Tax season 2025 preview

As CPA tax professionals get ready for another tax return season, they can take stock of recent tax law changes affecting 2024 returns and their firms’ processes and procedures for completing those returns while handling client communications. Although no new significant tax legislation was enacted in 2024, several previous law and administrative changes will figure in some returns’ calculations. Potential changes ahead will call for planning discussions with clients, particularly the scheduled sunset of numerous provisions of the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, at the end of this year. In addition, with other possible new or renewed initiatives going forward, the implications of November’s elections on the tax environment are still being evaluated.

“As we approach filing season, when I think about taxpayer and tax preparer concerns, there are two primary categories,” said Matthew Becker, CPA, national managing principal of BDO’s tax practice and a member of the AICPA Tax Practice Management Committee. “The first is technology. The second relates to law changes that were announced in previous years and the importance of getting them right.”

REQUIRED MINIMUM DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS

The SECURE 2.0 Act, passed in December 2022 (Division T of the Consolidated Appropriations Act, 2023, P.L. 117-328), included changes to required minimum distributions (RMDs) from qualified retirement accounts, along with a number of other related matters.

Among other things, the applicable age for RMDs was increased to 73, effective Jan. 1, 2023, for certain individuals. Becker noted that “it is important for taxpayers, based on their ages, to think about their RMDs and what is required, because it is important to get this right.” (See “SECURE 2.0 Developments and Guidance for 2024,” The Tax Adviser, January 2024.)

FORM 1099-K

The IRS is phasing in a lower reporting threshold for Form 1099-K, Payment Card and Third Party Network Transactions. The American Rescue Plan Act of 2021, P.L. 117-2, had set a $600 threshold, with no minimum number of transactions, but the IRS administratively delayed the $600 threshold for 2022 and 2023 and announced that a transitional $5,000 threshold would apply in 2024. In late November, the IRS said the threshold would be $2,500 in 2025 before going to $600 starting in 2026.

“For years, everyone understood that if they received over $600 for contract work, they would get a Form 1099,” said Mark Gallegos, CPA, MST, tax partner at Porte Brown and also a member of the AICPA Tax Practice Management Committee. But the lowered threshold for Form 1099-K has now been delayed several times. The reason Congress reduced the reporting threshold, he observed, is because “gig workers (like for Uber and Lyft), Airbnb transactions, online marketplaces, and use of third-party payment apps like Venmo and PayPal created a reporting issue for the government.”

As noted above, the reporting threshold for 2024 is $5,000. “It is likely that any taxpayer who has $5,000 or more in online receipts in 2024 could get a 1099-K that also goes to the IRS,” Gallegos said. “We will be working with taxpayers on what they need with these forms for this year and how they have to report it.”

TAX PLANNING FOR A TCJA SUNSET

Many clients will need planning advice because of the scheduled sunset, or reversion to prior law, of numerous provisions of the TCJA. 

“Without any bills passed, these provisions will expire at the end of 2025,” Gallegos said. “Although we have a year or so until TCJA comes to an end, we are advising our clients that they must be aware these things are coming down the road very quickly and how it will affect them.”

Because of the possible upcoming sunset of certain changes made by the 2017 legislation, “there is a lot of uncertainty regarding tax law provisions as we look forward to future years,” Becker said, noting that the TCJA was the biggest tax law overhaul in 30 years. For now, “coaching clients about timing of income or deductions is very difficult.”

Among the scheduled changes are:

• Individual income tax rates will revert to higher 2017 levels, with the highest marginal tax bracket returning to 39.6% from 37%, and the size of each bracket will change.
• The standard deduction will be cut roughly in half (the TCJA’s increase in the standard deduction has reduced the number of taxpayers itemizing deductions).
• The personal exemption will return, while the child tax credit will be reduced.
• The estate tax basic exclusion amount will be reduced.
• The 20% qualified business income (QBI) deduction under Sec. 199A for partnerships, sole proprietorships, and other noncorporate businesses will disappear.
• The $10,000 cap on the state and local income tax (SALT) itemized deduction will be removed and revert to allowing individuals a full deduction for these taxes.

For owners of flowthrough entities, “there will potentially be an increase in tax liability … from the change in tax brackets and rates and the loss of the QBI deduction that I don’t believe they are aware is going to happen,” Gallegos said. “I also don’t believe many tax practitioners, although they are aware of it, are planning for this.”

The estate and gift tax lifetime exclusion provision is another important planning topic. “Clients need to consider the total value of the assets in their estate,” Gallegos said. “If they were to liquidate them all at the date of death, under the TCJA there was an approximately $14 million lifetime exclusion under which they would not pay estate tax. If this expires, at the end of 2025 the lifetime exclusion is cut in half and reverts to $5 million ($7 million adjusted for inflation),” he observed. “It is important for taxpayers with significant assets in their estates to consider this now and to create or update their estate plan and their will.”

“Clients are going to ask what the law is and where it is going. But who knows?” Gallegos added. “Tax planning is important so clients know how much they will owe in November or December and can plan their cash flows to have money available in April to pay a potentially higher tax liability. We will likely have to model with and without TCJA.”

DIGITAL ASSET TRANSACTIONS

In June 2024, the IRS and Treasury issued final regulations (T.D. 10000) providing rules for taxpayers to determine their basis and gain or loss from certain digital asset transactions and addressing backup withholding. The final regulations also require certain brokers to file information returns with the IRS about digital asset transactions and provide Form 1099-DA, Digital Asset Proceeds From Broker Transactions, to taxpayers reporting the gross proceeds.

While most of the final regulations apply to transactions on or after Jan. 1, 2025, practitioners preparing clients’ 2024 returns that include digital asset transactions can advise them of the forthcoming changes and the need to keep track of them now. “At this time, the Form 1099-DA is still in draft form,” Gallegos said. “This is highly involved and does not apply to all platforms.”

CLEAN-ENERGY CREDITS

New or enhanced energy credits provided by the Inflation Reduction Act of 2022, P.L. 117-169, “can be a tax planning opportunity,” Gallegos said. “Clean-energy credits can apply to all taxpayers: to individuals’ home improvements or electric cars, to businesses’ facilities, and to developers and home builders.” For more information on energy credits available to individuals, see “New and Enhanced Energy Tax Credits for Individuals,” JofA, November 2024.

GROWING COMPETITION FROM DIRECT FILE

The IRS’s new free filing program, Direct File, which was piloted in a few states last tax season, has expanded and will become a permanent option for filing federal returns starting in the upcoming tax season. “It was the IRS’s response to taxpayers’ expressed desire to have a low-cost option for electronically filing,” Becker said.

“This is both a complication and an opportunity for tax preparers and taxpayers,” he said. “The dilemma is that the program is not designed for taxpayers to receive assistance from a tax preparer while using it,” and as a result, “if our current clients choose to use Direct File, we have to decide how to position any assistance to them.”

The IRS also has technology and other initiatives underway to improve how the agency interacts with taxpayers and preparers. These include simplifying and clarifying taxpayer notices from the Service and making it easier to file amended returns.

The technology changes “reduce the burden in taxpayers’ interactions with the IRS and potentially increase the availability of IRS staff resources to talk to taxpayers and preparers when direct interaction is needed,” Becker said. “Because of lack of IRS resources, it can be very difficult for a tax preparer to get the attention needed to resolve issues for clients.” Other modernization efforts underway at the IRS include a reduction in the use of paper and continued updating of IRS data security and privacy procedures.

PRACTICE MANAGEMENT

Considering all the issues tax preparers must address during filing season, effective practice management is essential. Better planning within the firm and better communications with clients upfront can make the return preparation process more efficient.

Documentation is key. In recent years, there has been “an increased focus of IRS audits on certain types of taxpayers,” Becker said. “These include high-net-worth individuals, and it is increasingly important that they have documentation in place for all tax positions taken.” Also, there has been “a general increase in IRS audit activity of partnerships and corporations compared with prior years, so CPAs preparing tax returns for individuals who are involved in businesses should make them aware of this.”

Another area of concern is that clients be able to substantiate any deductions taken. “We counsel our clients about documents they should have in place, and we often like to see it for verification,” Becker said. “Also, the timeliness of when information is available to preparers is always a difficult factor. It seems it is made available later and later in the year.” He noted it is increasingly burdensome for preparers to process the number of returns needed to take care of their clients in a shortened window of time.

Becker emphasized the importance of ensuring tax practice quality control is in place. “The availability of and ability to process information electronically and use the data we have helps us to provide clients with the highest level of quality and to fulfill our professional responsibilities,” he said.

He noted firms are using artificial intelligence (AI) alternatives in their tax return review process. “Firms like ours that prepare a large population of tax returns for a variety of taxpayers can use AI to identify an aspect of a return that is outside the range expected based on other factors in the return. This can lead us to look at a particular aspect of the return we might not have otherwise noticed to be out of the ordinary.”

GETTING UP TO SPEED

With another tax filing season ahead, “it is so important for practitioners to understand what they need to do to get up to speed on all of these changes,” Gallegos said.

About the author

Maria L. Murphy, CPA, is a senior content management consultant, accounting and auditing products, for Wolters Kluwer Tax & Accounting North America, and a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.

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