One Big Beautiful Bill Tax Act – How Can You Benefit?

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Focus: Casualty and Business Losses Deduction     

On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.

The OBBBA introduces several changes and clarifications regarding casualty and business loss deductions for businesses. A casualty loss is the (1) damage, destruction, or loss of property (2) resulting from an identifiable event that is (3) sudden, unexpected, and unusual.

Prior law

Personal casualty losses, which include theft losses, are temporarily limited under the Tax Cuts and Jobs Act of 2017 (TCJA). In the case of an individual, any personal casualty loss which would otherwise be deductible in tax years 2018 to 2025 is only allowed as a deduction in those years to the extent it is attributable to a federally declared disaster as defined in IRC Sec. 165(i)(5). There is an exception, however, for personal casualty gains during those years. Such gains can be used to offset a personal casualty loss not attributable to a federally declared disaster to the extent the loss does not exceed the gain.

Business casualty losses are not impacted by the TCJA limitations.  IRC Sec. 165(c)(1) allows a deduction for an uncompensated loss incurred in a trade or business. To be engaged in a trade or business, an individual must be involved in an activity with continuity and regularity, and the primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify. Whether an individual is carrying on a trade or business requires an examination of the facts involved in each case.

Under IRC Sec. 165(c)(2), an individual can deduct losses incurred in any transaction entered into for profit, though not connected with a trade or business. In determining whether a loss was incurred in any transaction entered into for profit, though not connected with a trade or business, courts consider whether the taxpayer’s predominant, primary or principal objective in engaging in the activity was to realize an economic profit independent of tax savings. Reg. Sec. 1.183-2(b) sets forth the following nonexclusive list of factors to be considered in evaluating a taxpayer’s profit objective:

(1) The manner in which the taxpayer carries on the activity;

(2) The expertise of the taxpayer or his advisers;

(3) The time and effort expended by the taxpayer in carrying on the activity;

(4) The expectation that assets used in the activity may appreciate in value;

(5) The success of the taxpayer in carrying on other similar or dissimilar activities;

(6) The taxpayer’s history of income or losses with respect to the activity;

(7) The amount of occasional profits, if any, from the activity;

(8) The financial status of the taxpayer; and

(9) Elements of personal pleasure or recreation.

OBBBA personal casualty losses deduction

Starting on January 1, 2026, OBBBA expands the definition of disasters to include certain state-declared disasters as well. All other limitations and restrictions still apply.

The loss amount is the lesser of the decline in the property’s value due to the casualty (up to your adjusted basis) or the property’s adjusted basis if completely destroyed. The loss must be reduced by any insurance or other reimbursements received or expected.  Remember, you must prove both the loss and its amount, including the property’s adjusted basis, pre- and post-casualty value, and any reimbursements received.

OBBBA business casualty loss deduction 

OBBBA makes no changes to provisions governing business casualty losses. Taxpayers can generally deduct business casualty losses in the year they occur provided that the lost or damaged property was connected to a trade or business or a transaction entered into for profit.

But Beware……

Regarding business casualty losses, you cannot deduct the loss of future earnings, or your time spent cleaning up after the event. Also, a decline in value due to a casualty without physical damage is generally not deductible.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. It’s important to consult with a tax professional for personalized advice on how these changes might affect your specific tax situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles, San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

One Big Beautiful Bill Tax Act – How Can You Benefit?

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Focus: Interest on Car Loans Deduction    

On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.

With the passing of OBBBA, a new temporary deduction for car loan interest for individual taxpayers has been introduced. Effective for tax years beginning after December 31, 2024, and before January 1, 2029, interest paid on a qualifying car loan can be deductible.

Prior Law:

For noncorporate taxpayers, no deduction is allowed for “personal interest”.

Personal interest is any interest that is not:

(1)        qualified residence interest;

(2)        investment interest;

(3)        interest on debt allocable to a trade or business, other than the trade or business of being an employee;

(4)        interest taken into account in computing passive activity income or loss;

(5)        interest on deferred estate tax payments; or

(6)        interest allowable as a deduction under IRC Sec. 221, relating to interest on educational loans.

Thus, for example, nondeductible personal interest includes interest on car loans (unless the car is used for business) and finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses.

Current law – OBBBA Car Loan Interest Deduction:

Taxpayers can deduct up to $10,000 of interest paid on car loans per tax year. The deduction begins to phase out and is reduced by $200 for each $1,000 of a taxpayer’s modified adjusted gross income (MAGI) of $100,000 for single filers and $200,000 for married filers. It is fully phased out at $150,000 MAGI for single filers and $250,000 for joint filers. Taxpayers can claim this deduction even if they do not itemize on Schedule A.

What Qualifies as Deductible Car Loan Interest?

A qualifying passenger vehicle interest paid or accrued during the tax year applies to indebtedness that:

  • Is incurred by the taxpayer after December 31, 2024.
  • Is for the purchase of a passenger vehicle for personal use.
  • Is not owed to a related party.

What type of vehicle qualifies?

  • An applicable passenger vehicle that is new, with original use starting with the taxpayer.
  • The vehicle must be manufactured for primary use on public roads, streets, and highways. It is required to have a minimum of two wheels (such as a car, minivan, sport utility vehicle, pickup truck, or motorcycle) and a gross vehicle weight rating of less than 14,000 pounds.
  • Final assembly of the vehicle must take place in the United States.
  • The vehicle must be categorized as a motor vehicle under the Clean Air Act.

But Beware……

Interest paid on lease financing does not qualify for the deduction. However, interest paid on refinanced loans is eligible, but only up to the amount still owed at the time of refinancing. The new loan must also be secured by a first lien on the same vehicle. Under the new OBBBA rules, lenders are required to file a new Form 6050AA with the IRS and provide a copy to the borrower by January 31st. Taxpayers must include the vehicle identification number (VIN) on their tax return for the year the interest is paid to confirm the vehicle meets the U.S. final assembly requirement.

To the extent the vehicle is used for business purposes, any interest allocable to the business use portion of the vehicle would not be subject to the limitations and phase-out of the OBBBA Car Loan Interest Deduction.

Recordkeeping Requirements:

Interest paid on a loan for a vehicle of which is used for business purposes should qualify as an ordinary and necessary expenses paid or incurred in carrying on a trade or business which would not be subject to the limitations and restrictions discussed above.

You must be able to substantiate the business use of the vehicle documenting how many total miles and how many business miles incurred during the year.  Keeping a diary with mileage information and copies of repair bills that show odometer readings are essential. Only the percentage use for business use applied against the transportation costs can be deductible.

Deductible local transportation costs generally include the transportation costs for:

(1) traveling between the taxpayer’s main workplace and another workplace within the same local area;

(2) visiting clients or customers in the local area of the taxpayer’s main workplace; and

(3) attending an off-site business meeting in the local area of the taxpayer’s main workplace.

The transportation costs for commuting between the family home and a main workplace are never deductible.

Besides interest paid on the vehicle loan, other transportation costs to consider are depreciation, insurance, repairs & maintenance, fuel, EV charging, parking and tolls.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. It’s important to consult with a tax professional for personalized advice on how these changes might affect your specific tax situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles, San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

One Big Beautiful Bill Tax Act – How Can You Benefit?

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Focus: Gambling Losses   

On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.
The OBBBA has made changes to the tax treatment of gambling losses, effective January 1, 2026.

Prior Law:

Prior to the enactment of the One Big Beautiful Bill Act (OBBBA), taxpayers could deduct gambling losses only to the extent of their gambling winnings. Gambling losses in excess of winnings are not deductible. Taxpayers must report the full amount of their gambling winnings (with no reduction for gambling losses) for the year as income on Form 1040, and then deduct their gambling losses (up to the amount reported as gambling winnings) for the year separately on Schedule A (Form 1040) as an itemized deduction.

Also starting with 2018, the limitation on losses from gambling transactions applies not only to the actual betting costs, but not to other expenses incurred in connection with gambling activity. For instance, a taxpayer’s otherwise deductible expenses in traveling to or from a casino are permitted only to the extent of gambling winnings.

OBBBA Gambling Loss Deduction:

Under the OBBBA you can still deduct gambling losses on your federal taxes, but only up to 90% of your gambling winnings. This new limitation on the deductibility of gambling losses will apply to all taxpayers, regardless of whether they gamble professionally or recreationally.

But Beware……

This deduction change can lead to individuals owing more taxes on what appears to be a break-even or even losing gambling year. To deduct gambling losses, you must itemize deductions on Schedule A of Form 1040. If you claim the Standard Deduction, you cannot deduct gambling losses. You also must report your winnings and losses separately on your tax return.

Record Keeping Requirements

It is extremely important for individuals who gamble to keep meticulous records of all winnings and losses. Taxpayers must keep an accurate diary or similar record of their losses and winnings. The diary should contain at least the following:

(1) The date and type of the specific wager or wagering activity;

(2) The name and address or location of the gambling establishment;

(3) The names of other persons present with the taxpayer at the gambling establishment; and

(4) The amounts the taxpayer won or lost.

A taxpayer can generally prove his or her winnings and losses through Form W-2G, Certain Gambling Winnings; Form 5754, Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, substitute checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided by the gambling establishment.

For specific wagering transactions, a taxpayer can use the following items to support his or her winnings and losses:

(1) Keno: Copies of the keno tickets the taxpayer purchased that were validated by the gambling establishment, copies of the taxpayer’s casino credit records, and copies of the taxpayer’s casino check-cashing records.

(2) Slot machines: A record of the machine number and all winnings by date and time the machine was played.

(3) Table games (twenty-one (blackjack), craps, poker, baccarat, roulette, wheel of fortune, etc.): The number of the table at which the taxpayer was playing. Casino credit card data indicating whether the credit was issued in the pit or at the cashier’s cage.

(4) Bingo: A record of the number of games played, cost of tickets purchased, and amounts collected on winning tickets. Supplemental records include any receipts from the casino, parlor, etc.

(5) Racing (horse, harness, dog, etc.): A record of the races, amounts of wagers, amounts collected on winning tickets, and amounts lost on losing tickets. Supplemental records include unredeemed tickets and payment records from the racetrack.

(6) Lotteries: A record of ticket purchases, dates, winnings, and losses. Supplemental records include unredeemed tickets, payment slips, and winnings statements

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. It’s important to consult with a tax professional for personalized advice on how these changes might affect your specific tax situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles, San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

One Big Beautiful Bill Tax Act – How Can You Benefit?

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Focus: Taxability Of Social Security Benefits and Tax Deduction For Seniors  

On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.

OBBBA introduces a temporary tax deduction for seniors aged 65 and older, potentially reducing or eliminating taxes on Social Security benefits for many, but it does not eliminate Social Security taxation entirely. This new deduction is in addition to the existing standard deduction and any age-based deductions. According to the Council of Economic Advisors, 88% of retirees who receive Social Security benefits will pay no tax on their benefits under OBBBA because of their total deductions exceeding their taxable Social Security benefits.

Prior Law – Partial Taxability Of Social Security Benefits

A taxpayer is subject to tax on a portion of his or her social security benefits only if the sum of the taxpayer’s modified adjusted gross income (“MAGI”) plus 50% of the social security benefits the taxpayer received exceeds a “base amount” determined by the taxpayer’s filing status. Married taxpayers who file a joint return must combine their incomes and benefits to figure whether any of their combined benefits are taxable, even if only one of the spouses received social security benefits.  This rule is referred to as the “income test”.

A taxpayer’s MAGI is essentially adjusted gross income (“AGI”) adjusted for certain items, the most common being an increase by the amount of any tax-exempt interest not included in AGI.

The “base amount” is:

(1)        $32,000 if the taxpayer is married filing jointly;

(2)        $0 if the taxpayer is married filing separately and lived with his or her spouse at any time during the tax year; or

(3)        $25,000 in any other case.

So for taxpayers who are filing married jointly, none of the social security benefits would be taxable where the sum of the taxpayer’s modified adjusted gross income (“MAGI”) plus 50% of the social security benefits the taxpayer received is less than or equal to $32,000.  For taxpayers who are single, the non-taxable threshold is $25,000.

For taxpayers exceeding thresholds above, under the income test you can expect to include at least 50% of the taxpayer’s social security benefits as income and in some cases, a taxpayer may have to include in income up to 85% of such benefits.

Prior Law – Additional Amount For Seniors Over The Standard Deduction Amount  

Regardless of whether a portion of social security benefits are taxable, an individual taxpayer is entitled to a higher standard deduction if the individual is age 65 or older at the end of the year and does not itemize deductions.  This amount is adjusted for inflation in each year and for tax years beginning in 2025, the additional standard deduction amount for the aged is $1,600. This amount is increased to $2,000 if the individual is unmarried and not a surviving spouse.

An individual is considered 65 on the day before his or her 65th birthday. Therefore, individuals who were born before January 2, 1960, can take the additional standard deduction for the aged for 2024. Individuals who were born before January 2, 1961, can take the additional standard deduction for age for 2025.

On a joint return, if both spouses are age 65 or older, both are entitled to an additional standard deduction for the aged. A married taxpayer who files a separate return can take the higher standard deduction for a spouse who is age 65 or older if the taxpayer can claim a personal exemption for the spouse because the spouse had no gross income and another taxpayer cannot claim the spouse as a dependent.

Current Law – Partial Taxability Of Social Security Benefits

OBBBA does not exempt Social Security benefits from taxation and the income test will still apply, but it does provide an additional deduction for seniors. The prior law computations for income testing discussed above still apply.

Current Law – OBBBA Senior Tax Deduction

OBBBA provides a new enhanced $6,000 deduction for individuals aged 65 and older, and a $12,000 deduction for married couples filing jointly, starting in 2025. This new deduction takes place regardless of whether the senior itemizes or takes the standard deduction.

But Beware……

OBBBA senior tax deduction is phased out for higher earners, with the full amount available for single filers with a Modified Adjusted Gross Income (“MAGI”) of up to $75,000 and for married couples filing jointly with MAGI up to $150,000. The application of the phase-outs will completely eliminate the deduction at $175,000 for single filers and $250,000 for joint filers. Also, keep in mind that this deduction is not a blanket exemption. While the deduction can significantly lower taxes for many, it does not eliminate Social Security taxation for everyone due to the pre-existing income test. Also this senior deduction is temporary, currently set to expire in 2028, unless extended by Congress.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. It is advisable to consult with a tax professional to understand how these tax deductions might affect your situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles, San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

One Big Beautiful Bill Tax Act – How Can You Benefit?

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Focus: Deduction For Tips and Overtime Earnings From Income Tax

On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.

One of the provisions of the OBBBA provides federal income tax deductions for a portion of an eligible worker’s tips and overtime earnings. Both deductions are temporary and are set to expire after the 2028 tax year.

Prior Law

All income is subject to federal income taxes except as provided otherwise under the Internal Revenue Code.  There is no distinction from worker’s tips or overtime earnings.  In addition, worker’s tips and overtime earnings are subject to Social Security and Medicare taxes (as well as state and local taxes).

New Law – Deduction for overtime pay

OBBBA creates a temporary deduction from gross income for premium pay for overtime hours worked. This means that if you earned $1,000.00 in overtime wages, that you could be able to claim as a deduction $1,000.00 this essentially exempting this income from federal taxation.

New Law – Deduction for tips

OBBBA creates a separate deduction for tipped workers, allowing them to deduct up to $25,000 of qualified tips earned.

But beware on the deduction for overtime pay …

OBBBA caps the deduction for overtime earnings at $12,500 (or $25,000, in the case of a joint return) for all employees. For higher earners, the allowable deduction is reduced by $100 for each $1,000 by which the employee’s gross income exceeds $150,000 (or $300,000, in the case of a joint return). That would mean for an individual worker, this deduction would be completely phased out upon the employee’s gross income exceeding $275,000.  Keep in mind that this deduction applies only to the premium compensation paid more than an employee’s regular rate of pay. If Federal law such as Section 7 of the Fair Labor Standards Act established a worker’s premium pay, then such premium compensation paid more than an employee’s regular rate of pay also qualified.  However, if such premium compensation is paid under some state-law requirements or under come collective bargaining agreement, such premium pay does not qualify for the deduction. The overtime deduction also does not apply to qualified tips.

But beware on the deduction for tips …

Similarly to the overtime deduction, the allowable deduction for tipped earnings is reduced by $100 for each $1,000 by which the tipped worker’s gross income exceeds $150,000 (or $300,000, in the case of a joint return). Only tips that are paid voluntarily by the customer or client, not subject to negotiation, may be deducted as qualified tips. Tips received under tip-sharing arrangements also count as qualified tips; however, earnings from mandatory service charges assessed automatically to customers are not deductible as qualified tips.

Furthermore, the deduction is available only for tips earned in “traditionally and customarily tipped industries.” This means the hospitality industry (restaurants and hotels), and other businesses where tips are common (such as nail or hair salons). It remains to be seen to what extent anyone who renders services could claim qualified tips; therefore, to provide clear guidance as tips received under tip-sharing arrangements count as qualified tips, the Treasury Secretary is required to publish within the next 90 days, a list of occupations that have customarily and regularly received tips on or prior to December 31, 2024.

OBBBA also includes an employer tax credit for Social Security taxes paid on all qualified tips which under prior law was applicable only to food or beverage service employees but now this credit extends to all employees that customarily receive tips in all industries such as in the industry of beauty services (i.e., hair care, nail care, and spa treatments).

This deduction also applies to individuals who are not statutory employees but who earn tips during a trade or business. The tip deduction only applies to the extent that the income from that trade or business (including tips) exceeds the full sum of allowable deductions (not counting the tip deduction) allocable to that trade or business.  In another words, to the extent that the tip deduction would result in a loss in your business, you would not be able to claim the full tip deduction amount.

Impact on employers

Starting with the 2025 tax year, employers are required to separately report on Form W-2 the portion of the employee’s pay that is For qualified overtime compensation and the employee’s qualifying tip-earning compensation. non-employees, businesses must publish a statement identifying the portion of payments made to the individual that are designated as cash tips, as well as the individual’s qualifying tip-earning occupation.

There is a transition rule for the 2025 tax year that permits employers to approximate a separate accounting of amounts designated as cash tips by any reasonable method specified by the IRS. Our office will be on the lookout for the IRS’ announcement on this and we will share this information when it becomes available.

If you are an employer using a payroll service, you should check with your service provider on what information they need to accurately report on the 2025 Form W-2 each employee’s qualified overtime compensation and qualifying tip-earning compensation.  Also, where the employer filed 2025 quarterly employment tax returns (Form 941) without claiming a tax credit for Social Security taxes paid qualified tips, amended employment tax returns should be prepared and filed to claim these overpaid amounts.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. It is advisable to consult with a tax professional to understand how these tips and overtime deduction changes might affect your specific tax situation, especially if your income relies on tips and/or overtime or you are an employer. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles, San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

One Big Beautiful Bill Tax Act – How Can You Benefit?

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Focus: Getting The Most Of The Increase In Deduction For State And Local Taxes

On July 4, 2025 President Donald J. Trump signed into law H.R.1 – One Big Beautiful Bill Act (“OBBBA”).  OBBBA contains hundreds of provisions including permanently extending the individual tax rates Trump signed into law in 2017, which were originally set to expire at the end of 2025.

One of the provisions allows for individuals to claim a higher Deduction For State And Local Taxes or as they are commonly referred to as the “SALT deduction.”  The SALT deduction permits individuals to deduct as an itemized deduction on their federal individual income tax returns either (1) their state and local income taxes or (2) their state and local general sales taxes. On top of that, individual are also allowed to deduct their real estate taxes.  However, no deduction for all these taxes shall be allowed in excess of the statutory cap.

Prior law

The Tax Cuts And Jobs Act of 2017 (“TCJA”) had capped the SALT deduction at $10,000 ($5,000 for married individuals filing separately) from 2018 through 2025. Prior to 2018, there was no overall limit on the SALT deduction, although its value could be reduced for some high-income earners due to the Alternative Minimum Tax (“AMT”) and the phase-out limitation on itemized deductions.

New law

OBBBA raises the SALT deduction limit to $40,000 ($20,000 for married individuals filing separately) starting in 2025, with a 1% yearly increase through 2029, before reverting to the statutory cap $10,000 ($5,000 for married individuals filing separately) in 2030. What this means is that starting in 2025, individuals can deduct up to an additional $30,000 ($15,000 if married individual filing separately) in State And Local Taxes.  OBBBA also preserved the use of pass-through entity (“PTE”) tax workarounds, allowing business owners in high-taxes states (like California and New York) to utilize their flow-through entities to pay and deduct these State And Local Taxes without being subject to the SALT deduction cap.

But Beware …

The $40,000 ($20,000 for married individuals filing separately) SALT deduction cap starts to phase out once modified adjusted gross income (“MAGI”) exceeds $500,000. This cap amount decreases as your MAGI increases beyond $500,000 with a complete reversion to a SALT deduction cap to $10,000 ($5,000 for married individuals filing separately) once MAGI reaches $600,000. MAGI is essentially adjusted gross income (“AGI”) with some tax breaks added back in. Even with the $30,000 increase in the SALT deduction cap, individuals in high-tax states may still have more in State And Local Taxes paid than what is deductible with IRS so it makes sense to see if you can qualify for a PTE tax workaround.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. It is advisable to consult with a tax professional to understand how these SALT changes might affect your specific tax situation, especially if your income is near the phase-out threshold. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles, San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

California Raising Cannabis Taxes In 2025

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The California Department Of Tax And Fee Administration (CDTFA) which oversees the reporting and collection of taxes for the California cannabis, in consultation with the Department Of Finance, is required by law to adjust the cannabis excise tax rate for the 2025-26 fiscal year and every two years thereafter. The rate change reflects an additional percentage equivalent to the amount of cultivation tax that would have been collected if the cultivation tax had not ended (Revenue and Taxation Code section 34011.2).

Cannabis retailers are responsible for collecting the cannabis excise tax from their customers who purchase cannabis or cannabis products based on the gross receipts from the retail sale. Gross receipts generally include any amount the purchaser is required to pay to purchase the cannabis or cannabis products.

The excise tax rate is 15% through June 30, 2025.  This rate increases to 19% starting July 1, 2025.  The cannabis excise tax is applied to all cannabis and cannabis product purchases made by consumers.  Cannabis retailers are responsible for reporting their sales to us on their online cannabis excise tax return. For monthly filers, the new rate applies starting with the July 2025 returns. For quarterly filers, the new rate applies starting with the third-quarter 2025 returns (covering July 1, 2025 – September 30, 2025).

Be aware that potential legislation that may impact the tax rate is still be considered by the California legislature so stay tuned.  Also, keep in mind that a cannabis business is also subject to excise taxes and other fees imposed by the local jurisdiction where the business is located.  Any change at the State level does not impact these local taxes and fees.

Invoice Requirements

Retailers are required to provide purchasers with a receipt or other similar document that includes the following statement – “The cannabis excise taxes are included in the total amount of this invoice.”

Recordkeeping

Every sale or transport of cannabis or cannabis products must be recorded on an invoice or receipt. Cannabis licensees are required to keep invoices for a minimum of seven years.

Distributors (or in some cases manufacturers) are responsible for collecting the cannabis cultivation and excise taxes, and the invoices they provide must include, among other specified requirements, the amount of tax collected.

Retailers, cultivators, and manufacturers must keep these invoices as verification that the appropriate tax was paid.

How This Impacts The Black Market

Legal California cannabis businesses have been complaining about taxes, which in parts of the state are among the highest in the nation. Many believe that these taxes on compliant cannabis operators while still mandating compliance with State and local regulations will widen the price disparity gap between cannabis products sold in the black market vs. cannabis products sold in the legal market. But with the State stepping up its enforcement efforts to uncover and prosecute illegal cannabis operators, the State is hoping to eliminate this discrepancy by eradicating non-compliant operators.

What Should You Do?

Start your cannabis business on the right track.  Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

The Threat Of Harvard’s Revocation Of Tax Exemption Status – What Should Other Non-Profit Organizations Learn From This?

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With all the publicity on Harvard University’s continued tax exemption status, any Non-Profit Organization including churches and charities should be aware of their filing and operational obligations to insure preservation of their tax exempt status.

A section 501(c)(3) organization will jeopardize its exemption if it ceases to be operated exclusively for exempt purposes. An organization will be operated exclusively for exempt purposes only if it engages primarily in activities that accomplish the exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities does not further an exempt purpose. A 501(c)(3) organization:

  • must absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office
  • must restrict its lobbying activities to an insubstantial part of its total activities
  • must ensure that its earnings do not inure to the benefit of any private shareholder or individual
  • must not operate for the benefit of private interests such as those of its founder, the founder’s family, its shareholders or persons controlled by such interests
  • must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school’s operation of a factory
  • may not provide commercial-type insurance as a substantial part of its activities
  • may not have purposes or activities that are illegal or violate fundamental public policy
  • must satisfy annual filing requirements

In addition to loss of the organization’s section 501(c)(3) exempt status, activities constituting inurement may result in the imposition of penalty excise taxes on individuals benefiting from excess benefit transactions.

A tax-exempt organization that does not file a required annual return or notice for three consecutive years automatically loses its tax-exempt status.  . An automatic revocation is effective on the original filing due date of the third annual return or notice. (Section 6033(j) of the Internal Revenue Code).

Automatic revocation of exemption list

The IRS publishes the list of organizations whose tax-exempt status was automatically revoked because of failure to file a required Form 990, 990-EZ, 990-PF or Form 990-N (e-Postcard) for three consecutive years.

The list gives the name, employer identification number (EIN), organization type, last known address the organization provided to the IRS, effective date of revocation and the date the organization was added to the list. For organizations that applied for and received reinstatement, the list gives the date of reinstatement. The IRS updates the list monthly.

Effect of losing tax-exempt status

If an organization’s tax-exempt status is automatically revoked, it is no longer exempt from federal income tax. Consequently, it may be required to file federal income tax returns (typically Form 1120 if incorporated or Form 1014 if formed as a trust) and pay applicable income taxes.

An automatically revoked organization is not eligible to receive tax-deductible contributions and will be removed from the cumulative list of tax-exempt organizations, Publication 78. The IRS will also send a letter informing the organization of the revocation.

Donors can deduct contributions made before an organization’s name appears on the Automatic Revocation List.

State and local laws may affect an organization that loses its tax-exempt status as well.

Reinstating tax-exempt status

The law prohibits the IRS from undoing a proper automatic revocation and does not provide for an appeal process. An automatically revoked organization must apply to have its status reinstated, even if the organization was not originally required to file an application for exemption.  There are four ways to be reinstated which are outlined in Revenue Procedure 2014-11.

  1. Streamlined retroactive reinstatement

Organizations that were eligible to file Form 990-EZ or 990-N (ePostcard) for the three years that caused their revocation may have their tax-exempt status retroactively reinstated to the date of revocation if they have not previously had their tax-exempt status automatically revoked.

Complete and submit Form 1023 , Form 1023-EZ, Form 1024 or Form 1024-A with the appropriate user fee no later than 15 months after the later of the date of the organization’s Revocation Letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website.

In addition, the IRS will not impose the Section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated under this procedure and files properly completed and executed paper Forms 990-EZ for all such taxable years.

  1. Retroactive reinstatement process (within 15 months)

Organizations that cannot use the Streamlined Retroactive Reinstatement Process (such as those that were required to file Form 990 or Form 990-PF for any of the three years that caused revocation or those that were previously auto-revoked) may have their tax-exempt status retroactively reinstated to the date of revocation if they:

  • Complete and submit Form 1023, Form 1024 or Form 1024-A with the appropriate user fee not later than 15 months after the later of the date on the organization’s revocation letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website.
  • Include with the application a statement establishing that the organization had reasonable cause for its failure to file a required annual return for at least one of the three consecutive years in which it failed to file.
  • Include with the application a statement confirming that it has filed required returns for those three years and for any other taxable years after such period and before the post-mark date of the application for which required returns were due and not filed.
  • File properly completed and executed paper annual returns for the three consecutive years that caused the revocation and any following years.

In addition, the IRS will not impose the Section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated under this procedure.

  1. Retroactive reinstatement (after 15 months)

Organizations that apply for reinstatement more than 15 months after the later of the date on the organization’s revocation letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website may have their tax-exempt status retroactively reinstated to the date of revocation if they satisfy all of the requirements described under the “Retroactive reinstatement (within 15 months)” procedure EXCEPT that the reasonable cause statement the organization includes with its application must establish reasonable cause for its failure to file a required annual return for all three consecutive years in which it failed to file.

In addition, the IRS will not impose the Section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated under this procedure.

  1. Post-mark date reinstatement

Organizations may apply for reinstatement effective from the post-mark date of their application if they complete and submit Form 1023, Form 1023-EZ, Form 1024 or Form 1024-A with the appropriate user fee.

What’s a reasonable cause statement?

A reasonable cause statement establishes that an organization exercised ordinary business care and prudence in determining and attempting to comply with its annual reporting requirement. The statement should have a detailed description of all the facts and circumstances about why the organization failed to file, how it discovered the failure, and the steps it has taken or will take to avoid or mitigate future failures.

Avoid being automatically revoked again – file annual returns

An organization can be automatically revoked again if it fails to file required returns for three consecutive years beginning with the year in which the IRS approves the application for reinstatement. Organizations seeking reinstatement of tax-exempt status after a subsequent revocation are not eligible to use the Streamlined Retroactive Reinstatement Process.

Reinstatement By The IRS Results In The Issuance Of A New Determination Letter

If the IRS determines that the organization meets the requirements for tax-exempt status, it will issue a new determination letter. The IRS also will include the reinstated organization in the next update of Tax Exempt Organizations Search (Pub. 78 database), and indicate in the IRS Business Master File (BMF) extract that the organization is eligible to receive tax-deductible contributions. Donors and others may rely upon the new IRS determination letter as of its stated effective date and on the updated Tax Exempt Organizations Search and BMF extract listings.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes and for non-profit organizations to preserve their tax exempt status. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you and if you are involved in crypto-currency, check out what a Bitcoin tax attorney can do for you.

 

President Biden Signs Into Law Expanded Federal Disaster Tax Relief

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President Biden Signs Into Law Expanded Federal Disaster Tax Relief

On December 12, 2024 President Joe Biden signed H.R. 5863, the “Federal Disaster Tax Relief Act of 2023” which will designate a series of presidentially declared disasters as qualified disaster events.  What this means – if you were impacted by recent hurricanes, you can now claim disaster-related losses more easily—whether you itemize your taxes or not. Settlements for disaster victims are now tax-free, and the burdensome 10% AGI threshold has been eliminated.

The legislation designates that Hurricane Ian and other hurricanes including Hurricanes Idalia, Nicole, Fiona, Debby, Helene, and Milton should be treated as qualified disaster events for purposes of determining the tax treatment of certain disaster-related personal casualty losses. It also includes Fire Victim Trust claimants in Northern California and elsewhere (encompasses a disaster declared after 2014 as a result of a forest or range fire) and those affected by the train derailment in East Palestine, Ohio that occurred on February 3, 2023.

The legislation will also cover any potential major disasters occurring up to 6 months after the President’s signature.

Extended Filing and Payment Deadlines Announced By IRS Still Remain In Place

The most recent announcement being made by IRS on October 25, 2024 where the IRS announced tax relief for individuals and businesses in the Juneau area of Alaska, affected by flooding that began on August 5, 2024. These taxpayers now have until May 1, 2025, to file various federal individual and business tax returns and make tax payments.

The tax relief postpones various tax filing and payment deadlines that occurred from August 5, 2024, through May 1, 2025 (postponement period). As a result, affected individuals and businesses will have until May 1, 2025, to file returns and pay any taxes that were originally due during this period.

This means, for example, that the May 1, 2025, deadline will now apply to:

  • Any individual or business that has a 2024 return normally due during March or April 2025.
  • Any individual, business or tax-exempt organization that has a valid extension to file their 2023 federal return. However, that payments on these returns are not eligible for the extra time because they were due last spring before the flooding occurred.
  • 2024 quarterly estimated income tax payments normally due on September 16, 2024, January 15, 2025, and 2025 estimated tax payments normally due on April 15, 2025.
  • Quarterly payroll and excise tax returns normally due on October 31, 2024, and January 31, 2025 and April 30, 2025.

In addition, penalties for failing to make payroll and excise tax deposits due on or after August 5, 2024, and before August 20, 2024, will be abated, as long as the deposits were made by August 20, 2024.

Other Areas Having Extended Deadlines:

The IRS announced (Kentucky) announced (West Virginia) on May 31, 2024 tax relief for individuals and businesses affected by severe storms, straight-line winds, tornadoes, flooding, landslides and mudslides that began on April 2, 2024 in Kentucky and West Virginia now have until November 1, 2024, to file various federal individual and business tax returns and make tax payments.

The IRS announced on August 12, 2024 tax relief for individuals and businesses in 25 Minnesota counties affected by severe storms and flooding that began on June 16, 2024 now have until February 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on August 9, 2024 tax relief for individuals and businesses in four states (South Carolina, Florida, North Carolina and Georgia) and on August 13, 2024 the IRS announced tax relief for individuals and businesses in the state of Vermont affected by Hurricane Debby now have until February 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on August 23, 2024 tax relief for individuals and businesses in Puerto Rico affected by Tropical Storm Ernesto that began on August 13, 2024 now have until February 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on August 23, 2024 tax relief for individuals and businesses in South Dakota affected severe storms, straight-line winds and flooding that began on June 16, 2024 now have until February 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on August 28, 2024 tax relief for individuals and businesses in the U.S. Virgin Islands affected Tropical Storm Ernesto that began on August 13, 2024 now have until February 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on September 10, 2024 tax relief for individuals and businesses in Connecticut and New York affected by severe storms and flooding from torrential rainfalls that began on August 18, 2024 now have until February 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on September 13, 2024 tax relief for individuals and businesses in Louisiana affected by Tropical Storm Francine that began on September 10, 2024 now have until February 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on September 18, 2024 tax relief for individuals and businesses in Pennsylvania affected by Tropical Storm Debby now have until February 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on October 1, 2024 tax relief for individuals and businesses in parts of Illinois affected by severe storms, tornadoes, straight-line winds and flooding that began on July 13, 2024 now have until February 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on October 1, 2024 tax relief for individuals and businesses affected by Hurricane Helene, including the entire states of Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia now have until May 1, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on October 3, 2024 tax relief for individuals and businesses affected by wildfires that began on June 22, 2024 to the Confederated Tribes and Bands of the Yakama Nation in Washington state now have February 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on October 11, 2024 tax relief for individuals and businesses affected by wildfires that began on July 10, 2024 to the San Carlos Apache Tribe in the State of Arizona now have February 3, 2025, to file various federal individual and business tax returns and make tax payments.

The IRS announced on October 11, 2024 tax relief for individuals and businesses affected by Hurricane Milton, including the entire states of Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia now have until May 1, 2025, to file various federal individual and business tax returns and make tax payments.

IRS Tax Relief Details

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance.

For Alaska – Individuals and households that reside or have a business in the Juneau area.

For Arizona – Individuals and households that reside or have a business in the San Carlos Apache Tribe.

For Alabama, Georgia, North Carolina and South Carolina – Individuals and households that reside or have a business in the state.

For Florida – Individuals and households that reside or have a business in the state.

For Tennessee – Individuals and households that reside or have a business in the following 8 counties: Carter, Cocke, Greene, Hamblen, Hawkins, Johnson, Unicoi and Washington counties.

For Virginia – Individuals and households that reside or have a business in the following 6 counties:  Grayson, Smyth, Tazewell, Washington, Wise and Wythe counties; and the City of Galax.

For Washington State – Individuals and households that reside or have a business in Confederated Tribes and Bands of the Yakama Nation.

For Illinois – Individuals and households that reside or have a business in Cook, Fulton, Henry, St. Clair, Washington, Will and Winnebago counties

For Pennsylvania – Individuals and households that reside or have a business in Lycoming, Potter, Tioga and Union counties.

For Louisiana – Individuals and households that reside or have a business in the entire state.

For Connecticut – Individuals and households that reside or have a business in Fairfield, Litchfield, and New Haven counties.

For New York – Individuals and households that reside or have a business in Suffolk County.

For the U.S. Virgin Islands – Individuals and households that reside or have a business in any of the U.S. Virgin Islands’ four islands.

For South Dakota – Individuals and households that reside or have a business in Aurora, Bennett, Bon Homme, Brule, Buffalo, Charles Mix, Clay, Davison, Douglas, Gregory, Hand, Hanson, Hutchinson, Jackson, Lake, Lincoln, McCook, Miner, Minnehaha, Moody, Sanborn, Tripp, Turner, Union and Yankton counties

For Puerto Rico – Individuals and households that reside or have a business in any of Puerto Rico’s 78 municipalities.

For Minnesota – Individuals and households that reside or have a business in Blue Earth, Carver, Cass, Cook, Cottonwood, Faribault, Fillmore, Freeborn, Goodhue, Itasca, Jackson, Lake, Le Sueur, Mower, Murray, Nicollet, Nobles, Pipestone, Rice, Rock, St. Louis, Steele, Wabasha, Waseca and Watonwan counties.

For North Carolina – Individuals and businesses and the following 66 counties: Alamance, Anson, Beaufort, Bertie, Bladen , Brunswick, Camden, Carteret, Caswell, Chatham, Chowan, Columbus, Craven, Cumberland, Currituck, Dare, Davie, Davidson, Duplin, Durham, Edgecombe, Forsyth, Franklin, Gates, Granville, Greene, Guilford, Halifax, Harnett, Hertford, Hoke, Hyde, Johnston, Jones, Lee, Lenoir, Martin, Montgomery, Moore, Nash, New Hanover, Northampton, Onslow, Orange, Pamlico, Pasquotank, Pender, Perquimans, Person, Pitt, Randolph, Richmond, Robeson, Rockingham, Sampson, Scotland, Stokes, Surry, Tyrrell, Vance, Wake, Warren, Washington, Wayne, Wilson and Yadkin.

For South Carolina – Individuals and businesses in all 46 counties.

For Georgia – Individuals and businesses in the following 55 counties: Appling, Atkinson, Bacon, Ben Hill, Berrien, Brantley, Brooks, Bryan, Bulloch, Burke, Camden, Candler, Charlton, Chatham, Clinch, Coffee, Colquitt, Cook, Crisp, Decatur, Dodge, Echols, Effingham, Emanuel, Evans, Glynn, Grady, Irwin, Jeff Davis, Jefferson, Jenkins, Johnson, Lanier, Laurens, Liberty, Long, Lowndes, McIntosh, Mitchell, Montgomery, Pierce, Richmond, Screven, Tattnall, Telfair, Thomas, Tift, Toombs, Treutlen, Turner, Ware, Wayne, Wheeler, Wilcox and Worth.

For Vermont – Individuals and businesses in all 14 counties.

For Kentucky – Currently, relief is available to affected taxpayers who live or have a business in Boyd, Carter, Fayette, Greenup, Henry, Jefferson, Jessamine, Mason, Oldham, Union and Whitley counties.

For West Virginia – Currently, relief is available to affected taxpayers who live or have a business in Boone, Brooke, Cabell, Fayette, Hancock, Kanawha, Lincoln, Marshall, Nicholas, Ohio, Preston, Putnam, Tyler, Wayne and Wetzel counties.

The current list of eligible localities is always available on the disaster relief page on IRS.gov.  The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area.

Tax Planning Tip

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2024 return normally filed next year), or the return for the current year (2023).

Be sure to write the FEMA declaration number on any return claiming a loss.  That number being: “4782-DR“ for Kentucky or “4783-DR” for West Virginia or “3605-EM” for Florida or “3606-EM” for South Carolina or “3607-EM” for Georgia or “3608-EM” for North Carolina or “3609-EM” for Vermont or “4797-DR” for Minnesota or “3610-EM” for Puerto Rico or “4807-DR” for South Dakota or “3611-EM” for the U.S. Virgin Islands or “3612-EM” for Connecticut or “3613-EM” for New York or “3614-EM” for Louisiana or “4815-DR” for Pennsylvania or “4819-DR” for Illinois or “3615-EM” for Hurricane Helene victims or “4823-DR” for Washington State or “3622-EM” for Hurricane Milton victims or “4833-DR” for Arizona or “4836-DR” for Alaska.

Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents.

Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow.

Importance To Preserve Records

Keep in mind that the IRS has up to three years to select a tax return for audit. The FTB has up to four years to select a tax return for audit. In some cases this period is extended to six years. When a taxpayer is selected for audit, the taxpayer has the burden of proof to show that expenses claimed are properly deductible. Having the evidence handy and organized makes meeting this burden of proof much easier.

Essential Records to Have for a Tax Audit

If you are getting ready for a tax audit, one of the most important things to do is gather and organize your tax records and receipts. There’s a good chance that you have a large amount of documents and receipts in your possession. No matter how organized you are, it can be a daunting task to collect the right pieces and make sure that you have them organized and handy for the audit conference.

We have seen many tax audits that hinge on whether or not the taxpayer can provide proper documentation for their previous tax filings. A tax lawyer in Orange County or elsewhere can make sure that the documentation is complete and proper.  By submitting this to your tax attorney in advance of the audit, your tax attorney can review your documentation and determine if there are any gaps that need to be addressed before starting the dialogue with the IRS agent.

So what are the most essential tax records to have ahead of your audit? Here are a few must-have items:

  • Any W-2 forms from the previous year. This can include documents from full-time and part-time work, large casino and lottery winnings and more.
  • Form 1098 records from your bank or lender on mortgage interest paid from the previous year.
  • Records of any miscellaneous money you earned and reported to the IRS including work done as an independent contractor or freelancer, interest from savings accounts and stock dividends.
  • Written letters from charities confirming your monetary donations from the previous year.
  • Receipts for business expenses you claimed.
  • Mileage Logs for business use of vehicle.
  • Entertainment and Travel Logs for business

Tips On Reconstructing Records

Reconstructing records after a disaster is important for several reasons including insurance reimbursement and taxes. Most importantly, records can help people prove their disaster-related losses. More accurately estimated losses can help people get more recovery assistance like loans or grants.

Whether it’s personal or business property that has been lost or destroyed, here are some steps that can help people reconstruct important records.

Tax records

Get free tax return transcripts immediately using the Get Transcript on IRS.gov or through the IRS2Go app.  Tax return transcripts show line-by-line the entries made on your Federal income tax returns.  The most three recent tax years are available.

Financial statements

People can gather past statements from their credit card company or bank. These records may be available online. People can also contact their bank to get paper copies of these statements.

Property records

  • To get documents related to property, homeowners can contact the title company, escrow company or bank that handled the purchase of their home or other property.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • When no other records are available, people should check the county assessor’s office for old records that might address the value of the property.
  • Car owners can research the current fair-market value for most vehicles. Resources are available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.

Develop And Implement Your Backup Plan

Do not wait for the next disaster to come for then it may be too late to retrieve your important records for a tax audit or for that matter any legal or business matter. And if you do get selected for audit and do not have all the records to support what was claimed on your tax returns, you should contact an experienced tax attorney who can argue the application of your facts and circumstances to pursue the least possible changes in an audit.

The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

How Can Estate Plan Documents Be Modified For An Incapacitated Spouse?

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How Can Estate Plan Documents Be Modified For An Incapacitated Spouse?

Bush Estate Tax Cuts expire December 31, 2025 – Here is what you need to know.

In 2001 and 2003 under President Bush temporary tax cuts were enacted through through two pieces of legislation: the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). Both measures were renewed in 2012 and 2017. Some of these tax cuts that have been enacted over the past 20 plus years are set to expire December 31, 2025, such as the Estate and Gift provision from the Tax Cuts and Jobs Act (TCJA) of 2017.

Estate and gift taxes – current law

The estate and gift provision in the TCJA of 2017 had a major impact on many people who may have a taxable estate in the future. The TCJA doubled the federal lifetime gift tax exemption amount, from $5.49 million in 2017 to $11.18 million in 2018 per individual. Under the TCJA, this higher exemption amount was then indexed for inflation in each subsequent each year.

In 2024, each individual has a combined federal estate and gift tax exemption of $13,610,000 (less any prior gifts made during life). This means that for federal tax purposes, in 2024 an individual can make lifetime gifts totaling up to $13,610,000 to anyone or transfer at death up to $13,610,000 (less any gifts made during life) to anyone without triggering the imposition of the federal estate and/or gift taxes. Married couples have a combined exemption, allowing them to make gifts during their lifetimes totaling $27,220,000. Any gifts during life or transfers at death with a value in excess of the available exemption amount will be subject to a federal estate and/or gift tax at a rate of 40%.

Estate and gift taxes – consequence of expiration of current law

After December 31, 2025 exemptions from estate and gift taxes will revert to pre-TCJA levels of around $5 million, adjusted for inflation. The lifetime gift and estate tax exemption, which was more than doubled by the 2017 tax reform bill, will go up with inflation in January 2025, then go down to near-2017 levels in January 2026 unless and until Congress steps in. If no action is taken by Congress by the end of 2025, then under the current law, on January 1, 2026, the federal lifetime exemption amount will be reduced to approximately one-half of the current value. Based on the rate of inflation, the exemption as of January 1, 2026 will be approximately $7 million per person.

We recommend that you review your assets, income and living expenses, then project those numbers out for your expected lifetime. Any excess assets remaining after your projected lifetime expenses is what you should consider to include in a revised estate plan that will not be burdened by a decrease in the estate and gift tax exemption.  Not taking full advantage of the gift tax exemption before it drops in two years could result in a much smaller estate for your heirs.

Leverage 2024 gifting limits

Based on the 2024 gifting limits a direct gift of cash, securities or other assets with a value up to the lifetime exemption is a simple was to gift money or part of inheritance. Furthermore, you can use the annual gift tax exclusion — $18,000 in 2024, $36,000 for couples — to make yearly gifts to as many people as you like. For example, you can make a payment directly to a school to cover a child’s or grandchild’s tuition, or to a medical provider for health expenses, without incurring taxes. Neither “free” nor annual exclusion gifts count toward your lifetime gifting limit, and these rules are not slated to change in 2026.

Family Limited Partnerships or LLC’s

For estates that have substantial real estate holdings, it is beneficial to have such real estate owned by a limited liability company (“LLC”) and then all of the LLC interests owned by a Family Limited Partnership (“FLP”).  As the owner of an FLP, you can then make gifts of limited partner interests in the FLP to family members at gift tax values that are discounted for lack of marketability and minority interests.  These discounts essentially provide a great mechanism by which you can leverage your gift tax exemption to reduce your taxable estate.  As the general partner of the FLP, you still control the management of the LLC’s.

Irrevocable Trusts

Rather than gifting cash or assets, alternatively, an irrevocable trust permits withdrawals based upon a schedule and conditions that you determine. This allows you to maintain a level of control over how and when the beneficiaries will receive distributions. When choosing which assets to gift or place in a trust it is important to look at what assets or gifts you expect will keep growing. When you gift assets using your lifetime gift tax exemption, the assets are transferred at today’s value, and there’s no tax to the beneficiaries. You can gift these assets using your lifetime gift tax exemption, allow heirs to have the current benefit and the gift or asset may experience appreciation in future years. It is important to have a skilled trusts and estates attorney draft documents, such as trust, so there are no issues with your estate.

How Can You Modify Estate Plan Documents For An Incapacitated Spouse?

If you have an incapacitated spouse who has not done any estate planning including not having executed a will or a revocable living trust or his or her documents are outdated, getting his or her estate in order is extremely important. In California, there is a special law available in regard to setting up an estate plan for an incapacitated spouse. Under California Probate Code §3100, a petition can be filed with the Courts to authorize a particular transaction involving spouse or domestic partner who lacks legal capacity, of unsound mind and unable to sign a power of attorney and has no conservator. This proceeding may be brought to authorize a particular transaction when both spouses or domestic partners have conservators, as well as when one has capacity and the other does not, or does not have a conservator. For example, this probate tool can be used if a husband and wife have all their assets as community property and they want to make gifts to their children and grandchildren to reduce their taxable estates, but one spouse lacks capacity (i.e. dementia) to make financial or testamentary decisions.

The effectiveness of a California Probate Code §3100 petition depends on the character of the subject assets being community property.  If a proposed transaction involves mixed community and separate property, then for good cause the court may still include that separate property in the transaction. If some of the incapacitated spouse’s assets are exclusively his or her own separate property alone — such as, bank accounts from before their marriage or real property assets acquired as an inheritance during their marriage — then this approach probably will not work, unless the court is willing to be flexible and to see the bigger estate picture which is mainly community property assets.

With any separate property assets, commencing a conservatorship court proceeding may be necessary.  A conservatorship must be opened in order to then make a substituted judgment petition asking the court to authorize estate planning. The California Probate Code §3100 petition and the court conservatorship petition are court proceedings that each require the following:  (1) a determination of incapacity with respect to spouse with diminished capacity; (2) notification to the relatives within the 2nd degree of the spouse with diminished capacity regarding the hearing; (3) representation of the interests of the spouse with diminished capacity; and (4) service of a citation to appear at the court hearing on the spouse with diminished capacity.

Under California Probate Code §3100, the community property will be transferred to the well spouse as sole and separate property and then with the complete ownership of the assets, the well spouse can then engage in estate planning for the couple’s best interests.

What Should You Do?

When it comes to being ready for changes in the tax laws – two years may seem like a lot of time to adjust your estate plans, however, unless you’re simply making large cash gifts, developing a new plan will involve detailed conversations and analysis. Whether your existing estate plan was created recently or a while ago having a conversation with your estate attorney now can help you make better-educated decisions about your family’s future. Furthermore, drafting of documents and trusts can be done by a professional tax and estate attorney who can guide you through the complexities, nuances, and changes in estate and gift tax law.

That is why it is worth reaching out to a Trusts and Estates and/or Probate Attorney such as the at the Law Offices Of Jeffrey B. Kahn, P.C. We are always thinking of ways that our clients can save on taxes, trusts and estates planning, and probate matters. Whether or not a will exists, the expertise of a skilled lawyer at the Law Offices Of Jeffrey B. Kahn, P.C. is needed to help protect the interests of the parties involved. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax and probate matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.