2026 Tax Law Changes for Individuals
As we enter the 2026 tax year, sweeping changes under the recent One Big Beautiful Bill Act and annual IRS inflation updates are reshaping how individuals approach deductions, credits, and retirement strategies. Here’s a sampling of some significant tax law changes going into effect this year:
- New charitable contribution deduction for nonitemizers for cash contributions up to $1,000 ($2,000 for married couples filing jointly)
- New 0.5% of adjusted gross income floor on charitable deduction for itemizers
- New 35% benefit limit on itemized deductions for taxpayers in the 37% tax bracket
- Reduced income thresholds at which the alternative minimum tax exemption begins to phase out (and a phaseout rate that’s twice as fast as 2025’s)
- New tax-advantaged Trump accounts to benefit children under age 18
- Increase in tax-free 529 plan withdrawal limit for qualified elementary and secondary school expenses to $20,000 (from $10,000 for 2025)
- New requirement that higher-income taxpayers’ catch-up contributions to employer-sponsored retirement plans must be treated as post-tax Roth contributions
- Elimination of certain energy-efficiency credits for homeowners
- Wider income ranges over which the Section 199A qualified business income (QBI) deduction limitations phase in, potentially allowing larger deductions for some pass-through entity owners.
- New minimum QBI deduction of $400 for taxpayers who materially participate in an active trade or business if they have at least $1,000 of QBI from it
With these developments, understanding how they affect your personal tax situation could lead to meaningful savings or strategic planning opportunities. Reach out to our office to explore how these updates might impact your year-end tax strategy or long-term financial goals.
Can You Claim a Tax Deduction for Tips or Overtime Income?
If you received tips or overtime pay in 2025, you may be eligible for a new deduction when you file your income tax return. Both deductions can be claimed whether or not you itemize deductions. But various rules and limits apply. Also be aware that such income may still be fully taxable for state and local income tax purposes. And federal payroll taxes still apply to tips and overtime income you deduct for federal income tax purposes.
Deducting Tips
Eligible taxpayers can deduct up to $25,000 of annual qualified tips income. The deduction begins to phase out when modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for married couples filing jointly). It’s completely phased out when MAGI reaches $400,000 ($550,000 for joint filers).
Qualified tips can be paid by customers in cash or with credit cards or given to workers through tip-sharing arrangements. The tips deduction is available if you receive qualified tips in an occupation that’s designated by the IRS as one where tips are customary. Some examples of eligible occupation categories are beverage and food service, hospitality and guest services, personal appearance and wellness, and transportation and delivery.
The tips deduction is allowed for both employees and self-employed individuals. However, those who work in certain trades or businesses (such as health, law, accounting, financial services, investment management) are ineligible.
Deducting Overtime
Eligible taxpayers can deduct up to $12,500 of qualified overtime income ($25,000 for joint filers). The deduction begins to phase out when MAGI exceeds $150,000 ($300,000 for joint filers). It’s completely phased out when MAGI reaches $275,000 ($550,000 for joint filers).
Qualified overtime income is overtime compensation mandated under Section 7 of the Fair Labor Standards Act. It requires time-and-a-half overtime pay except for certain exempt workers. Only the extra “half” constitutes qualified overtime income and thus is deductible.
Qualified overtime income doesn’t include overtime premiums that aren’t required by Sec. 7, such as those required under state laws or pursuant to union-negotiated collective bargaining agreements.
Reporting Requirements
Under the OBBBA, qualified tips income must be reported on Form W-2, Form 1099-NEC or another specified information return or statement furnished to both the worker and the IRS. And qualified overtime income must be reported to workers on Form W-2 or another specified information return or statement furnished to both the worker and the IRS.
However, the IRS announced that for the 2025 tax year, there will be no OBBBA-related changes to federal information returns such as Form W-2, Forms 1099 and Form 941. The IRS is providing transition relief for the 2025 tax year and will update forms for the 2026 tax year.
Contact the office for help determining your eligibility for one or both of these deductions.
Businesses: Act Soon to Take Advantage of Clean Energy Tax Incentives
While legislation signed into law in 2025 extends or enhances many tax breaks for businesses, it ends some clean energy tax incentives. Fortunately, your business may still benefit from certain clean energy breaks if it acts in the first half of 2026.
Make Building Improvements
The Section 179D deduction allows owners of new or existing commercial buildings to immediately deduct the cost of certain energy-efficient improvements rather than depreciate them over the 39-year period that typically applies. The deduction is available as long as construction begins by June 30, 2026.
The Sec. 179D deduction is available for new construction as well as additions to or renovations of commercial buildings of any size. (Multifamily residential rental buildings that are at least four stories above grade also qualify.) Eligible improvements include depreciable property installed as part of a building’s interior lighting system, HVAC and hot water systems, or the building envelope.
To be eligible, an improvement must be part of a plan designed to reduce annual energy and power costs by at least 25% relative to applicable industry standards, as certified by an independent contractor or licensed engineer. The base deduction is calculated using a sliding scale, ranging for 2026 from 59 cents per square foot for improvements that achieve 25% energy savings to $1.19 per square foot for improvements that achieve 50% energy savings.
Projects that meet specific prevailing wage and apprenticeship requirements are eligible for bonus deductions. Such deductions for 2026 range from $2.97 per square foot for improvements that achieve 25% energy savings to $5.94 per square foot for improvements that achieve 50% energy savings.
Look at Vehicle-Related Breaks
The Section 45W Qualified Commercial Clean Vehicle Credit is available for vehicles that were acquired on or before September 30, 2025. If your business acquired one or more eligible vehicles before that date, you may be able to claim the credit on your 2025 tax return.
And you still have time to install alternative fuel vehicle refueling property and claim a Section 30C tax credit for 2026. The credit is available for property placed in service by June 30, 2026. Property that stores or dispenses clean-burning fuel or recharges electric vehicles is eligible. The credit is worth up to $100,000 per item (each charging port, fuel dispenser or storage property).
Don’t Wait
Other clean energy breaks that might still be available to you if you act soon include the clean energy investment and production credits and the advanced manufacturing production credit. Contact the office for more information about clean-energy tax breaks and how your business might benefit.
Make Smart Choices With a Sudden Windfall
An unexpected influx of money (such as from an inheritance, bonus, legal settlement or lottery win) can feel exciting and full of possibility. But without a clear plan, that financial good fortune might not last as long as you’d hoped.
Avoid Common Pitfalls
It can be tempting to immediately buy your dream car or home, which could turn out to be an unwise purchase. Or you might be feeling generous when charities come knocking, only to find out later that they were fraudulent.
You can avoid these potential pitfalls by stashing your windfall in a bank or money market account as soon as you receive it. Waiting at least a month before you touch the money can help prevent impulse buys and other mistakes.
Also, you may owe taxes. Some windfalls, such as lottery winnings and certain legal settlements, are subject to federal tax. This could be at a rate as high as 37% if your windfall pushes you into the top income tax bracket. State and local taxes may apply as well. A tax professional can help you determine what you owe.
Use Your Windfall Wisely
What you eventually decide to do with your windfall will depend on many factors. If you have debt, you’ll probably want to pay it off, especially if it carries a high interest rate and the interest isn’t deductible. Also, establishing or boosting your emergency savings can minimize the need to incur future debt.
Next, consider where you’d like to be five, 10 or 20 years into the future. Develop a budget that will help you move toward your goals, whether that means retiring early, starting a business or something else. You probably shouldn’t quit your job without having thought it through carefully. Few windfalls are large enough to see you all the way through retirement (depending on your age).
Plan for the Long Term
Be cautious about requests for money. Friends and family members may expect to share in your good fortune or may pitch “can’t-miss” investment ideas. Before making any commitments, seek professional advice. Contact our office for help evaluating the tax impact, prioritizing goals and creating a personalized plan to make your windfall last for years to come.
Heavy Tax Breaks for Heavy Business Vehicles
Did you buy a “heavy” business vehicle in 2025? An SUV, pickup or van with a manufacturer’s gross vehicle weight rating (GVWR) over 6,000 pounds that’s used over 50% in your business is treated as transportation equipment for tax purposes. That means the business percentage of its cost can qualify for 100% first-year bonus depreciation.
Heavy vehicles used over 50% for business may also be eligible for Sec. 179 expensing. But the maximum Sec. 179 deduction for 2025 is generally only $31,300 for vehicles with GVWRs between 6,001 and 14,000 pounds.
To claim one of these breaks for 2025, you must have placed the heavy business vehicle in service by Dec. 31, 2025. Contact the office to learn more.
More Taxpayers May Qualify for the Casualty Loss Deduction
Starting in 2026, personal casualty loss deductions will no longer be limited to federally declared disasters. Certain state-declared disasters will also be eligible. For a disaster to qualify, the governor (or D.C. mayor) and the U.S. Treasury Secretary must agree that the damage is severe enough to apply these rules. Now more taxpayers affected by natural disasters or by fires, floods or explosions, regardless of the cause, may qualify.
Note that taxpayers can still claim personal casualty losses not attributable to federally or state-declared disasters, but only to the extent of any personal casualty gains. Need guidance? Contact the office for help.
How Progress Invoicing Can Improve Your Cash Flow
If you’re concerned about your company’s cash flow, you’re not alone. The majority of small businesses struggle with cash flow. Are you making more than you’re spending? Will that change six weeks or three months from now?
QuickBooks Online can help. Besides providing predictive charts that can assist you in looking at future cash flow trends, it offers a tool that can help you take concrete steps to improve your cash flow in the near future.
If you send out estimates and/or do multi-part projects for your customers, you can create progress invoices. These modified invoices allow you to send partial bills. You can break up your product and service costs into smaller pieces and start getting paid sooner than you would if you waited until your work was complete. Here’s how it works.
Readying QuickBooks Online
Before you get started, prepare QuickBooks Online to accommodate these modified invoices. Click the gear icon in the upper right and click Account and settings under YOUR COMPANY. Scroll down and click Sales, then scroll down in the right pane until you see Progress Invoicing. Make sure this option is turned On. Click Done in the lower right corner.
Creating a New Template
Now you have to modify the invoice template to accommodate progress invoicing. Click the gear icon in the upper right again and then click Custom form styles under YOUR COMPANY. Open the New style menu in the upper right and select Invoice. Your default template will appear in the box under Design/Content/Emails. Replace that name with a new descriptive name, such as “My Progress Invoice Template,” so you don’t overwrite your default invoice settings. Click Change up the template.
Select Airy new in the box of options that opens. You can now modify the design of your new template by, for example, adding a logo. Click When in doubt, print it out to see your print options. Next, click the Content tab. You’ll see a grayed-out version of your template in the right pane. Click any of the template sections, and the corresponding fields will appear in the left pane. You can modify these as needed, then move on to the next.
When you’re satisfied with the template, click the Emails tab and make any changes necessary there. Finally, you can Preview PDF by clicking the link in the lower right corner. Click Done when you’re finished.
You’ll be returned to the Custom form styles page, where you’ll see your new template in the list. Pay attention to which template says (default) in the FORM TYPE column. This is the template that will automatically open when you’re creating a new form. (You can change this on the fly.) You can designate a new default by opening the Edit menu in the last column.
Creating a Progress Invoice
When you have an estimate that you want to start billing (even though you haven’t completed all the work or purchased all the products needed), locate the estimate in the Estimates list. Click Convert to invoice at the end of the row. A window opens, asking how much you want to invoice:
You would choose the first option if you’ve already partially processed the invoice and are ready to close it out. The second option allows you to enter a flat percentage of the invoice total to include. If you choose the third, the invoice that opens will have zeroes in the Due column.
You can alter the amount due for any of these by either a percentage or an amount, and/or leave them at zero if you don’t want to bill a particular product or service. Either way, the Balance due will reflect your changes. When you’ve come to the last invoice for the project, you’ll check Remaining total of all lines.
When you’re done, just process the invoice like you would a standard form. You can always see an accounting of your progress invoices by running the Estimates & Progress Invoicing Summary by Customer Report.
Other Routes to Better Cash Flow
Of course, there are other ways you can improve your cash flow. You can, for example:
- Offer modest discounts for early payment,
- Apply finance charges to late payments,
- Send invoices immediately and consider altering your terms (like 15 days instead of 30 days),
- Look for inventory items that aren’t moving fast and sell them off with a sale, and
- Send reminders for late payments and follow up if they’re not settled quickly.
Progress invoicing benefits both you and your customers. Contact the office if you have questions about managing estimates and invoices in QuickBooks Online.
Upcoming Tax Due Dates
January 15
Employers: Deposit nonpayroll withheld income tax for December 2025 if the monthly deposit rule applies.
Individuals: Pay the fourth installment of 2025 estimated taxes (Form 1040-ES) if not paying income tax through withholding or not paying sufficient income tax through withholding.
February 2
Employers: File 2025 Form W-2 (Copy A) and transmittal Form W-3 with the Social Security Administration.
Employers: File a 2025 return for federal unemployment taxes (Form 940) and pay any tax due if all the associated taxes weren’t deposited on time and in full.
Employers: Report Social Security and Medicare taxes and income tax withholding for the fourth quarter of 2025 (Form 941) if all of the associated taxes due weren’t deposited on time and in full.
Employers: Provide 2025 Form W-2 to employees.
Businesses: Provide 2025 Form 1098, Form 1099-MISC (except for those with a February 18 deadline), Form 1099-NEC and Form W-2G to recipients.
Individuals: File a 2025 income tax return (Form 1040 or Form 1040-SR) and pay the tax to avoid penalties for underpaying the January 15 installment of estimated taxes.
February 10
Employers: File a 2025 return for federal unemployment taxes (Form 940) if all associated taxes due were deposited on time and in full.
Employers: Report Social Security and Medicare taxes and income tax withholding for the fourth quarter of 2025 (Form 941) if all associated taxes due were deposited on time and in full.
Individuals: Report January tip income of $20 or more to employers (Form 4070).
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.
