service industry from 2025 through 2028, subject to a phase-out above $150,000 of MAGI for single filers and $300,000 for joint filers.

 

BUSINESS TAX PLANNING

Depreciation-based Deductions

A business may benefit from one of two depreciation-related tax breaks, or both, for qualified property placed in service. The OBBBA enhances those tax breaks, beginning in 2025.

Ensure that qualified property is placed in service before the end of the year. Otherwise, your business does not qualify for either tax break on its 2025 return.

• Section 179 deduction: Section 179 allows a business to currently deduct the cost of qualified property up to an annual limit, subject to a phase-out. The OBBBA permanently hikes the limit to $2.5 million and the phase-out threshold to $4 million in 2025, with future indexing.

• First-year bonus depreciation: the TCJA authorized 100% first-year bonus depreciation subject to a phase-out over a five-year period. The applicable percentage for 2025 was scheduled to be only 40%, but the OBBBA permanently restores the 100% deduction, retroactive to Jan. 20, 2025.

Regular depreciation deductions may be elected. As always, special rules may apply, such as a separate set of limits on vehicles.

 

Research and Experimental Expenses

Previously, the tax law permitted a company to fully deduct domestic R&E expenses in the year in which they were incurred. But the TCJA required costs incurred after 2021 to be capitalized and amortized over 60 months.

Now, the new law reinstates the prior rules, retroactive to Jan. 1, 2025. Alternatively, a business can still elect to amortize the expenses over 60 months. Due to special transitional rules for expenses incurred in 2022 through 2024, it may be beneficial to file amended returns for these years. Note: the amortization period for foreign R&E expenses remains at 15 years.

 

Miscellaneous

Stock up on routine supplies (especially if you expect prices to rise soon). If you buy the supplies in 2025, they are deductible this year even if they are not used until 2026.

The OBBBA imposes a 1% floor on deductions for charitable donations by C corporations, beginning in 2026. A corporation may increase its donations late in 2025 to avoid the upcoming floor on deductions.

Owners of pass-through business entities like S corporations and partnerships may adopt SALT ‘workarounds’ to qualify for state deductions or credits. The entities make the payments, and then tax benefits are passed through to individuals on their personal tax returns.

Maximize the qualified business income deduction of up to 20% for pass-through entities and self-employed individuals. Note that special rules apply if you are in a specified service trade or business. The OBBBA extends this tax break and makes it permanent.

 

Bottom Line

This year-end tax-planning article is based on the prevailing federal tax laws, rules, and regulations. Of course, it is subject to change, especially if additional tax legislation is enacted by Congress before the end of the year.

Finally, remember that this article is intended to serve only as a general guideline. Your personal circumstances will likely require careful examination. You should schedule a meeting with your adviser to assist with all your tax planning needs.

 

Kristina Drzal Houghton, CPA, MST is a partner at the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.

Legislation Creates Unequal Tax Treatment for Gambling Losses

By Contributor
Accounting and Tax Planning

Out of Luck

By Adam Hoffer, Garrett Watson,
and Jacob Macumber-Rosin

 

In a surprising tax code alteration that has frustrated Americans who enjoy gambling, a provision in the One Big Beautiful Bill Act (OBBBA) limits gambling losses that can be used to offset gambling winnings to 90% of their value. This provision, which previously allowed for 100% deductibility of losses against winnings, introduces a steep tax penalty for professional gamblers and certain casual bettors.

The OBBBA provision limiting the deduction of gambling losses might cause individuals to owe taxes on imaginary income, incentivizing gamblers succeeding on thin margins to exit the U.S. or participate in illicit markets.

While the Joint Committee on Taxation estimated that the deduction limit would generate $1.1 billion in tax revenue over eight years, behavioral responses and tax avoidance could quickly reverse that effect. If only a fraction of professional gamers take their bets outside of legal U.S. markets, the effect will be a net loss to tax collections and an increase in illegal activity.

“The OBBBA provision limiting the deduction of gambling losses might cause individuals to owe taxes on imaginary income, incentivizing gamblers succeeding on thin margins to exit the U.S. or participate in illicit markets.”

Consider Daniel Negreanu, perhaps the most famous poker player in the world. Thanks to his vlog and public tracking of poker payouts, we can estimate his tax burden under various tax designs. He successfully nets profitable payouts from his poker playing most years, though he notably lost $2.2 million in 2023.

In the 2025 World Series of Poker (WSOP), Negreanu won (cashed) $1,478,240. His buy-ins for the 2025 WSOP totaled $1,297,143, for net winnings of $181,097. Under pre-OBBBA policy, he would pay income tax on that $181,097, and, assuming his income is taxed at 37% (the highest income tax bracket), his income tax liability would be $67,006, resulting in take-home pay of $114,091.

When his post-OBBBA losses are limited to 90%, however, his tax liability jumps to $115,000, and his take-home pay is cut nearly in half to $66,097.

The new limit for loss deductions in the OBBBA would result in any gambler who breaks even now taking a net loss after paying taxes on money they never made. For example, the tax liability for a player who breaks even on $1 million of wagers would increase from $0 to $37,000. A player who nets $50,000 in winnings from $1 million in wagers — a profitable gambling season — would end up owing $55,500 in taxes to the IRS, resulting in negative take-home pay and an effective tax rate of more than 100%. This would create a unique precedent of taxing unrealized income.

Standard accounting practices allow for full deductibility of most business expenses, but it is worth noting that some limitations apply to things like meals and entertainment expenses and excessive corporate officer compensation. These limitations are fundamentally different from the proposed 90% wagering loss limitation, though. Traditional deductibility limits are largely designed to discourage abusive corporate behavior among large companies. In contrast, the new wagering loss cap primarily affects individual taxpayers who are engaged in a legal, heavily regulated activity.

 

Broad Impact

The impact of the new loss deduction limitation will likely be felt by individuals beyond Las Vegas. Seven states (Michigan, Pennsylvania, New Jersey, West Virginia, Delaware, Connecticut, and Rhode Island) have legalized online gambling, while popular land-based commercial or tribal casinos can be found in nearly every state, including Massachusetts. State tax revenues from online gaming, nearly $3 billion in 2024, will also be affected if gamblers change behavior.

Unpacking why this change was made may help explain why legislation to reverse this provision has bipartisan support, including some members of Congress who voted in support of the broader OBBBA.

In the Senate, the Byrd Rule requires that all measures in a reconciliation bill have a significant budgetary impact. In the 2017 Tax Cuts and Jobs Act (TCJA), Congress amended Sec. 165 of the Internal Revenue Code so that professional gamblers could no longer deduct non-wagering business expenses (e.g., hotel rooms, meals, and transportation) from their gambling winnings. This change aligned the tax treatment of professional gamblers with that of casual gamblers.

With that TCJA provision scheduled to expire in 2026, Senate tax writers were forced to make an adjustment to Sec. 165 in the 2025 reconciliation bill to generate a sufficient budgetary impact. Lowering the deductibility threshold to 90% satisfied the Byrd Rule. The original House-passed reconciliation bill, which did not have to comply with the Byrd Rule, did not include this provision.

If the change to gambling deductibility was primarily procedurally driven — and easy to overlook in legislation as substantial as the OBBBA — a reversal of this provision could make for better fiscal policy. In the House, lawmakers are co-sponsoring the bipartisan Fair Accounting for Income Realized from Betting Earnings Taxation (FAIR BET) Act, introduced by U.S. Rep. Dina Titus and co-sponsored by U.S. Rep. Guy Reschenthaler. U.S. Rep. Andy Barr separately introduced the Winnings and Gains Expense Restoration (WAGER) Act.

In the other chamber, U.S. Sens. Catherine Cortez-Masto, Ted Cruz, and Jacky Rosen introduced the Facilitating Useful Loss Limitations to Help Our Unique Service Economy (FULL HOUSE) Act.

When Congress back in session and Americans eagerly placing bets on their favorite football teams, congressional efforts to restore full gambling deductions will likely be an early priority. And rightfully so: full deductibility of gambling losses is a sound tax policy that would make the treatment of gambling winnings and expenses more neutral.