Michael Gray, CPA's Tax and Business Insight
November 5, 2025
© 2025 by Michael C. Gray
ISSN 1539-395X
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Table of Contents
- Happy Thanksgiving!
- Family celebrations.
- Make your year-end planning appointment now.
- IRS inflation adjusted amounts announced.
- Social Security wage limit for 2026.
- Social Security benefit increase for 2026.
- No car loan interest information form for 2025.
- FBAR penalty invalidated.
- Commission financial advisor was an employee.
- Year-end planning - Required Minimum Distributions.
- Year-end planning - Seniors should consider making donations from their IRAs./a>
- Year-end planning - Roth conversions.
- Does your business have unclaimed property to report?
- If you exercised ISOs during 2025, should you use the "escape hatch"?
- Year end planning - should you "harvest" losses before the year end?
- 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: The Art of Creative Thinking
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
This praying mantis showed up in our backyard Happy Thanksgiving!
Thanksgiving falls late on November 27 this year. This is one holiday people of all faiths or no faith can share. Being thankful and counting your blessings is one of the best things you can do for your emotional health. Even when things aren't working out, you can still be thankful for past good memories.
Family celebrations.
My brother, Steve, and I are celebrating our birthdays this month. Thank goodness we are both healthy and enjoying spending time with our family.
Make your year-end planning appointment now.
Halloween has passed and the Holidays are here! Now would be a good time to review your tax situation with your tax advisor. Make your appointment now.
IRS inflation adjusted amounts announced.
The IRS has published inflation-adjusted amounts for certain items for 2026, including the tax rate schedules and the annual per-donor, per-donee limitation for gifts, which is unchanged at $19,000. https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
Social Security wage limit for 2026.
The Social Security Administration has announced the wage ceiling for Social Security withholding for 2026. It has increased from $176,100 for 2025 to $184,500 for 2026. The tax rate for withholding is unchanged at 7.65%. https://www.ssa.gov/news/en/cola/factsheets/2026.html
Social Security benefit increase for 2026.
The Social Security Administration has announced a 2.8% cost of living benefit increase for 2026. https://www.ssa.gov/news/en/press/releases/2025-10-24.html
No car loan interest information form for 2025.
Certain taxpayers who bought a qualified passenger vehicle after 2024 might qualify to deduct some or all of the interest paid on a loan to finance the purchase. Lenders are supposed to provide an information return to the borrower disclosing the amount of interest received. Since OBBBA was enacted July 4, 2025, the IRS doesn't have time to vet a new form. The IRS has issued guidance to lenders, waiving penalties for not submitting the information return, provided the lender provides a statement to borrowers showing the total interest received.
(Notice 2025-57.)
FBAR penalty invalidated.
A federal district court granted a taxpayer's motion to dismiss an action by the IRS imposing a failure to file penalty for a foreign bank account report (FBAR). The taxpayer failed to timely file FBAR reports for 2011, 2012 and 2013.
The Court found the IRS violated the taxpayer's Seventh Amendment right to a jury trial, despite having a right to an "after the fact" jury trial, by imposing the penalty without the benefit of a neutral factfinder. In the court's view, the Treasury Department and IRS acted as "prosecutor, jury and judge" by imposing the penalty based on its own factual conclusions.
The taxpayer did have access to a federal court with a jury only after the penalty was assessed. She would not have the opportunity to exercise her Seventh Amendment rights unless she refused to pay the penalty and the government chose to bring an action to convert the penalty into a judgment, which it did.
(It seems to me the court is opening a can of worms. I think most federal penalties could be challenged with this argument. The IRS will probably appeal this ruling.)
(U.S. v. Sagoo, Northern District of Texas, Civil Action No. 4-24-CV-01159-0, September 19, 2025.)
Commission financial advisor was an employee.
Francisco Gil worked for Wells Fargo Bank as a commission financial advisor. Although he had considerable flexibility, he was subject to Wells Fargo's supervision and policies. He could participate in Wells Fargo's 401(k) plan. Wells Fargo could fire Gil at any time without notice, and, upon his departure, his client list and corresponding notes would be the property of Wells Fargo.
Gil asked Wells Fargo to reclassify him as a statutory employee, and Wells Fargo denied his request. Gil finally left Wells Fargo to work at another firm as an independent contractor.
Wells Fargo issued Form W-2 to Gil, and he reported the income and his expenses as self-employment income on Schedule C for 2020 and 2021.
The IRS assessed a $5,000 civil penalty for filing a frivolous income tax return.
A federal district court found Gil was an employee, and that he erroneously disregarded the common-law test for an employee in the tax guide that he relied on. His deductions on Schedule C were disallowed as employee business expenses.
(U.S. v. Gil., Eastern District of Pennsylvania, Civil Act 24-825, September 24, 2025.)
Year-end planning - Required Minimum Distributions.
When a retirement plan (including a traditional IRA) participant reaches age 73, minimum distributions are generally required from the plan. For the first year, the distribution must be made by April 1 of the following year. Thereafter, the distribution must be made by December 31. (When the first distribution is made April 1 of the following year, another distribution must be made by December 31 of that year, resulting in two distributions during the same year.)
The rules are even more complicated for inherited retirement accounts.
If you are approaching age 73, you should meet with a tax advisor who is familiar with the rules about whether or not to wait until the next year to take a retirement plan distribution.
To avoid missing making a required minimum distribution, consider having the plan custodian compute the required distribution and automatically make the distribution annually.
If you are charitably inclined, qualified charitable distributions "count" as required minimum distributions, and avoid income taxes on the distributions. See the Year-End Planning Tip below.
Year-end planning - Seniors should consider making donations from their IRAs.
Many of us make a lot of donations during the holiday season. With a $34,700 federal standard deduction for married couples filing a joint return who age 65 or over and $17,750 for singles age 65 or over, most taxpayers get no federal tax benefit from making charitable contributions. (Especially when their home mortgage has been paid off!) A better approach for individuals age 70 ½ or greater is to make donations to "50% charities" (not a donor advised fund) directly from their traditional IRA.
(Note the federal tax deduction for donations up to $2,000 for married, filing joint and $1,000 for other taxpayers who don't itemize deductions under OBBBA doesn't become effective until 2026.)
An individual age 70 ½ or older may distribute up to $108,000 for 2025 to qualified charities each year without including the distribution in taxable income. (The limit is indexed for inflation after 2023.) In addition, the distribution "counts" as part of any required minimum distribution for the year.
In order to qualify, a qualified receipt is required to be kept by the taxpayer. The donation must be made directly by the IRA to the charity.
My IRA custodian gave me a checkbook for the purpose of making donations from my account.
Most seniors who make significant charitable contributions should consider making this their regular practice.
See your IRA custodian and your tax advisor for guidance with this important tax planning strategy.
Year-end planning - Roth conversions.
Taxpayers who have traditional retirement accounts should consider switching their contributions to Roth (if their employer plan offers that option) and converting their traditional retirement accounts to Roth. To avoid creating a huge tax obligation, the conversion can be staged over several years. Since low tax rates have been extended by the One Big Beautiful Bill Act (OBBBA), Roth conversions aren't as urgent as before OBBBA was enacted. The tax cuts are generating significant federal deficits, so it seems income tax rates will increase in the future. See your tax advisor before going ahead with a conversion to find out how much to convert and have a tax bill you can afford. (Note - No custodians for Simplified Employee Pension (SEP) plans are offering a Roth option at this time.)
Does your business have unclaimed property to report?
California's Unclaimed Property Law requires organizations to review their records annually to determine if they are holding any funds, securities, or other properties that have been unclaimed for the required dormancy period. A common item would be checks issued but uncashed by the recipient.
There is a question on California business entity tax returns about compliance with the Unclaimed Property Law. Remember these questions are answered under penalties of perjury and the responses are shared with the State Controller's office.
The State Controller's office may waive interest for organizations that participate in its Voluntary Compliance Program. Get the details here. https://sco.ca.gov/upd_vcp.html
If you exercised ISOs during 2025, should you use the "escape hatch"?
Remember if you exercised ISOs during 2025 and didn't sell the stock, your AMT adjustment will be based on the fair market value of the stock on the date of exercise. However, if you sell the stock before the end of the year of exercise, the AMT adjustment is eliminated. Ordinary income is reported for the excess of the selling price over the option price. I call this strategy "the escape hatch."
For example, Jean Employee exercised an ISO for 1,000 shares of XYZ stock on March 1, 2025. The fair market value of the shares on March 1, 2025 was $55 per share and the option price was $5 per share. If Jean didn't sell the stock, she would report additional AMT income of $55 - $5 = $50 X 1,000 shares = $50,000. On December 15, 2025, Jean sells the stock for $15 per share. The AMT adjustment is eliminated and Jean reports $15 - $5 = $10 X 1,000 shares = $10,000 of ordinary income for regular tax and AMT.
There is an important requirement to get this tax benefit. A loss would have to be "allowable" if the stock was sold at a loss. A common transaction that would disqualify an escape hatch is a wash sale. A wash sale happens when replacement shares or an option to acquire replacement shares are acquired during the period 30 days before or 30 days after the sale.
For example, if, in the above example, Jean purchased 1,000 shares of XYZ Software for $16 per share on December 10, 2025, she would still have a disqualifying disposition of the ISO shares, but she would have $50,000 of ordinary income because the escape hatch wouldn't apply. Her short-term capital loss of $15 - $55 = $40 X 1,000 shares = $40,000 would be disallowed as a current deduction. The disallowed loss would be added to the tax basis of the replacement shares. Therefore, the tax basis of the replacement shares would be $16 + $40 = $56 X 1,000 shares = $56,000.
If you are going to use this "escape hatch" strategy, I suggest not waiting until the last minute. One of my clients was thinking of doing this, and an employee unexpectedly sued the company for an employment-related matter. The company's stock was locked up for employees because of the lawsuit. My client wasn't able to use the "escape hatch" strategy.
Tax projections should be made to determine whether an alternative minimum tax will apply without implementing an "escape hatch" strategy.
Year end planning - should you "harvest" losses before the year end?
The stock market has been very active this year, and some individuals have experienced lost value in their investments. Review the securities (or other assets) you are holding for potential capital losses. If you sell the loss shares before the end of the year, you can offset the losses against your gains plus $3,000. This is even more important if you could be subject to the 3.8% federal net investment income tax. You could bring your adjusted gross income below the $250,000 threshold for married persons filing joint returns or $200,000 for singles.
Remember the wash sale rules. If you purchase shares of the same security during the period 30 days before and 30 days after a sale at a loss, the loss is disallowed for the same number of shares.
Consult with your tax advisor.
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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