Michael Gray, CPA's Tax and Business Insight
January 3, 2025
© 2025 by Michael C. Gray
ISSN 1539-395X
A monthly report to help you prepare for your financial future, keep more of what you earn by minimizing your taxes, and build an extraordinary business!
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Table of Contents
- Happy New Year!
- Attention: tax return preparers, financial planners, estate planning attorneys.
- Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.
- Tax preparation materials will soon be on the way.
- Make your tax return preparation interview appointment now.
- Federal Disaster Tax Relief Act enacted.
- Social Security benefits change for public service workers.
- IRS postpones effective date for proposed required minimum distribution regulations.
- Final regulations issued for partnership liabilities and related persons.
- Estates and trusts should plan distributions.
- Remember to take a physical inventory on January 1.
- Remember to "reset" payroll on January 1.
- California FUTA makeup payment for 2024.
- W-2s, 1099s and DE 542 reminder.
- Were you age 73 or older during 2024?
- Business Ownership Information Reports put on hold again.
- Standard Mileage Rates for 2025 announced.
- 2025 retirement account limits announced.
- New form released for Section 83(b) election.
- Do you invest in digital assets (including BitCoin)?
- 'Tis the season to exercise ISOs?
- Do you sell products, services or software to CPAs?
- Attention CPAs-would you like help with marketing your services?
- Attention CPAs-do you need support for tax issues?
- Attention Accountants! Speed up processing your business closings!
- Please share your good experiences with Michael Gray, CPA.
- Financial Insider Weekly past episodes.
- Visit our new book review: Seeing What's Next
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Janet and me when we saw "Wicked" at the Pruneyard Cinema Happy New Year!
Happy New Year!
Best wishes to you and your family for you to accomplish your dreams and to be safe in turbulent times.
Your CPA, enrolled agent, attorney and financial planner should be working with you to help you achieve your financial goals, but it's up to you to ask for that help.
Most of the provisions of the Tax Cuts and Jobs Act of 2017 are scheduled to expire after 2025, so we can look forward to major debates in Congress about what provisions should be extended. Although the Republicans have a razon-thin majority in both houses of Congress, I don't expect the extensions to be a "slam dunk." Partly as a result of the tax cuts, we already have built a massive increase in the Federal debt. Conservatives might be concerned about fiscal responsibility.
Based on past experience, I don't expect major tax legislation to be enacted until the end of the year.
Attention: tax return preparers, financial planners, estate planning attorneys.
You can generate more fees by adding another service to your clients during 2025. No governing body licensing is required. To get more information, write to me at mgray@taxtrimmers.com with the subject line "Send The Information."
Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.
The final 2024 estimated tax payment for individuals and calendar-year estates and trusts is due January 15, 2024. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts.
See your tax advisor.
Tax preparation materials will soon be on the way.
ATL-CPAs & Advisors, Inc. is in the process of mailing instructions for sending their 2024 tax return preparation instructions. If you haven't received instructions by January 20 or you would otherwise like to receive instructions, contact Thi Nguyen at thi@atl-cpa.com.
Make your tax return preparation interview appointment now.
Most personal interview appointments for preparing 2024 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now.
Federal Disaster Tax Relief Act enacted.
President Biden approved the Federal Disaster Tax Relief Act of 2023 on December 16, 2024.
The Act:
- Retroactively excludes qualified wildfire relief payments, except for insurance payments, paid to individuals as compensation for losses, expenses, or damages for any wildfire declared a federal disaster after December 31, 2014.
- Treats disaster relief payments to victims of the East Palestine, Ohio train derailment as excludable Section 139(b) payments.
- Allows individual victims with a net disaster loss from any taxable year to claim an enhanced personal casualty loss for certain federally-declared disasters that occurred after February 24, 2021.
- The definition of a qualified disaster area is broadened to include any area with respect to which a major disaster was declared by the President of the United States during the period beginning on January 1, 2020 and ending on the date 60 days after the date of enactment of the Federal Disaster Tax Relief Act of 2023.
See your tax advisor for details.
(H.R. 5863, P.L. 118-148, December 16, 2024.)
Social Security benefits change for public service workers.
Congress has passed the Social Security Fairness Act. President Biden still has to sign the legislation for it to become a law. The Act removes provisions from the Social Security Act that reduce or eliminate benefits for public service workers who also receive benefits from a state or local government.
(H.R. 82., passed by the Senate on December 20, 2024.)
IRS postpones effective date for proposed required minimum distribution regulations.
The IRS issued proposed regulations on July 19, 2024 for changes to the required minimum distribution rules for qualified employer retirement plans and individual retirement accounts that were enacted in the SECURE 2.0 Act, enacted December 29, 2022.
The proposed regulations were originally scheduled to be effective on or after calendar years beginning January 1, 2025.
In response to comments received by the IRS, it has announced sections of the proposed regulations relating to (1) the beneficiary of a deceased surviving spouse receiving inherited benefits not being an eligible designated beneficiary, (2) the election by the surviving spouse to be treated as the employee for purposes of determining required minimum distributions, and (3) required minimum distributions for defined benefit plans and annuity contracts are anticipated to apply beginning in the 2026 distribution calendar year.
For periods before the effective date, taxpayers must apply a reasonable, good-faith interpretation of the statutory provisions, as amended by the SECURE 2.0 Act. Presumably, following the proposed regulations would be a reasonable, good-faith interpretation.
(Announcement 2025-2.)
Final regulations issued for partnership liabilities and related persons.
The IRS has issued final regulations relating to how to allocate the economic risk of loss when multiple partners bear the economic risk of loss for the same partnership liability and when a partner makes a nonrecourse loan to a partnership and that partner is related to another partner in the partnership.
See your tax advisor for details.
(T.D. 10014.)
Estates and trusts should plan distributions.
The maximum 37% federal income tax rate and the 3.8% tax on net investment income hit estates and trusts especially hard. For 2024, they apply when the undistributed estate or trust income exceeds $15,200. (The income of some trusts is automatically considered distributed. See your tax advisor.) An election is available to treat distributions made during the first 65 days of the following year (for example, January 31, 2025) as distributed for a taxable year (for example 2024).
In most cases, capital gains don't qualify for the distribution deduction. See your tax advisor.
The beneficiaries should be involved in this decision and be informed about the additional income to be reported on their income tax returns (in writing) to avoid unpleasant surprises.
Remember to take a physical inventory on January 1.
Calendar year businesses with inventories should take a physical count as of January 1. This creates a "clean" record for the income tax return.
Remember to "reset" payroll on January 1.
Software providers will issue updates including the new payroll tax tables as of January 1, 2025. Be sure you have installed those updates before processing your first payroll for 2025.
California FUTA makeup payment for 2024.
California employers will have an additional tax for a credit reduction on their Federal Unemployment Tax Return, Form 940, for 2024. The credit reduction is .09% of FUTA wages, or a maximum of $63.00 per employee.
W-2s, 1099s and DE 542 reminder.
Remember that most 2024 annual information returns, such as W-2s and 1099s, should be issued to payees and sent to the tax authorities by February 28, 2025, including electronically filed forms, except Form 1099-NEC and Form W-2 should be submitted by January 31, 2025. If you have a California business, be sure to send Form 1099-NEC to the Franchise Tax Board.
Amounts paid using a credit card or a payment service like PayPal should not be included on Form 1099. Those amounts are being reported by the merchant companies.
Also remember that Form DE542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 21, 2025. The due date is the earlier of 20 days after the date, $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year. (Martin Luther King's birthday will be celebrated on January 20, 2025.)
Although requirements for real estate operators to issue Forms 1099 were repealed, real estate operators that claim their real estate operations are a trade or business (including for the 20% federal tax deduction for trade or business income) should prepare them anyway. See your tax advisor for details.
Were you age 73 or older during 2024?
Required minimum distributions apply for traditional IRAs and employer retirement accounts (with some exceptions) for the year the plan participant reaches age 73. The first payment must be made by April 1 of the following year. Thereafter, the payment must be made by December 31, so there could be two payments required during the year following the year the plan participant reaches age 73. The two payments could throw you into a higher tax bracket or make qualified dividends or long-term capital gains subject to a higher tax rate. Calendar taking care of this. Consider scheduling automatic payments with the plan custodian. See your tax advisor.
Business Ownership Information Reports put on hold again.
A new panel of the U.S. Fifth Circuit Court of Appeals has reinstated the nationwide preliminary injunction against enforcing the beneficial ownership reporting requirements mandated by the Corporate Transparency Act.
Watch the FinCEN website for the status of appeals. www.fincen.gov/boi
The most recent ruling was issued December 26, 2024.
For now, businesses don't have to file BOI reports with FinCEN.
If you haven't filed, have your documents ready in case the penalties are ultimately upheld.
(Texas Top Cop Shop, Inc. et al. v. Garland, U.S. Court of Appeals, Fifth Circuit, Case No. 24-40792, December 26, 2024.)
Standard Mileage Rates for 2025 announced.
The IRS has issued the 2025 optional standard mileage rates for computing the deductible costs of operating an automobile for business, charitable, medical or moving.
Effective January 1, 2025, the standard mileage rates are:
- 70¢ per mile driven for business (67¢ for 2024).
- 21¢ per mile for medical or moving (unchanged).
- 14¢ per mile driven for charitable purposes (unchanged statutory rate).
(IR-2024-312, December 19, 2024.)
2025 retirement account limits announced.
The IRS has announced cost of living increases for retirement account contributions for 2025.
- The annual limit for contributions to a traditional IRA or a Roth IRA is unchanged at $7,000, subject to limitations. The catch up contribution for individuals aged 50 and over is unchanged at $1,000.
- The annual limit for employee contributions to 401(k), 403(b), governmental 457 plans and the federal government's Thrift Savings Plan is increased from $23,000 to $23,500. The catch-up contribution for employees aged 50 and over is unchanged at $7,500.
- A higher 2025 catch-up contribution limit for 401(k), 403(b), governmental 457 plans and the federal government's Thrift Savings Plan applies for employees aged 60 to 63 is $11,250 instead of $7,500.
- The limitation for the annual benefit under a defined benefit plan is increased from $275,000 to $280,000.
- The limitation for contributions to deferred contribution plans, including Simplified Employee Pensions and Profit Sharing Plans is increased from $69,000 to $70,000.
- The limitation that generally applies to salary reduction contributions under a SIMPLE retirement account or elective contributions under a SIMPLE 401(k) plan is increased from $16,000 to $16,500. The limitation for certain of those accounts under §408(p)(2)(E)(i)(l) or (ll) remains $17,600.
(IR-2024-285, November 1, 2024, Notice 2024-80.)
New form released for Section 83(b) election.
The IRS has released Form 15620 that taxpayers may use to make a Section 83(b) election. The election is made to disregard a substantial risk of forfeiture for receiving property as compensation, such as an unvested stock grant (not an RSU) or exercising an unvested nonqualified stock option. The election must be mailed to the IRS with a copy provided to the company for which services were provided within 30 days after receiving the property. https://www.irs.gov/pub/irs-pdf/f15620.pdf
Note the election is only effective for the alternative minimum tax and not for the regular tax when exercising an unvested incentive stock option.
The form can't be e-filed. It must be mailed. I recommend sending a second copy of the Section 83(b) election to the IRS with a return-addressed envelope, so you have a record of filing it. (Also, send the election certified mail, return receipt requested.)
The taxpayer can also use an alternative form to make the election.
Do you invest in digital assets (including BitCoin)?
If yes, check out Revenue Procedure 2024-28, describing a one-time election for allocating tax basis of units acquired before January 1, 2025. https://www.irs.gov/pub/irs-drop/rp-24-28.pdf
Previous IRS basis guidance is obsolete. A specific unit allocation or global allocation should be done by the later of the first sale during 2025 or the original due date for your 2025 income tax return. Send an email to yourself as a record of the election. See your tax advisor.
'Tis the season to exercise ISOs?
Since stock received from exercising an incentive stock option has to meet two holding period tests (more than two years after grant and more than one year after exercise) to avoid having the excess of the fair market value over the option price taxed as ordinary income, exercising early in the year can be advantageous when you decide to hold the stock after exercise. The reason is you have the alternative of selling the stock before the end of the year of exercise and possibly avoiding the alternative minimum tax if the value of the stock drops after exercise. I call this tax strategy the "escape hatch."
If the company's stock isn't publicly traded and you can't sell the shares, this strategy won't work.
Be careful about blackouts. I have had some individuals call me who wanted to use the escape hatch during December, only to discover they were prohibited from selling their shares because they were subject to an employee blackout. Sometimes blackouts can happen unexpectedly, like when an employer becomes a party to a lawsuit. There's no magic solution in these cases - you could be stuck with a significant tax liability.
For many people, the exercise and immediate sale of the shares is the most comfortable alternative, even if the tax bill is higher.
Also remember the wash sale rules can spoil an "escape hatch" transaction. You can't repurchase the shares or even receive an employee stock option or buy a put option during the period starting 30 days before the sale to 30 days after the sale.
Another advantage of an exercise early in the year is to be able to meet the holding period requirements and sell the shares before the tax is due on April 15. But check the estimated tax payment requirements to avoid penalties for late estimated tax payments. (The alternative minimum tax liability should be included in estimated tax payments.)
Do you sell products, services or software to CPAs?
Maybe I can help with writing promotional material and marketing ideas. Call me, Michael Gray, at 408-918-3161 or email mgray@taxtrimmers.com.
Attention CPAs-would you like help with marketing your services?
Maybe I can help with writing promotional material and marketing ideas, including encouraging referrals from your current clients. Call me, Michael Gray, at 408-918-3161 or email mgray@profitadvisors.com.
Attention CPAs-do you need support for tax issues?
Michael Gray, CPA can help you with research and guidance on complex tax planning and tax return reporting issues. mgray@taxtrimmers.com.
Attention Accountants! Speed up processing your 2019 business closings!
Do you still have 2019 business income tax returns on extension that need to be done? Check out this trial balance software, EZ Trial Balance, that's super-easy to set up and use. There is a desktop version and an online version. The online version includes consolidations and ratio analysis for analytical review. http://www.eztrialbalance.com
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Financial Insider Weekly past episodes
After eight years of production, I have discontinued producing new interviews for Financial Insider Weekly. Doing the show has been a rewarding experience and I consider back episodes to be my legacy of financial literacy education to our community. Back episodes available at https://www.youtube.com/user/financialinsiderweek.
Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.
For your questions about dependent exemptions, see IRS Publication 501 at www.irs.gov.
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Michael Gray, CPA2482 Wooding Ct.San Jose, CA 95128(408) 918-3162FAX: (408) 938-0610email: mgray@taxtrimmers.comHours: 8am - 5pm PDT Monday - Friday
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