RMG

The IRS recently issued new guidance clarifying how the permanent 100% bonus depreciation deduction, enacted as part of the One Big Beautiful Bill Act (OBBBA) passed in January 2025, will work going forward. The latest IRS update, Notice 2026-11, explains how these rules apply beginning with the 2025 tax year. 

For businesses across construction, real estate, hospitality, manufacturing, and other capital-intensive industries, understanding these rules is about more than compliance. It is an opportunity for strategic tax planning that can meaningfully impact cash flow and investment capacity. At RMG, we are working closely with clients to help them take full advantage of this opportunity while ensuring proper documentation and compliance.

Before diving into the latest guidance, it is helpful to revisit how bonus depreciation works.

Refresher: what is bonus depreciation?

Bonus depreciation allows businesses to immediately deduct the cost of qualifying capital assets in the year they are placed in service, rather than depreciating those costs over time. The provision has existed in various forms for years and was most recently expanded under the Tax Cuts and Jobs Act (TCJA) in 2017.

Under the TCJA, 100% bonus depreciation applied to qualifying property placed in service through 2022, followed by a scheduled phase-out beginning in 2023. The OBBBA reversed that phase-out and made 100% bonus depreciation permanent for qualifying property placed in service after January 19, 2025.

While Section 179 also allows immediate expensing of certain assets, it is subject to income limitations and deduction caps. Bonus depreciation, by contrast, has no income limitation and can be used to create or increase net operating losses, making it a particularly effective planning tool when used strategically.

IRS confirms which property qualifies

The IRS confirmed that the rules are largely the same as in previous years. To qualify, property generally must:

• Be tangible and depreciable under the Modified Accelerated Cost Recovery System (MACRS)
• Have a recovery period of 20 years or less (most standard business property fits this)
• Be placed in service after January 19, 2025
• Be purchased new or used (with some limitations)
• Qualified Improvement Property (QIP), generally consisting of interior improvements made to nonresidential buildings after the property is placed in service
• Certain business vehicles with a gross vehicle weight rating (GVWR) above 1,000 pounds, subject to specific use and substantiation requirements
• Off-the-shelf computer software, meaning commercially available software that is not custom-developed and is subject to a nonexclusive license

There are a few new categories of property now eligible under the updated law, including qualified sound recordings, which could be relevant for media, entertainment, and advertising businesses.

Real estate investors: Maximizing bonus depreciation through cost segregation

While 100% bonus depreciation applies to many types of business assets, real estate investors have a particularly powerful opportunity to accelerate deductions by combining the permanent rules with cost segregation studies.

Although bonus depreciation does not apply to the building structure itself, which is depreciated over 27.5 years for residential property and 39 years for commercial property, a significant portion of a real estate purchase typically 20% to 30% consists of components that qualify for accelerated depreciation.

“We’re seeing sophisticated investors use this strategy to offset gains from other activities,” notes Ilya Brodetskiy, Tax Partner at RMG. “When taxpayers qualify as real estate professionals and materially participate in their rental activities, cost segregation and accelerated bonus depreciation can generate losses that may offset other income reported on the individual’s Form 1040, including wages, bonuses, or business income. For example, a real estate professional having a strong year might acquire a rental property, complete a cost segregation study, and use bonus depreciation to reduce overall taxable income, all while maintaining healthy operational cash flow. It’s a powerful planning tool for growing businesses that need to manage current tax exposure while preserving capital for reinvestment.”

To qualify as a real estate professional, a taxpayer must spend more than half of their working time and at least 750 hours per year materially participating in real property trades or businesses such as development, construction, leasing, or property management. Material participation generally requires the taxpayer to be involved in the activity on a regular, continuous, and substantial basis, such as participating more than 500 hours during the year, performing substantially all of the work, or meeting one of the other IRS material participation tests. When these standards are met, rental real estate losses may be treated as non-passive and potentially used to offset other income on the individual return. RMG works closely with clients to evaluate their facts and circumstances, track qualifying activities, and determine whether these standards are met.

What qualifies in rental properties?

Through a cost segregation study, an engineering-based analysis identifies and reclassifies building components into shorter recovery periods:

• 5-year and 7-year property: Appliances, carpeting, furniture (for short-term rentals), window treatments, and certain fixtures
• 15-year property: Land improvements including parking lots, driveways, fencing, landscaping, and irrigation systems
• Qualified Improvement Property (QIP): Certain interior improvements to commercial buildings

These components all qualify for 100% first-year bonus depreciation under the permanent rules.

The financial impact

Consider a real estate investor who purchases a $5 million commercial property. Under standard depreciation rules, the building, excluding land value, would be written off over 39 years.

A cost segregation study, however, might identify $2 million in components qualifying for accelerated depreciation. Under the permanent 100% bonus depreciation rules, the investor could potentially deduct that full $2 million in the first year.

For a high-net-worth investor in the top federal tax bracket of 37%, that deduction could result in approximately $816,000 in first-year federal tax savings. This capital can be immediately redeployed into additional investments or business growth.

For construction companies that own their facilities or developers managing multiple projects, this can translate into immediate cash flow to fund equipment purchases, take on additional work, or strengthen working capital. It can also be applied retroactively to properties previously purchased, allowing owners to “catch up” on missed depreciation without amending prior returns.

Creating strategic tax losses

Unlike Section 179, bonus depreciation is not limited by taxable income and can create or increase net operating losses. These losses may be carried forward to offset future income, making bonus depreciation especially valuable for long-term planning.

Just as important, the permanent reinstatement of 100% bonus depreciation removes the pressure of timing acquisitions around legislative phase-outs. Businesses and investors can now plan based on fundamentals rather than artificial deadlines.

How RMG can help

At RMG, we’ve built our practice around becoming an extension of our clients’ businesses – and nowhere is that partnership more valuable than in strategic tax planning opportunities like this. We have established relationships with qualified cost segregation service providers who specialize in conducting the detailed engineering studies required to support accelerated depreciation claims.

Our approach goes beyond simply connecting you with a cost segregation firm. We integrate this strategy into your overall financial picture:

• Strategic timing and planning: We help determine the optimal timing for cost segregation studies based on your overall tax situation, acquisition timeline, and business objectives. Should you do the study immediately upon acquisition or wait until a year when you have higher income to offset? We work through these decisions together.
• Expert coordination: We work directly with cost segregation specialists to ensure studies are properly structured and documented to withstand IRS scrutiny. Our involvement ensures the analysis aligns with your specific property characteristics and tax situation.
• Integrated tax planning: We incorporate cost segregation results into comprehensive tax strategies that consider entity structure, passive activity loss rules, state and local tax implications, and long-term portfolio objectives. This isn’t isolated planning – it’s part of your complete financial strategy.
• Proper implementation and ongoing support: We ensure the cost segregation results are correctly reflected on your tax returns, that all required elections are properly made, and that supporting documentation is maintained. If questions arise later or circumstances change, we’re here to help you navigate them.

Our clients, from contractors and developers to real estate investors and growing operating businesses, benefit from a proactive, integrated approach designed to maximize tax efficiency while maintaining compliance.

Planning ahead

Although the IRS refers to this as interim guidance, it provides a reliable framework for the current filing season and for planning ahead.

If you are considering significant equipment purchases, property acquisitions, or construction projects, now is an ideal time to discuss these plans with your tax advisor. The reinstatement of permanent 100% bonus depreciation creates meaningful opportunities for businesses across our focus industries, including construction companies investing in equipment, hospitality operators renovating locations, manufacturers upgrading production capabilities, and real estate investors acquiring properties.

At RMG, we work proactively with clients throughout the year to identify planning opportunities like this well before tax season. We help evaluate whether taking the full deduction now makes sense, coordinate it with other tax-saving strategies, and ensure accounting systems are set up to properly track and support these deductions.

The permanent nature of this benefit allows businesses to make strategic decisions without artificial urgency. At the same time, acting sooner rather than later provides greater flexibility and more options to optimize your overall tax position.

If you are planning capital investments or real estate acquisitions, we encourage you to reach out to discuss the best approach for your situation. Our team is here to help you navigate these opportunities and ensure you are capturing every legitimate tax benefit available to your business.

For most business owners, tax season arrives with a familiar sense of dread: the nagging worry that something’s been overlooked, the last-minute hunt for missing documents, the uncertainty about whether you’re leaving money on the table. But it doesn’t have to be that way. With a little preparation and the right partner, you can approach tax season with confidence—and maybe even find opportunities you didn’t know existed.

Here’s what you need to know to stay ahead this tax season.

Start with the basics: gathering your documentation

Tax season is mostly about documentation. If you can gather what’s needed early, the rest of the process tends to fall into place.

You’ll need your Social Security number, address, and details for any dependents. Collect documents for all income sources: W-2s from employers, 1099s for contract work and investment income, K-1s from partnerships or S corporations, and brokerage statements showing investment activity.

For above-the-line deductions, gather IRA and HSA contribution statements and any student loan interest documentation. If you’re itemizing deductions, compile your mortgage interest statement, property tax payments, state and local tax payments, charitable donation receipts, and medical expense records.

Don’t forget health insurance documentation if you’re self-employed or purchased coverage through the marketplace. Collect records for childcare expenses, education costs, and any expenditures on energy-efficient home improvements.

Finally, note any major life events that occurred during the year: births, deaths, marriage or divorce, sale of a home, sale of a business, or significant changes in income. These events often have tax consequences that require specific attention.

Be patient with late or corrected forms

Once you have your paperwork together, the next step is knowing when to file. It’s tempting to file early and check taxes off your list, but sometimes that can create more problems than it solves.

This is especially true if you have investments or receive K-1s from partnerships. Some custodians don’t issue 1099s until mid-February or later. And even then, corrected forms may show up weeks after the originals.

While early organization is essential, it’s wise to wait until everything is in before filing. That way, you avoid the hassle and expense of filing an amended return due to late or revised documents. If you’re not sure whether to expect additional forms, reach out to us—we can help you determine whether you have everything you need.

Don’t miss these overlooked deductions and credits

Tax season is when easy wins are often missed. Let’s make sure you’re capturing everything available to you.

If you’re self-employed and paying for your own health insurance, those premiums are likely deductible. Health Savings Account contributions are another overlooked tool for reducing taxable income. Childcare expenses, educational costs, and charitable donations can all provide tax relief.

If you made retirement contributions to a SEP IRA, solo 401(k), or traditional IRA, those may be deductible depending on your income and the type of plan. Even if you haven’t claimed these deductions in past years, it’s worth revisiting them now. Tax laws change, and so does life.

We recommend reviewing your situation with us before finalizing your return. We’ve seen countless situations where clients missed deductions simply because they didn’t know they qualified or didn’t have the right documentation prepared.

New deductions under the One Big Beautiful Bill Act

The One Big Beautiful Bill Act, signed into law on July 4, 2025, introduced several new deductions that could meaningfully reduce your taxable income this year. Here’s what you need to know.

Tip income. Workers in tipped occupations may deduct qualified tips from federal taxable income, up to $25,000 for married couples filing jointly, with lower limits for other filers. This deduction phases out for taxpayers with modified adjusted gross income above $150,000 (or $300,000 for joint filers). Strict eligibility criteria apply, so verify you meet the requirements before claiming it.

Overtime pay. The premium portion of overtime compensation—such as the “half” in time-and-a-half—may now be deductible, up to $12,500 annually ($25,000 for joint filers). This applies to overtime required under the Fair Labor Standards Act and is subject to the same income phase-outs as the tip deduction.

Car loan interest. Individuals may now deduct up to $10,000 in interest paid on loans used to purchase a new vehicle for personal use. The vehicle must be new, and the deduction phases out for taxpayers with modified adjusted gross income above $100,000 ($200,000 for joint filers). Lease payments do not qualify.

Additional deduction for seniors. Individuals age 65 and older may claim an additional $6,000 deduction on top of the standard deduction ($12,000 for married couples where both spouses qualify). This begins to phase out for taxpayers with modified adjusted gross income above $75,000, or $150,000 for joint filers.

These provisions have detailed requirements, income limits, and documentation standards. Working with us ensures you’re both complying with the latest rules and making the most of every available deduction.

If you run a business, don’t overlook these tasks

If you own a business, there are additional steps to keep in mind—and getting them right can save significant time and money.

File your business return first if you’re an S corporation or partnership. Your business return typically needs to be filed before your personal return because the K-1 that reports your share of the company’s income, deductions, and credits flows through to your individual tax return. Delays in filing your business return can delay the rest of your tax process.

Make sure your books are up to date, or that your bookkeeper has everything needed to close out the year. That means reconciling bank accounts, categorizing expenses, and flagging any unusual income or reimbursements. If you’re working with our outsourced accounting team, we’ll handle this for you—but if you’re managing your own books, now is the time to make sure everything is current.

If you paid independent contractors more than $600 last year, you’re likely required to send them a 1099-NEC by February 2nd. Missing that deadline can result in penalties, so confirm that those forms have been issued.

It’s also a good time to review your mileage logs, home office expenses, and any business-related travel or meals you may have paid for out of pocket. Better records mean more deductions—and more confidence if your return is ever audited.

For our construction clients, make sure your work-in-progress schedules are accurate and your job costing is up to date. For restaurant and hospitality operators, verify that your POS systems properly integrated with your accounting software and that tip reporting is complete. These industry-specific details matter when it comes to accurate tax reporting.

Understand your deadlines—and what an extension really means

As you organize your documents, keep an eye on key deadlines. For most taxpayers, the filing deadline this year is April 15, 2026. Some states may have different dates, especially if disaster declarations are involved.

If you’re not ready to file by then, you can request an extension—but remember: an extension gives you more time to file, not more time to pay. If you expect to owe taxes and don’t make a payment by April 15, interest and penalties can still apply.

That’s why we often recommend sending in an estimated payment with your extension rather than underestimating and coming up short. We can help you calculate what you’re likely to owe so you can avoid surprises later.

Why professional guidance matters

Even seemingly simple returns can involve layers of complexity that are easy to miss. If you’ve experienced a major life event—a marriage, divorce, inheritance, or the sale of a business—those changes often have tax consequences that aren’t always obvious upfront.

Equity compensation like stock options and RSUs, cryptocurrency transactions, and passive income from K-1s are all examples where thorough documentation and nuanced reporting are critical. Multi-state income and prior IRS notices also call for a closer look.

Tax software can’t always spot issues—or opportunities—that an experienced CPA will catch. And by the time errors show up, they can be expensive to fix.

At RMG, we don’t just prepare tax returns—we become an extension of your business, helping you navigate regulatory changes, identify planning opportunities, and ensure you’re positioned for success. We work with you year-round, not just during tax season, so we know your business and can provide guidance that’s specific to your situation.

Our construction clients benefit from our deep understanding of percentage-of-completion accounting, job costing, and bonding relationships. Our hospitality clients appreciate that we understand POS integration, tip reporting, and multi-location operations. Our waste management, manufacturing, real estate, and transportation clients know we speak their language and understand their unique challenges.

Bringing us in early helps ensure you’re complying with the latest rules, optimizing your outcome, and avoiding unpleasant surprises down the road.

A little preparation goes a long way

The more organized you are now, the less time you’ll spend hunting down paperwork or worrying about what you might have missed. Filing on time and accurately reduces your chances of missing deductions, triggering penalties, or rushing decisions that can’t be undone later.

If you’re not sure whether your current approach is still serving you well, this is a great time to ask. We’re here to help—not just with tax preparation, but with proactive planning that positions you for growth and minimizes your tax burden.

For personalized guidance tailored to your business and industry, contact RMG. We’re happy to help you through this tax season and beyond.

For most people, tax season brings a quiet panic about what they might be forgetting and a last-minute rush to pull everything together before the deadline. But it doesn’t have to be that way. With just a little preparation, you can avoid surprises, minimize your tax bill, and make the entire process smoother for both you and your advisor.

Here are a few simple ways to stay ahead this year.

Start with the basics: what documents you’ll need

First things first: tax season is mostly about documentation. If you can gather what’s needed early, the rest of the process tends to fall into place.

You’ll need your Social Security number, address, and details for any dependents. Collect documents for all income, which include W-2s, 1099s, K-1s, and brokerage statements. For above-the-line deductions, collect IRA and HSA contribution statements and any student loan interest. For itemized deductions, gather your mortgage statement, property tax payments, state and local tax payments, charitable donations, and all medical expenses. Don’t forget to compile health insurance details if you’re self-employed or bought coverage through the marketplace. Collect childcare expenses, education expenses, and any expenditures on energy efficiency.  Finally, note any major events that may have occurred, such as a birth, death, change in marital status, sale of a home, or sale of a business. 

Be patient with late or corrected forms

Once you have your paperwork together, the next step is knowing when to use it. It’s tempting to file early and check taxes off your list, but sometimes that can cause more harm than good. This is especially true if you have investments or receive K-1s from partnerships. Some custodians don’t have to issue 1099s until mid-February or later. And even then, corrected forms may show up weeks later. 

While early organization is key, it’s wise to wait until everything is in before filing. That way, you avoid the hassle of filing an amended return due to late or revised documents. 

Don’t miss these overlooked deductions and credits

This is the time of year when easy wins are often missed.

If you’re self-employed and paying for your own health insurance, those premiums are likely deductible. Health Savings Account contributions are another overlooked tool for reducing taxable income. Childcare expenses, educational costs, and charitable donations can all provide added tax relief.

If you made retirement contributions to a SEP IRA, solo 401(k), or traditional IRA, those may be deductible as well, depending on your income and the type of plan. Even if you haven’t claimed these deductions in past years, it’s worth revisiting them now. Tax laws change, and so does life.

New deductions under the One Big Beautiful Bill Act

The One Big Beautiful Bill Act, signed into law on July 4, 2025, introduced several new deductions that could meaningfully reduce your taxable income this year. Here’s what to know.

Tip income. Workers in tipped occupations may deduct qualified tips from federal taxable income, up to $25,000 for married couples filing jointly, with lower limits for other filers. This deduction phases out for taxpayers with modified adjusted gross income above $150,000 (or $300,000 for joint filers). Strict eligibility criteria apply, so verify you meet the requirements before claiming it.

Overtime pay. The premium portion of overtime compensation—such as the “half” in time-and-a-half—may now be deductible, up to $12,500 annually ($25,000 for joint filers). This applies to overtime required under the Fair Labor Standards Act and is subject to the same income phase-outs as the tip deduction.

Car loan interest. Individuals may now deduct up to $10,000 in interest paid on loans used to purchase a new vehicle for personal use. The vehicle must be new, and the deduction phases out for taxpayers with modified adjusted gross income above $100,000 ($200,000 for joint filers). Lease payments do not qualify.

Additional deduction for seniors. Individuals age 65 and older may claim an additional $6,000 deduction on top of the standard deduction ($12,000 for married couples where both spouses qualify). This begins to phase out for taxpayers with modified adjusted gross income above $75,000, or $150,000 for joint filers.

These provisions have detailed requirements, income limits, and documentation standards. Working with a qualified tax advisor is the best way to ensure you’re both complying with the latest rules and making the most of every available deduction.

If you run a business, don’t overlook these tasks

If you own a business, there are a few extra steps to keep in mind.

File your business return first if you’re an S corporation or partnership. Your business return typically needs to be filed before your personal return, because the K-1 that reports your share of the company’s income, deductions, and credits flows through to your individual tax return. Delays in filing your business return can delay the rest of your tax process.

Make sure your books are up to date, or that your bookkeeper has everything they need to close out the year. That means reconciling bank accounts, categorizing expenses, and flagging any unusual income or reimbursements.

If you paid independent contractors more than $600 last year, you’re likely required to send them a 1099-NEC by February 2nd. Missing that deadline can result in penalties, so confirm that those forms have been issued.

It’s also a good time to review your mileage logs, home office expenses, and any business-related travel or meals you may have paid for out of pocket. Better records mean more deductions—and more confidence if your return is ever audited.

Understand your deadlines – and what an extension really means

As you organize your documents, keep an eye on key deadlines. For most taxpayers, the filing deadline this year is April 15, 2026. Some states may have different dates, especially if disaster declarations are involved.

If you’re not ready to file by then, you can request an extension—but remember: an extension gives you more time to file, not more time to pay. If you expect to owe taxes and don’t make a payment by April 15, interest and penalties can still apply. That’s why it’s often better to send in an estimated payment with your extension rather than underestimate and come up short.

Why professional guidance matters

Even seemingly simple returns can involve layers of complexity. If you’ve experienced a major life event—a marriage, divorce, inheritance, or the sale of a business—those changes often have tax consequences that aren’t always obvious upfront.

Equity compensation like stock options and RSUs, cryptocurrency transactions, and passive income from K-1s are all examples where thorough documentation and nuanced reporting are critical. Multi-state income and prior IRS notices also call for a closer look.

Tax software can’t always spot issues—or opportunities—that an experienced CPA will catch. And by the time errors show up, they can be expensive to fix. Bringing in a professional early helps ensure you’re complying with the latest rules, optimizing your outcome, and avoiding unpleasant surprises down the road.

A little preparation goes a long way

The more organized you are now, the less time you’ll spend hunting down paperwork or worrying about what you might have missed. Filing on time and accurately reduces your chances of missing deductions, triggering penalties, or rushing decisions that can’t be undone later.

If you’re not sure whether your current process is still serving you well, this is a great time to ask. A little help now can prevent a lot of cleanup later.

For more personalized guidance, please contact our office. We’re happy to help through this tax season and beyond.

If you have young children or employ people who do, there’s a new savings tool coming your way. The IRS recently released guidance (IR-2025-117 and Notice 2025-68, both issued December 2, 2025) that clarifies how Trump Accounts will work when they launch in 2026. These are tax-advantaged retirement accounts specifically designed for children under 18. While there’s still a lot to be determined, here’s what we know so far and what it might mean for your family or your business.

What is a Trump Account?

A Trump Account is a new type of tax-advantaged individual retirement account (IRA) designed specifically for children under age 18, created by the One Big Beautiful Bill Act (OBBBA) and now governed by Section 530A of the Internal Revenue Code.

At its core, a Trump Account is intended to help families begin long-term investing for a child well before adulthood. Unlike traditional or Roth IRAs, Trump Accounts do not require the child to have earned income. Instead, parents and other permitted contributors may fund the account on the child’s behalf.

The IRS has confirmed that contributions cannot begin until July 4, 2026, and many administrative details are still being finalized. This is important to understand: while the framework is now clear, some operational questions remain unanswered.

Who is eligible?

A Trump Account may be established for an individual with a social security number who has not turned 18 before the end of the calendar year in which the election to open the account is made. The election is expected to be made by a parent, legal guardian, adult sibling, or grandparent using Form 4547, which the IRS has released in draft form but has not yet finalized.

Although the IRS has not yet published full custodial rules, Trump Accounts are expected to operate similarly to custodial IRAs, with an adult acting as trustee or custodian until the child is legally permitted to control the account.

How do Trump Accounts work?

Contributions

Under current guidance, total contributions to a Trump Account are generally capped at $5,000 per year, aggregated across all sources. This limit applies regardless of whether contributions come from parents, relatives, employers, or other eligible contributors. Exceptions to the $5,000 cap include the $1,000 pilot program contribution (discussed below) and qualified general contributions from governments or charities, such as the recent $6.25 billion pledge from Michael and Susan Dell. Beginning after 2027, this annual limit will be indexed for inflation.

For business owners, there’s an important employer component: employers may contribute up to $2,500 per year to a Trump Account for an employee’s child through an employer Trump Account contribution program. These contributions are excluded from the employee’s taxable income, but they do count toward the $5,000 annual limit. Employers can also offer contributions to a dependent’s Trump Account through a salary reduction arrangement under a Section 125 cafeteria plan, which would allow employees to redirect salary on a pre-tax basis into the account.

If you’re a business owner considering whether to offer Trump Account contributions as an employee benefit, this is something we can help you evaluate. The tax advantages for both employer and employee may be attractive, but implementation requires careful planning around payroll systems and compliance.

Certain governmental entities and charitable organizations may also make contributions to Trump Accounts for a qualified group of beneficiaries, such as children in foster care or other defined populations.

Investments

Funds held in a Trump Account must be invested in broad-based U.S. equity index funds, such as mutual funds or exchange-traded funds that track the S&P 500 or another index primarily composed of American companies. Individual stocks, cryptocurrencies, and alternative investments are not permitted under current rules.

This is a significant restriction compared to other retirement accounts and limits the investment flexibility families might want for long-term growth strategies.

Withdrawals and tax treatment

Trump Accounts are subject to strict withdrawal limitations. No distributions may be taken before January 1 of the year in which the child turns 18, except for limited circumstances that have not yet been fully defined by the IRS.

After the child reaches that threshold, the account is generally treated as a traditional IRA. Withdrawals are taxed as ordinary income, and early withdrawal penalties may apply if funds are accessed before age 59 1/2, unless a qualifying exception applies. IRA basis rules also apply, which only tax the earnings and pre-tax contributions portion of withdrawals.

This tax treatment is critical to understand: unlike a Roth IRA where qualified distributions are tax-free, Trump Account withdrawals will create taxable income. This may be fine for long-term retirement planning, but it’s a disadvantage compared to Roth accounts if the child will need funds earlier in adulthood.

$1,000 pilot program contribution

Separate from regular contributions, the federal government will make a one-time $1,000 pilot contribution to certain Trump Accounts. This feature has received much attention, but it applies only to a limited group of children.

To qualify, the child must be:

• A U.S. citizen, and
• Born between January 1, 2025, and December 31, 2028, and
• Properly enrolled through a timely Trump Account election completed by the qualifying child’s parent or legal guardian.

This $1,000 contribution does not count toward the annual $5,000 contribution limit. However, children born outside the 2025-2028 window will not receive this federal deposit unless Congress extends or modifies the program in the future.

How Trump Accounts compare to other common options

Many parents are already familiar with Roth IRAs, custodial Roth IRAs, and 529 plans, and may wonder how Trump Accounts fit alongside or compete with those tools. Here’s how they stack up:

This comparison highlights a key point: Trump Accounts are designed for long-term retirement-style savings, not education funding or short-term flexibility. For many families, they may complement rather than replace existing college savings or other investment strategies.

What we don’t know yet

Although the December 2025 guidance answers many foundational questions, important uncertainties remain. The IRS has not yet finalized rules addressing:

• Whether funds can be rolled into Trump Accounts from 529 plans or other custodial accounts
• How Trump Accounts will be treated for state income tax purposes
• Detailed trustee and custodial requirements

The IRS has explicitly requested public comments on several of these issues, signaling that additional guidance is expected in 2026. We’re monitoring these developments closely and will keep clients informed as clarity emerges.

What should you do now?

Even though contributions cannot begin until July 2026, there are practical steps you can take now:

Familiarize yourself with the rules. Understanding how Trump Accounts work and how they differ from other savings vehicles will help you make informed decisions when the accounts become available.

Track eligibility for the $1,000 pilot program. If you have children born between 2025 and 2028, make note of the enrollment requirements to ensure you don’t miss the opportunity for the federal contribution.

Evaluate whether Trump Accounts fit your planning strategy. This requires looking at your overall financial picture: college funding needs, retirement planning, existing savings vehicles, and family circumstances. We can help you think through how Trump Accounts might complement your existing strategies or whether other approaches make more sense for your situation.

For business owners: Consider the employee benefit implications. If you’re thinking about offering Trump Account contributions as part of your benefits package, now is the time to start planning for payroll system adjustments and understanding how the program would work administratively.

Parents who already use 529 plans or custodial Roth IRAs should be especially cautious about assuming Trump Accounts are a replacement. At least for now, they appear to serve a distinct and more restrictive purpose.

A new tool, still taking shape

Trump Accounts are still very much a work in progress. The IRS’s December 2, 2025, notice provides clarity on structure and intent, while also making clear that important questions remain unresolved.

For families trying to make sense of these accounts, the key takeaway is this: Trump Accounts are real, they are coming, and they may be useful–but the full picture will not be clear until additional IRS guidance is released.

At RMG, we’re staying on top of these developments and will continue to monitor guidance as it evolves. If you have questions about how Trump Accounts might fit into your family’s financial planning or whether offering them as an employee benefit makes sense for your business, we’re here to help you think through the implications and make informed decisions.

For high-income professionals, the list of tax-advantaged retirement strategies gets shorter every year. Income limits phase out access to Roth IRAs. Traditional IRA contributions become limited or non-deductible. And after you’ve maxed out your annual 401(k) deferrals, it’s not always clear where to save next.

That’s where the mega backdoor Roth strategy comes in. When your 401(k) plan supports it and you have the cash flow to execute it, this approach can funnel tens of thousands of additional dollars annually into a Roth environment—unlocking tax-free growth and tax-exempt withdrawals in retirement.

The challenge isn’t whether this strategy makes sense—for most high earners with access, it does. The real questions are whether your plan permits it and whether you have the disposable income to fund it.

Understanding the Mechanics

Most people think about 401(k)s in terms of one number: the $24,500 employee deferral limit for 2026. That’s the maximum you can contribute from your paycheck as pre-tax or Roth deferrals.

But there’s a second, much higher limit that often goes unused: the total plan contribution limit of $72,000 for 2026. This includes everything—your deferrals, employer contributions like matches or profit-sharing, and any additional after-tax contributions your plan allows.

Here’s how it works in practice. Let’s say you contribute the maximum $24,500 in salary deferral, and your employer contributes $14,000 as a match or profit-sharing. That’s $38,500 total, leaving $33,500 of unused room under the $72,000 cap.

If your plan permits, you can contribute that remaining $33,500 as after-tax dollars into your 401(k) plan. These aren’t Roth contributions—they go into a separate after-tax account within your 401(k). But here’s where the strategy gets powerful: if your plan allows it, you can immediately convert those after-tax dollars into a Roth 401(k) or roll them into a Roth IRA outside the plan.

Once converted, they grow tax-free and can be withdrawn tax-free in retirement, just like any other Roth money.

This matters because high earners are typically locked out of contributing directly to Roth IRAs due to income limits. The mega backdoor Roth bypasses those limits entirely, allowing you to build substantial tax-free retirement assets—far more than the standard $7,000 Roth IRA contribution limit.

You’re not contributing beyond the $72,000 cap. You’re simply choosing to fill unused space within it with after-tax 401(k) contributions that you can convert to Roth, rather than investing those same dollars in a taxable brokerage account.

Plan Design Is Everything

Before you get too excited, check your 401(k) plan documents or speak with your HR department. Not all plans support this strategy—in fact, most don’t.

To execute a mega backdoor Roth, your plan must allow three things:

• After-tax (non-Roth) contributions beyond the standard $24,500 deferral
• Either in-service withdrawals (so funds can be rolled into a Roth IRA) or in-plan Roth conversions
• Passing annual nondiscrimination testing, which can limit contributions for highly compensated employees in non-safe harbor plans

Some plans allow only one of these options. Others don’t allow after-tax contributions at all. Larger companies and tech-sector employers are more likely to support these features. Smaller businesses often don’t.

One factor that improves your odds: generous employer matches. After-tax contributions have to go through nondiscrimination testing at the plan level, so the more generous the employer match, the more likely these after-tax contributions will pass the required testing.

The Real Barriers: Access and Cash Flow

Let’s be direct about what it takes to execute this strategy.

First, you need substantial disposable income. After maxing out your $24,500 deferral (which has already reduced your take-home pay), you’re contributing additional after-tax dollars. In our example, that’s another $33,500 per year—money that’s already been taxed and that you won’t see again until retirement. This level of savings capacity is realistically available only to high earners with significant cash flow beyond their living expenses.

Second, you need plan access. The majority of 401(k) plans don’t support this strategy. Even when they do, annual nondiscrimination testing may limit contributions for highly compensated employees.

The decision itself isn’t complex: if you have the cash flow and your plan permits it, pursuing tax-free growth through a mega backdoor Roth is almost always better than investing the same dollars in a taxable account. The real question is whether you have access to begin with.

Timing Matters: Converting Quickly Minimizes Taxes

When you convert after-tax 401(k) contributions to a Roth account immediately, you typically don’t trigger additional tax because the contributions were already taxed. However, if those after-tax contributions earn investment gains before conversion, the earnings portion will be taxed at conversion.

To minimize or eliminate this risk, convert frequently. Many plans allow regular in-plan conversions or automatic rollovers to a Roth IRA shortly after each payroll contribution. The faster you convert, the less opportunity there is for taxable growth to accumulate in the after-tax account. Some employers even offer automatic conversion features that execute this immediately with each contribution.

How the Pro Rata Rule Works Differently Here

One significant advantage of the mega backdoor Roth over the traditional backdoor Roth IRA is how the pro rata rule applies.

With 401(k) plans that maintain separate accounting for different contribution types, you can isolate your after-tax contributions for conversion without being forced to include your pre-tax 401(k) balance. This is fundamentally different from IRAs, where the pro rata rule requires you to consider all your traditional IRA balances when converting.

However, there are two important caveats:

Within your after-tax 401(k) account, the pro rata rule does apply to any earnings that have accumulated. You cannot cherry-pick only the principal to convert. If your after-tax account has $40,000 in contributions and $10,000 in earnings, any distribution includes both proportionally. This is another reason to convert quickly.

Your traditional IRA balances don’t affect mega backdoor Roth conversions, but they remain relevant if you’re also doing traditional backdoor Roth IRA conversions separately. The two strategies are independent from a tax perspective, but coordinating both requires careful planning.

Since 2014, IRS guidance has allowed you to split a distribution from your 401(k) to multiple destinations—rolling pre-tax dollars to a traditional IRA and after-tax dollars to a Roth IRA simultaneously. This makes execution more flexible than it once was.

Common Pitfalls to Avoid

Despite its advantages, the mega backdoor Roth strategy can be derailed by avoidable mistakes:

• Delaying conversions too long, which allows taxable earnings to accumulate on after-tax contributions
• Blending pre-tax and after-tax funds in a single conversion, leading to complex tax reporting and unintended consequences
• Overlooking annual plan testing requirements, such as ACP tests, which may limit or return after-tax contributions for highly compensated employees in non-safe harbor plans
• Failing to coordinate with your overall tax strategy, particularly if you’re also executing traditional backdoor Roth conversions or have complex IRA situations

Each of these risks can be managed with proactive planning, accurate payroll administration, and clear communication with your plan sponsor and tax advisor.

A Roth Engine for the Right Situation

For those with access to the right plan design and the cash flow to fund it, mega backdoor Roth conversions offer one of the most powerful ways to expand Roth assets—often allowing annual Roth contributions several times higher than what’s possible through traditional channels.

But success requires coordination. The strategy works best when HR policies, plan features, tax timing, and personal cash flow all align. When they do, you’re not merely working around Roth contribution limits—you’re building a high-efficiency engine for long-term, tax-free retirement wealth.

If you’re a high earner wondering whether this strategy makes sense for your situation, we can help you evaluate your plan’s capabilities, assess whether the numbers work for your cash flow, and coordinate execution with your broader tax planning. Contact our office to discuss your specific circumstances.

When people hear about gifting as part of a tax strategy, most assume it’s something only the ultra-wealthy need to worry about when they’re trying to avoid estate taxes. But here’s the reality: gifting is actually one of the simplest and most powerful financial planning tools available to you, regardless of whether you expect to owe estate tax down the road.

And while it might not feel urgent today, a thoughtful gifting strategy can make a meaningful difference for your family – both now and in the long run.

To understand why, let’s look at how two key concepts work together: the lifetime gift and estate tax exemption and the annual gift tax exclusion. These are the rules that define how much wealth you can transfer, and when – and how to do it in a way that’s as tax-efficient as possible.

Understanding the Lifetime Gift and Estate Tax Exemption

The lifetime gift and estate tax exemption is the total amount you can transfer – either during your life or at death – without triggering federal estate or gift tax.

For 2026, that exemption sits at a historically high level: $15 million per person. So if your estate is below that threshold, your heirs can generally receive your assets without owing federal estate tax.

But here’s the catch: if the value of your estate exceeds that exemption, the excess could be subject to estate tax at a rate of up to 40%.

Let’s look at a real example. Say someone passes away in 2026 with a $17 million gross estate. If they’re single, their taxable estate is reduced by their $15 million lifetime exemption (assuming they never had reportable gifting during their lifetime). The remaining $2 million taxable estate could result in approximately $800,000 of estate tax.

While that exemption might seem more than generous today, it’s not set in stone. It has changed many times in the past, and it can – and likely will – change again.

So even if you’re well under the threshold now, that doesn’t guarantee you’ll stay there. You might live another 20 or 30 years, during which time your assets could grow, your life situation could change, or the exemption itself could be reduced by future legislation.

That’s why we encourage families to plan ahead. Not because they know they’ll owe estate tax, but because none of us knows what the rules will look like when the time comes.

By planning proactively now, you give yourself more flexibility and control, regardless of how the tax laws evolve.

What the Annual Gift Tax Exclusion Lets You Do

Now that we’ve talked about the lifetime exemption – that larger umbrella for lifetime and posthumous transfers – let’s zoom in on something more immediate and practical: the annual gift tax exclusion.

This is one of the simplest and most underused tools in the tax code.

Each year, the IRS allows you to give a certain amount of money – currently $19,000 per recipient in 2026 – to as many people as you’d like, without paying gift tax and without using up any of your lifetime exemption.

In other words, it’s a way to reduce the size of your estate a little bit each year with no tax consequences whatsoever.

Here’s how it works in practice. Let’s say you have three children. You could give each of them $19,000 this year – that’s $57,000 out of your estate, completely tax-free. And if they’re married, you could give each of their spouses another $19,000, which brings the total to $114,000 gifted in a single year, all without touching your lifetime exemption.

If you’re married, you and your spouse can combine your annual exclusions and gift $38,000 per recipient. This is called gift splitting, and it’s a great way to maximize your gifting capacity as a couple. Just keep in mind – gift splitting requires you to file a gift tax return, even when no tax is due.

These annual exclusion gifts might seem small compared to your overall estate, but they add up. And the longer you live, and the more recipients you include, the more meaningful the impact becomes. Think of it as a slow and steady way to transfer wealth on your own terms, without waiting until the end of your life to make a difference.

A Real-World Example: How Simple Gifting Creates Flexibility for a Family

Let me share an example that’s probably more common than most people realize.

A woman in her 70s loses her husband. They had three adult children together and saved about $1 million over their lifetime, plus they owned a home worth around $350,000. After her husband passes, she eventually remarries – her new spouse has his own savings, and they decide to live together in his home.

She sells her original home, adds the proceeds to her savings, and now has roughly $1.35 million in her own name. She doesn’t need it to live on – her daily expenses are covered – and she intends to leave it to her three children when she passes.

On paper, that might not seem like an estate that needs “planning.” It’s well below the federal estate tax exemption. But this is actually a great case where annual gifting can make a real difference, for both her and her kids.

If she gifts $19,000 to each of her three sons, and also gives $19,000 to each of their spouses, she’s moved $114,000 out of her estate in one year – tax-free, with no reporting required.

The benefits here are multi-layered:

• Each family now has $38,000 they can put to work today – investing it, paying down debt, funding a child’s college savings – whatever makes the most sense for them.
• That money is no longer sitting in her estate, exposed to the uncertainties of probate, potential legal costs, or future changes in estate tax law.
• Because this is cash, there’s no issue with basis or capital gains – it’s a clean transfer.
• If she does this year after year, she could potentially transfer hundreds of thousands of dollars during her lifetime – without ever touching her lifetime exemption.

Now let’s imagine she didn’t do any of that. The full $1.35 million remains in her estate, and when she passes, it’s left equally to her three children. On the surface, each one inherits about $450,000.

There’s no federal estate tax due because she’s under the lifetime exemption, but that inheritance could still be tied up in probate if no planning was done. And depending on her state’s laws, that could mean extra fees, delays, or even state-level estate tax or inheritance tax consequences.

The point is: she could have started moving money earlier – on her terms, with zero tax consequences – and created more flexibility for her family while she’s still here.

And that’s the essence of this strategy. It’s not just about estate tax avoidance for the ultra-wealthy. It’s about using the rules we have today to create flexibility and opportunity for the next generation.

Tips to Maximize Annual Gifting

Once you understand how the annual gift tax exclusion works, the next step is learning how to use it strategically. Because while it’s simple on the surface, there are smart ways to maximize its impact and build flexibility into your long-term planning.

Here are some practical tips we share with our clients to help them get the most from their annual gifting strategy.

Start with Cash Gifts Whenever Possible

First, try to use the annual exclusion for cash gifts whenever you can. Cash doesn’t carry any hidden tax consequences, and it gives the recipient full flexibility to use the gift however they need – whether that’s investing, paying down debt, or covering family expenses.

When you gift appreciated assets like stocks or real estate, the recipient inherits your original cost basis. That means they could owe capital gains tax on the full appreciation when they sell. If you wait and pass those assets at death, your heirs typically receive a step-up in basis to fair market value, potentially avoiding capital gains tax altogether. So the strategic question becomes: are you more concerned about removing appreciation from your estate now or minimizing future tax exposure for your heirs?

There’s no one-size-fits-all answer, but it’s an important conversation to have with your tax advisor, especially when large capital assets are involved.

If You’re Married, Consider Gift Splitting

If you’re married, consider gift splitting. This allows a couple to combine their annual exclusions and give $38,000 per recipient, even if only one spouse actually makes the gift.

This can double your annual gifting power across multiple recipients, allowing you to move more wealth out of your estate each year. But don’t forget: gift splitting requires you to file IRS Form 709, the gift tax return, even when no tax is owed. So if your goal is to avoid any paperwork, this is something to plan around.

Pay Tuition or Medical Expenses Directly

If you’re helping family with education or medical costs, consider paying the institution directly.

Payments made directly to a school or medical provider don’t count as gifts at all – they don’t reduce your annual exclusion and don’t count against your lifetime exemption. That means you could help cover a grandchild’s tuition and still gift them $19,000 the same year.

So if you know a loved one needs money for education or healthcare, a direct payment to the provider could enable you to make an even bigger impact than gifting alone.

Use Trusts to Retain Control While Still Gifting

You can also use your annual exclusion to make gifts into certain irrevocable trusts, like Intentionally Defective Grantor Trusts (IDGTs), Spousal Lifetime Access Trusts (SLATs), or trusts with Crummey powers that allow gifts to qualify as present interest gifts.

These strategies are especially helpful if:

• You want to remove appreciating assets from your estate
• You want to provide for family over time, but retain some control
• You’re coordinating annual exclusion gifts with larger estate planning goals

Annual exclusion gifts can be used to fund these trusts gradually, year after year – adding up to significant long-term transfers without gift tax exposure.

Keep in mind, though, that these trusts come with legal and tax complexities. It’s essential to work with a qualified estate planning attorney to ensure the structure aligns with your goals and with IRS requirements.

Superfund a 529 Plan for Education Savings

Finally, if you’re helping with future education expenses, you may want to superfund a 529 plan. The IRS allows you to contribute up to five years’ worth of annual gifts at once – which in 2026 means up to $95,000 per beneficiary.

This strategy lets you use your annual exclusion in advance, without using your lifetime exemption – enabling you to remove a significant amount from your estate right away.

Just note: this strategy requires a gift tax return and the election to spread the gift evenly over five years. And withdrawals from the 529 plan must be used for qualified education expenses in order to remain tax-free for the beneficiary.

Pitfalls to Avoid

While annual gifting is relatively straightforward, there are a few traps that can undermine the benefits or create surprises you’d rather avoid.

First, be careful not to unintentionally exceed the annual exclusion. While going over the annual exclusion isn’t a problem in itself, you will be required to file a gift tax return for that year. And any amount gifted above the limit will use up a portion of your lifetime exemption.

Next, if you’re gifting appreciated assets, make sure to talk with both your tax advisor and the person receiving the gift. Remember, they inherit your cost basis – not a stepped-up one – so they may face capital gains tax when they eventually sell. It doesn’t make the gift a bad idea, but it’s something that should be part of the conversation.

Also, document your gifts carefully, especially large or non-cash transfers. Even when a gift tax return isn’t required, good records can be helpful for future planning or in the event of an audit or family dispute down the road.

And finally, make sure your gifting aligns with your overall estate plan. For example, if you have trusts in place, beneficiary designations, or provisions in your will, make sure your gifting strategy doesn’t create conflict or confusion – especially if you’re gifting unevenly among heirs or supporting one child more heavily during life.

A Simple Strategy with Long-Term Impact

The annual gift tax exclusion isn’t flashy. But when used thoughtfully, it’s one of the most efficient tools we have for tax-free wealth transfer.

Whether you’re helping a child buy a home, funding a grandchild’s education, or simply reducing your estate one year at a time, annual gifting is a strategy that rewards consistency and planning.

If you’re considering annual gifts and want to make sure you’re using the exclusion effectively, we’re here to help. Our team is happy to discuss how annual gifting fits into your broader financial or estate plan – and how you can use it to create meaningful impact across generations.

Hiring your child in your business is one of the most overlooked tax-saving strategies available to family-owned enterprises. And it’s not just about lowering taxes, although the tax savings can be substantial. When structured correctly, employing a child can also support long-term wealth transfer goals, impart financial responsibility, and create meaningful educational opportunities.

But there are also compliance landmines. The IRS pays close attention to these arrangements, especially when the work performed or wages paid raise questions about legitimacy.

In this article, we’ll examine the key tax advantages of hiring your child, the financial opportunities it offers, and the structural nuances that must be carefully managed to make the most of this strategy.

Strategic benefits for the business

For business owners, particularly those running sole proprietorships, family partnerships, or other closely held pass-through entities, employing a child can trigger a significant shift in how income is taxed. Instead of being taxed at the parent’s top marginal rate, wages paid to the child can be taxed at a much lower rate, or potentially not taxed at all.

How it works in practice

When a child is legitimately employed in the business and performs actual, age-appropriate work, the wages paid are deductible as an ordinary business expense. This reduces the business’s taxable income, and because many small businesses are pass-through entities, it also lowers the family’s overall tax liability.

If the child earns less than the standard deduction, which is $15,750 in 2025 (and $16,100 in 2026), then no federal income tax is owed by the child. In effect, that income escapes taxation entirely. The business deducts it, and the child pays no tax on it. This is one of the rare situations in the tax code where the same income can be both deductible and non-taxable, but only if every aspect is properly documented and the compensation is reasonable for the work performed.

The tax efficiency improves further when the business is structured as a sole proprietorship or a partnership in which both parents are sole partners. Under IRS rules, wages paid to a child by one of these entities are not subject to Social Security, Medicare (FICA), if the child is under 18, or Federal Unemployment Tax (FUTA), if the child is under 21 (IRC § 3121(b)(3)(A), § 3306(c)(5)). That exemption, however, does not apply to S corporations or C corporations, where full payroll taxes apply regardless of the employee’s age or relationship to the owner.

Entity structure matters here – and many small businesses operate as LLCs, which brings some complexity. A single-member LLC is typically treated as a disregarded entity for tax purposes and taxed as a sole proprietorship, meaning the child employment tax exemptions would still apply. If the LLC has two spouses as members and files as a qualified joint venture, it may also retain the FICA and FUTA exemptions. But if the LLC is treated as a partnership or elects corporate tax treatment, the exemption status changes. This makes it especially important for LLC owners to understand their tax classification before assuming these payroll tax savings apply.

It’s also worth noting that reducing adjusted gross income (AGI) at the household level can yield additional benefits. A lower AGI can affect eligibility for certain deductions and credits and may help avoid phaseouts or surtaxes, such as the Net Investment Income Tax.

Of course, the IRS is fully aware that this strategy is ripe for abuse, which is why the arrangement must be defensible on all fronts. The work must be real, the compensation must reflect market value, and the employment must be properly documented. 

Financial and educational benefits for the child

While the tax advantages to the business are clear, the benefits to the child can be just as impactful (if not more so) over the long term. Earning income at a young age opens doors that are typically closed to minors, especially when that income is structured and reported correctly.

Retirement savings

One of the most significant outcomes is eligibility to contribute to a Roth IRA. Only earned income qualifies a minor to open and fund this type of account. That means even modest wages from part-time or seasonal work in the family business can lay the foundation for a retirement asset with decades of tax-free growth ahead. A $7,000 Roth contribution made at age 15, left untouched until retirement, could grow into a six-figure sum thanks to the power of compounding – and all of it would be tax-free under current law.

Financial literacy

Beyond retirement savings, the experience of working in the family business can provide children with something arguably even more valuable: financial literacy. Getting a paycheck, seeing taxes withheld, understanding what those deductions mean – these are formative lessons. They bridge the gap between textbook knowledge and real-world application. For many families, this kind of practical exposure helps offset the common challenge of raising financially capable children in environments where money often feels abstract or unlimited.

Educational savings

There’s also the flexibility to use earned income for educational savings. A child’s wages can be directed toward a 529 plan or used to fund a Coverdell ESA. In families with college-bound children, this income can even reduce the Expected Family Contribution (EFC) on financial aid forms, since student-earned income is assessed differently than parental income under FAFSA guidelines.

Compliance considerations and pitfalls

For all its benefits, hiring a child is not without risk. The IRS has clear rules around family employment, and the burden of proof falls squarely on the business owner to show that the arrangement is legitimate. The closer the relationship, the higher the scrutiny. That’s why documentation, compensation, and business structure matter as much as the work itself.

Reasonable compensation

The first issue is reasonable compensation. A child can be paid for real work, but not at inflated rates. The wages must reflect what an unrelated employee would earn for similar duties. Paying a 12-year-old $40 an hour to file paperwork or manage a company’s Instagram feed is unlikely to survive an audit, even if the business is profitable. On the other hand, $12 to $15 an hour for simple administrative or marketing tasks may be defensible if the child is actually doing the work and hours are tracked.

Documentation

That brings us to documentation. This is not the place to cut corners. The work should be clearly defined, with a job description outlining responsibilities appropriate to the child’s age and skill set. Time logs or weekly work summaries should be maintained. Payroll should be run through a proper system, and W-2s must be issued. Simply writing a check or transferring money into a child’s account is not enough. Treating your child like any other employee, on paper and in practice, is essential.

Entity type matters

Business entity type adds another layer of complexity and opportunity when employing a child. Sole proprietorships and partnerships in which both parents are the only partners generally offer the most favorable tax treatment. In these cases, wages paid to a child under age 18 are not subject to Social Security, Medicare, or FUTA taxes. 

That payroll tax advantage doesn’t apply if the business is structured as a corporation (whether an S corp or a C corp). In those cases, children are treated like any other employee, and wages are fully subject to FICA and FUTA. But this does not disqualify the strategy or eliminate its core benefits. You can still deduct the child’s wages as a legitimate business expense, shift income into a lower tax bracket, and provide the child with earned income that can be used for savings, retirement, or education. The overall strategy remains viable, just not quite as tax-efficient at the margins.

For some families operating under a corporate structure, there may be ways to work around this limitation. One option is to establish a management company or family LLC taxed as a sole proprietorship or qualified joint venture. This secondary entity can employ the child directly and, if structured properly, restore the payroll tax exemption. That said, these arrangements require careful coordination and should only be implemented with guidance from a tax advisor or legal counsel, since they introduce new compliance obligations and entity-level risks.

Child labor laws

Finally, child labor laws can’t be overlooked. While federal law permits children to work in their parents’ business in many cases, state laws vary. Some states limit the number of hours minors can work, impose restrictions on hazardous tasks, or require work permits even for family employment. These rules apply even when wages are minimal and the work is remote or seasonal. Ignorance of the law is not a defense, and violations can jeopardize both the tax benefits and the business’s standing.

The bottom line is that the IRS is not opposed to children working in a family business, but they are quick to disallow deductions that look like disguised gifts or lack economic substance. The more closely your arrangements resemble traditional employment (with real duties, fair pay, and formal records), the safer and more sustainable the strategy becomes.

Age-appropriate roles and examples: putting the strategy into practice

The type of work a child can reasonably perform, and how that work is compensated, depends heavily on age. The IRS expects roles to be appropriate for the child’s maturity and ability, and that expectation is shared by state labor departments. When done thoughtfully, however, even young children can play a meaningful and defensible role in a family business.

Case study 1: the sole proprietor

Take, for instance, a dentist who operates as a sole proprietor and hires her 15-year-old son to scan documents, organize files, and help digitize patient intake forms. He works six to eight hours per week during the summer and a few weekends during the school year, earning about $6,000 annually. The work is real, the hours are tracked, and his hourly rate matches what the practice would pay for similar entry-level help. Because he’s under 18 and the business is a sole proprietorship owned by a parent, his wages are not subject to payroll taxes. The business deducts the wages, the child pays no income tax (since the earnings fall below the standard deduction), and the family benefits from a simple but effective income shift. Better still, his income qualifies him to contribute to a Roth IRA, which his parents help him fund.

Case study 2: S-corp workaround

In another example, a family running an S-corp wants to employ their teenage daughter, but they know the corporate structure doesn’t offer the same payroll tax advantages. Instead of abandoning the idea, they establish a small management company (a disregarded entity owned by one parent as a sole proprietor) to handle internal marketing and operations support. Their daughter is hired by this entity to manage the business’s social media presence and help with email marketing campaigns. Her compensation is tracked carefully and reported via W-2. Because the management company is a sole proprietorship, her wages are not subject to FICA or FUTA taxes, and the deduction flows through to the overall business structure. The setup requires more planning and oversight, but it’s fully compliant and allows the family to realize the same tax benefits despite the corporate parent entity.

Case study 3: a modest start for young children

Even younger children can participate when the role is clearly tied to a legitimate business function. A graphic designer, for example, uses photos of her two children, ages 7 and 10, in marketing materials and social media posts. The children are paid modest modeling fees, supported by comparable rates from local agencies. Payments are documented, taxes are withheld, and the business retains proof of how the images were used. 

The bigger picture

These examples reflect a broader principle: the younger the child, the more narrowly defined and carefully documented the role must be. Tasks should make sense given the child’s age and the business’s actual needs. Filing paperwork or organizing inventory might be suitable for a pre-teen. Teenagers, particularly those with digital skills, can take on more complex responsibilities like content creation, customer engagement, or even light bookkeeping. As long as the work is real, the pay is reasonable, and the documentation is in order, the IRS has little grounds for objection.

Strategically, these arrangements can serve as more than tax strategies. They can be early lessons in responsibility, personal finance, and entrepreneurship. 

A smart move – if done right

Hiring your child can be a powerful way to reduce taxes and build generational wealth. But like any tax strategy, it must be executed properly, with clear documentation, age-appropriate work, and respect for employment laws.

This strategy works best for families with active businesses and a long-term view of financial planning. If you’re considering it, contact one of our expert advisors to ensure the arrangement is both beneficial and compliant.

The short-term rental (STR) landscape has matured. What began as a way for homeowners to offset costs by renting out a spare room or vacation home has evolved into a highly scrutinized area of the tax code. Now, property owners must take a more deliberate approach to tax strategy, classification, and compliance. 

Whether you rent out a second home for a few weeks a year or manage a portfolio of short-term units, the tax treatment of your activity depends on how it’s structured and operated. Let’s walk through the key considerations that will shape how your short-term rental income is taxed, and what you can do to optimize outcomes.

Rental vs. business: classification comes first

Short-term rentals are generally defined as properties rented on a transient basis – typically for an average period of seven days or less per guest. This 7-day threshold is important because it helps determine whether the activity is treated as a rental or rises to the level of a trade or business for tax purposes. 

By default, all rental activities are considered passive under the tax code. This means losses from those activities can generally only offset other passive income, unless you meet specific exceptions, such as qualifying as a real estate professional. 

The key exception hinges on the nature of the services you provide and your level of participation. When a property is rented for short periods, and you provide services such as cleaning during the guest’s stay, concierge assistance, or meals, the IRS may treat the activity as an active trade or business rather than passive rental income.

This classification carries several implications. Business income may be subject to self-employment tax. But it also opens the door to the 20% qualified business income (QBI) deduction, and it allows losses to be deducted against other income if you materially participate in the business. That can be especially advantageous in high-income years or when leveraging cost segregation and depreciation strategies.

If your role is more passive and you don’t provide substantial services, the IRS will likely treat the income as passive rental income. In that case, losses may be limited unless you meet the real estate professional criteria or have sufficient passive income to absorb them.

It’s also worth noting that many hosts fall into a gray area. The IRS hasn’t issued comprehensive guidance for every STR scenario, so how your activity is documented and presented, particularly with respect to guest services and participation, can influence the tax treatment.

The 14-day rule and vacation home exception

Owners of vacation homes or dual-use properties may benefit from one of the simpler provisions in the tax code. If you rent out a personal residence for 14 days or less in a year, and use it personally for more than 14 days or more than 10% of the total rental days, you don’t have to report the rental income at all. The expenses related to those rental days aren’t deductible, but the income itself is entirely excluded.

This is often referred to as the Augusta Rule, named after homeowners in Augusta, Georgia, who began renting out their homes during the Masters golf tournament. The rule, IRC §280A(g), was written with precisely this type of situation in mind.

It’s a valuable provision for high-demand areas during major events, where a few well-timed rentals can result in thousands of dollars in untaxed income. However, once you exceed that 14-day threshold, the income becomes fully reportable, and your expenses must be allocated between personal and rental use. This is where recordkeeping becomes critical. Not only must you track rental dates, but you also need to clearly separate time spent maintaining the property from time spent enjoying it personally. The IRS distinguishes between the two, and so should you.

Income, expenses, and depreciation

Once your STR becomes taxable – whether because you exceeded the 14-day exemption or because it doesn’t qualify as a personal-use property – you must report all rental income, including rents, cleaning fees, and any other amounts paid by guests. 

While platforms like Airbnb and VRBO may provide gross receipts through forms like the 1099-K, these figures don’t always align perfectly with what’s taxable, which puts the onus on you to reconcile totals and ensure accuracy.

You’re allowed to deduct many of the ordinary and necessary expenses associated with the rental, including mortgage interest, property taxes, insurance, utilities, cleaning, and repairs. If the property is used for both personal and rental purposes, these expenses must be prorated. 

Depreciation is also key: the cost of the structure itself (not the land) is typically depreciated over 27.5 years for residential property, but shorter depreciation lives may apply to certain furnishings or improvements. For higher-value properties, cost segregation studies can accelerate depreciation deductions by separating out components eligible for shorter lives. 

Self-employment tax and the risk of “substantial services”

One area that often surprises hosts is self-employment (SE) tax. While traditional rental income is not subject to SE tax, the rules change when you provide substantial services to guests during their stay. This can include meals, daily housekeeping, or entertainment; activities that make the arrangement resemble a hotel or bed-and-breakfast more than a passive rental.

Importantly, the services must be provided by you, your employees, or agents to trigger SE tax. Services provided by independent third parties, such as cleaning companies or platform-facilitated support, do not typically subject you to SE tax. That distinction is crucial.

If your rental activity includes substantial services that you or your staff perform, it could be subject to SE tax and treated as a business, which opens up other tax planning considerations, such as QBI eligibility or entity structuring.

QBI deduction: potential upside with caveats

If your short-term rental activity qualifies as a trade or business, it may also qualify for the 20% qualified business income (QBI) deduction under IRC §199A. This deduction applies to certain non-corporate taxpayers with income from eligible domestic businesses.

To qualify, you must treat the rental as a business and meet specific criteria. The IRS has issued a safe harbor that applies to rental real estate enterprises:

• You must maintain separate books and records for each rental activity.
• You or your agents must perform 250 hours of rental services during the year.
• You must maintain contemporaneous records to substantiate the hours and nature of the services performed.

Even if you qualify as a trade or business, the deduction may still be limited or phased out based on your income level and the amount of wages paid or property held. For 2025, the phase-out begins at $394,600 for joint filers (adjusted annually for inflation). If you’re near or above that threshold, advanced planning is especially important.

State and local considerations

While federal tax rules set the foundation, your obligations don’t stop there. State and local governments have become increasingly aggressive in taxing and regulating short-term rentals. Occupancy taxes, gross receipts taxes, permit requirements, and zoning restrictions all vary by jurisdiction. And noncompliance can result in penalties or denial of deductions.

In some states, such as Virginia and Colorado, localities are now allowed to impose higher lodging taxes on short-term rentals than on traditional hotels. Many jurisdictions also require hosts to register their properties, obtain operating permits, and comply with specific safety, insurance, or usage rules. 

Importantly, if you own rental property in a state where you don’t live, you may still owe state income taxes on the income generated there. In other words, you don’t have to physically set foot in the state to be taxed on short-term rental income earned within its borders.

Audit risk and documentation standards

The IRS and state taxing authorities have increased focus on short-term rental activity. Large losses without clear evidence of material participation, mismatches between reported income and 1099-K data, and improperly allocated expenses are among the most common triggers.

To reduce risk, hosts should maintain detailed records: calendars showing guest stays and personal use, receipts and logs for maintenance, property management agreements, depreciation schedules, and platform income summaries. In the event of an audit, the burden of proof falls on you.

Strategic takeaways

The STR sector is stabilizing after years of rapid expansion. Growth has moderated, regulations have tightened, and tax rules have caught up to the realities of the market. For hosts with multiple properties, high rental income, or significant personal use of the property, a cookie-cutter tax approach won’t suffice.

Whether you operate one property or a dozen, understanding how your activity is classified, reported, and documented is essential. The rules are complex, but the payoff for getting them right is significant.

A comprehensive tax review with a qualified advisor can help you identify hidden risks, capture available deductions, and position your portfolio for the year ahead. For more personalized guidance, please contact our office. 

The IRS is offering employers a break for 2025, easing penalties as businesses work to comply with new reporting rules for tips and overtime pay. In Notice 2025-62, released November 5, the IRS acknowledged that many employers aren’t ready to meet the reporting obligations introduced under the One, Big, Beautiful Bill Act (OBBBA).

This relief is especially important for employers with tipped workers or those who pay overtime, though it comes with clear limits and expectations.

OBBBA changes to tips and overtime

To appreciate why this penalty relief matters, it’s helpful to understand what changed. The OBBBA, which became law in July 2025, introduced two major provisions affecting workers and their employers. These provisions are effective for tax years 2025 through 2028, creating a four-year window during which special deductions apply.

The first provision, commonly called “No tax on tips,” allows employees and self-employed individuals in certain tipped occupations to deduct up to $25,000 of qualified tips annually on their individual tax returns. This isn’t a credit or exclusion from wages for employment tax purposes; rather, it’s a deduction that workers claim on Form 1040, similar to other above-the-line deductions. The deduction is available regardless of whether the taxpayer itemizes or takes the standard deduction. However, the benefit phases out at higher income levels, and not all tips qualify.

The second provision, “No tax on overtime,” provides a similar benefit for overtime compensation. Workers can deduct up to $12,500 of qualified overtime pay annually, or $25,000 for married couples filing jointly. Like the tips provision, this deduction is claimed on the individual’s tax return and is subject to income limitations and eligibility requirements.

The new reporting burden on employers

While the OBBBA ultimately requires employers to separately report qualified tips and overtime compensation on information returns like Forms W-2, 1099, and 1099-K, these requirements do not apply for tax year 2025.

Instead, the IRS has granted a one-year transition period, waiving penalties for failure to provide separate reporting of these amounts or the applicable occupation codes. That said, employers will need to comply with the full reporting requirements beginning in 2026. 

What the penalty relief covers

For 2025 only, the IRS won’t impose penalties under IRC §§6721 or 6722 for failing to separately report:

• Qualified tips
• Qualified overtime
• Occupation codes

But this relief applies only if employers file accurate and timely returns otherwise. It’s not a waiver for missing filings or incorrect wage reporting. 

What employers can do now

Even with penalty relief in place, the IRS strongly encourages employers to voluntarily provide employees with the information they need to claim the new deductions for qualified tips and overtime. 

While the standard tax forms for 2025 won’t include specific fields for this data, there are still several practical ways to communicate it. One option is to use Box 14 of Form W-2 to report qualified overtime amounts, labeled appropriately. 

Employers can also issue supplemental written statements alongside W-2s or 1099s, or establish secure online portals that give employees access to detailed breakdowns of their compensation. For businesses with tipped workers, it’s important to include the relevant occupation codes along with the reported tip amounts so employees can determine whether they qualify for the deduction.

Preparing for 2026 compliance

The extra time offers employers a chance to prepare for full compliance:

• Assess payroll systems to identify gaps and needed updates
• Work with software providers on timelines for compliant reporting
• Review IRS occupation codes and match them to your workforce
• Develop tracking processes for qualifying tips and overtime
• Train payroll and HR staff on definitions, eligibility, and reporting standards

Complex businesses, especially those with tipped workers performing multiple roles, may need outside help to apply codes correctly and track eligible compensation.

Looking ahead

More IRS guidance for individual taxpayers is expected soon, covering how to claim the new deductions on 2025 returns. For 2026 and beyond, tax forms will likely be updated with new boxes for qualified tips, overtime, and occupation codes.

And because these provisions are set to expire after 2028, employers need systems that can adapt if the rules are extended, revised, or sunset.

Bottom line: the IRS has given employers breathing room for 2025, but the clock is ticking. Start preparing now to ensure full compliance in 2026. For guidance tailored to your business, contact our office.

As 2025 draws to a close, business owners have more certainty regarding many tax provisions that were previously set to expire. The One Big Beautiful Bill Act (OBBBA), signed into law mid-year, preserved many provisions from the Tax Cuts and Jobs Act (TCJA), made others permanent, and clarified the direction of federal tax policy heading into 2026.

With major provisions now settled for the foreseeable future, businesses can make informed choices not only to manage current liability but to align structure, compensation, and investment strategies with a more predictable tax code.

Here are some of the most relevant strategies to consider before the end of the year.

Maximize the QBI deduction

The 20% deduction for qualified business income (QBI) for sole proprietors, S corporation shareholders, and partners has now been made permanent. This means eligible owners of pass-through entities can plan with more certainty.

QBI generally refers to the net amount of income, gain, deduction, and loss from a qualified domestic trade or business. It doesn’t include capital gains/losses, dividend income, interest income (not allocable to a trade or business), wage income, or guaranteed payments to partners.

If your taxable income remains below $197,300 (or $394,600 if married filing jointly), you can generally deduct the full 20% of your QBI. Once taxable income exceeds the threshold, the deduction becomes subject to wage and property limitations. In such a case, the deduction is limited to the greater of:

• 50% of W-2 wages paid by the business, or
• 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property.

For specified services, trades, or businesses (SSTBs) such as law, health, performing arts, consulting, athletics, and financial services, the deduction is subject to a stricter income phase-out, and fully phases out once income exceeds the top of the range. Non-SSTBs, on the other hand, may still qualify depending on how much they pay in W-2 wages and how much qualified property they own.

Starting in 2026, the income ranges where limits phase in will be expanded, allowing more partial deductions for higher earners. The OBBBA also introduces a modest minimum deduction ($400) for qualifying small business owners with at least $1,000 in QBI who materially participate in the business.

Year-end move

Run income projections now to assess whether you’ll benefit most by managing income below phaseout levels or adjusting wages to optimize your deduction under the wage/property test. If you’re over the threshold or close to it, work with an advisor to evaluate strategies like increasing W-2 wages or grouping related businesses under IRS aggregation rules to maximize the deduction.

Structure matters

Under the OBBBA, the tax rates for both corporations and pass-through business owners are now anchored: the federal corporate rate remains 21%, and the 37% individual top rate will continue to apply. With the 20% QBI deduction made permanent for pass-throughs, many of the structural “moving parts” that caused uncertainty in prior years are now settled.

That doesn’t mean that entity choice is irrelevant, though. In fact, your structure still should be reviewed. But rather than being driven solely by fear of rate increases or expiring benefits, the decision now hinges on long-term strategy: how you plan to distribute profits, reinvest in the business, transfer ownership, and position for state-level taxes or other policies.

With a flat 21% rate, C corporations can be advantageous when profits are retained and reinvested rather than distributed. But any distributions trigger a second layer of tax on dividends.

Pass-through owners benefit from the avoidance of double taxation and the QBI deduction, but eligibility and magnitude of the deduction depend on income thresholds, W-2 wages, and qualified property. If you exceed those limits (especially for SSTBs or closely held firms lacking significant W-2 wages or property), the effective rate on pass-through income could approach or even exceed what a C-corp owner might face when factoring distributions.

Year-end move

If your business is structured as a pass-through and you expect taxable income to remain well below the QBI thresholds, maintaining that structure likely remains attractive.

If, instead, you are projecting taxable income above those thresholds, or you run an SSTB, or you intend to retain significant earnings in the business rather than distribute them immediately, it’s time to ask your advisor to model alternatives, such as converting to a C corporation, adjusting owner compensation, or reorganizing how profits are distributed.

Capital investment: depreciation and expensing incentives

Bonus depreciation – Section 168(k)

The OBBBA restores 100% bonus depreciation permanently for qualified property acquired and placed in service after January 19, 2025, reversing the prior phase-down schedule. “Qualified property” generally includes tangible personal property with a recovery period of 20 years or less, certain computer software, and used property acquired from unrelated parties.

A transitional election exists: for the first tax year ending after January 19, 2025, taxpayers may elect to apply a lower rate (40% in many cases).

Section 179 expensing

The deduction cap under Section 179 is increased to $2.5 million, and the phase-out threshold is raised to $4 million of qualifying property placed in service in the year. These numbers are effective for property placed in service in taxable years beginning after December 31, 2024.

Section 179 remains limited to the business’s taxable income (i.e., you cannot use it to create a net operating loss) and cannot apply to the same asset in the same year that you claim bonus depreciation.

Because many states do not conform to the bonus depreciation rules or offer limited conformity, Section 179 can be a valuable alternative in multi-state planning.

Year-end move

If you plan to purchase equipment, software, or make building improvements before year-end, coordinate with your advisor to determine whether Section 179 expensing or 100% bonus depreciation (or a mix) gives the greatest benefit, especially in light of your business’s taxable income, asset types, and state-tax implications.

If you operate across multiple states, review whether those states conform to federal treatment of bonus depreciation or Section 179 rules, as your effective deduction value may differ depending on state-tax treatment.

Business losses and excess business loss rules

Under the TCJA and subsequent legislation, non-corporate taxpayers remain subject to limits on “excess business losses.” The OBBBA makes those limits permanent.

For tax years beginning in 2025, non-corporate taxpayers cannot offset more than $313,000 (single) or $626,000 (married filing jointly) of business losses against other non-business income. Losses above these thresholds aren’t lost; instead, they’re carried forward and treated as a net operating loss (NOL). That NOL may be used in future years to offset income, but those future NOL deductions generally are limited to 80% of taxable income for losses arising in years after Dec. 31, 2017.

Year-end move

If your business is projecting a significant loss in 2025, coordinate with your advisor to determine whether shifting expenses or income can keep the loss below the threshold so it’s fully deductible now, or plan how to use an NOL in future years under the 80% limitation.

Check your estimated tax payments

If your income increased in 2025 through higher profits, bonuses, or unexpected gains, you may need to make additional estimated tax payments before year-end to avoid underpayment penalties.

The IRS requires individuals (including self-employed business owners) to pay taxes throughout the year as income is earned. If your prior estimated payments were based on lower 2024 income, those payments may no longer be sufficient to cover your 2025 liability.

Year-end move

Use IRS Form 1040-ES or work with your CPA to calculate whether a “catch-up” payment is needed. The IRS safe harbor rules generally require you to pay at least 100% of last year’s tax liability, or 110% if your adjusted gross income exceeded $150,000.

If you expect your 2025 tax bill to be significantly higher than last year’s, you can generally avoid underpayment penalties by ensuring your quarterly payments total 110% of your 2024 tax liability. Making a final estimated payment by January 15, 2026 (the Q4 deadline), can help you meet this safe harbor even if your 2025 liability ultimately exceeds the amount paid.

Retirement & savings strategies

Retirement plan contributions continue to be a key tax-saving strategy, especially when combined with entity structure, compensation planning, and income-timing.

If your business has not yet established a retirement plan (e.g., SEP IRA, Solo 401(k), SIMPLE), 2025 remains a strong year to do so. For certain plans, contributions can be made as late as the business’s tax-return deadline (including extensions).

Year-end move

Review whether you or your business should establish or fully fund a retirement plan before year-end, especially if you expect to benefit from taxable income reduction (which may preserve QBI deduction eligibility) or want to reduce exposure to the 3.8% NIIT (Net Investment Income Tax), or expect significant earnings that could be tax-efficiently deferred or sheltered via a qualified plan.

Don’t neglect the fundamentals: inventory, receivables, and books

As the year closes, it’s an ideal time to perform the foundational tax and finance housekeeping that supports deduction integrity and audit readiness.

• Inventory: conduct a physical count, evaluate obsolete or slow-moving items, and consider write-downs or write-offs where appropriate.
• Receivables: for accrual-basis taxpayers, analyze aging receivables and consider writing off uncollectible amounts as bad-debt deductions.
• Recordkeeping: ensure intercompany transactions, shareholder/owner compensation, profit distributions, and loan arrangements are properly documented.
• De minimis safe harbor: businesses may elect to immediately expense qualifying tangible property if certain criteria are met. For taxpayers with an Applicable Financial Statement (AFS), the threshold is $5,000 per item or invoice; without an AFS, the threshold is $2,500 per item or invoice.

Year-end move

Schedule a year-end review of inventory and receivables, document any material property acquisitions, and ensure your expensing policy is in place for safe-harbor treatment of smaller purchases.

Tailor your strategy now, while time remains

With many of the major business tax provisions of the Tax Cuts and Jobs Act now permanent or clarified under the OBBBA, tax planning in 2025 is less about anticipating sweeping legislative change and more about maximizing opportunity within a clearer framework.

The strategies above can help reduce your 2025 liability and position your business more strategically for the years ahead. But the right moves will depend on your structure, income mix, investment plans, and long-term goals.

Before the year closes, schedule time with your CPA or tax advisor. Because the OBBBA changes are in effect now, proactive planning could unlock savings that extend beyond this tax year.

For personalized guidance, please contact our office.

For the first time since 1986, the annual contribution limits for Dependent Care Flexible Spending Accounts (DCFSAs) are increasing. Under the One Big Beautiful Bill Act (OBBBA), employers can raise the cap on employee contributions beginning January 1, 2026. But the increase is not automatic.

To offer these enhanced benefits, plan documents should be formally amended by December 31, 2025. 

What’s changing?

The new limits raise the annual contribution ceiling to:

• $7,500 for individuals and married couples filing jointly (up from $5,000)
• $3,750 for married individuals filing separately (up from $2,500)

A brief refresher on DCFSAs

Dependent Care FSAs allow employees to set aside pre-tax income to cover eligible expenses for children under age 13, elderly parents, or disabled adult dependents. Qualified uses include:

• Daycare and preschool programs
• Before- and after-school care
• Summer day camps
• In-home caregiving for elderly or disabled dependents

DCFSAs are governed under Section 129 of the Internal Revenue Code, offering a triple tax benefit:

1. Contributions reduce federal taxable income
2. Exempt from Social Security and Medicare (FICA) taxes
3. Reimbursements for qualified expenses are tax-free

The employer also benefits: employee contributions reduce the organization’s payroll tax obligations. The increased benefit is funded through employee pre-tax deferrals, not employer outlays. Yet employers can save 7.65% in payroll taxes on each dollar deferred.

This benefit is optional – if you don’t act, it doesn’t happen

The law authorizes the increase but doesn’t require it. Employers should amend their cafeteria plan documents to reflect the new limits by December 31, 2025.

Inaction now likely means no increase until at least 2027 for calendar-year plans, as plan amendments must generally be adopted before the start of the plan year they affect.

Immediate action required: how to implement the change

Employers have a narrow window to act if they want the increased DCFSA limits to take effect for the 2026 plan year. This isn’t a change that will happen automatically, and it’s strongly recommended that plan documents be formally amended before December 31, 2025. 

The first step is to take a close look at current participation rates: how many employees are contributing to your DCFSA, and how many are already maxing out under the current limits? It’s also worth considering what portion of your workforce is eligible for this benefit. If you’d like to run the numbers and model potential tax savings, we’re happy to assist. 

From there, you’ll need to adopt the amendment, coordinate with your third-party administrator to update systems and enrollment materials, and ensure your employee communications clearly reflect the new contribution limits. Educating your workforce on the enhanced benefit is critical, especially for working parents and caregivers who may now be able to set aside substantially more pre-tax dollars. 

The clock is ticking, and the opportunity is real. If you’d like help modeling the potential payroll tax impact of raising your plan caps, contact our office.

This article is intended to provide a brief overview of the recent changes to DCFSA regulations. Individual circumstances vary, and nondiscrimination testing, employee demographics, and plan design considerations may affect whether this change is advantageous for your company. We recommend consulting with your professional advisors to evaluate all options and determine the best approach for your specific situation.