This And That
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.
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.).
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 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.