Circulated biweekly to business clients since 1925
Reported from Washington, D.C. • kiplinger.com • Vol. 100, No. 13
View The Kiplinger Tax Letter Archive
Washington, June 19, 2025
| Highlights |
Health Care Long-term care Energy Credits Home upgrades Bad Debts Worthlessness Donations Easements Supreme Court Wis. state tax In Congress Auto loan interest |
Dear Client:
It’s summer, and tax talks are heating up.
Odds are good for major tax changes in the next month or so. But Congress still has work to do before any bill gets to President Trump’s desk.
The House passed its version of tax changes four weeks ago in a very narrow vote…215-214. The One Big Beautiful Bill has lots of proposals. It would extend many of the expiring tax provisions in the 2017 Tax Cuts and Jobs Act and enhance a few, provide brand new tax breaks that Trump promised on the campaign trail, repeal clean-energy credits for individuals and businesses, and make Medicaid cuts to offset some of the bill’s cost.
The Senate has now released its tax plan. Its version takes a similar approach to the House bill in that it would extend many of the TCJA’s expiring provisions, scale back energy credits, enact new tax breaks and make Medicaid cuts.
But there are also key distinctions, some of which have sparked backlash from factions of Republican lawmakers in the upper chamber and in the House.
Changes will have to be made before the Senate votes on any package.
But for now, we’ll point out a few major differences between the versions. Note that there are lots of other differences that we don’t have room to discuss here.
Start with the deduction for state and local taxes that individuals claim on Schedule A of their 1040. The TCJA capped the SALT deduction at $10,000. The House bill would quadruple the cap to $40,000, with the deduction phasing out for filers with modified adjusted gross incomes over $500,000. The Senate bill would permanently keep the cap at $10,000. Senate taxwriters say this is a placeholder because negotiations are still under way on the amount of the limit. The House bill narrowly passed after House GOP leaders and Trump reached a deal with a faction of House members from high-tax states who pushed for a higher cap. Senate leaders fervently hope those members can accept a figure between $10,000 and $40,000. But if they don’t and negotiations hit a standstill, it’s back to the drawing board.
Though both versions of the tax bill would roll back clean-energy breaks that were originally enacted in Joe Biden’s 2022 Inflation Reduction Act…
The Senate’s plan generally proposes a longer runway for the credits to end.
Three business tax breaks would be fully restored and made permanent. The Senate plan would revive 100% bonus depreciation, let firms expense their costs for domestic R&D in the year incurred instead of amortizing them over five years, and ease the rules on the limitation on interest deduction write-offs for large firms. The House bill would temporarily restore these three breaks only through 2028.
Two nontax items could also pose problems. First, the Senate version makes deeper cuts to Medicaid than the House version. Second, the debt ceiling in the Senate version would rise by $5 trillion, compared with $4 trillion in the House.
If you, your spouse or your dependent requires long-term care…
You may be able to deduct the unreimbursed costs as medical expenses on Schedule A of your 1040, to the extent that your total medicals exceed 7.5% of adjusted gross income. Long-term-care expenses include the costs of in-home care, assisted living and nursing home services. The care must be medically necessary for a person who is chronically ill, meaning at least two activities of daily living can’t be performed without help for 90 days or more. Anyone in need of long-term care because of dementia or other cognitive impairment is also considered chronically ill if substantial supervision is needed to protect the individual’s health and safety. The chronic illness must be certified by a licensed health care practitioner. The costs of meals and lodging at a nursing home or assisted living facility count as medical expenses if a person is mainly there for medical care.
Premiums you pay for a long-term-care policy are deductible medicals, too.
The deduction is capped based on age. The older you are, the higher the break. For 2025, taxpayers who are 71 or older can deduct as much as $6,020 per person. Filers age 61 to 70…$4,810. Those who are 51 to 60 can deduct up to $1,800. Individuals who are 41 to 50 can take $900. And people age 40 and younger…$480.
For most, long-term-care premiums are medical costs deductible by itemizers on Schedule A to the extent that total medical expenses exceed 7.5% of AGI.
Self-employed individuals can deduct the premiums on Schedule 1.
A tax break related to paying long-term-care premiums kicks in next year. Generally, pre-age-59½ distributions from IRAs and workplace retirement plans are hit with a 10% early withdrawal tax, in addition to any regular income tax that is due on the distribution. Beginning in 2026, you can withdraw up to $2,500 from your 401(k) or other plan each year to help pay for long-term-care premiums without having to pay the additional 10% tax if you are younger than 59½.
Act soon if you want a tax credit for energy-efficient home improvements.
The One Big Beautiful Bill proposes to axe these income tax breaks. The House-passed bill would repeal the energy-efficient home improvement credit and the residential clean-energy credit for property placed in service after 2025. The Senate’s bill would axe the credits for property placed in service 181 days or more after the bill is enacted. Since homeowners may claim these credits only for the year the improvements are made, if you’re thinking of making any energy-saving upgrades, you’ll want to pay for them and get them completed quickly to ensure a credit.
We’ll briefly review the two credits here, which you would claim on Form 5695:
The energy-efficient home improvement credit is for homeowners who make smaller energy-saving purchases. The basic credit is 30% of the cost and installation of certain types of insulation, central air-conditioning systems, water heaters, heat pumps, exterior doors and windows, etc., that you install in your home. These items must also meet certain energy-efficiency requirements, depending on the product. There is a $1,200 general aggregate annual credit limit. But many specific upgrades have lower credit limits and others have higher ones.
The residential clean-energy credit is a much bigger income tax break. It’s for homeowners who install an alternative energy system in their residence that relies on a renewable energy source…such as solar, wind or geothermal... or fuel cell or battery storage technology. Think solar panels and the like. The credit equals 30% of the cost of materials and installation of systems that you install in your home. There is no maximum credit limit for solar, geothermal, wind or battery storage systems. But for fuel cells, the credit is capped at $500 for each half-kilowatt of power capacity. Unused credits can be carried forward.
Changing a business’s accounting method generally requires IRS approval. A company bought farmland over many years and negotiated with the sellers to receive Agriculture Dept. subsidies based on the number of acres for growing crops. From 2004 to 2008, the firm didn’t take amortization deductions for its “base acres,” but started doing so on its 2009 tax return. However, it never filed a form with IRS requesting to change its accounting method. IRS claimed the company’s decision to start claiming amortization deductions was a change in accounting method that necessitated the Service’s approval. IRS regs say that changing the tax treatment of an asset from nonamortizable to amortizable is a change in method of accounting. Based on the language in the regs and the underlying facts, the Tax Court sided with IRS, and an appeals court has now affirmed (Conmac Investments, 8th Cir.).
Claiming large bad-debt deductions leads to tax woes for a taxpayer. Entities that he directly and indirectly owned advanced millions of dollars to related companies from 2007 to 2010. In late 2010, he cancelled many of the loans. On his 1040, he reported cancellation of debt (COD) income, which he then excluded from income because he was insolvent. He also took a nonbusiness bad-debt deduction. But he couldn’t show that the debt became wholly worthless in the year he deducted it. He claimed that the indebtedness first became worthless when the related entities reported COD income on their tax returns, which then flowed to his individual 1040. Neither the Tax Court nor an appeals court bought his argument. The taxpayer must prove the worthlessness of his discharged debts and not presume worthlessness solely on the basis that COD income arose from the discharge (Kelly, 9th Cir.).
An abusive syndicated easement transaction suffers a major defeat. An LLC took a $22 million write-off on the donation of a conservation easement. The Tax Court, after approving the appraisal obtained by the LLC as qualified and deciding the LLC was entitled to a deduction, slashed the write-off to $193,250 and imposed a 40% penalty (Beaverdam Creek Holdings, TC Memo. 2025-53).
IRS rules on abusive syndicated easement donations should cool these deals. A 2022 federal statute disallows a charitable contribution deduction to owners of pass-through entities that make qualified conservation easement contributions if the tax write-off exceeds 2.5 times the sum of each owner’s investment in the entity. The law doesn’t apply to easement donations on property held by an entity for three or more years, or if substantially all of the interests in the pass-through are owned by family members. Last year, IRS issued final regs to implement the law.
Donating an easement on inventory property limits the deduction amount. In 2006, a firm bought 2,000 acres of undeveloped land, with the plan to develop it into a residential community. Bad economic conditions caused the plan to go awry. In 2012, the firm contributed an easement on the property to a nature conservancy. The donor claimed a deduction for the full easement value. IRS limited the amount to the donor’s adjusted basis in the easement, claiming the property was inventory. The Tax Court agreed with IRS, and an appeals court recently upheld that decision. Based on all the facts, the donor donated inventory (Glade Creek Partners, 11th Cir.).
Bad news for a Russian post-doc who got paid for laboratory work in the U.S.
Her salary is taxable compensation. It is not akin to nontaxable grants under the U.S.-Russia tax treaty, the Tax Court says. She worked as a research scientist at a university. She was first hired for a post-doc fellowship position and did research for several years in a medical lab. The school received the benefit of her full-time labor as a condition of her receiving ordinary compensation in the form of salary and benefits. Her treaty exemption argument fails, her salary is taxed, and she owes a 20% penalty for substantially understating her income tax (Kramarenko, TC Memo. 2025-61).
Here’s a tip if you missed the deadline for taking an RMD from a plan or IRA.
Ask IRS for a penalty waiver. Failure to take a required minimum distribution can lead to an excise tax of as much as 25% of the shortfall. The penalty falls to 10% if the failure is corrected within two years. However, you needn’t pay the fine at all if you can demonstrate that you had reasonable cause for failing to take the shortfall and you are taking steps to remedy the issue. If you think you are on solid ground, follow the instructions on Form 5329 and attach a letter of explanation to your 1040. If you’re asking IRS to waive the fine, don’t pay the penalty up front with your return. The fine will be due only if and when IRS denies relief and notifies you of its decision.
The Supreme Court sides with a nonprofit in a state and local tax case.
A Catholic Charities nonprofit group doesn’t owe Wis. unemployment tax, the high court decides, reversing a 2024 decision from the Wis. state supreme court. The organization, a 501(c)(3) entity, claimed that it and its four nonprofit subgroups operated primarily for religious purposes and were thus exempt under Wis. state law from making contributions to the Wis. state unemployment insurance system. They provide free services to people with developmental and mental health disabilities. The state argued that although the group’s services to the public are charitable and secular, they are not activities primarily conducted for religious purposes. The Court disagreed, viewing the state’s interpretation of the statutory exemption from unemployment tax contributions as too narrow (Catholic Charities Bureau).
The One Big Beautiful Bill offers an interest write-off for folks with auto loans.
Let’s take a close look at this proposition to see which taxpayers would benefit. The proposal would allow individuals who buy an auto for personal use in 2025-28 to deduct in each year up to $10,000 in interest that they pay on their vehicle loans. This is an above-the-line deduction, meaning it would be available for taxpayers who take the standard deduction and for those who itemize on Schedule A of the 1040. The deduction begins to phase out at modified adjusted gross incomes of $200,000 for joint filers…$100,000 for others…and ends at MAGIs of $250,000 for joint filers… $150,000 for others. Additionally, the auto’s final assembly must occur in the U.S.
Many GOP lawmakers want to expand school choice for K-12 students.
Providing a new income tax credit is one way they hope to achieve this goal. The OBBB would give a nonrefundable federal tax credit to individuals who donate cash or marketable securities to qualifying organizations created to provide scholarships to K-12 students. The credit would be capped at the greater of $5,000 or 10% of income.
GOPers want to deter noncitizens in the U.S. from sending money abroad.
They think that charging a 3.5% remittance tax would accomplish this goal. The OBBB would impose a 3.5% excise tax on remittance transfers made after Dec. 31. Transfers by U.S. citizens and permanent residents generally would be exempt. The excise tax would be paid by the sender at the time of the remittance and collected by the bank or other money transfer provider. This proposal is extremely convoluted. There are lots of rules that some say could, if this idea is eventually enacted, lead to chaotic situations and to people paying the tax who otherwise might not owe it.
Yours very truly,
Joy Taylor, Editor
June 19, 2025
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