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Many business tax limits have increased in 2025

Tax Prep, Planning & Strategy|March 11, 2025

A variety of tax-related limits that affect businesses are indexed annually based on inflation. Many have increased for 2025, but with inflation cooling, the increases aren’t as great as they have been in the last few years. Here are some amounts that may affect you and your business.

2025 deductions as compared with 2024

Section 179 expensing:
- Limit: $1.25 million (up from $1.22 million)
- Phaseout: $3.13 million (up from $3.05 million)
- Sec. 179 expensing limit for certain heavy vehicles: $31,300 (up from $30,500)
Standard mileage rate for business driving: 70 cents per mile (up from 67 cents)
Income-based phaseouts for certain limits on the Sec. 199A qualified business income deduction begin at:
- Married filing jointly: $394,600 (up from $383,900)
- Other filers: $197,300 (up from $191,950)

Retirement plans in 2025 vs. 2024

Employee contributions to 401(k) plans: $23,500 (up from $23,000)
Catch-up contributions to 401(k) plans: $7,500 (unchanged)
Catch-up contributions to 401(k) plans for those age 60, 61, 62 or 63: $11,250 (not available in 2024)
Employee contributions to SIMPLEs: $16,500 (up from $16,000)
Catch-up contributions to SIMPLEs: $3,500 (unchanged)
Catch-up contributions to SIMPLE plans for those age 60, 61, 62 or 63: $5,250 (not available in 2024)
Combined employer/employee contributions to defined contribution plans (not including catch-ups): $70,000 (up from $69,000)
Maximum compensation used to determine contributions: $350,000 (up from $345,000)
Annual benefit for defined benefit plans: $280,000 (up from $275,000)
Compensation defining a highly compensated employee: $160,000 (up from $155,000)
Compensation defining a “key” employee: $230,000 (up from $220,000)

Social Security tax

Cap on amount of employees’ earnings subject to Social Security tax for 2025: $176,100 (up from $168,600 in 2024).

Other employee benefits this year vs. last year

Qualified transportation fringe-benefits employee income exclusion: $325 per month (up from $315)
Health Savings Account contribution limit:
- Individual coverage: $4,300 (up from $4,150)
- Family coverage: $8,550 (up from $8,300)
- Catch-up contribution: $1,000 (unchanged)
Flexible Spending Account contributions:
- Health care: $3,300 (up from $3,200)
- Health care FSA rollover limit (if plan permits): $660 (up from $640)
- Dependent care: $5,000 (unchanged)

Potential upcoming tax changes

These are only some of the tax limits and deductions that may affect your business, and additional rules may apply. But there’s more to keep in mind. With President Trump back in the White House and the Republicans controlling Congress, several tax policy changes have been proposed and could potentially be enacted in 2025. For example, Trump has proposed lowering the corporate tax rate (currently 21%) and eliminating taxes on overtime pay, tips, and Social Security benefits. These and other potential changes could have wide-ranging impacts on businesses and individuals. It’s important to stay informed. Consult with us if you have questions about your situation.

Maryland’s Proposed Business-to-Business Tax: A Direct Hit on Small Businesses

|March 10, 2025

Maryland lawmakers are considering a 2.5% sales tax on business-to-business (B2B) services, which could significantly impact small businesses across the state. The proposed tax, outlined in House Bill 1554 and Senate Bill 1045, would apply to essential professional services such as accounting, consulting, IT, advertising, and equipment repair—all of which small businesses rely on to stay compliant and competitive.

Why Small Businesses Will Bear the Biggest Burden

Unlike large corporations with in-house teams, small businesses depend on outside professionals for financial management, payroll, and compliance. This new tax would make these services more expensive, forcing small business owners to:

Absorb the costs, cutting into already tight margins.
Raise prices for consumers, making it harder to stay competitive.
Reduce reliance on critical services, increasing financial and legal risks.

This tax discourages small business growth and makes Maryland a less attractive place to do business, especially compared to neighboring states like Virginia and Delaware that don’t impose such a tax.

A Compliance Nightmare for Small Business Owners

Beyond the financial burden, this tax creates complex regulatory challenges. Questions arise, such as:

If a Maryland CPA prepares taxes for a business with locations in multiple states, how is the tax applied?
If a consultant works remotely, splitting time between multiple locations, where does the tax apply?
Will small businesses have to track and report professional service taxes on top of existing compliance burdens?

This tax could result in confusion, disputes, and increased administrative costs, making it even harder for small businesses to operate smoothly.

A Hidden Tax on Consumers

The proposal could lead to tax pyramiding, where taxes accumulate at different stages of production, ultimately driving up the cost of goods and services for consumers.

Other States Have Tried and Failed

Maryland isn’t the first state to consider taxing professional services—but history shows it doesn’t work.

Florida (1987) repealed its service tax within six months due to overwhelming business opposition.
Michigan (2007) repealed a similar tax within one day after immediate backlash.

Maryland’s Competitiveness is at Risk

With today’s remote work capabilities, businesses can easily hire professionals in other states. If Maryland imposes this tax, it risks losing revenue, jobs, and business growth.

What Small Business Owners Can Do

If this tax concerns you, now is the time to take action:

Call or email your legislators—explain how this tax would impact your business.
Join business organizations advocating against the tax.
Stay informed—follow updates and attend hearings.

Maryland’s small businesses are the backbone of the economy. Let’s make sure policymakers understand the real impact before it’s too late. Read more about these proposed bills here.

Taming the tax tangle if you’re retiring soon

Tax Prep, Planning & Strategy|March 6, 2025

Retirement is often viewed as an opportunity to travel, spend time with family or simply enjoy the fruits of a long career. Yet the transition may bring a tangle of tax considerations. Planning carefully can help you minimize tax bills. Below are four steps to take if you’re approaching retirement, along with the tax implications.

1. Consider your post-career lifestyle

Begin by assessing what retirement might look like for you. For example, will you relocate to a different state or downsize by selling your home? Will you continue to work part-time?

Tax implications: Moving to a state with lower income or property taxes may stretch your retirement savings. If you sell your home and the capital gain exceeds $250,000 ($500,000 for married couples filing jointly), you’ll need to pay tax on the amount over the exclusion limit. And if you work part-time, your earnings could reduce your Social Security benefits (depending on your age) or push you into a higher tax bracket.

2. Assess your income sources

Social Security is a major income component for many retirees, and deciding when to start collecting benefits is crucial. The government will permanently reduce your monthly benefit if you begin collecting before your full retirement age. Conversely, if you delay benefits past your full retirement age (up to age 70), you’ll receive larger monthly payments.

Tax implications: Depending on your total income (including wages, retirement distributions and taxable investment income), up to 85% of your Social Security benefits could be taxable. Proper planning can help you manage taxable income and potentially reduce or avoid higher taxes on benefits.

If you’re fortunate enough to have a pension, find out your payout options. Some pensions offer lump-sum distributions, while others offer monthly annuity payments.

Tax implications: Most pension income is taxable at ordinary income tax rates.

In addition to retirement accounts, you may have savings and investments in brokerage accounts that can supplement your income.

Tax implications: Capital gains and dividends may be taxed differently than ordinary income, potentially at lower rates. Strategic withdrawals from taxable accounts and retirement accounts can help you manage your overall tax liability.

3. Develop a retirement account withdrawal strategy

Once you turn 73, you must take required minimum distributions (RMDs) from most tax-deferred retirement accounts such as traditional IRAs and 401(k)s. Failing to do so can result in hefty penalties.

Tax implications: RMDs are treated as ordinary income for tax purposes. If you don’t need them for living expenses, you might consider a qualified charitable distribution (QCD) to lower your taxable income. With a QCD, funds go directly from your retirement account to a qualified charity. They can count toward your RMD but aren’t included in your taxable income.

Distributions from Roth IRAs and Roth 401(k)s are generally tax-free (if holding-period requirements are met), making them valuable tools for reducing taxes in retirement. If you have traditional and Roth accounts, you might choose to take withdrawals from Roth accounts in years when you want to manage your tax bracket more carefully.

Tax implications: Roth accounts don’t require RMDs during the original owner’s lifetime.

4. Plan for health care expenses

Medical costs can significantly impact retirees. Medicare premiums, hospital visits, prescriptions and potential long-term care are just some of the expenses that can eat into your retirement savings without careful planning.

Tax implications: Health Savings Accounts (HSAs) allow for tax-deductible contributions, tax-free growth and tax-free withdrawals for qualified medical expenses. If you’re retiring soon and have a high-deductible health plan, maximizing HSA contributions can be a smart move. In addition, qualified medical expenses can sometimes be deducted if they exceed a certain percentage of your adjusted gross income (AGI).

Final thoughts

Retirement can span decades, and tax laws frequently change. By combining various withdrawal strategies and staying proactive about tax changes, you can tame the tax tangle. These are only some of the tax issues and implications. Contact us. We can help forecast tax outcomes under different scenarios and advise on strategies that complement your retirement goals.

The tax treatment of intangible assets

Tax Prep, Planning & Strategy|February 27, 2025

Intangible assets, such as patents, trademarks, copyrights and goodwill, play a crucial role in today’s businesses. The tax treatment of these assets can be complex, but businesses need to understand the issues involved. Here are some answers to frequently asked questions.

What are intangible assets?

The term “intangibles” covers many items. Determining whether an acquired or created asset or benefit is intangible isn’t always easy. Intangibles include debt instruments, prepaid expenses, non-functional currencies, financial derivatives (including, but not limited to, options, forward or futures contracts, and foreign currency contracts), leases, licenses, memberships, patents, copyrights, franchises, trademarks, trade names, goodwill, annuity contracts, insurance contracts, endowment contracts, customer lists, ownership interests in any business entities (for example, corporations, partnerships, LLCs, trusts and estates) and other rights, assets, instruments and agreements.

What are the expenses?

Some examples of expenses you might incur to acquire or create intangibles that are subject to the capitalization rules include amounts paid to:

Obtain, renew, renegotiate or upgrade business or professional licenses,
Modify certain contract rights (such as a lease agreement),
Defend or perfect title to intangible property (such as a patent), and
Terminate certain agreements, including, but not limited to, leases of tangible property, exclusive licenses to acquire or use your property, and certain non-competition agreements.

IRS regulations generally characterize an amount as paid to “facilitate” the acquisition or creation of an intangible if it’s paid in the process of investigating or pursuing a transaction. The facilitation rules can affect any business and many ordinary business transactions. Examples of costs that facilitate the acquisition or creation of an intangible include payments to:

Outside counsel to draft and negotiate a lease agreement,
Attorneys, accountants and appraisers to establish the value of a corporation’s stock in a buyout of a minority shareholder,
Outside consultants to investigate competitors in preparing a contract bid, and
Outside counsel for preparing and filing trademark, copyright and license applications.

Why are intangibles so complex?

IRS regulations require the capitalization of costs to:

Acquire or create an intangible asset,
Create or enhance a separate, distinct intangible asset,
Create or enhance a “future benefit” identified in IRS guidance as capitalizable, or
“Facilitate” the acquisition or creation of an intangible asset.

Capitalized costs can’t be deducted in the year paid or incurred. If they’re deductible, they must be ratably deducted over the life of the asset (or, for some assets, over periods specified by the tax code or under regulations). However, capitalization generally isn’t required for costs not exceeding $5,000 and for amounts paid to create or facilitate the creation of any right or benefit that doesn’t extend beyond the earlier of 1) 12 months after the first date on which the taxpayer realizes the right or benefit or 2) the end of the tax year following the tax year in which the payment is made.

Are there any exceptions to the rules?

Like most tax rules, these capitalization rules have exceptions. Taxpayers can also make certain elections to capitalize items that aren’t ordinarily required to be capitalized. The examples described above aren’t all-inclusive. Given the length and complexity of the regulations, transactions involving intangibles and related costs should be analyzed to determine the tax implications.

For assistance and more information

Properly managing the tax treatment of intangible assets is vital for businesses to maximize tax benefits and ensure compliance with tax regulations. Contact us to discuss the capitalization rules and determine whether any costs you’ve paid or incurred must be capitalized, or whether your business has entered into transactions that may trigger these rules. You can also contact us if you have any questions.

Saving for college: Tax breaks and strategies your family should know

Tax Prep, Planning & Strategy|February 20, 2025

As higher education costs continue to rise, you may be concerned about how to save and pay for college. Fortunately, several tools and strategies offered in the U.S. tax code may help ease the financial burden. Below is an overview of some of the most beneficial tax breaks and planning options for funding your child’s or grandchild’s education.

Qualified tuition programs or 529 plans

A 529 plan allows you to buy tuition credits or contribute to an account set up to meet your child’s future higher education expenses. State governments or private institutions establish 529 plans.

Contributions aren’t deductible. They’re treated as taxable gifts to the child, but they’re eligible for the annual gift tax exclusion ($19,000 in 2025). If you contribute more than the annual exclusion limit for the year, you can elect to treat the gift as if it is spread out over five years. By taking advantage of the five-year gift tax election, a grandparent (or anyone else) can contribute up to $95,000 ($19,000 × 5) per beneficiary this year, free of gift tax.

Earnings on 529 plan contributions accumulate tax-free until the education costs are paid with the funds. Distributions are tax-free to the extent they’re used to pay “qualified higher education expenses,” which can include up to $10,000 in tuition per beneficiary for an elementary or secondary school. Distributions of earnings that aren’t used for qualified higher education expenses are generally subject to income tax plus a 10% penalty.

Coverdell education savings accounts (ESAs)

You can establish a Coverdell ESA and make contributions of up to $2,000 for each child under age 18. This age limitation doesn’t apply to beneficiaries with special needs.

The right to make contributions begins to phase out once AGI is over $190,000 for married couples filing jointly ($95,000 for singles). If income is too high, the child can contribute to his or her own account. These thresholds haven’t been adjusted for inflation in many years.

Although Coverdell ESA contributions aren’t deductible, income in the account isn’t taxed, and distributions are tax-free if spent on qualified education expenses. If the child doesn’t attend college, you must withdraw the money when the child turns 30, and any earnings will be subject to tax plus a penalty. However, you can transfer unused funds tax-free to a Coverdell ESA of another family member who isn’t 30 yet. The age 30 requirement doesn’t apply to individuals with special needs.

Savings bonds

Series EE U.S. savings bonds offer two tax-saving opportunities when used for college expenses:

You don’t have to report the interest on the bonds for federal tax purposes until the bonds are cashed in, and
Interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the proceeds are used for qualified college expenses.

To qualify for the college tax exemption, you must purchase the bonds in your name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees, etc. — not room and board. If only some proceeds are used for qualified expenses, only that part of the interest is exempt. The exemption is phased out if your modified adjusted gross income exceeds certain amounts.

Education tax credits

Beyond saving vehicles, there are also tax credits you may be able to claim while paying college expenses:

American Opportunity Tax Credit (AOTC). This is worth up to $2,500 per eligible student each year for the first four years of undergraduate study. It is subject to income limits and is partially refundable (up to $1,000). That means you could receive a refund even if you owe no tax.
Lifetime Learning Credit (LLC). This is worth up to $2,000 per tax return (20% of up to $10,000 of qualified education expenses). There’s no limit on how many years you can claim it, so this credit can benefit graduate studies or professional development courses. It’s also subject to income limits.

You can’t claim the AOTC and the LLC for the same student in the same year. However, you can claim each credit for different students in the same household if you meet eligibility requirements.

Plan ahead

These are just some of the tax-wise ways to save and pay for college. Contact us to discuss the best path forward in your situation.

Small business strategy: A heavy vehicle plus a home office equals tax savings

Tax Prep, Planning & Strategy|February 18, 2025

New and used “heavy” SUVs, pickups and vans placed in service in 2025 are potentially eligible for big first-year depreciation write-offs. One requirement is you must use the vehicle more than 50% for business. If your business usage is between 51% and 99%, you may be able to deduct that percentage of the cost in the first year. The write-off will reduce your federal income tax bill and your self-employment tax bill, if applicable. You might get a state tax income deduction too.

Setting up a business office in your home for this year can also help you collect tax savings. Here’s what you need to know about the benefits of combining these two tax breaks.

First, buy a suitably heavy vehicle

The generous first-year depreciation deal is only available for an SUV, pickup, or van with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds that’s purchased (not leased). First-year depreciation deductions for lighter vehicles are subject to smaller depreciation limits of up to $20,400 in 2024. (The 2025 amount hasn’t come out yet.)

It’s not hard to find attractive vehicles with GVWRs above the 6,000-pound threshold. Examples include the Cadillac Escalade, Jeep Grand Cherokee, Chevy Tahoe, Ford Explorer, Lincoln Navigator, and many full-size pickups. You can usually find the GVWR on a label on the inside edge of the driver’s side door.

Take advantage of generous depreciation deductions

Favorable depreciation rules apply to heavy SUVs, pickups and vans that are used over 50% for business because they’re classified as transportation equipment for federal income tax purposes. Three factors to keep in mind:

First-year Section 179 deductions. Many businesses can write off most or all of the business-use portion of a heavy vehicle’s cost in year 1 under the Section 179 deduction privilege. The maximum Sec. 179 deduction for tax years beginning in 2024 is $1.25 million.
Limited Sec. 179 deductions for heavy SUVs. There’s a limit on Sec. 179 deductions for heavy SUVs with GVWRs between 6,001 and 14,000 pounds. For tax years beginning in 2025, the limit is $31,300.
First-year bonus depreciation. For heavy vehicles placed in service in 2025, the first-year bonus depreciation percentage is currently 40%, but future legislation may allow a bigger write-off. There are several limitations on Sec. 179 deductions but no limits on 40% bonus depreciation. So, bonus depreciation can help offset the impact of Sec. 179 limitations, if applicable.

Then, qualify for home office deductions

Again, the favorable first-year depreciation rules are only allowed if you use your heavy SUV, pickup, or van over 50% for business.

You’re much more likely to pass the over-50% test if you have an office in your home that qualifies as your principal place of business. Then, all the commuting mileage from your home office to temporary work locations, such as client sites, is considered business mileage. The same is true for mileage between your home office and any other regular place of business, such as another office you keep. This is also the case for mileage between your other regular place of business and temporary work locations.

Bottom line: When your home office qualifies as a principal place of business, you can easily rack up plenty of business miles. That makes passing the over-50%-business-use test for your heavy vehicle much easier.

How do you make your home office your principal place of business? The first way is to conduct most of your income-earning activities there. The second way is to conduct administrative and management chores there. But don’t make substantial use of any other fixed location (like another office) for these chores.

Key points: You must use the home office space regularly and exclusively for business throughout the year. Also, if you’re employed by your own corporation (as opposed to being self-employed), you can’t deduct home office expenses under the current federal income tax rules.

Double tax break

You can potentially claim generous first-year depreciation deductions for heavy business vehicles and also claim home office deductions. The combination can result in major tax savings. Contact us if you have questions or want more information about this strategy.

Do you have questions about taking IRA withdrawals? We’ve got answers

Tax Prep, Planning & Strategy|February 11, 2025

Once you reach age 73, tax law requires you to begin taking withdrawals — called Required Minimum Distributions (RMDs) — from your traditional IRA, SIMPLE IRA and SEP IRA. Since funds can’t stay in these accounts indefinitely, it’s important to understand the rules behind RMDs, which can be pretty complex. Below, we address some common questions to help you navigate this process.

What are the tax implications if I want to withdraw money before retirement?

If you need to take money out of a traditional IRA before age 59½, distributions are taxable, and you may be subject to a 10% penalty tax. However, there are several ways that you can avoid the 10% penalty tax (but not the regular income tax). They include using the money to pay:

Qualified higher education expenses,
Up to $10,000 of expenses if you’re a first-time homebuyer,
Expenses after you become totally and permanently disabled,
Expenses of up to $5,000 per child for qualified birth or adoption expenses, and
Health insurance premiums while unemployed.

These are only some of the exceptions to the 10% tax allowed before age 59½. The IRS lists them all in this chart.

When am I required to take my first RMD?

For an IRA, you must take your first RMD by April 1 of the year following the year in which you turn 73, regardless of whether you’re still employed. The RMD age used to be 72 but the Secure 2.0 Act raised it to 73 starting in 2023.

How do I calculate my RMD?

The RMD for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who’s 10 or more years younger than the owner.

How should I take my RMDs if I have multiple accounts?

If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all of your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You don’t have to take a separate RMD from each IRA.

Can I withdraw more than the RMD?

Yes, you can always withdraw more than the RMD. But you can’t apply excess withdrawals toward future years’ RMDs.

In planning for RMDs, you should weigh your income needs against the ability to keep the tax shelter of the IRA going for as long as possible.

Can I take more than one withdrawal in a year to meet my RMD?

You may withdraw your annual RMD in any number of distributions throughout the year, as long as you withdraw the yearly total minimum amount by December 31 (or April 1 if it is for your first RMD).

What happens if I don’t take an RMD?

If the distributions to you in any year are less than the RMD for that year, you’ll be subject to an additional tax equal to 50% of the amount that should have been paid but wasn’t.

Plan carefully

Contact us to review your traditional IRAs and analyze other retirement planning aspects. We can also discuss who you should name as beneficiaries and whether you could benefit from a Roth IRA. Roth IRAs are retirement savings vehicles that operate under a different set of rules than traditional IRAs. Contributions aren’t deductible, but qualified distributions are generally tax-free.

How Section 1231 gains and losses affect business asset sales

Management Advisory Services & Business Consulting|February 6, 2025

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

Now for a warning: 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 in order 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.

Conclusion

Achieving the best tax treatment for Sec. 1231 gains and losses can be a challenge. We can help you plan the timing of gains and losses for optimal tax results.

Maximize your 401(k) in 2025: Smart strategies for a secure retirement

Tax Prep, Planning & Strategy|February 4, 2025

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’re not already contributing 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 significant 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 they’re increasing a modest amount. The contribution limit in 2025 is $23,500 (up from $23,000 in 2024). Employees age 50 or older by year end are also generally permitted to make additional “catch-up” contributions of $7,500 in 2025 (unchanged from 2024). This means those 50 or older can generally save up to $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.

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

Traditional 401(k)s

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)s

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.

Planning for the future

Contact us if you have questions about how much to contribute or the best mix between traditional and Roth 401(k) contributions. We can also discuss other tax and retirement-saving strategies for your situation.

Unlocking the mystery of taxes on employer-issued nonqualified stock options

Tax Prep, Planning & Strategy|January 28, 2025

Employee stock options remain a potentially valuable asset for employees who receive them. For example, many Silicon Valley millionaires got rich (or semi-rich) from exercising stock options when they worked for start-up companies or fast-growing enterprises.

We’ll explain what you need to know about the federal income and employment tax rules for employer-issued nonqualified stock options (NQSOs).

Tax planning objectives

You’ll eventually sell shares you acquire by exercising an NQSO, hopefully for a healthy profit. When you do, your tax planning objectives will be to:

1. Have most or all of that profit taxed at lower long-term capital gain rates.

2. Postpone paying taxes for as long as possible.

Tax results when acquiring and selling shares

NQSOs aren’t subject to any tax-law restrictions, but they also confer no special tax advantages. That said, you can get positive tax results with advance planning.

When you exercise an NQSO, the bargain element (difference between market value and exercise price) is treated as ordinary compensation income — the same as a bonus payment. That bargain element will be reported as additional taxable compensation income on Form W-2 for the year of exercise, which you get from your employer.

Your tax basis in NQSO shares equals the market price on the exercise date. Any subsequent appreciation is capital gain taxed when you sell the shares. You have a capital loss if you sell shares for less than the market price on the exercise date.

Let’s look at an example

On December 1, 2023, you were granted an NQSO to buy 2,000 shares of company stock at $25 per share. On April 1, 2024, you exercised the option when the stock was trading at $34 per share. On May 15, 2025, the shares are trading at $52 per share, and you cash in. Assume you paid 2024 federal income tax on the $18,000 bargain element (2,000 shares × $9 bargain element) at the 24% rate for a tax of $4,320 (24% × $18,000).

Your per-share tax basis in the option stock is $34, and your holding period began on April 2, 2024. When you sell on May 15, 2025, for $52 per share, you trigger a $36,000 taxable gain (2,000 shares × $18 per-share difference between the $52 sale price and $34 basis). Assume the tax on your long-term capital gain is $5,400 (15% × $36,000).

You net an after-tax profit of $44,280 when all is said and done. Here’s the calculation: Sales proceeds of $104,000 (2,000 shares × $52) minus exercise price of $50,000 (2,000 shares × $25) minus $5,400 capital gains tax on the sale of the option shares minus $4,320 tax upon exercise.

Since the bargain element is treated as ordinary compensation income, the income is subject to federal income tax, Social Security and Medicare tax withholding.

Key point: To keep things simple, the example above assumes you don’t owe the 3.8% net investment income tax on your stock sale gain or any state income tax.

Conventional wisdom and risk-free strategies

If you had exercised earlier in 2024 when the stock was worth less than $34 per share, you could have cut your 2024 tax bill and increased the amount taxed later at the lower long-term capital gain rates. That’s the conventional wisdom strategy for NQSOs.

The risk-free strategy for NQSOs is to hold them until the earlier of 1) the date you want to sell the underlying shares for a profit or 2) the date the options will expire. If the latter date applies and the options are in-the-money on the expiration date, you can exercise and immediately sell. This won’t minimize the tax, but it eliminates any economic risk. If your options are underwater, you can simply allow them to expire with no harm done.

Maximize your profit

NQSOs can be a valuable perk, and you may be able to benefit from lower long-term capital gain tax rates on part (maybe a big part) of your profit. If you have questions or want more information about NQSOs, consult with us.