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Even if you’re still working on your 2024 tax return due in April, your 2025 taxes are taking shape right now.

Several tax amounts have changed for 2025 because of inflation and could impact your return next year. Not all tax figures are adjusted annually, and some amounts only change when Congress passes new laws.

One caveat to tax planning is the situation in Washington, where tax law changes are likely in the coming months. But for now, here are a few common questions and answers – based on what we know so far – for 2025.

 I haven’t been able to itemize deductions on my last few tax returns. Will I qualify for 2025?

Beginning in 2018, the Tax Cuts and Jobs Act (TCJA) eliminated the ability to itemize deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2025, the standard deduction amount is $30,000 for married couples filing jointly (up from $29,200 in 2024). For single filers, the amount is $15,000 (up from $14,600 in 2024) and for heads of households, it’s $22,500 (up from $21,900 in 2024). If the total amount of your itemized deductions (including mortgage interest) is less than the applicable standard deduction amount, you won’t itemize for 2025.

If I don’t itemize deductions, can I claim charitable deductions on my 2025 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations.

How much can I contribute to an IRA for 2025?

If you’re eligible, you can contribute up to $7,000 a year to a traditional or Roth IRA. If you earn less than $7,000 during the year, you can contribute up to 100% of your earned income. (This is unchanged from 2024.) If you’re 50 or older, you can make an additional $1,000 “catch up” contribution for 2024 and 2025.

I have a 401(k) plan with my employer. How much can I contribute to it?

In 2025, you can contribute up to $23,500 to a 401(k) or 403(b) plan (up from $23,000 in 2024). You can make an additional $7,500 catch-up contribution if you’re age 50 or older for 2024 and 2025. However, there’s something new this year for 401(k) and 403(b) participants of certain ages. Beginning in 2025, those who are age 60, 61, 62 or 63 can make catch-up contributions of up to $11,250.

I occasionally hire someone to clean my house. Am I required to withhold and pay FICA tax on the amounts I pay them?

In 2025, the threshold for when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc. who are independent contractors is $2,800 (up from $2,700 in 2024).

How much of my earnings are taxed for Social Security in 2025?

The Social Security tax “wage base” is $176,100 for this year (up from $168,600 in 2024). That means you don’t owe Social Security tax on amounts earned above that. You must pay Medicare tax on all amounts you earn.

How much can I give to one person without triggering a gift tax return in 2025?

The annual gift tax exclusion for 2025 is $19,000 (up from $18,000 in 2024).

How will the changes in Washington affect taxes?

The specifics of any new tax legislation depend on political and economic factors. However, there are likely to be many changes in the next few years. Republicans have signaled that they’d like to extend and possibly make permanent the provisions in the TCJA that expire after 2025. They’ve also discussed raising or eliminating the cap on the state and local tax deduction. Other proposals include expanding the Child Tax Credit and making certain types of income (tips, overtime, and Social Security benefits) tax-free. Some of these tax breaks could become effective for the 2025 tax year.

© 2025 KraftCPAs PLLC

Businesses in certain industries – restaurants, hotels, and salons, for example – typically hire employees who receive tips as a large part of their compensation. That business model, however, triggers a whole new set of tax regulations at the state and federal levels.

The tax-free temptation

During the campaign, President Trump promised to end taxes on tips. The proposal excited employees and some business owners, but so far, legislation to eliminate taxes on tips hasn’t gained much steam in Congress. For now, employers must continue to follow existing IRS rules until — or if — the law changes.

With that in mind, here are answers to questions about the current rules.

What makes a tip

Tips are optional and can be cash or noncash. Cash tips are received directly from customers. They can also be electronically paid tips distributed to employees by employers and tips received from other employees in tip-sharing arrangements. Workers must generally report cash tips to their employers. Noncash tips are items of value other than cash. They can include tickets, passes, or other items that employees receive from customers. Workers don’t have to report noncash tips to employers.

Four factors determine whether a payment qualifies as a tip for tax purposes:

1. The customer voluntarily makes a payment
2. The customer has an unrestricted right to determine the amount
3. The payment isn’t negotiated with, or dictated by, employer policy
4. The customer generally has a right to determine who receives the payment

There are more relevant definitions. A direct tip occurs when an employee receives it directly from a customer (even as part of a tip pool). Directly tipped employees include wait staff, bartenders, and hairstylists. An indirect tip occurs when an employee who normally doesn’t receive tips receives one. Indirectly tipped employees can include bussers, service bartenders, cooks, and salon shampooers.

Keeping the right records

Tipped workers must keep daily records of the cash tips they receive. To do so, they can use Form 4070A, Employee’s Daily Record of Tips, found in IRS Publication 1244.

Workers should also keep records of the dates and values of noncash tips. The IRS doesn’t require workers to report noncash tips to employers, but they must report them on their tax returns.

What employers must know

Employees must report tips to employers by the 10th of the month following the month they were received. The IRS doesn’t require workers to use a particular form to report tips. However, a worker’s tip report generally should include the:

• Employee’s name, address, Social Security number, and signature
• Employer’s name and address
• Month or period covered
• Total tips received during the period

If an employee’s monthly tips are less than $20, there’s no requirement to report them to his or her employer. However, they still must be included as income on his or her tax return.

Other requirements for employers

A business owner must send each employee a Form W-2 that includes reported tips. In addition, employers must:

• Keep employees’ tip reports
• Withhold taxes, including income taxes and the employee’s share of Social Security and Medicare taxes, based on employees’ wages and reported tip income
• Pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as reported tip income
• Report this information to the IRS on Form 941, Employer’s Quarterly Federal Tax Return
• Deposit withheld taxes in accordance with federal tax deposit requirements

In addition, larger food or beverage establishments must file another annual report. Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, discloses receipts and tips.

There is a potential perk for an employer who hires tipped workers to provide food and beverages: They might qualify for a valuable federal tax credit involving the Social Security and Medicare taxes paid on employees’ tip income.

© 2025 KraftCPAs PLLC

A Republican-led White House, Senate, and House have indicated they plan to act swiftly to make broad changes to the federal tax system. Congress is already working on legislation that would extend and expand provisions of the sweeping Tax Cuts and Jobs Act (TCJA), as well as incorporate some of President Trump’s tax-related campaign promises.

To that end, GOP lawmakers in the U.S. House of Representatives have compiled a 50-page document that identifies potential opportunities, as well as how much these tax and other fiscal changes would cost or save. Here’s a preview of potential changes that might be on the horizon.

Multiple tax cuts

The TCJA is the signature tax legislation from Trump’s first term in office, and it cut income tax rates for many taxpayers. Some provisions — including the majority affecting individuals — are slated to expire at the end of 2025. The nonpartisan Congressional Budget Office estimates that extending the temporary TCJA provisions would cost the government $4.6 trillion in lost tax revenue over 10 years.

In addition to supporting the TCJA, Trump has pushed to reduce the 21% corporate tax rate to 20% or 15%, with the intention of generating growth. He also supports eliminating the 15% corporate alternative minimum tax imposed by the Inflation Reduction Act (IRA), signed into law by President Biden. It applies only to the largest C corporations.

Regarding tax cuts for individuals beyond TCJA extensions, Trump has expressed support for:

• Eliminating the estate tax, which currently applies only to estates worth more than $13.99 million
• Repealing or raising the $10,000 cap on the deduction for state and local taxes
• Creating a deduction for auto loan interest
• Eliminating income taxes on tips, overtime pay, and Social Security benefits

He’s also said he wants to cut IRS funding, which would reduce expenses but also reduce revenues. In all, the tax-cutting plans would significantly drive up the federal deficit.

Possible revenue offsets

The House GOP document outlines numerous options beyond spending reductions to pay for the tax cuts. For example, it lists tariffs — a major plank in Trump’s campaign platform — as a potential boost. While Trump insists that the exporting countries will pay the tariffs, that cost more often is the responsibility of the U.S. importer. Economists largely agree that at least part of the cost of higher tariffs would be passed on to consumers.

The GOP document suggests a 10% across-the-board import tariff. Trump, however, has discussed and imposed varying tariff amounts, depending on the exporting country. The 25% tariffs on Canadian and Mexican products, which were imposed shortly after he began his new term, have been paused until March 4. An additional 10% tariff on Chinese imports took effect on February 4.

In addition, Trump said tariffs on goods from other countries, including the 27-member European Union, could happen soon.

The House GOP document also examines generating savings through eliminating or lowering other tax breaks. Here are some of the options:

The mortgage interest deduction. Suggestions include eliminating the deduction or lowering the current $750,000 limit to $500,000.

Head of household status. The document looks at eliminating this status, which provides a higher standard deduction and certain other tax benefits to unmarried taxpayers with children compared to single filers.

The child and dependent care tax credit. The document considers eliminating the credit for qualified child and dependent care expenses.

Renewable energy tax credits. The IRA created or expanded various tax credits encouraging renewable energy use, including tax credits for electric vehicles and residential clean energy improvements, such as solar panels and heat pumps. The GOP has proposed changes ranging from a full repeal of the IRA to more limited deductions.

Employer-provided benefits. Revenue could be raised by eliminating taxable income exclusions for transportation benefits and on-site gyms.

Health insurance subsidies. Premium tax credits are currently available for households with income above 400% of the federal poverty line. (Those amounts phase out as income increases.)

Revenue could be raised by limiting such subsidies to what the document calls the “most needy Americans.”

Education-related breaks are also being assessed. The House GOP document looks at how much revenue could be generated by eliminating credits for qualified education expenses, the deduction for student loan interest, and federal income-driven repayment plans. The GOP is also weighing the elimination of interest subsidies for federal loans while borrowers are still in school and imposing taxes on scholarships and fellowships, which currently are exempt.

There may be hurdles

Republican lawmakers plan on passing tax legislation using the reconciliation process, which requires only a simple majority in both houses of Congress. However, the GOP holds the majority in the House by only three votes.

That gives potential holdouts within their own caucus a lot of leverage. For example, deficit hawks might oppose certain proposals, while centrist members may prove reluctant to eliminate popular tax breaks and programs.

The GOP hopes to enact tax legislation within President Trump’s first 100 days in office, but that may be challenging as Republican representatives are likely to oppose moves that would hurt industries in their districts, such as the reduction or elimination of certain clean energy incentives.

© 2025 KraftCPAs PLLC

The deadline is coming up fast for businesses to submit a slate of annual tax forms.

By January 31, 2025, employers are required to file these items with the federal government and furnish them to employees:

Form W-2, Wage and Tax Statement. Form W-2 shows the wages paid and taxes withheld for the year for each employee. It must be furnished to employees and filed with the Social Security Administration (SSA). The IRS notes that “because employees’ Social Security and Medicare benefits are computed based on information on Form W-2, it’s important to prepare Form W-2 correctly and timely.”

Form W-3, Transmittal of Wage and Tax Statements. Anyone required to file Form W-2 must also file Form W-3 to transmit Copy A of Form W-2 to the SSA. The totals for amounts reported on related employment tax forms (Form 941, Form 943, Form 944, or Schedule H for the year) should agree with the amounts reported on Form W-3.

Failing to timely file or include the correct information on either the information return or statement may result in penalties.

Freelancers and independent contractors

The January 31 deadline also applies to Form 1099-NEC, Nonemployee Compensation. This form is furnished to recipients and filed with the IRS to report nonemployee compensation to independent contractors.

If the following four conditions are met, payers must generally complete Form 1099-NEC to report payments as nonemployee compensation:

• You made a payment to someone who isn’t your employee.
• You made a payment for services in the course of your trade or business.
• You made a payment to an individual, partnership, estate, or, in some cases, a corporation.
• You made a payment of at least $600 to a recipient during the year.

Keep in mind that when the IRS requires you to “furnish” a statement to a recipient, it can be done in person, electronically, or by first-class mail to the recipient’s last known address. If forms are mailed, they must be postmarked by January 31.

Your business may also have to furnish a Form 1099-MISC to each person to whom you made certain payments for rent, medical expenses, prizes and awards, attorney’s services, and more. The deadline for furnishing Forms 1099-MISC to recipients is January 31, but the deadline for submitting them to the IRS depends on the method of filing. If they’re being filed on paper, the deadline is February 28. If filing them electronically, the deadline is March 31.

© 2025 KraftCPAs PLLC

Earned wage access (EWA) policies are popping up at companies of every size in every industry, often becoming a key selling point to potential employees.

For industries facing labor shortages – take construction, for example – a perk like EWA could help attract job candidates and motivate current employees to stick around. Regardless of the industry, be aware of all the perks and downsides before jumping into the EWA concept.

Nuts and bolts

EWA goes by several other names — including early pay, same-day pay, instant pay, and daily pay. The perk allows employees to access part of or all their earned but unpaid wages before their next payday. Participants can usually receive the funds within one to three business days at no charge, or sooner if they pay a fee. Funds can be disbursed as a direct deposit to the worker’s bank account, a prepaid card, or a digital wallet.

Although employees may engage an EWA provider directly, employer-sponsored programs are becoming more common. Under this model, an employer usually contracts with a third-party provider to fund early payroll disbursements based on the employer’s time and attendance records. Because the provider is responsible for funding, EWA doesn’t affect the employer’s cash flow and requires no changes to its payroll systems. The provider is repaid through deductions from participants’ paychecks every payday. Some also charge employers fees for setup, maintenance, or transactions.

The popularity of EWA has been climbing steadily. A 2022 survey by human capital management solutions provider ADP found that four out of five employers already offered some form of EWA. What’s more, according to the Consumer Financial Protection Bureau (CFPB):

• The number of EWA transactions processed jumped by more than 90% from 2021 to 2022
• More than 7 million workers accessed approximately $22 billion in 2022

The CFPB attributes the high demand to the fact that about 75% of workers in the U.S. are paid every two weeks or once a month. The wait time between payments can create a cash crunch for employees, who may turn to more costly payday loans, credit cards, bank overdrafts, or other options.

Pros and cons

The benefits of EWA for participants are obvious. They can tap their wages before payday without going through a credit check or satisfying an income requirement. Even with fees for instant access, EWA is often cheaper than a payday loan. And participants don’t have to worry about dealing with collection agencies, accumulating interest at staggering rates, or lowering their credit scores.

The advantages for employers might not be as apparent, but they are significant.

For starters, personal finances are a leading cause of stress for employees. These issues often undermine employees’ performance, creates distractions, and lowers productivity. Money troubles may even drive employees to look for new jobs. In other words, workers’ financial concerns are bad for their employer.

Additionally, many workers now expect employers to offer EWA in today’s on-demand environment. According to the ADP survey, about 60% of millennial respondents said they’d prioritize a job offer that includes EWA, and 75% said the availability of it would influence their acceptance of an offer.

Still, there are potential issues to consider before rolling out an EWA program.

First, participants may hold unrealistic expectations of EWA and grow disgruntled if it doesn’t solve their financial woes. Design your program carefully and clearly communicate all its features and limitations. In other words, implementing and administering EWA will consume time and resources.

Second, if you partner with a third-party EWA provider and participants encounter problems, your business will still take the blame. It’s critical to carefully vet potential providers and choose one you can trust and work with comfortably. Some providers charge employers fees for their services, so get a clear understanding of every potential fee and their impact on your cash flow.

© 2025 KraftCPAs PLLC

Despite a U.S. Supreme Court ruling Thursday in favor of the Corporate Transparency Act, enforcement of the law remains on hold.

The CTA and its beneficial ownership information requirement would force about 32 million small businesses in the U.S. to file information about their owners for face penalties. The bipartisan law passed in 2021 was intended to combat money laundering and terrorist financing by fraudulent businesses. Opponents of the law say its requirements place undue burdens on small businesses.

It was scheduled to go into effect January 1, 2025, before a series of court decisions changed its course.

On December 3, Judge Amos Mazzant of the U.S. District Court for the Eastern District of Texas ordered a nationwide injunction that froze enforcement of the law. That injunction was the subject of Thursday’s Supreme Court decision, which granted the Biden administration’s appeal to reinstate the CTA. The Court did not explain its ruling.

However, in a separate ruling on January 7, Judge Jeremy Kernodle – also of the Eastern District of Texas – issued his own nationwide injunction that also blocks enforcement of the CTA. That ruling stands and has not yet been appealed by the government.

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which would oversee implementation of the law, said companies and trusts aren’t currently obligated to file BOI reports and will not face penalties while the injunction is in place. To avoid potential deadlines if the law is ruled enforceable, companies can voluntarily file BOI reports now.

Filing is free, and BOI forms and resources are available online from FinCEN.

© 2025 KraftCPAs PLLC

The IRS will start processing 2025 individual income tax returns on January 27. Even if you’re not ready to file yet, there are perks to filing sooner rather than later.

Here are answers to often-asked questions about filing federal returns. Our free 2025 tax planning guide has even more guidance on filing your taxes.

How can your tax identity be stolen?

Tax identity theft occurs when someone uses your personal information — such as your Social Security number — to file a fraudulent tax return and claim a refund in your name. One of the simplest and most effective ways to protect yourself from this type of fraud is to file your tax return as early as possible.

The IRS processes returns on a first-come, first-served basis. Once your legitimate return is in the system, thieves will have a tougher time filing a return under your name.

Are there other advantages to filing early?

In addition to protecting yourself from tax identity theft, another advantage of filing early is that if you’re getting a refund, you’ll get it faster. The IRS expects to issue most refunds in less than 21 days. The wait time is often shorter if you file electronically and receive a refund by direct deposit into a bank account.

Direct deposit also avoids the possibility that a refund check could be lost, stolen, returned to the IRS as undeliverable, or caught in mail delays.

What’s this year’s deadline?

For most taxpayers, the filing deadline to submit 2024 returns or file an extension is Tuesday, April 15, 2025. The IRS has granted extensions to victims of certain disasters to file tax returns.

What if I can’t file by April 15?

You can file for an automatic extension on IRS Form 4868 if you’re not ready to file by the deadline. If you file for an extension by April 15, you’ll have until October 15, 2025, to file. Remember that an extension of time to file your return doesn’t grant you any extension of time to pay your taxes. You should estimate and pay any taxes owed by the regular deadline to help avoid penalties.

When will W-2s and 1099s arrive?

To file your tax return, you need all your Forms W-2 and 1099. January 31 is the deadline for employers to issue 2024 W-2s to employees and, generally, for businesses to issue Forms 1099 to recipients of any 2024 interest, dividend, or reportable miscellaneous income payment, (including those made to independent contractors.

If you haven’t received a W-2 or 1099 by February 1, contact the entity that should have issued it. If that doesn’t help, ask your tax preparer about next steps.

What if I can’t pay my tax bill in full?

If you can’t pay what you owe by April 15, there are generally penalties and interest. You should still file your return on time because there are failure-to-file penalties in addition to failure-to-pay penalties. Try to pay as much as possible and request an installment payment plan in the meantime.

© 2025 KraftCPAs PLLC

As audit season gets underway for calendar-year entities, materiality will be the subject of many discussions – but as a business owner, how familiar are you with materiality and how it’s determined?

Simply put, materiality determines what’s important enough to be included in the financial statements and what can be omitted. It may also affect the nature, timing, and extent of audit procedures.

What’s materiality?

The Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) voted in 2019 to align the definition of materiality in the auditing standards with the definition used in financial reporting under U.S. Generally Accepted Accounting Principles (GAAP).

The current definition of materiality is: “The omission or misstatement of an item in a financial report is material if, in light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.”

Under current rules, there are no longer inconsistencies between the AICPA standards and the definition of materiality used by the U.S. judicial system and other U.S. standard-setters and regulators. This definition was also the original definition in effect from 1980 until 2010.

However, the move to align the definitions in the United States has created inconsistencies with the international interpretation of this concept. According to the definition set by the International Accounting Standards Board, misstatements and omissions are considered material if they, individually or in the aggregate, could “reasonably be expected to influence the economic decisions of users made on the basis of the financial statements.”

How auditors set the threshold

No prescribed materiality threshold applies to all entities. Instead, the AICPA instructs auditors to rely on their professional judgment to determine what’s material for each company based on such factors as:

• Size
• Industry
• Internal controls
• Financial performance

During fieldwork, auditors may ask about line items on the financial statements that have changed materially from the prior year. A “materiality” rule of thumb for small businesses might be to inquire about items that change by more than, say, 10% or $10,000. For example, if marketing expenses or labor costs increased by 25% in 2024, it may raise a red flag, especially if the increase didn’t correlate with an increase in revenue. Businesses should be ready to explain why the cost went up and provide supporting documents (such as invoices) for auditors to review.

However, auditors may consider certain transactions or events to be material despite being relatively small in monetary value. Examples include related-party transactions, loan covenant violations, or misstatements that impact contractual obligations or regulatory compliance.

When CPAs attest to subject matters that can’t be measured — such as sustainability programs, employee education initiatives or fair labor practices — establishing what’s material is less clear. As nonfinancial matters become increasingly important, it’s critical to understand what information will most significantly impact stakeholders’ decision-making process. In this context, “stakeholders” could refer to more than just investors. It also could mean customers, employees, suppliers, and communities — many groups to consider when determining materiality.

How materiality impacts procedures

The materiality threshold affects more than audit planning and the audit opinion. It also guides the audit’s scope and procedures. Auditors typically apply more robust procedures in areas with a high risk of material misstatement. For example, high-risk accounts may call for detailed testing, while low-risk accounts may be verified using analytical reviews.

Materiality also guides the sample size auditors use for testing transactions and balances. In high-risk areas, where material misstatements are more probable, auditors may choose larger sample sizes to increase the accuracy of their testing. Smaller samples may be used in low-risk areas with less likelihood of material misstatements.

If misstatements are discovered during fieldwork, auditors apply the materiality threshold to assess whether to adjust the financial statements. If management refuses to make an adjusting journal entry to correct a misstatement, the auditor may issue a qualified or adverse opinion.

Cornerstone of financial statement audits

Materiality helps auditors focus on areas most likely to impact financial statement users’ decisions. Applying this concept throughout an audit balances thoroughness with practicality, thereby enhancing the audit’s effectiveness and efficiency. Likewise, a solid understanding of this concept helps business owners and external stakeholders appreciate the rigor involved in financial audits.

© 2025 KraftCPAs PLLC

If you own a growing, unincorporated small business, you may be concerned about high self-employment (SE) tax bills. The SE tax is how Social Security and Medicare taxes are collected from self-employed individuals like you.

SE tax basics

The maximum 15.3% SE tax rate hits the first $168,600 of your 2024 net SE income. The 15.3% rate is comprised of the 12.4% rate for the Social Security tax component plus the 2.9% rate for the Medicare tax component. For 2025, the maximum 15.3% SE tax rate will hit the first $176,100 of your net SE income.

Above those thresholds, the SE tax’s 12.4% Social Security tax component goes away, but the 2.9% Medicare tax component continues for all income.

How high can your SE tax bill go? Maybe a lot higher than you think. The real culprit is the 12.4% Social Security tax component of the SE tax, because the Social Security tax ceiling keeps getting higher every year.

To calculate your SE tax bill, take the taxable income from your self-employed activity or activities (usually from Schedule C of Form 1040) and multiply by 0.9235. The result is your net SE income. If it’s $168,600 or less for 2024, multiply the amount by 15.3% to get your SE tax. If the total is more than $168,600 for 2024, multiply $168,600 by 12.4% and the total amount by 2.9% and add the results. This is your SE tax.

Here’s an example: For 2024, you expect your sole proprietorship to generate net SE income of $200,000. Your SE tax bill will be $26,706 (12.4% × $168,600) + (2.9% × $200,000). For most, it’s not a small amount.

Projected tax ceilings 

The current Social Security tax on your net SE income is expensive enough, but it will only worsen in future years. That’s because your business income will likely grow, and the Social Security tax ceiling will continue to increase based on annual inflation adjustments.

The latest Social Security Administration (SSA) projections (from May 2024) for the Social Security tax ceilings for 2026–2033 are:

2026: $181,800
2027: $188,100
2028: $195,900
2029: $204,000
2030: $213,600
2031: $222,900
2032: $232,500
2033: $242,700

Could these estimated ceilings get worse? Absolutely, because the SSA projections sometimes undershoot the actual final numbers. For instance, the 2025 ceiling was projected to be $174,900 just last May, but the final number turned out to be $176,100. But let’s say the projected numbers play out. If so, the 2033 SE tax hit on $242,700 of net SE income will be a whopping $37,133 (15.3% × $242,700).

Tax ceiling vs. benefit increases

Don’t think that Social Security tax ceiling increases are linked to annual Social Security benefit increases. Common sense dictates that they should be connected, but they aren’t. For example, the 2024 Social Security tax ceiling is 5.24% higher than the 2023 ceiling, but benefits for Social Security recipients went up by only 3.2% in 2024 compared to 2023. The 2025 Social Security tax ceiling is 4.45% higher than the 2024 ceiling, but benefits are going up by only 2.5% for 2025 compared to 2024.

The reason is that different inflation measures are used for the two calculations. The increase in the Social Security tax ceiling is based on the increase in average wages, while the increase in benefits is based on a measure of general inflation.

S corporation strategy

While your SE tax bills can be high and will probably get even higher in future years, there may be potential ways to cut them to more manageable levels. For instance, you could start running your business as an S corporation. Then, you can pay yourself a reasonably modest salary while distributing most or all of the remaining corporate cash flow to yourself. That way, only your salary would be subject to Social Security and Medicare taxes.

© 2025 KraftCPAs PLLC

When selling business assets, understanding the tax implications is crucial. One area to focus on is Section 1231 of the Internal Revenue Code, which governs the treatment of gains and losses from the sale or exchange of certain business property.

Business gain and loss tax basics

The federal income tax character of gains and losses from selling business assets can fall into three categories:

• Capital gains and losses. These result from selling capital assets which are generally defined as property other than 1) inventory and property primarily held for sale to customers, 2) business receivables, 3) real and depreciable business property including rental real estate, and 4) certain intangible assets such as copyrights, musical works, and art works created by the taxpayer. Operating businesses typically don’t own capital assets, but they might from time to time.
• Sec. 1231 gains and losses. These result from selling Sec. 1231 assets which generally include 1) business real property (including land) that’s held for more than one year, 2) other depreciable business property that’s held for more than one year, 3) intangible assets that are amortizable and held for more than one year, and 4) certain livestock, timber, coal, domestic iron ore, and unharvested crops.
• Ordinary gains and losses. These result from selling all assets other than capital assets and Sec. 1231 assets. Other assets include 1) inventory, 2) receivables, and 3) real and depreciable business assets that would be Sec. 1231 assets if held for over one year. Ordinary gains can also result from various recapture provisions, the most common of which is depreciation recapture.

Favorable tax treatment

Gains and losses from selling Sec. 1231 assets receive favorable federal income tax treatment.

Net Sec. 1231 gains. If a taxpayer’s Sec. 1231 gains for the year exceed the Sec. 1231 losses for that year, all the gains and losses are treated as long-term capital gains and losses — assuming the nonrecaptured Sec. 1231 loss rule explained later doesn’t apply.

An individual taxpayer’s net Sec. 1231 gain — including gains passed through from a partnership, LLC, or S corporation — qualifies for the lower long-term capital gain tax rates.

Net Sec. 1231 losses. If a taxpayer’s Sec. 1231 losses for the year exceed the Sec. 1231 gains for that year, all the gains and losses are treated as ordinary gains and losses. That means the net Sec. 1231 loss for the year is fully deductible as an ordinary loss, which is the optimal tax outcome.

Unfavorable nonrecaptured Sec. 1231 loss rule

Taxpayers must watch out for the nonrecaptured Sec. 1231 loss rule. This provision is intended to prevent taxpayers from manipulating the timing of Sec. 1231 gains and losses to receive favorable ordinary loss treatment for a net Sec. 1231 loss, followed by receiving favorable long-term capital gain treatment for a net Sec. 1231 gain recognized in a later year.

The nonrecaptured Sec. 1231 loss for the current tax year equals the total net Sec. 1231 losses that were deducted in the preceding five tax years, reduced by any amounts that have already been recaptured. A nonrecaptured Sec. 1231 loss is recaptured by treating an equal amount of current-year net Sec. 1231 gain as higher-taxed ordinary gain rather than lower-taxed long-term capital gain.

For losses passed through to an individual taxpayer from a partnership, LLC, or S corporation, the nonrecaptured Sec. 1231 loss rule is enforced at the owner level rather than at the entity level.

Tax-smart timing considerations

Because the unfavorable nonrecaptured Sec. 1231 loss rule cannot affect years before the year when a net Sec. 1231 gain is recognized, the tax-smart strategy is to try to recognize net Sec. 1231 gains in years before the years when net Sec. 1231 losses are recognized.

© 2025 KraftCPAs PLLC

Saving for retirement is a crucial financial goal, and a 401(k) plan is one of the most effective tools for achieving it. If your employer offers a 401(k) or Roth 401(k), contributing as much as possible to the plan in 2025 is a smart way to build a considerable nest egg.

If you don’t already contribute the maximum allowed, consider increasing your contribution in 2025. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions can have a big impact on the amount of money you’ll have in retirement.

With a 401(k), an employee elects to have a certain amount of pay deferred and contributed to the plan by an employer on his or her behalf. The amounts are indexed for inflation each year, and the 2025 amounts show modest increases. The contribution limit in 2025 is $23,500 (up from $23,000 in 2024). Employees age 50 or older by year’s end are also permitted to make additional catch-up contributions of $7,500 in 2025 (unchanged from 2024). This means those 50 or older can save up to about $31,000 in 2025 (up from $30,500 in 2024).

However, under a law change that becomes effective in 2025, 401(k) plan participants of certain ages can save more. The catch-up contribution amount for those who are age 60, 61, 62, or 63 in 2025 is $11,250.

The 401(k) contribution amounts also apply to 403(b) and 457 plans.

Traditional 401(k) perks

A traditional 401(k) offers many benefits, including:

• Pretax contributions, which reduce your modified adjusted gross income (MAGI) and can help you reduce or avoid exposure to the 3.8% net investment income tax
• Plan assets that can grow tax-deferred — meaning you pay no income tax until you take distributions
• The option for your employer to match some or all of your contributions pretax

If you already have a 401(k) plan, look at your contributions. In 2025, try to increase your contribution rate to get as close to the $23,500 limit (with any extra eligible catch-up amount) as you can afford. Of course, the taxes on your paycheck will be reduced because the contributions are pretax.

Roth 401(k) benefits

Your employer may also offer a Roth option in its 401(k) plans. If so, you can designate some or all of your contributions as Roth contributions. While such amounts don’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions may be especially beneficial for higher-income earners because they can’t contribute to a Roth IRA. That’s because the ability to make a Roth IRA contribution is reduced or eliminated if adjusted gross income (AGI) exceeds specific amounts.

© 2024 KraftCPAs PLLC

The on-again, off-again requirement for business owners to file beneficial ownership information (BOI) is on hold one more time.

On December 26, a federal appeals court reinstated a lower court’s injunction that stopped enforcement of a January 13, 2025, BOI filing deadline for many small businesses in the U.S. On December 23, a different panel of judges on the court had lifted the injunction and ordered the BOI requirements to resume.

Under the rule, an estimated 32 million businesses in the U.S. would be required to file the report or face civil or criminal penalties. As the issue continues to drift through the courts, business may voluntarily file BOI reports and avoid potential last-minute scrambles if the injunction is again lifted. At least 6.5 million BOI reports have been filed so far.

Filing is free, and BOI forms and extensive resources are available online at fincen.gov/boi.

BOI’s path so far

Under the Corporate Transparency Act (CTA), the BOI reporting requirements went into effect on January 1, 2024. The requirements are intended to help prevent criminals from using businesses for illicit activities, such as money laundering and fraud. The CTA requires most small businesses to provide information about their beneficial owners – or the individuals who ultimately own or control the businesses – to FinCEN.

Under the CTA, the exact deadline for BOI compliance depends on the entity’s date of formation. Reporting companies created or registered before January 1, 2024, have one year to comply by filing initial reports, which means their deadline would be January 1, 2025. Those created or registered on or after January 1, 2024, but before January 1, 2025, have 90 days to file their initial reports upon receipt of their creation or registration documents. Entities created or registered on or after January 1, 2025, have 30 days upon receipt of their creation or registration documents to file initial reports.

District court issues an injunction

On December 3, the U.S. District Court for the Eastern District of Texas issued an order granting a nationwide preliminary injunction that enjoined the CTA (including enforcement of the statute and regulations implementing its BOI reporting requirements) and stayed all deadlines to comply with the CTA’s reporting requirements.

The U.S. Department of Justice, on behalf of the Treasury Department, filed an appeal in the case on December 5.

Fifth Circuit lifts the injunction

On December 23, the U.S. Court of Appeals for the Fifth Circuit issued a ruling to lift the preliminary injunction. FinCEN quickly announced that reporting companies were once again required to provide BOI. However, the January 1 deadline was extended to January 13, 2025, with some exceptions. For example, reporting companies qualifying for disaster relief may have extended deadlines beyond January 13.

Fifth Circuit upholds injunction

On December 26, the same Fifth Circuit court – but consisting of a different panel of judges – reversed its order and placed an injunction on the BOI rules. In its ruling, the court said it needed additional time to consider the merits of the case and issue its final ruling.

© 2024 KraftCPAs PLLC