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.

2026 Tax Law Changes for Individuals

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

Contact the office to discuss how these or other changes might affect you.

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.

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).

Tax Filing Considerations for Households With Multiple Income Streams

Managing your taxes can feel simple when you have one paycheck. Once your household has multiple income streams, things get more complex very quickly. Side businesses, freelance work, rental income, investments, or dual earners all add layers to your tax picture. Understanding how these pieces fit together helps you avoid surprises and feel confident that your filing is accurate and compliant.

Why Multiple Income Streams Change Your Tax Picture

Having more than one source of income often means more opportunity, but it also means more responsibility at tax time. Each income stream may follow different tax rules, reporting requirements, and withholding structures.

You may notice that your taxes owed are higher than expected, even when your total income has not dramatically increased. This often happens because not all income has taxes withheld upfront. Recognizing this early helps you plan rather than react when filing season arrives.

Tracking Income Is Not Optional

When income comes from several places, organization becomes one of your most valuable tools. Missing or incomplete records can lead to errors, delays, or even penalties.

You should track every source consistently throughout the year, not just when filing approaches. This includes income that does not come with a traditional tax form.

Examples of income that often require extra tracking include:

• Freelance or contract payments
• Rental or short-term property income
• Online sales or gig work earnings

Clear records make it easier to report your income accurately and support deductions if questions arise later.

Understanding Withholding and Estimated Taxes

One of the most common issues for households with multiple income streams is underpayment. When you earn income outside of a regular paycheck, taxes are often not withheld automatically.

You may need to adjust your primary job withholding or make quarterly estimated tax payments to stay on track. Failing to do so can result in a large balance due or penalties.

Situations where estimated taxes are often required include:

• Self-employment or independent contractor income
• Significant investment or rental earnings

By planning for tax season as you earn income throughout the year, you can better protect your cash flow and reduce stress when it’s time to file your returns.

Deductions and Credits Can Get Complicated

Multiple income streams can open the door to valuable deductions, but only if they are handled correctly. Business expenses, home office use, depreciation, and retirement contributions all require careful documentation and proper classification.

Mixing personal and business finances is a common mistake that can limit deductions or raise red flags. Keeping accounts separate and understanding which expenses qualify as deductible will help you maximize your legitimate tax benefits.

Filing Status and Household Strategy Matters

When more than one person contributes income to a household, tax decisions become strategic. Filing status, allocation of deductions, and timing of income or expenses can all affect your total tax liability.

What works one year may not be ideal the next, especially as income sources change. Reviewing your situation annually ensures your approach evolves with your financial life.

Turning Complexity Into Confidence

Handling multiple income streams does not have to feel overwhelming. With the right guidance, you can face tax season with clarity and confidence.

Professional accounting support helps you understand how each income source affects your overall tax picture. Instead of guessing or hoping for the best, you gain a clear strategy built around accuracy, compliance, and long-term financial health. When your taxes are handled thoughtfully, you gain peace of mind and more control over your financial future.

Multi-State Tax Challenges for Expanding Small Businesses

Expanding your small business into new states is an exciting milestone. Growth often means more customers, more revenue, and greater visibility. It also means more tax responsibilities that can catch you off guard if you are not prepared. When your business crosses state lines, your tax strategy needs to evolve just as quickly as your operations.

Why State Lines Matter for Taxes

Once your business operates in more than one state, tax rules are no longer centralized. Each state has its own requirements, rates, and definitions that affect how and when you owe taxes.

You may create what is known as tax nexus simply by having employees, inventory, or regular sales activity in another state. Even online sales can trigger obligations depending on the volume and location of your customers. Understanding where your business has a taxable presence is the first step in staying compliant.

Income Taxes Do Not Work the Same Everywhere

State income tax rules vary widely, and assumptions based on your home state can lead to costly mistakes. Some states tax business income aggressively, while others have no income tax at all.

You need to determine how income is allocated or apportioned among states. This process decides how much of your total income is taxed in each location. Without proper allocation, you risk double taxation or underreporting income.

Common factors used in apportionment include:

• Sales made to customers in each state
• Physical presence such as offices or warehouses
• Payroll or employee activity within a state

Clear documentation supports accurate reporting and helps defend your position if questions arise.

Sales Tax Adds Another Layer of Complexity

Sales tax is often one of the most challenging areas for growing businesses. Rules around collection, rates, and filing frequency differ by state and sometimes by city or county.

If you sell products or taxable services across state lines, you may be responsible for collecting and remitting sales tax even without a physical storefront. Economic nexus laws have expanded these obligations in recent years.

You should pay close attention to:

• Where your customers are located
• Whether your products or services are taxable in that state
• State-specific thresholds that trigger collection requirements

Missing sales tax obligations can lead to penalties that quickly outweigh the cost of proper setup.

Payroll and Employment Taxes Can Multiply Quickly

Hiring employees in new states creates additional tax responsibilities beyond income and sales taxes. Payroll taxes, unemployment insurance, and state-specific reporting all come into play.

Each state has its own registration process and compliance deadlines. Managing this manually can become overwhelming as your team grows. Setting up payroll correctly from the start prevents issues that disrupt both your business and your employees.

Planning Before You Expand Saves Time and Money

The most successful expansions are planned with taxes in mind, not addressed after problems appear. A proactive approach allows you to budget accurately and avoid compliance surprises.

Professional accounting guidance helps you evaluate where expansion makes sense and how to structure operations efficiently. Instead of reacting to notices and penalties, you gain a clear roadmap that supports growth with confidence. When your tax strategy keeps pace with your business, expansion becomes an opportunity rather than a risk.

How Poor Financial Reporting Limits Business Growth Decisions

When you are focused on running a business, financial reports can feel like paperwork rather than strategy. Yet the quality of your financial reporting directly affects how confidently you can grow. When reports are unclear, outdated, or inaccurate, even smart decisions become risky. Understanding how poor reporting holds you back helps you see why reliable accounting is essential to sustainable growth.

Financial Reports Are Your Strategic Tools

Every major business decision relies on financial data. Whether you are considering hiring, expanding locations, or investing in new technology, you depend on reports to show what your business can realistically support.

If your reports do not reflect reality, your decisions are based on assumptions rather than facts. You may feel uncertain about cash flow, profit margins, or overall performance. Clear financial reports give you visibility into what is working and where adjustments are needed before problems grow larger.

Cash Flow Confusion Slows Growth

Cash flow is one of the most common areas affected by poor reporting. When inflows and outflows are not tracked accurately, it becomes difficult to plan ahead.

You might hesitate to invest in growth because you are unsure whether funds will be available. On the other hand, you might overextend your business based on incomplete information.

Signs that cash flow reporting may be limiting your decision-making include:

• Difficulty predicting upcoming expenses
• Frequent surprises in account balances
• Delayed visibility into late or missed payments

Reliable cash flow reports let you time growth decisions with confidence instead of reacting under pressure.

Inaccurate Profitability Hides Opportunities

Not all revenue contributes equally to growth. Without accurate reporting, it is hard to see which products, services, or clients are truly profitable. Poorly categorized expenses or missing data can make strong areas look weak and weak areas look sustainable. This misalignment often leads to investing resources in the wrong places.

Common reporting issues that distort profitability include:

• Mixing personal and business expenses
• Failing to allocate overhead correctly
• Failing to separate fixed and variable costs

When profitability is clear, you can focus on opportunities that actually move your business forward.

Delayed Reports Create Missed Timing

Timing matters in growth decisions. Outdated financial reports limit your ability to respond to market changes or internal trends. If you only review financials months after activity occurs, you lose the chance to adjust pricing, manage costs, or shift strategy when it matters most. Regular, timely reporting turns financial data into a proactive tool rather than a historical record.

Strong Reporting Builds Confidence and Credibility

Beyond internal decisions, your financial reports affect how others view your business. Lenders, investors, and partners rely on accurate financial information when evaluating risk and potential.

Professional accounting support helps ensure your reports are consistent, compliant, and meaningful, allowing your numbers to tell a clear story. When that clarity is in place, you gain confidence in your decisions and credibility with stakeholders. In this way, strong financial reporting does more than track your business’ performance. It can also enable growth, giving you the clarity you need to move forward with purpose.

What Can a Trust Pay For?

If you’ve recently set up a trust or have been named a trustee, you may find yourself wondering what the trust can actually pay for. Trusts are designed to manage and distribute assets according to specific terms, and they can be powerful tools for both estate planning and ongoing financial care. However, they also come with rules and responsibilities. Knowing what a trust is allowed to pay for can help you avoid mistakes and fulfill your duties with confidence.

The types of expenses a trust can cover depend on the trust’s purpose, its legal structure, and the language included in the trust document. As a trustee, your job is to follow those instructions closely while managing the trust in the best interest of its beneficiaries.

Common Expenses a Trust May Cover

If you are acting as trustee, you are legally required to manage the assets in a way that serves the beneficiaries and aligns with the intent of the person who created the trust. The trust document outlines what the assets can be used for and often includes guidelines for both routine expenses and specific circumstances.

Trusts are commonly used to support individuals, families, or charitable causes. In general, a trust can pay for anything that directly benefits the named beneficiaries, as long as the expense is allowed by the trust’s terms and does not violate state or federal law.

Depending on the goals of the trust, you might find that the allowed expenses include:

• Education expenses, including tuition, books, and related fees
• Medical costs such as health insurance premiums, doctor visits, and prescription drugs
• Housing expenses like rent, mortgage payments, or property taxes
• Basic living needs such as groceries, clothing, or transportation
• Travel, enrichment programs, or special experiences, if deemed appropriate
• Maintenance costs for real estate or other trust-owned property

For example, if a trust was established to support a minor child, it might include language allowing funds to be used for private school tuition, extracurricular activities, and summer camps. On the other hand, a trust created for an adult beneficiary with special needs might allow for medical care, in-home assistance, and therapeutic services.

What a Trust Cannot Pay For

While a trust can pay for many things, there are also limits. The trust document may specifically restrict certain types of spending, and even when it doesn’t, the trustee must still act within the bounds of reasonableness and legal responsibility.

Common examples of prohibited or inappropriate trust spending include:

• Giving cash gifts or loans that are not authorized by the trust terms
• Making speculative investments with trust assets
• Paying for luxuries or personal expenses not deemed necessary for the beneficiary’s well-being
• Commingling trust funds with personal or business accounts

If you’re unsure whether an expense is permitted, it is always safer to pause and consult the trust attorney or a qualified fiduciary advisor.

Staying Compliant as a Trustee

If you are responsible for managing a trust, keeping clear records of every transaction is essential. Transparency and accountability are key to fulfilling your fiduciary duty and avoiding potential disputes.

Understanding what a trust can pay for helps you protect the assets, support the beneficiaries, and honor the intentions of the trust creator. However, interpreting the language of a trust is not always simple, which is why working with an attorney or accountant familiar with trust management is often a wise choice. With careful planning and the right professional guidance, trust administration can be both manageable and rewarding.

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