This is a good time to take a look at some of the things we can do to get the best result on our
2025 taxes, and to get a good start on 2026. There are several notable changes for 2025 and
2026 resulting from the “One Big Beautiful Bill Act” but there are many issues that should be
considered every year. This is intended to be a tax planning tool, and not an exhaustive
summary of tax law.

FILING DEADLINES
Here’s a summary of filing deadlines:

Individuals, C Corporations and Trusts – April 15, 2026 – or October 15 if you file an extension
S Corporations and Partnerships – March 16 – or September 15 if you file an extension
LLCs – single member – same as individual returns
FBAR – Form FinCEN 114 – April 15, with an automatic extension to October 15
Estimated payments – April 15, June 15, September 15 and January 15
1099s and W-2s – W-2s, and 1099s for individuals and partnerships to whom your business paid
over $600 during the year are due by February 2
Retirement contributions – Traditional and ROTH IRA contributions for 2025 can be made up to
the original filing date – April 15, 2026 – not the extended filing date. SEP IRA and solo 401(k)
contributions can be made up to the extended filing date (September 15 for partnerships and S
Corps, October 15 for personal contributions) IF you file an extension. Personal 401(K)
contributions deducted from W-2 income are due by December 31, 2025
State extensions– Some states, including New York require separate filing of extensions.
California extensions, however, are automatic when you file a federal extension.
Business licenses – These are not part of your tax return. Check your local requirements. The
City of Los Angeles requires a business license filing for businesses, including self-employed,
independent contractors and some owners of rental property by February 28.
Corporation and partnership/LLC registrations – Check your state’s registration requirements.
California corporations and LLCs must file a statement of information every one or two years.
The risk is that your entity will be suspended. Reinstatement of a suspended business is
annoying and expensive.

NOTABLE CHANGES FOR 2025 and 2026
Here are some of the changes. Remember that these are IRS changes only, and states may or
may not comply with the changes. California, for example does not comply.

Child Tax Credit – Increased from $2,000 to $2,200 for children under age 17
Child and Dependent Care Credit increases, but not until 2026
Senior deduction – a $6,000 deduction for seniors 65 years and over ($12,000 if married) –
phases out for income between $75,000 and $150,000 ($150,000 and $250,000 if married)
SALT tax – The limit on deductibility of state and local taxes (SALT) was not eliminated, but the
deduction increases from $10,000 to $40,000 in 2025. The deduction phases out for incomes
over $500,000.
Tips deduction – Up to $25,000 of income from tips is deductible. Each spouse can deduct up to
$25,000, but they must file a joint return. There is no deduction for couples who file separately.
The deduction phases out for incomes over $150,000 ($300,000 if married). To qualify, tips
need to be reported to the IRS on forms W-2 or other approved forms, and be related to a list
of specific qualified occupations, including delivery and food and beverage service.
Overtime deduction – Up to $12,500 of overtime pay is deductible ($25,000 if married). The
deduction phases out for incomes over $150,000 ($300,000 if married). Before you get your
hopes up, it must be reported on Forms W-2 or other approved forms, and it only applies to
overtime “premium” pay over and above the regular rate. An example is the “half” portion of
time and a half.
Auto loan interest deduction – Up to $10,000 of interest on loans to buy a new vehicle with
final assembly in the US. The deduction phases out for income over $100,000 ($200,000 if
married). The lender must report the amount to you if it is $600 or more.
Charitable donations – In 2026, there will be a $1,000 deduction for taxpayers who take the
standard deduction. But there will be restrictions on deductions for taxpayers who itemize.
Savings plans for students – 529 plans can cover more expenses for K-12 education.
Savings account for young children – up to $5,000 nondeductible contribution to a tax deferred
account, but the federal government also contributes $1,000… but not until 2026
Electric vehicle credit expired September 30, 2025
Last call for energy-efficient home improvement credits – these credit end December 31, 2025
Bonus depreciation – previously phased out, is now back to 100%. Limits for Section 179
deductions are also increased substantially.
R&D costs – can be deducted 100% immediately. Amortization over 5 years (previously
required) is now optional.

PERSONAL DEDUCTIONS

Itemized Deductions vs Standard Deduction
Most taxpayers are entitled to the Standard Deduction, so unless your deductible personal
items add up to more than the Standard Deduction there is no need to keep track of them.
The 2025 Standard Deduction is $15,750 for a single person, and $31,500 for a married couple.
These amounts are increased if you or your spouse are over age 65 or blind, or if you are an
unmarried head of household. It can be reduced if you are someone’s dependent.
State standard deductions may differ from federal, and the states may allow additional
itemized deductions. California’s standard deduction, for example, is $5,706 if you are single,
and $11,412 if you are married. You may have additional deductions for unreimbursed
employment expenses personal property taxes, mortgage interest and your residence property
tax, which may be limited by the IRS, is fully deductible.
If you have deductible expenses in excess of the Standard Deduction, you can claim them as
Itemized Deductions, instead of the standard deduction.

Here is a summary of deductions you can and can’t deduct:

What You Can Deduct

Medical expenses – You can deduct medical expenses that exceed 7.5% of your income. They
include medical and dental expenses for you and your dependents, including those who you
could have claimed as dependents, except their income was too high.
State and local taxes (SALT) – State income taxes, real estate taxes and personal property taxes
are deductible, but they are limited to $40,000 (previously $10,000) whether you are single or
married. The limit is $20,000 (previously $5,000) if you are married but filing separately. The
deduction phases out for incomes over $500,000, but not below $10,000. States may differ,
though. California does not limit the property tax deduction, so you may itemize your expenses
for state purposes, even if you can’t on your federal return,
Mortgage interest – Interest on home mortgages secured by a primary or secondary residence
is an Itemized Deduction, subject to specific limits. Interest on loans of up to $750,000 is
deductible, whether you are single or married. The limit is reduced to $375,000 if you are
married but filing separately. If you secured the mortgage before December 17, 2017, though,
the limit is $1,000,000. The debt must be “acquisition debt,” which means the loan must be for
the acquisition, construction or major improvement of the home. The $1,000,000 limit remains
on refinanced amounts on loans secured before December 17, 2017, as long as it doesn’t
exceed the outstanding balance at the time of refinancing. States may have different rules.
California, for example, allows interest on loans of up to $1 million.
Charitable donations – Charitable donations are deductible, up to 60% of your income, if you
donate cash to qualified organizations. Excess amounts can be carried forward to future years.
The limit is 30% for gifts of stock or other appreciated assets. If your itemized deductions are
below the Standard Deduction, making a larger donation every second or third year could put
you over the threshold in those years, and increasing your deduction. Charitable donations are
discussed in more detail later in this article.
Gambling expenses, up to the amount of winnings, and investment interest, up to the amount
of investment income, are Itemized Deductions. Gambling income is discussed later in this
article.

Note: Itemized deductions will be capped in 2026 for taxpayers in the 37% tax bracket. States
may differ. California itemized deductions currently phase out for incomes over $200,534
($401,072 if married).

What You Can’t Deduct

Casualty and theft losses – You can only deduct losses in a federally declared disaster area for
federal purposes. In 2026, state declared disasters will also qualify for the deduction. There is
no federal deduction for theft losses. States may allow deductions for other losses not covered
by insurance for casualty and theft. California conforms with federal law on casualty losses, but
allows a deduction for theft losses. So if your Rolex watch is stolen, you may get a tax break in
California.
Unreimbursed employment expenses – Business expenses for employees (NOT self-employed
or 1099 independent contractors) are not deductible on your federal tax return. These include
union and professional dues, education expenses, home office expense, business mileage,
travel and meals, and other usual and necessary expenses incurred for the convenience of your
employer, but which the employer will not reimburse. Note that some states differ from the
federal rules, and allow these deductions – California is one of those states. If you have
substantial expenses of this nature, you may benefit from a change of status from employee to
independent contractor (although there are important issues related to independent contractor
status, and your employer may not be willing to make the change). If your income is relatively
high, you might consider forming an S Corporation, discussed later. I have separate articles on S
Corporations on my website.
Alimony – Alimony payments related to divorce or separation agreements finalized after 2018
are not deductible, and they are not taxable to the recipient. If your divorce was finalized
before December 31, 2018, though, you can still deduct the payments. Child support payments
are not deductible. As always, states may differ. In California, alimony payments are deductible,
and alimony received is taxable for divorces finalized prior to 2026. Starting in 2026, California
will comply with the federal treatment.
Investment expenses – Fees paid to investment advisors are not deductible on your federal tax
return. Speak to your advisors to see if they can replace advisory fees with transaction-based
fees, which are deductible. Investment interest is an itemized deduction, up to a maximum of
your investment income. States may differ. California allows both investment expense and
investment interest deductions.
Legal expenses – Most personal legal expenses are not deductible. Legal expenses related to
your business are still deductible, as are fees related to discrimination lawsuits. Note that many
employer lawsuits can be considered discrimination lawsuits. Legal fees for divorce or child
support are not deductible. Some states may have different rules and limits on deductible legal
expenses.
Hobby and not-for-profit rental expenses – You have to report income from hobbies and casual
rentals, but you can’t deduct the related expenses, although states may differ. No, it doesn’t
seem fair. If you can generate a profit from these activities in some years, though, they could be
considered for-profit business activities, and you could deduct your expenses in that case. Some
states, including California, may allow deduction of expenses up to the amount of income from
these activities.
Moving expenses – Moving expenses are not deductible for non-military individuals. States may
have different rules. California allows a deduction for moving expenses if you move into the
state for business or employment purposes (welcome to California), but if you leave, you need
to check the state you move to.
Tax preparation fees – Personal tax preparation fees are not deductible on your federal return,
but states, including California, may differ. Fees for preparation of business or rental returns are
still deductible, though.

DEFER INCOME / ACCELERATE DEDUCTIONS

There are opportunities to defer income items that would be taxable this year, and move them
into next year. You may also be able to pay certain deductible expenses this year that you might
have waited to pay next year. This strategy only makes sense, of course, if you are not
expecting to be in a higher tax bracket next year.
If you have business income, you can delay billing your customers or clients, so you don’t
receive payment until after December 31. Similarly, you can speed up payment of some of your
expenses to get a deduction this year. The Qualified Business Income Deduction (QBI) phases
out above certain income limits, so it may be an important consideration if you can keep your
income below the thresholds. It is discussed later in this article.
If you have a rental property, and your income is under $100,000, you may be eligible to deduct
up to $25,000 of rental losses against your regular income. The deduction phases out to zero
when your income goes over $150,000. It is a good incentive to defer income or accelerate
expenses if you are in this range.
Talk to your employer about receiving any year-end bonus after December 31, so you don’t pay
tax on it until next year. Alternatively, think about contributing all or part of your bonus to your
401(k) account.
Medical expenses are deductible when you pay them, not when you receive the treatment or
the bill. Paying bills sooner, or holding them off until next year could possibly result in an
itemized deduction either this year or next year.

INCOME ISSUES

Social Security Income
If you receive Social Security, the taxable amount can range from zero to 85% percent of the
total, in a calculation that factors in your other income. The calculation is 50% of your social
security income plus your other income – if this total is over $25,000 ($32,000 if married) you
may pay tax on 50% of your social security, and if it is over $34,000 ($44,000 if married) it is
85%.
Social Security benefits are increasing by 2.8% for 2026, so you may want to defer receipt of
other income if you are in these ranges. Two strategies come to mind: – –
Limit your capital gains income – by delaying sales, or by harvesting losses to offset
gains, as discussed below.
Donate your RMD to a charity – but you would need to do a careful calculation to be
sure it is the best alternative.
A few states tax social security, but in most states, including California, it’s not taxable.
Unemployment Income
Don’t forget that unemployment is taxable for federal purposes, although some states,
including California, do not tax it. Be sure to have taxes withheld from your payments to avoid
an unpleasant surprise at tax time.
Stock Options and Awards
Stock options and grants are a popular form of compensation. They come in several forms,
however, and the tax consequences can vary widely. Careful planning can have a big impact.
Examples include:
Incentive stock options (ISOs) – When you exercise an ISO, the gain over the option price is not
immediately taxable if you don’t sell the stock right away. BUT the gain is factored into the
Alternative Minimum Tax (AMT) calculation. This can result in a surprise tax bill, and may cause
cash flow problems if you don’t plan ahead. Consult a tax professional at the time you receive
the ISOs, rather than after you exercise them. Careful timing may reduce your tax bill
substantially.
Restricted stock units (RSUs) – Generally, the value of a restricted stock award is taxable as
ordinary income at the time it vests (ie. when you take full ownership of the shares). If you hold
the vested stock for over a year before selling it, then any gain in value while you hold the stock
is taxed at lower capital gains rates. BUT if you work for a startup, the stock generally has little
or no value at the time of the award, and the hope is that it will increase in value by the time it
vests. You can make a Section 83(b) election to be taxed on the value (possibly zero) at the time
of the award, instead of at the time of vesting. This means that if the stock vests any time after
one year, the entire gain in value is taxed at capital gains rates.
Non-qualified stock options (NSOs) – When you exercise a NSO, any gain over the option price
and the value at the time of exercise is taxed as ordinary income. If you hold the stock for over
a year, any gain while you held the stock is generally taxed at lower capital gains rates. Carefully
choosing the exercise dates may reduce your tax bill.

Investment Income / Losses
Take Investment Losses – If you have losses on taxable investments, think about selling them
this year. They will offset any capital gains you may have, but even if your losses are more than
your gains, you can use up to $3,000 per year to reduce other income, and you can carry any
excess losses forward to reduce capital gains in future years.
Be careful of Wash Sales – If you sell stock at a loss, and repurchase it within 30 days, it is called
a Wash Sale, and you can’t deduct the loss. You can’t repurchase it in your IRA, either. This can
cause a nasty tax surprise if you aren’t paying attention when you sell at a loss in December,
and repurchase in January. Items to consider: – –
Buying an option on the same stock within 30 days also makes it a wash sale.
If you receive a stock grant within 30 days of selling the same stock at a loss, the sale is
considered a wash sale.
Take investment gains (maybe) – If your income drops below specific levels, tax on capital gains
may be lower. If your taxable income is going to be under $48,350 ($96,700 if married) there is
no tax on capital gains. If income is under $533,400 ($600,050 if married) your tax on capital
gains is only 15%. The rate above those limits is 20%. States, including California, may not have
special capital gains rates. The limits vary if your filing status is Head of Household or Married
Filing Separately.
Remember that investment income may also be subject to an additional 3.8% Net Investment
Income Tax (NIIT) if your income is over $200,000 ($250,000 if married)
Consider investment in REITs – The Qualified Business Income (QBI) deduction applies to
qualified REIT dividends, so taxable income is reduced by 20%.
Timing of mutual fund investments – Purchase mutual fund shares after the dividend date, or
wait until after the end of the year. If you buy now and receive a dividend before the end of the
year, you will pay tax on the dividend, and the value of your investment will be reduced by the
dividend – unless you reinvest it.
Small corporations – Consider investing in corporations with assets under $50 million. If you
hold the stock for 5 years, there may not be any tax on capital gains.
Estimated taxes – It’s a good habit to have your investment adviser give you estimates of your
investment income for the year. Estimates can be increased or decreased as the year goes on.
And don’t forget those real estate partnerships you invested in. They can give you big surprises
if there are significant transactions during the year. With proper planning, you can avoid big tax
surprises, and make appropriate estimated payments during the year.
The “Kiddie Tax” – If your dependent children (under 19, or under 24 if they are full time
students) have investment income over $2,700, it will be taxed at your marginal tax rate, not
theirs. So think carefully before you give them stocks to sell to pay for college.

Rental and Other Passive Income / Losses
Rental income and income from limited partnership investments are generally considered
passive income. When there is net income, it is taxed the same as other nonpassive income, but
losses are treated differently. Passive losses can only be deducted from passive gains.
Otherwise, they are carried forward as suspended losses to be applied against future passive
gains, or deducted at the time you dispose of the entire property or investment. Passive income
is in a different category than investments in stocks and other securities, and the rules are
different. There is an exception for some real estate losses on actively managed properties, as
discussed previously.
If you anticipate a passive gain on an investment, you may be able to identify a passive loss that
you can use to deduct against it.

Virtual Currency
If you receive Bitcoin or another crypto currency in exchange for services or for other reasons,
your income is the value of the currency at the time you receive it.
Bitcoin and other crypto currencies are treated as investments for tax purposes. That means
that every time you sell – or even just trade for another currency – it is treated as a sale of an
investment, and any gain is taxable. You will need to report all sales, trades and other
transactions, and you will need to know the cost basis for each. The cost basis of the currency
sold or traded is the value at the time you bought, traded or received it.
Wash sales – Interestingly, the wash sale rules do not apply to crypto currencies. So you can
take a deductible loss to offset capital gains, then buy back the currency before the 30 day
wash sale time period

Gambling Winnings
Gambling winnings are taxable. This includes lotteries, raffles, casino games, sports betting,
poker tournaments, horse racing, etc. Depending on the amount and type of winnings, you may
receive form W-2G which reports the income and tax withholdings. Tax withholding applies to
all winnings, including non-cash prizes. That means you may have to make a large tax payment
to the IRS and the state if you win a car, or you may have to pay tax on a trip this year, even if
you don’t take the trip until next year.
Your gambling expenses are deductible up to the amount of winnings, but you only get the
benefit if you itemize your deductions. In 2026 expenses will be limited to 90% of winnings.

Education and Scholarships
If you or your dependent were a post-secondary student, and received Form 1098-T you may
be eligible for the American Opportunity Credit (up to $2,500 for the first 4 years of
undergraduate study) or the Lifetime Learning Credit (up to $2,000 for graduate or non-degree
studies). The credits phase out for incomes over $80,000 ($160,000 if married)
Scholarships reduce the education expenses eligible for the tax credits. Scholarship income in
excess of tuition cost is taxable.
Student loan interest up to $2,500 is deductible, but the deduction phases out for incomes over
$85,000 ($170,000 if married)

INTERNATIONAL ISSUES

The rules regarding reporting of overseas assets and transactions are wildly complex, and the
penalties for noncompliance are severe.
Worldwide income – The US taxes residents on all worldwide income, including foreign
pensions, interest, dividends or rental income. There are tax credits and exemptions available
to reduce the possibility of double taxation in the event the same income is also taxed in
another country. States may not have such credits or exemptions. California is an example.
Financial assets – Overseas financial assets in excess of $10,000 at any time during the year
must be reported (but not taxed) on Form FinCEN 114 (aka FBAR). If accounts total over
$50,000 ($100,000 if married), they must also be reported (but not taxed) on your tax return.
Financial assets include bank accounts, investment accounts, pension funds, investment
accounts and accounts on which you are a signatory, even if you have no financial interest.
Controlled foreign corporation – If you are an officer or own shares in a foreign corporation
that is more than 50% owned by US residents, there is complex reporting required. If you act
promptly in the first year of reporting, you may be able to reduce the reporting burden, and
possibly reduce your tax liability.
Passive Foreign Investment Company (PFIC) – If you own shares in a foreign company that
generates more than 75% of its income from passive activities, such as a foreign mutual fund,
the investment income, including gains on disposition, is taxed at prohibitively high tax rates
based on a wildly complex calculation, BUT the impact may be substantially reduced if you act
promptly in the first year of reporting. Consult a tax professional for the best course of action in
these cases.
Foreign gifts – Gifts from foreign individuals of over $100,000 must be reported (but not taxed).
If the gift is from a foreign corporation or partnership, then the reporting threshold is $20,116
for 2025.
Foreign trusts – if you control a foreign grantor trust, or if you are a beneficiary of a foreign
trust, there is complex reporting required, and possible tax liability.
Foreign owned corporation or LLC – If you are not a US resident, and own a US company or LLC,
again, there are complex reporting requirements.
Foreign earned income exclusion – If you lived outside the US for over 330 days during a 365
day period, and pass the bona fide residence test or the physical presence test, you and your
spouse may each be eligible to exclude foreign earned income of up to $130,000. You would
pay only foreign tax, if any, on this income. Amounts over that will be taxed in the US, but will
be eligible for a foreign tax credit.

INDEPENDENT CONTRACTOR vs EMPLOYEE

You may find that your most effective status is either independent contractor or employee.
There is increasing emphasis on classifying workers as employees, though, rather than
independent contractors. California, for example, makes it very difficult to classify workers as
independent contractors. Employers are required to pay a portion of an employee’s social
security and Medicare taxes, workers compensation and other state taxes. They may also be
required to extend health insurance and retirement benefits.
While some workers are negatively impacted by the independent contractor classification,
others find significant benefits. Highly paid contractors can deduct their business expenses
(which are not deductible by employees), make substantial contributions to SEP IRA retirement
plans or individual 401(k)s, and deduct their health insurance premiums.

HEALTH INSURANCE INDIVIDUAL MANDATE

There is no federal penalty for not having health insurance, but subsidies are available under
the Affordable Care Act. It is important to note that some states may have penalties for not
having health insurance. California and Massachusetts are examples. Changes may result from
the health coverage debate currently under way in the federal government.

RETIREMENT PLANS

Make contributions to your retirement plans. The future comes before many of us are ready for
it, and it’s easy to underestimate what it will take to live comfortably when we are past our
peak earning years.
401(K) Plan – including 403(b) and 457(b)
For 2025, you can deduct contributions of up to $23,500 ($31,000 if you’re over 50) to your
401(k) or similar plan. Your employer can contribute as well, up to a total of employee and
employer contributions of $70,000 ($77,500 if you are over 50). Contributions must be made as
deductions from your salary. Consider contributing your year-end bonus to your 401(k) plan –
but at least make sure you contribute enough to get the full amount of your employer’s
matching program… It’s free money.
In 2025 the additional “catch up” contribution is $11,250 if you are age 60, 61, 62 or 63. So your
personal contribution can be up to $34,750, and total employer and employee contributions
$81,250.
Traditional IRA
You may be able to deduct a contribution of up to $7,000 ($8,000 if you’re over 50) to a
traditional IRA. You have until April 15, 2026 to make a contribution for 2025, so you can see
how it will affect your taxes before making the payment. There are income limitations if you
and/or your spouse participate in a 401(k) or other qualified retirement plan with your
employer. The additional catch-up contribution for ages 60-63 does not apply to IRAs.
Age limit – There is no federal age limit for contributing to a traditional or ROTH IRA, but states
may have different rules. In 2025, California now allows a deduction for IRA contributions after
age 70 ½.
ROTH IRA
Contributions to a ROTH IRA are not deductible, but you won’t pay tax on the investment
income of the plan if you wait until retirement age. There are restrictions on ROTH
contributions based on your income, though. April 15, 2026 is the deadline for ROTH
contributions for the 2025 tax year.
I have never seen a definitive answer to whether it’s better to choose a ROTH or a traditional
IRA.
Backdoor ROTH – If you are in an income category where you are not eligible to deduct
contributions to a traditional IRA or contribute to a ROTH IRA, consider a “Backdoor ROTH.” You
can make a non-deductible contribution to a traditional IRA, then convert it to a ROTH. It
sounds a bit sneaky, but it is allowed. The contribution can be made over and above the
$70,000 limit on qualified plans.
Mega Backdoor ROTH – IF your company’s plan allows it… you may contribute up to $46,500 of
after-tax funds to your 401(k), and IF your company’s plan allows it, roll it over into a ROTH IRA.
This is in addition to your maximum $23,500 ($31,000 if over age 50) pretax contribution. Total
employer and employee contributions are limited to $70,000 ($77,500 if over age 50), so your
employer’s contribution would reduce the mega backdoor ROTH contribution. The enhanced
limit for ages 60-63 also applies here.
SEP IRA
If you’re self-employed or have an S Corporation or partnership, you can contribute to a SEP IRA
or a similar plan. You can deduct approximately 20% of your net self-employment income, up to
$70,000 ($77,500 if over age 50). The additional catch-up contribution for ages 60-63 does not
apply to SEP IRAs. The good news is that you can make your contribution all the way up to the
filing deadline, including extensions, which gives you plenty of time to calculate your income. If
you have an S Corp, you can also take advantage of a SEP IRA, but it must be paid by the
corporation, and the amount is limited to 25% of the W-2 salary you receive from the
corporation. If you are a partner in a partnership or LLC, the contributions must be made by the
partnership, and not by the individual partner.
Remember that you have to include employees in the plan, and make contributions if they
meet certain criteria.
Solo 401(k)
If you are self-employed or have an owner-operated business, you may find that a Solo 401(k)
plan offers you a better benefit than a SEP IRA. While the “employer” contribution is limited by
your income (or by your W-2 salary from an S Corporation) you can still make an additional
personal contribution of up to $23,500 ($31,000 if over age 50, and $34,750 if age 60-63). It is
recommended to set up the plan by the end of the current year. Total employer and employee
contributions are still limited to $70,000, $77,500 and $81,250 depending on your age.
Form 5500 – If your 401(k) balance is over $250,000 you need to file Form 5500, providing plan
information. Assuming you have fewer than 100 employees in the plan, you can file Form 5500
SF online.
Remember that you have to include employees in the plan, and make contributions if they
meet certain criteria.
Defined Benefit Plan
If you have a successful corporation or partnership, you may consider a defined benefit
retirement plan. Unlike SEP IRAs and 401(k)s, which are “defined contribution” plans, these use
actuarial calculations to achieve a specified benefit at a specified retirement date. There are
important cost and other business issues involved in the decision, but you could potentially
take a deduction for the contribution required to fund an annual benefit of up to $280,000 –
potentially much more than a SEP IRA or 401(k). Note that this contribution is in addition to
contributions to a SEP IRA or 401(k) plan.
These plans work best for small businesses, as employees must generally be covered as well as
owners and officers.
Retirement Distributions
Generally speaking, don’t take money out of your traditional IRA or 401(k) plan if you are under
59 ½ years old. There is a 10% penalty on top of the regular tax, and some states have an
additional penalty. There are also penalties for early withdrawal from a ROTH, but only on the
accumulated income, as your original after-tax contributions are not taxed a second time.
Before you take an early withdrawal, though, remember that you can borrow up to $50,000
from your 401(k), 403(b) or 457 plan – but not your IRA – and it won’t be taxed if you pay
interest and repay it within 5 years.
You can take a distribution from your IRA (not your 401(k)) without a penalty if you make
qualified tuition payments, and several other special situations, including up to $10,000 if you
are a first-time home buyer. You will pay tax on the distribution, but not the penalty.
Remember that if you have a 401(k), and plan to make tuition or home purchase payments, roll
the 401(k) over into a traditional IRA first.
Rollover
Consider rolling over your traditional IRA into a ROTH IRA. You will pay tax on the full amount
when you roll it over, but if you expect to be in a low tax bracket this year, for any reason, this
might be a good time to do it. Also, there is no required minimum distribution from a ROTH IRA
after age 72. Be sure you understand how much tax you will pay on a conversion before you do
it, though, because you can’t change your mind and undo a conversion.
Required Minimum Distribution (RMD)
Minimum required distributions from your traditional IRA or 401(k) for those over age 72 are
required for 2025. There is a 25% tax if you don’t take a distribution. Don’t freak out if you miss
the first one, though. They will generally abate the penalty, as long as you act quickly to correct
the oversight.
Consider contributing your required minimum distribution (RMD) to a charity, to avoid paying
tax on it. As discussed above, this may be a good strategy if Social Security is a significant part
of your income.

HEALTH SAVINGS ACCOUNT

You can make a deductible contribution up to $4,300 ($8,550 for family coverage) to a Health
Savings Account (HSA) for payment of qualified medical expenses. If you are over 55, you and
your spouse can each contribute an additional $1,000. You must have a high deductible health
plan to qualify. The result is that your out-of-pocket medical expenses are paid with tax free
funds. Many employers offer such plans, but they are available for individuals as well. With
some exceptions, you can carry forward unused balances to future years. Some states,
including California, don’t recognize HSAs, and don’t allow the deduction. If you don’t have an
HSA, you really should look into it.

CHARITABLE DONATIONS

Charitable donations are a nice deduction, assuming your total deductions exceed the Standard
Deduction. Cash donations are limited to 60% of income, with any excess carried over for up to
5 years.
If you have shares of stock that have appreciated in value, you might reduce your tax by
donating the stock to charity, instead of selling it. If you have owned the stock for more than
one year, you can deduct the entire appreciated value of the stock, and avoid capital gains tax
or Net Investment Income Tax (NIIT). The limit is 30% of your income, but any excess can be
carried forward for up to 5 years.
Don’t contribute stock or other assets that have gone down in value. You are better to sell, and
take the capital loss.
If you are over 70 1/2 years of age, you can make a Qualified Charitable Distribution of up to
$108,000 (by both you and your spouse) from your IRA, SEP or SIMPLE IRA directly to a charity.
This can include all or part of your Required Minimum Distribution. Such a Qualified Charitable
Distribution is not taxable, even if you don’t itemize your deductions.

GIFTS

You can make tax-free gifts of up to $19,000 ($38,000 for a married couple) per recipient in2025. Remember that gifts are not taxed to the recipient, but to the giver. Gifts in excess of this
amount require filing a gift tax return, but you won’t actually pay tax until you go over your
lifetime limit of $13,990,000 (or $27,980,000 for a married couple)
Qualified payments for tuition or medical expenses are NOT considered a gift, as long as they
are paid directly to the educational institution or the medical provider.
Consider contributing to a 529 savings plan for education. The contribution is not deductible,
but income on the account is not taxable to the recipient if the funds are used for qualified
education expenses. Contributions are subject to the gift tax rules, but you can spread a
contribution over 5 years, so for example, a $95,000 payment will be considered $19,000 per
year for 5 years. There can be differences between federal and state treatment of 529 plans.
Some states allow a tax deduction for 529 plan contributions. California is not one of those
states. If there are unused funds in the plan, up to $35,000 can be gradually rolled over into a
ROTH IRA for the beneficiary. There are many restrictions on these rollovers, but they do
provide the possibility of relief.
Gift vs inheritance – Some people, in anticipation of their death, make gifts of real estate or
other valuable property to family members. Be sure to speak with a tax advisor before you do
this, as an inheritance could have a much more favorable tax benefit to your family members
than a gift.

BUSINESS ISSUES – SOLE PROPRIETORS, CORPORATIONS AND PARTNERSHIPS

Business Entities
If you are a sole proprietor, an independent contractor, or operate your business as a single
member LLC, you will report your income and expenses on Schedule C of your tax return (Profit
or Loss From Business). This is a schedule on which you are actually required to report all of
your allowable expenses.
If you are a shareholder of an S Corporation, you receive income from the corporation in two
ways. First, you are considered an employee of the corporation, and you are required to pay
yourself a “reasonable” W-2 salary. Second, the corporation doesn’t pay tax (except for some
state tax) and the company’s income (after deducting your salary) “passes through” as income
on your personal tax return. Because you are taxed on all of your income, when you take funds
out of the corporation, it is a tax-free distribution, as long as you have “basis” to draw from (see
discussion below)
If you are a partner in an LLC or partnership, the partnership doesn’t pay tax (except for some
state tax) and your share of the partnership’s income “passes through” on Schedule K-1 as
income on your personal tax return. If you receive payments for your investment or for
performing services that are not based on profitability, you receive a “guaranteed payment”
listed on the same Schedule K-1. You do not receive a W-2 salary from your partnership, but
your guaranteed payments and self-employment income from the partnership are subject to
social security and Medicare tax. You can take tax-free distributions, as long as you have “basis”
to draw from (see discussion below).
If you are the only member of your LLC, it is a Single Member LLC, and is considered a
“disregarded entity” because it is only recognized by your state. The IRS doesn’t recognize it at
all. You report your income on Schedule C or E on your personal tax return, just as if the LLC
didn’t exist. You may need to file a state return, and there may be a state tax. California has a
minimum tax of $800, and additional fees based on gross revenue.

Income and Expenses
All your business or independent contractor income is taxable, regardless of whether you
receive Form 1099 from your clients or customers.
The guideline for deductible expenses is to determine the ordinary and necessary expenditures
you needed to make in order to earn the business income you report. Common items include: – – – – – –
Automobile cost – You can deduct the cost of driving for business purposes. The IRS
requires that you keep a log of the trips you make for business. You can deduct your
actual auto expenses, including depreciation, gas, insurance, etc., based on the
percentage of business use to total miles driven, or you can use a standard rate
provided by the IRS. If you have a very expensive car, you may choose to use the actual
costs. Commuting to your office or a regular place of business is considered personal
mileage, and it is not deductible. Don’t try to exaggerate your mileage deduction, as the
IRS watches this item closely, and it often results in an audit.
Meals and entertainment – Only 50% of business meals can be deducted. Entertainment
is not deductible.
Home office – If you use a space in your home regularly and exclusively for business
(typically a second bedroom), and you don’t have an office elsewhere, you can deduct a
portion of your rent, mortgage interest, taxes, utilities and maintenance as a percentage
of the office space to the square footage of your entire home. This is another area that
famously draws scrutiny from the IRS.
There will be expenses that are specifically applicable to the type of business you are in.
An example is writers, producers and others in the entertainment industry often pay
commissions to agents and managers, and they can generally deduct the cost of
subscriptions to HBO or Netflix as research costs.
Health insurance – If you are not eligible for another insurance plan, for example
through your spouse’s employer, you can deduct the cost of health insurance for
yourself and your family, as long as you have net income from your business.
Retirement contribution deductions for self-employed individuals and other business
owners can be quite generous. Common plans are SEP IRAs, and for those who want to
make larger contributions, a solo 401(k) can be beneficial. See a discussion below.
Unreimbursed expenses that are not deductible for a W-2 employee can still be deducted if you
change your status to independent contractor or S Corporation (see discussion below). This can
be important in some businesses, such as the entertainment industry, where agent and
attorney commissions and fees can be significant.
Keep Records – It is important to keep documentation of your income and expenses. Especially
expenses. Most people have never been audited, so it is easy to be undisciplined about
documentation, but finding supporting documents 2 or 3 years after the fact can be a
nightmare, and deductions may be disallowed if not properly documented.
If you are a sole proprietor or independent contractor and your income reaches a certain level,
you may benefit from incorporating your business as an S Corporation. This is not for everyone,
but it could potentially lower your tax bill, depending on your income level and other tax
planning objectives. I discuss the positive and negative aspects of S Corps in the blog section of
my website.

Independent Contractors or Employees
When an employer treats a worker as an employee, they are required to pay 7.65% social
security and Medicare taxes, in addition to state unemployment, workers compensation and
other taxes. This is not required for independent contractors, so there is a significant difference
in the cost to the employer, and to potential benefits available to workers, such as participation
in health care and retirement plans. The employment taxes are passed on to the independent
contractor.
Both the IRS and individual states have very specific rules to protect workers from employer
abuse of the independent contractor classification. If you use independent contractors, you
should speak with your attorney. You may feel you need to change their status to employee.
This may increase your costs substantially, so you will need to plan for it. The penalties for
noncompliance can be severe, so it is worth careful consideration.

Qualified Business Income Deduction (QBI)
There is a potential deduction on your personal tax return of up to 20% of your Qualified
Business Income, or income from a trade or business. This applies to income from a sole
proprietor as well as a partner with pass-through income from a partnership or a shareholder
with pass-through income from an S Corporation. It also applies to REIT dividends, as
mentioned previously.
If your income (excluding capital gains and losses) is under $197,300 ($394,600 if you are
married) you will be eligible for the full 20% deduction. The benefit phases out, however, so
that there is no deduction when your income reaches $247,300 (or $494,600 if you are
married). There are exceptions, though, and this is where planning can make a difference.
If you are in a Specified Service Trade or Business (SSTB), you can’t get any benefit from the QBI
deduction after you pass the phase-out income range. SSTBs include businesses related to
health, law, accounting, consulting, performing arts and others. But if you are not a SSTB, and
your business pays W-2 wages, then you can take a QBI deduction of up to 50% of wages paid,
up to the 20% maximum deduction. Alternatively, you can use 25% of wages and 2.5% of the
undepreciated cost of property used in your business. This also applies to your share of pass
through income, wages and qualified property from a partnership or S Corporation

Depreciation Opportunities
You can deduct 100% of qualifying asset purchases up to $2,500,000 (with phase-outs if your
total purchases exceed $4 million) under Section 179. This is a tremendous incentive to buy
capital assets, which you would otherwise have to deduct over several years. There are
exclusions, but many of the excluded items are eligible for a 100% special depreciation
allowance available in 2025. These are terrific deductions. Of course, states may differ.
California allows Section 179 deductions up to $25,000, but does not have the special
depreciation allowance.
If you are planning to buy assets, buy them before year-end, and get the full tax break this year.

Net Operating Losses (NOL)
Business losses cannot be carried back to earlier years, but can be carried forward indefinitely.
Losses can only be used to offset 80% of income in any given future year. There are different
rules for farming losses. States may have different rules. California rules change regularly.
Trade or business losses are limited to $313,000 ($626,000 if married filing jointly). Losses
disallowed may be carried forward as NOLs.

Rules for S Corps and Partnerships
There are very specific rules related to S Corps and Partnerships, and now is a perfect time to
be sure you in compliance before year-end. It would be a shame to lose out on the tax benefits
of these business entities.
S Corp W-2 Salary – IMPORTANT – If you have a Subchapter S Corporation, you are an
employee of the company. You pay employment taxes on your W-2 salary, but not on the net
income of the corporation. You are required to pay yourself a “reasonable” salary, and issue
yourself a W-2 as an employee. Issuing yourself a 1099 is not a substitute. – – –
There is an incentive to pay a lower salary to reduce employment taxes, but the
“reasonable salary” requirement is there to prevent abuse.
On the other side, company SEP IRA and 401(k) contributions are limited to 25% of your
W-2 salary. The more you want to contribute, the higher your W-2 salary must be.
As discussed above, your W-2 salary can be used to take advantage of the Qualified
Business Income deduction if your income is over the phase-out range, and you are not
an SSTB. To complicate matters, though, the W-2 wages reduce income eligible for the
QBI deduction, so you will need to do some analysis before making a decision.
Retirement plans – As discussed above, there are opportunities for S Corp shareholders and
partners in partnerships and LLCs to make substantial tax-deferred contributions to SEP IRAs
and other retirement plans. The contributions are a percentage of your partnership income or
your S Corp W-2 salary. It is important to remember that the retirement plans MUST be in the
name of the S Corp or the partnership. Individual shareholders and partners cannot have their
own individual plans. Remember that if you don’t pay yourself a W-2 salary, you can’t
contribute to a SEP IRA or a 401(K) plan. Your pass-through income is not considered
“compensation” so you can’t contribute to a traditional or ROTH IRA either.
Health Insurance – Health insurance payments for yourself and your family may be deductible
on your personal return if you are a shareholder in an S Corp or a partner in a partnership or
LLC, and you meet certain requirements. Remember, though, that the payments must be made
by the corporation or LLC – or reimbursed if you make the payments yourself. Payments for
your health insurance made by your S Corp must be included as compensation on your W-2, but
are not subject to payroll taxes. Make this clear to your payroll processing company. Payments
by your partnership or LLC are treated as distributions. If you have a single member LLC, you
can make payments from your business or personal account. You can also deduct health
insurance if you are a sole proprietor/independent contractor.

C Corporations
A C Corporation is a corporation formed in your state, which you did not elect to be taxed as an
S Corporation.
The main difference is that a C Corp pays federal and state tax directly. Unlike an S Corp,
income does not pass through to the owners’ personal tax returns. Instead, profits are
distributed to the shareholders in the form of taxable dividends. For the most part, this results
in double taxation of the corporation’s income.
Most small businesses will find an S Corp to be more favorable, but there may be reasons why a
C Corp is appropriate, including investor requirements or having foreign shareholders.
Strategies for C Corporations are different than those for S Corps, as there is incentive to keep
taxable income low, reducing income subject to double taxation. There are also rules to ensure
that C Corps distribute their income promptly. Paying higher salaries and benefits to
shareholders is a common strategy to reduce double taxation.
There are rules and restrictions, but a C Corp may be converted to an S Corp with a simple
election. You would need to carefully evaluate your situation to determine whether and/or
when a conversion is appropriate.

Estimated Payments – Business
C Corporations are expected to make estimated payments directly, but S Corp shareholders and
partners in partnerships or LLCs need to pay their estimated taxes personally, because their
business income passes through to their personal returns. My website blog page has an outline
of the rules for estimated payments.
Instead of estimated payments, some S Corp shareholders make their tax payments as
withholdings from their W-2 wages. Some prefer to take monthly or quarterly payroll, and
withhold federal and state taxes at that time. Others just take distributions during the year, and
issue a W-2 in December, based on estimates and projections of their income and deductions
for the year. This can result in a big tax payment in December, though.
Either way, it is a really good idea to do the estimates before the end of the year.

Passthrough Entity Tax
A number of states have introduced plans to compensate for the cap imposed on deductions
for state and local taxes (SALT). You should check your state’s plans, as there may be action
required before the end of the year.
California introduced a Passthrough Entity Tax (PTET). A partnership or S Corporation can elect
to pay a 9.3% tax on its California income. This will result in a deduction on your federal tax
return – a state tax deduction that would not otherwise be deductible under the current SALT
limitation. This does not apply to individuals or single member LLCs. The federal cap on SALT
taxes increased in 2025 from $10,000 to $40,000, but the California PTET remains in effect.
The tax is taken as a credit on your California personal return, so there is no net California tax
impact.
The passthrough entity tax must be paid in the year of deduction. California requires that a
business make a minimum payment by June 15, and you may want to make an additional
payment so you get the federal deduction in the current year.
The California credit can’t reduce your California tax below zero, but any excess credit can be
carried forward for up to 5 years. You will need to have enough taxable income on your
personal tax return to make the plan work for you.

Basis Tracking
It is important to keep track of your basis – effectively your net investment – in your partnership
or S Corporation. This affects your gain or loss when you sell your interest, but more often it
determines whether you can recognize operating losses currently, or if you need to defer them
to future years. Your tax return includes forms that track your basis.
Your federal and state basis may be different, for various reasons, but states have generally not
required a separate basis calculation. California does require a separate calculation. While small
partnerships are exempted, it will probably cause additional work for many others. Be sure to
check what your state’s requirements are.

Basis Limitations
Income or losses from a partnership or S Corporation are not taxed directly, but pass through to
your personal tax return. Generally speaking, then, funds you distribute to yourself have
already been taxed, so they are not taxed a second time. BUT there is a limitation. You can’t
deduct a loss on your personal return if it exceeds your basis, which is your accumulated
investment in the business – capital contributions plus accumulated undistributed profits.
These suspended losses are carried forward to offset income in future years. Similarly, if you
take a distribution in excess of your basis, it is treated as a taxable dividend.
Typically, a suspended loss or an excess distribution happens when the business has loans or
other debt. The borrowed funds may be the reason why you have cash available, even though
you have already spent all of your initial investment and accumulated income.
Be aware of your basis before taking distributions from your business. It’s not uncommon to
see excess distributions accounted for as loans to the partner or shareholder. Loans can be
legitimate under certain circumstances, but the IRS is very aware that they can be used to avoid
tax on excess distributions.

Something to Think About
Do you need your LLC or S Corp? – Are you getting any real benefit from it? If you are in a state
that has a minimum LLC or S Corp tax, you may be paying for something you don’t really need.
California’s minimum tax is $800, and you’re also paying for a relatively expensive tax return. If
limited liability is a big concern, consider buying insurance that offers appropriate protection.
Closing the LLC or S Corp before year-end won’t reduce your 2025 tax bill, but it will cut future
costs… See articles I have posted previously in my tax blog on my website.