Important 2025–2026 Tax & Retirement Changes You Need to Know

Dear [First Name]

Welcome to SK Financial CPA’s latest tax and financial update! With new rules and deductions coming into effect for 2025 and 2026, understanding how MAGI, estate and gift taxes, adoption credits, and retirement contributions impact your finances is more important than ever. In this edition, we break down key updates and strategies to help you plan ahead and make the most of your tax benefits.

What Is MAGI, and Why Does It Matter?

Modified Adjusted Gross Income (MAGI) is the income number the IRS uses to decide who qualifies for certain tax breaks and who may owe extra taxes. It starts with your AGI from line 11 of your tax return, with certain income amounts added back based on IRS rules. Many new deductions under the “One Big Beautiful Bill,” along with credits like the Child Tax Credit and education credits, are all based on your MAGI. It also affects whether you can deduct student loan interest or rental losses and whether you owe the 3.8% investment surtax.

MAGI even impacts your Medicare premiums. Higher MAGI can increase what you pay for Part B (doctor and outpatient care) and Part D (prescription drugs). In short, your MAGI influences your tax benefits, possible surtaxes, and even your Medicare costs, so it’s important to keep an eye on it each year.

2025–2026 Estate & Gift Tax Changes

Topic	2025	2026	Key Details
Lifetime Estate & Gift Tax Exemption	$13.99M	$15M	Adjusts for inflation; permanently set under new tax law.
Special Valuation for Farm/Business Real Estate	N/A	Up to $1,460,000	Allows valuing property at business-use value; must be 50% of estate and actively used 5 of last 8 years.
Annual Gift Tax Exclusion	$17,000 (2024), $18,000 (2025)	$19,000 per recipient	Gifts up to $19,000 require no tax return and don’t use the lifetime exemption.
Gift Tax Rules	—	—	Gifts over the exclusion need a return; tax only if lifetime gifts exceed $15M. Gifted assets keep original basis; inherited assets get stepped-up basis.

Remote Sales Tax: What You Should Know

Most states now require out-of-state (remote) sellers to collect sales tax after the 2018 Supreme Court ruling. Small businesses may be exempt, but each state sets its own sales or transaction threshold.

No sales tax: Delaware, Montana, New Hampshire, and Oregon.
Alaska: No state tax, but some local taxes apply.

Examples:

South Dakota: Threshold of $100,000 in sales.
California: Threshold of $500,000 in sales.
Texas: Threshold of $500,000 in sales

Remote sales tax rules are especially important for online sellers and businesses shipping across states.

IRS Rules on HOAs and Nonprofits

The IRS is strict about who qualifies for tax-exempt status.

HOAs: To be tax-exempt, an HOA must benefit the public, not just its members. Gated communities or associations serving only residents don’t qualify. Those that don’t meet the rules can file Form 1120-H, which shields owner dues from tax, though other income may be taxed at 30%.
Nonprofits: A nonprofit must operate for public benefit—not for a founder’s personal gain. Groups that function like for-profit businesses, such as selling merchandise mainly to benefit the founder, can be denied 501(c)(3) status.

Closing Your Business? Don’t Forget These Tax Steps

If you’re closing a business, the IRS has a helpful “Closing a Business” page with guidance for sole proprietors, partnerships, and corporations. Key steps include:

File a final tax return and pay any taxes owed.
Follow rules for terminating retirement plans.
Pay all employees and independent contractors.
Cancel your Employer Identification Number (EIN).
Keep all tax and payroll records for future reference.

Properly handling these steps can help you avoid future tax headaches.

Adoption Tax Credit Updates for 2026

Topic	2025	2026	Details
Maximum Credit per Child	$17,280	$17,670	Covers adoption fees, legal costs, travel, meals, and other related expenses.
Special Needs Adoption	Full credit even if expenses are lower	Full credit even if expenses are lower	Credit is fully available regardless of costs.
Income Phaseout	$259,190 – $299,190	$265,080 – $305,080	Begins and ends based on Modified Adjusted Gross Income (MAGI).
Refundable Portion	$5,000	$5,120	Refundable even if no tax liability. Adjusted for inflation each year.
Claim Form	Form 8839 + Schedule 3 (1040)	Form 8839 + Schedule 3 (1040)	Required to claim the credit.
Timing	Domestic: before/after finalization; Foreign: after finalization	Domestic: before/after finalization; Foreign: after finalization	Unsuccessful foreign adoptions are not eligible.

Use Your Annual Gift-Tax Exclusion

You can give up to $19,000 per person in 2025 without using your lifetime estate and gift tax exemption or paying gift tax. Gifts above this amount require filing a gift tax return, but no tax is due unless your lifetime gifts exceed $13.99 million.

2026 Update: Lifetime exemption rises to $15 million.
Recipients: Do not pay income tax on gifts.
Reminder: Check state and local gift tax rules.

Year-End Tax Planning: Key Tips for 2025

With less than two months left in 2025, now is the time to review your tax planning strategies. The “One Big Beautiful Bill” (OBBB) introduced changes that affect 2025 and 2026, including permanent extensions of many prior provisions, new deductions, and phased-out breaks based on Modified Adjusted Gross Income (MAGI).

Here’s what to focus on:

Accelerate or defer income and deductions: Depending on your situation, move write-offs from 2026 into 2025, or defer income to reduce overall federal tax liability.
State and Local Taxes (SALT): The deduction cap increased to $40,000, meaning more filers will benefit from itemizing.
Medical Expenses: Elective procedures before year-end may increase deductible medical expenses, especially if you’re near the 7.5% AGI threshold.
Charitable Gifts: Bundle contributions into 2025 to maximize deductions. Consider donor-advised funds or appreciated property, but avoid giving assets that have lost value. Remember: cash donations are deductible up to 60% of AGI; capital gain assets up to 30%.
MAGI-Sensitive Breaks: New deductions, such as the $6,000 senior deduction, SALT, overtime, tips, and car loan interest, phase out at higher MAGI levels.
Medicare Premiums: Higher MAGI can increase Part B and D premiums. For 2025 coverage, joint filers over $212,000 and singles over $106,000 pay surcharges. Premiums for 2027 will be based on 2025 MAGI, so tax moves now can affect future Medicare costs.

Retirement Account Tips for Year-End 2025

Important tips on RMDs, inherited IRAs, charitable giving, Roth conversions, and contribution limits to help you plan before year-end.

Required Minimum Distributions (RMDs): Traditional IRA owners 73+ must take annual RMDs based on Dec. 31, 2024, balances. The first RMD can be deferred to April 1, 2026, but two distributions will be taxed that year. 401(k) RMDs can be deferred if still working for the employer.
Inherited IRAs: Nonspousal beneficiaries generally must withdraw funds within 10 years. Eligible designated beneficiaries can stretch distributions over time.
Charitable Giving: Individuals 70½+ can make Qualified Charitable Distributions (QCDs) up to $108,000 from IRAs; QCDs count toward RMDs but aren’t taxable.
Roth Conversions: Converting a traditional IRA to a Roth IRA triggers taxes now, but future earnings grow tax-free. Partial conversions over multiple years can help manage tax impact.
Maximize Contributions: The 401(k) limit for 2025 is $23,500; the catch-up is $7,500 (50+) or $11,250 (60–63). IRA limit is $7,000 with a $1,000 catch-up if 50+. Contributions for 2025 can be made until April 15, 2026.

New Vehicle Loan Interest Deduction: What You Need to Know for 2025

The One Big Beautiful Bill lets individuals deduct up to $10,000 of 2025 passenger vehicle loan interest, reducing AGI whether you itemize or take the standard deduction.

Who qualifies: Only new passenger vehicles purchased in 2025 or later, assembled in the U.S., weighing under 14,000 pounds, and used for personal purposes. Vehicles bought in 2024 or used cars do not qualify. Business-use vehicles are reported on Schedule C.
Income limits: The deduction phases out for modified AGIs over $200,000–$250,000 for joint filers and $100,000–$150,000 for others. Modified AGI includes AGI on line 11 of Form 1040, plus certain exclusions for foreign earned income, housing, and income from Puerto Rico, Guam, American Samoa, or the Northern Mariana Islands.
How to claim: Use Part IV of new Schedule 1-A, transfer the amount to line 13 of Form 1040, and include your vehicle identification number (VIN).
Reporting: Lenders must report interest received, but the IRS is providing transitional relief for 2025. They can satisfy this by giving buyers a statement online, in monthly statements, or in annual statements, allowing taxpayers to claim the deduction while lenders adjust to reporting changes.

Social Security & Payroll Updates for 2026

For 2026, Social Security benefits increase 2.8%. Full-retirement-age earners can make up to $65,160, younger workers up to $24,480, before benefits are reduced, with no limit after full retirement age. The Social Security wage base rises to $184,500; tax rates remain 6.2% for SS and 1.45% for Medicare (12.4% and 2.9% for self-employed), with a 0.9% Medicare surtax for high earners. The nanny tax threshold increases to $3,000, and ERC refunds for 2021 Q3–Q4 claims filed after Jan. 31, 2024, won’t be issued after July 4, 2025.

1099-K Reporting Threshold Reverted

The $600 reporting rule for third-party payment platforms like PayPal, Square, and eBay has been repealed. Now, 1099-Ks are issued only if a payee receives over $20,000 and completes more than 200 transactions in a year. Even without a 1099-K, all income from sales or services must still be reported on your tax return.

New 2025 Tax Deductions for Tips and Overtime

The Treasury and IRS have issued guidance for taxpayers claiming deductions on tips and overtime under the One Big Beautiful Bill for 2025–2028.

Overtime Deduction:

Qualified overtime compensation (generally the “half” portion of time-and-a-half pay) can be deducted.
Maximum annual deduction: $12,500 ($25,000 for joint filers).
Phases out for taxpayers with modified AGI over $150,000 ($300,000 for joint filers).
Applicable to both itemizing and non-itemizing taxpayers.
Guidance includes examples for payroll statements, law enforcement, and government employees receiving compensatory time.

IRS Interest Rates Hold Steady for Early 2026

For the first quarter of 2026, IRS interest rates remain unchanged. Individuals face a 7% rate on both overpayments and underpayments. For corporations, the rates are 6% for overpayments, 7% for underpayments, and 9% for large underpayments. Additionally, the rate on corporate overpayments exceeding $10,000 is 4.5%.

Retirement Contribution Limits Increased for 2026

The IRS has raised the contribution limits for retirement accounts in 2026, helping individuals save more for the future:

401(k), 403(b), 457 plans, and Thrift Savings Plan:

The contribution limit rises to $24,500 (up from $23,500 in 2025).
Catch-up contributions for participants aged 50 and older increase to $8,000.
For ages 60–63, the higher catch-up limit remains $11,250, under SECURE 2.0 rules.

IRA contributions: The limit increases to $7,500 (up from $6,500).

IRA catch-up contribution for those 50+ rises to $1,100.

SIMPLE retirement accounts: Contribution limit increases to $17,000, with higher catch-ups for older participants. For full details, see Notice 2025-67.

Happy Thanksgiving from SK Financial CPA!

At SK Financial CPA, we’re always here to help you navigate changes in taxes, deductions, and retirement planning. Stay informed, make confident financial decisions, and connect with us on our social channels for the latest updates, tips, and guidance all year long.

SK Financial CPA

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

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