Michael Gray, CPA's Tax and Business Insight
January 7, 2026
© 2026 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!
- Form W-4.
- Remember to take a physical inventory on January 1.
- Remember to "reset" payroll on January 1.
- California FUTA makeup payment for 2025.
- W-2s, 1099s and DE 542 reminder.
- 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.
- Estates and trusts should plan distributions.
- Were you age 73 or older during 2025?
- IRS releases standard mileage rates for 2026.
- IRS issues guidance about HSA changes.
- IRS issues guidance for Trump accounts.
- IRS allows state advance elections to participate in the federal tax credit for Scholarship Granting Organizations.
- Termination of life insurance results in taxable income.
- Congress tentatively extends the due date for filing a claim for credit or refund relating to a disaster.
- CalSavers mandate applies for household employees.
- California Office of Tax Appeals is disregarding nexus thresholds.
- Executive Order to reclassify cannabis as Schedule III drug.
- '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: Secrets of the Sprakkar
- Follow me on social media!
- Check out my blogs.
- Subscribe/Remove from Michael Gray, CPA's Tax & Business Insight
Janet and me in Reykjavik, Iceland, December 27, 2025 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.
Many of the provisions of the One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, become effective during 2026. The thresholds for the tax breaks and limitations are all over the place. This is one year when it would be helpful to make tax projections relating to your withholding and estimated tax payments using updated tax projection software and to discuss advantageous tax elections in advance. Remember, the states that have income taxes might not conform to federal tax changes, such as 100% bonus depreciation. California passed a conformity bill on October 1, 2025, updating its specified conformity date to January 1, 2025 (before the effective date for OBBBA).
Form W-4.
Form W-4 is the form telling an employer what amount of federal income tax to withhold from wages. With the changes in OBBBA, you should revisit giving your employer an updated Form W-4 for 2026.
Your state might have its own form for withholding instructions. In California, it's Form DE-4.
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, 2026. Be sure you have installed those updates before processing your first payroll for 2026.
California FUTA makeup payment for 2025.
California employers will have an additional tax for a credit reduction on their Federal Unemployment Tax Return, Form 940, for 2025. The credit reduction is 1.2% of FUTA wages, or a maximum of $84.00 per employee.
W-2s, 1099s and DE 542 reminder.
Remember that most 2025 annual information returns, such as W-2s and 1099s, should be issued to payees and sent to the tax authorities by March 2, 2026, including electronically filed forms, except Form 1099-NEC and Form W-2 should be submitted by February 2, 2026. (Since the regular due dates fall during weekends, the date is moved to the next Monday.) 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 20, 2026. 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.
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.
Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.
The final 2025 estimated tax payment for individuals and calendar-year estates and trusts is due January 15, 2026. 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.
Your tax return preparer should be sending their 2025 tax return preparation instructions. Contact them if you haven't received instructions by January 20.
Make your tax return preparation interview appointment now.
Most personal interview appointments for preparing 2025 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.
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 2025, they apply when the undistributed estate or trust income exceeds $15,650. (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, 2026) as distributed for a taxable year (for example 2025).
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.
Were you age 73 or older during 2025?
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.
IRS releases standard mileage rates for 2026.
The IRS has issued its annual notice of changes for standard mileage rates for 2026. The standard rate for business use of a vehicle is increased from 70¢ per mile to 72.5¢. The standard mileage rate for medical mileage and for moving mileage for active-duty members of the armed forced is decreased from 21¢ per mile to 20.5¢ per mile. The statutory standard mileage rate for charitable use of a vehicle is unchanged at 14¢ per mile.
(IR-2025-128, Notice 2026-10, December 29, 2025.)
IRS issues guidance about HSA changes.
The IRS issued Notice 2026-05, providing guidance about new tax benefits for health savings accounts (HSAs) under OBBBA. Changes include:
- Telehealth and other remote care services before meeting the high-deductible health plan deductible and remaining eligible to contribute to an HSA was made permanent, effective for plan years beginning on or after January 1, 2025.
- Effective January 1, 2026, Bronze and Catastrophic plans available through an exchange are treated a HSA-compatible high-deductible health plans (HDHP), regardless of whether the plans satisfy the general definition of an HDHP. Notice 2026-05 clarifies these plans do not have to be purchased through an exchange to qualify for relief.
- Effective January 1, 2026, an otherwise eligible individual enrolled in certain direct primary care (DPC) service arrangements may contribute to an HSA. HSA funds may be used tax-free to pay periodic DPC fees.
(IRS Notice 2026-05, December 9, 2025.)
IRS issues guidance for Trump accounts.
Trump accounts are a new vehicles for education savings enacted by OBBBA. The IRS has issued preliminary guidance for Trump accounts in Notice 2025-68. No contributions can be made to a Trump account until July 4, 2026.
Employers may contribute up to $2,500 to a Trump account for an employee's child. The contribution is excluded from taxable income for the employee. The employer contribution can be made via a Section 125 cafeteria plan.
(IRS Notice 2025-68, December 2, 2025.)
IRS allows state advance elections to participate in the federal tax credit for Scholarship Granting Organizations.
Effective January 1, 2027, individual taxpayers may claim a tax credit of up to $1,700 per year for contributions to Scholarship Granting Organizations (SGOs) serving elementary and secondary school students from low- and middle-income families.
An SGO must be listed on a state list of one or more covered states for the applicable calendar year. A covered state is one of the states. or the District of Columbia, that, for a calendar year, voluntarily elects to participate in the credit and identifies SGOs in the state.
The IRS has issued Revenue Procedure 2026-6, providing that a state may choose to be a covered state for calendar year 2026 before it provides the IRS with a list of SGOs located in the state.
The advanced election is made using Form 15714, Advance Election to Participate Under Section 25F for 2027, on or after January 1, 2026, and before the final date on which the state is permitted to submit the state SGO list.
(Revenue Procedure 2026-6, December 12, 2025.)
Termination of life insurance results in taxable income.
Taxpayers took out whole life life insurance policies for two of their children. They borrowed against the cash surrender value of the policies and later terminated the policies. The life insurance company issued Form 1099-R for proceeds from the termination of the policies, including the loans. The taxpayers didn't report the income, because they didn't receive the loan amounts in cash when the policies were terminated.
The Tax Court ruled the policy loans must be reported as amounts received when the policies were terminated.
(David B. Fugler, et Ux v. Commissioner, TC Summary Opinion 2025-10, November 17, 2025.)
Congress tentatively extends the due date for filing a claim for credit or refund relating to a disaster.
On December 18, 2025, Congress passed H.R. 1491, the Disaster Related Extension of Deadlines Act. As I write this, President Trump hasn't signed the legislation.
Under the Act, the time to file a claim for credit or refund will be extended for disasters by the period of any postponement of the tax payment deadline due to a federally declared disaster or certain other events. Before the change, the time for filing the claim was generally three years from the filing date, without extensions.
(H.R. 1491, the Disaster Related Extension of Deadlines Act., passed by the Senate December 18, 2025.)
CalSavers mandate applies for household employees.
All employers that do not offer a qualified retirement plan to their employees are required to register with CalSavers when the employer has at least one California employee who is age 18 or older.
The employer doesn't have to make contributions to the employee's traditional or Roth IRA provided the employee elects out of the programs.
CalSavers has stated that household employers who haven't received a notice informing them that they have to register do not need to take any compliance action.
For more details about registration and the employee's election out, see the CalSavers website https://www.calsavers.com/.
(Spidell's California Taxletter Podcast: CalSavers: Household employers, employee owners, and more, December 14, 2025.)
California Office of Tax Appeals is disregarding nexus thresholds.
Californina's Revenue and Taxation Code includes thresholds for payroll, property and sales for when a taxpayer has economic nexus with the state. In recent rulings, the Office of Tax Appeals has been finding economic nexus, despite filing below those thresholds.
For example, in Metro Mortgage Group, an out of state business was required to pay the California minimum franchise tax when the only connection to California was $121 paid to a part-time, temporary employee who was a resident of California. (Appeal of Metro Mortgage Group, LLC, 2025-OTA-093SCP.)
In Appeal of Diet Standards, a Florida taxpayer that participated in Amazon's Fulfillment by Amazon program was found to be "actively engaged in transactions in California for the purposes of financial gain or profit" during a tax year when there were less than $14,000 of sales to California customers and had a maximum of $2,333 of inventory in California. (Appeal of Diet Standards, LLC, 2025-OTA-646.)
It appears that any economic contact with California could subject an out-of-state taxpayer to California tax.
(Spidell's California Taxletter Podcast: "Do California's economic nexus thresholds mean anything?", December 21, 2025.)
Executive Order to reclassify cannabis as Schedule III drug.
President Trump has issued an Executive Order directing Attorney General to take the necessary steps to reschedule cannabis from a Schedule I drug to a Schedule III drug.
Becoming a Schedule III drug is significant because business expenses could be tax deductible for a Schedule III drug and aren't tax deductible for a Schedule I drug.
Note the Executive Order does not, by itself, reclassify cannabis as a Schedule III drug. The Attorney General's office must issue regulations to complete the reclassification process. That won't happen until sometime during 2026.
Also note cannabis would still remain illegal at the federal level, so banking probably still won't be permitted.
(Spidell's Flash E-mail: "Executive Order reclassifies cannabis as Schedule III drug", December 22, 2025.)
'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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