Circulated biweekly to business clients since 1925
Reported from Washington, D.C. • kiplinger.com • Vol. 100, No. 14
View The Kiplinger Tax Letter Archive
Washington, July 2, 2025
| Highlights |
Benefit Plans 401(k)s and divorce Child Care Dependent care credit Real Estate Vacation homes Tax Disputes Lucky taxpayer Exempt Groups Hospitals Amended Returns Tax tips |
Dear Client:
It looks like Congress will enact tax changes.
The One Big Beautiful Bill passed the Senate on a 51-50 vote, with most Republicans voting for it and all Democrats opposing the legislative proposal.
And the House is on the cusp of approving it… although there may be some more back-and-forth… in a very narrow vote, at the time we went to press.
President Trump will sign it with delight, happy to deliver his key legislative campaign priority.
GOP leaders have overcome many hurdles. They include complaints about higher federal deficits and cost-cutting measures used to offset tax breaks, grim poll numbers, the complex procedures used to pass the bill in the Senate, Trump’s tight timeframe and in-party fighting between moderates and conservatives.
Lots of back-door deals were made in a bid to secure Republican holdouts.
Here are a few examples: The $10,000 cap on state and local tax deductions was hiked to $40,000 to gain the support of GOPers from high-tax states. A tax break for whalers and clean-energy tax easings helped to lure Sen. Lisa Murkowski (R-AK). And a tax break for the space industry pushed by Sen. Rick Scott (R-FL) made it in.
The GOP’s use of budget reconciliation procedures complicated the process.
Budget reconciliation requires only a simple-majority vote in the Senate, thus overriding the need for 60 votes in the chamber to defeat a Democratic filibuster.
But it has lots of technical rules. We discuss two of these rules below.
First, each provision must have a budgetary impact, meaning a change in revenues or expenditures. The Senate parliamentarian ruled against proposals to scrap IRS’s Direct File program, impose red tape on earned income credit filers, deregulate gun silencers, and cut an estimated $250 billion in health care spending.
Second, the bill’s provisions can’t increase deficits outside a 10-year window. This is the reason that many tax changes affecting individuals in the 2017 tax law, which was also passed in Congress using budget reconciliation, were temporary.
However, GOPers pushed to make many OBBB tax provisions permanent…
Which, under normal accounting rules, violates the 10-year requirement.
So GOPers used a controversial accounting gimmick to mask the bill’s cost. Republican senators voted to use a “current policy” baseline to score the cost of the tax provisions in the OBBB. This assumes that the 2017 tax law changes don’t expire at year-end, so making them permanent does not cost anything. The Senate parliamentarian ruled against the use of a current-policy baseline, but Republicans voted for it anyway, thus overruling the parliamentarian’s decision. The Congressional Budget Office estimated the OBBB would generate $508 million in savings over 10 years using the current-policy baseline. The CBO also estimated that the OBBB would cost $3.5 trillion and increase deficits past 2034 (the end of the 10-year window) if the Senate were to use the normal “current law” baseline.
Splitting 401(k) funds in a divorce can lead to unintended tax consequences.
A 10% fine hits many pre-age-59½ payouts from IRAs, 401(k)s and the like. This excise tax on early distributions is in addition to any regular income tax due.
But paying 401(k) funds early to an ex-spouse can avoid the penalty.
Use of a qualified domestic relations order is required. The QDRO, which is issued by a court or state agency, recognizes a divorcing spouse’s right to receive all or a portion of the account owner’s 401(k) or certain other benefit plans.
The QDRO exception doesn’t apply to IRA funds paid to a spouse in a divorce.
Here’s a tutorial on the rules for claiming the dependent care credit. Expenses for the care of your kids under age 13 and other qualifying relatives must be incurred so you can work or look for employment. If you’re taking the credit to help care for a relative who isn’t a qualifying child, such as an aging parent, that person needs to have lived with you for more than six months during the year and be unable to care for him- or herself. You calculate the credit on Form 2441.
The One Big Beautiful Bill would make the credit more generous. For 2025, the credit is worth 20% to 35% of up to $3,000 in care expenses…$6,000 if you have two or more dependents needing care. That makes the maximum credit for 2025 $1,050 for one dependent and $2,100 for two or more dependents. The OBBB would make the credit worth 20% to 50% of up to $3,000 in expenses…$6,000 for two or more dependents. That would make the top credit $1,500 or $3,000 for 2026.
If you’re a working parent who would qualify for the dependent care credit…
Check whether your employer offers a dependent care FSA benefit option that you can fund with pretax wages. For 2025, you can contribute up to $5,000 to this flexible spending account. The OBBB would hike the cap to $7,500 in 2026.
Employers that provide child care for workers can get a tax credit to offset up to 10% of child care resource and referral expenditures and 25% of facility costs. The maximum annual credit is capped at $150,000. Firms use Form 8882 to claim it. The OBBB would hike the credit for facility costs to as much as 40% of expenditures… 50% for small firms…and it would increase the yearly total credit limit to $500,000… $600,000 for small firms. Additionally, more employer costs would be credit-eligible.
One question we get asked a lot: How long to keep individual tax returns?
You should keep your 1040 for at least three years. That’s how long IRS has to question items on your return and to bill you for any additional tax that may be due. It’s also the timeframe for you to file an amended return and seek a refund. IRS can go back up to six years if over 25% of income is omitted from your return. If fraud is proved, there is no limit. State tax returns may have to be retained longer.
You may want to keep some returns and tax records for more than three years.
Here are some examples: Hold on to records that establish the tax basis of securities or real estate for at least three years after you dispose of the property. If you’ve made nondeductible contributions to IRAs or post-tax payins to 401(k)s, save records until three years after the accounts are depleted. If you inherit property that you might eventually sell, you’ll need to know the date-of-death value of the asset, so keep documentation of this figure until three years after you sell the property.
Don’t fret if you need information on a tax return that you’ve thrown out.
There are a few ways to get a tax transcript, which is a summary of key data on your tax return. Individuals who have online accounts with IRS can go on its site to access their transcripts and print them out. If you don’t have an online account, you can set one up. Alternatively, you can call IRS toll-free at 800-908-9946 to have a transcript sent to you, or you may submit Form 4506-T by mail.
People seeking copies of tax returns must request them by mail on Form 4506.
Is there a big event coming to your city and you want to escape the mayhem? Think the July 4 holiday in D.C., New Orleans Jazz & Heritage Festival, Lollapalooza music festival in Chicago, or next year’s Super Bowl in Northern Calif.
Consider a short-term rental of your home and pocket tax-free cash. The proceeds from a personal residence that is rented out 14 days or fewer in a year are nontaxable and aren’t reported on your return, no matter the rent charged.
If you own a vacation home, you may have pondered renting it occasionally.
Proceeds from a vacation home rented out 14 days or fewer a year are tax-free. To qualify for this income tax break, the property must be your personal residence. A dwelling is a personal residence if the owner’s annual use exceeds the greater of 14 days or 10% of the days that the home is rented to others at fair market value.
If you rent out the vacation home for more than 14 days in a year…
The rent is taxable. Your rental expenses can be deducted proportionately to the property’s use as a short-term rental. How much you can take is determined by dividing the number of days you rented the home by the combined total days of personal and rental use. The deductions can’t exceed your total rental income, which is reported on Schedule E of your 1040 along with rental-related expenses.
What if your vacation rental activity generates a loss? The tax laws prohibit deducting rental losses for a personal residence, but the loss is not gone. It can be carried over and used to offset future rental income. If the vacation home is not a personal residence and you actively participate in the rental activity, you might be able to deduct up to $25,000 of rental losses against your other income. But there’s a catch. This $25,000 phases out as modified adjusted gross income exceeds $100,000 and disappears entirely once modified AGI reaches $150,000.
Payment of a termination fee related to a failed merger is a business write-off, the Tax Court decides. A company that agreed to acquire another firm paid such a fee when the merger fell apart. More specifically, the board of directors of the taxpayer chose not to recommend the merger to the company’s shareholders after IRS released adverse guidance on the tax treatment of similar transactions. Under the terms of the agreement, the taxpayer paid the $1.6 billion termination fee. The taxpayer deducted the fee as an ordinary and necessary business expense. IRS claimed to no avail that the fee is a capital loss because it is attributable to property that would have been treated as a capital asset in the taxpayer’s hands if the merger had gone through. The Tax Court found that the taxpayer’s rights and duties under the contract to pay the fee didn’t relate to property (AbbVie, 164 TC No. 10).
A lucky break for a taxpayer in his tax dispute with the Service. The agency mailed a notice of deficiency to a man on Jan. 23, 2023. His address is 220 6th Street, but, because of an IRS typo, the notice was addressed to 2206 TH Street. The taxpayer filed his Tax Court petition on Feb. 26, 2024. IRS claimed the taxpayer’s petition was late, and that the case should be tossed. The Tax Court did throw out the case, but for a different reason. The Court decided that IRS’s notice of deficiency is invalid because of the incorrect address, which the Court said isn’t a harmless typographical error (Cano, TC Memo. 2025-65).
Watch what you cop to in a guilty plea. IRS may use it against you, as a man who pled guilty to criminal tax evasion for the 2014 tax year discovered. After his guilty plea, IRS audited him and assessed a civil fraud penalty for 2014. The Service relied on the disclosures made by the man in his plea agreement for purposes of proving civil fraud. The man claimed this was wrong. But the Tax Court sided with IRS. His guilty plea to tax evasion in his criminal case precludes him from litigating the fraud penalty in his civil tax case (Miller, TC Memo. 2025-41).
IRS must step up its review of tax-exempt hospitals. These hospitals must satisfy many rules to get and keep their federal tax exemption. They must provide a community benefit, observe organizational and operational rules, and satisfy other edicts related to emergency care policies, billing and collection data, community health needs assessment, and financial assistance policies for the indigent. Every three years, IRS must review whether a hospital is meeting these requirements. The agency looks at Form 990, the hospital’s website and various other public records. These reviews aren’t audits…hospitals don’t even know they are being reviewed.
From 2015 to 2019, IRS did 4,700 reviews and made 1,000 audit referrals.
In 2022, IRS revised its review to focus only on the community benefit rule.
And between 2022 and 2024, it made only 31 audit referrals of hospitals.
Congress should address the hospital community benefit rule in the tax code, Treasury inspectors say, claiming the current definition is vague and makes it difficult for hospitals and IRS to figure whether hospitals are giving ample community benefits. They want Congress to amend the statute to include specifics as to which services and activities constitute sufficient community benefits for tax-exempt hospitals.
The Social Security wage base cap is expected to be $183,600 for 2026, up $7,500 from this year’s cap, according to Social Security Admin. trustees. The final number, based on national average-wage-index growth, comes in mid-Oct.
Small start-up businesses can use R&D credits to offset payroll taxes. Eligible firms can opt to claim up to $500,000 of qualified research expenses to offset payroll taxes instead of income taxes. The election, which is available to firms in business for not more than five years that have gross receipts of less than $5 million, is made on Form 6765 and attached to the income tax return. Firms use Form 8974 to figure the credit and claim it on Form 941 for the period after the tax return is filed.
Need to amend an individual tax return that you filed? Here are some tips:
You generally have three years from the due date of your original Form 1040 or 1040-SR to amend it by filing an amended individual tax return on Form 1040-X.
If you’re due a refund on your 1040, wait to receive it before filing the 1040-X.
If amending for multiple years, use a separate 1040-X for each year.
You can e-file Form 1040-X using a tax software product or file on paper. If you filed your original 1040 on paper, you will have to mail a paper 1040-X to IRS. Note that e-filers can request direct deposit of their refunds into their bank accounts. This helpful feature doesn’t apply if you are mailing in a paper amended return.
Have lots of patience once you file your amended tax return with IRS. IRS’s processing of most amended individual returns is taking longer than 45 days. Although most people can e-file amended returns, IRS workers manually review them. 63% of Form 1040-X filings processed by IRS’s accounts management function and 73% of such filings processed by the agency’s submission processing function are included in overaged inventory, meaning processing time is greater than 45 days. IRS says it is currently processing paper amended returns received in March 2025.
Use IRS’s “Where’s My Amended Return” to check the status of a filed 1040-X.
Yours very truly,
Joy Taylor, Editor
July 2, 2025
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