As the U.S. economy evolves, so too do its tax policies. Recent changes to tax legislation have a significant impact on small and medium-sized entrepreneurs and individual taxpayers. Whether you're a business owner navigating the complexities of new tax regulations or an individual trying to understand how these shifts affect your bottom line, staying informed is crucial.
In this post, we'll break down the most recent changes in U.S. tax laws and how they could impact both entrepreneurs and individual taxpayers.
1. Increased IRS Scrutiny on Small and Medium Businesses
One of the major updates affecting small and medium-sized entrepreneurs is the increased focus from the IRS on tax compliance. The IRS has received substantial funding to enhance its enforcement capabilities, including the ability to audit more small businesses. This shift comes as part of the broader efforts to crack down on tax avoidance and underreporting.
Key Takeaways:
· More audits: Small businesses can expect a higher chance of audit, especially if they're involved in complex transactions or have inconsistent reporting. Proper record-keeping and transparency in financial reports are essential.
· Enforcement focus: Industries with a high volume of cash transactions (like restaurants and construction) may face more attention.
What Can Entrepreneurs Do? Ensure that your accounting practices are top-notch. Consider using digital tools for bookkeeping and hire professionals to review your financials regularly. Proactive steps can help mitigate the risk of audits.
2. Changes to Pass-Through Entity Taxation
Pass-through entities (like LLCs, S corporations, and partnerships) have always been a popular structure for small and medium-sized businesses due to their tax benefits, as profits are passed directly to the business owner’s personal tax return. However, recent legislative changes have altered some of the tax treatment of these entities.
Key Takeaways:
· Section 199A Deduction: The Qualified Business Income (QBI) deduction, also known as Section 199A, has been a game-changer for pass-through entities. This deduction allows business owners to deduct up to 20% of their qualified business income, lowering their taxable income.
· Income thresholds: For 2025, the threshold for claiming the full QBI deduction will gradually begin phasing out for high-income earners. If your business generates substantial income, you may need to revisit your tax strategy.
What Entrepreneurs Need to Know: If you're a pass-through entity owner, be sure to calculate your potential QBI deduction and consult with a tax advisor to understand how the phase-out might affect you as your business grows.
3. Standard deduction increases for Individuals
For individual taxpayers, the standard deduction has seen increases in recent years, and the trend continues in 2025. The standard deduction is the portion of income not subject to tax, essentially lowering your taxable income.
Key Takeaways:
· Standard Deduction: The standard deduction for individuals has been increased for 2025, allowing taxpayers to claim more in deductions without the need for itemizing. For single filers, the deduction is expected to rise to $14,500, while married couples filing jointly can expect a $29,000 deduction.
· Impact on Tax Filing: More people may opt for the standard deduction instead of itemizing, simplifying the filing process and reducing the paperwork burden.
What Individuals Should Consider: If you typically itemize deductions, check whether your total deductions exceed the standard deduction in 2025. If not, taking the standard deduction might be a better choice for you, saving time and simplifying the filing process.
4. Changes to Capital Gains Taxes
Another key area of focus in recent tax reform is the treatment of capital gains. For business owners who sell assets or individuals who invest in stocks, mutual funds, or real estate, these changes could have a significant impact.
Key Takeaways:
· Capital Gains Rates: For 2025, long-term capital gains tax rates remain favorable but could be subject to slight changes. The top rate is still 20%, but high-income earners may see higher rates on certain types of investment income.
· Impact on Real Estate: The tax treatment of real estate sales, particularly regarding the exclusion of capital gains on the sale of a primary residence, remains largely unchanged. However, new rules may affect the way depreciation is handled when selling investment properties.
What Investors and Business Owners Should Do: Make sure to stay updated on the latest developments regarding capital gains taxation. If you're planning to sell a business or investment property, it might be beneficial to consult a tax professional to strategize the sale in a way that minimizes tax liabilities.
5. Child Tax Credits and Family-Related Deductions
Family-related tax credits and deductions have always been a key part of the U.S. tax system, and recent changes in these areas offer additional benefits for parents and caretakers.
Key Takeaways:
· Child Tax Credit: The child tax credit has been expanded for 2025, offering up to $3,000 per qualifying child, and the phase-out thresholds have been adjusted. This means that families with children could see a significant reduction in their tax bills.
· Paid Family Leave: Certain states have introduced paid family leave tax credits that can help working parents and caregivers offset some of their expenses.
What Families Should Know: If you have children or dependents, ensure you're claiming the appropriate tax credits and deductions available to you. For families with lower or moderate income, these credits could provide significant relief.
6. Retirement Savings and Tax-Advantaged Accounts
For individual taxpayers planning for retirement, recent updates have improved access to tax-advantaged retirement accounts.
Key Takeaways:
· Contribution Limits: The contribution limits for retirement accounts like 401(k)s and IRAs have increased, meaning individuals can save more tax-deferred or tax-free for retirement.
· Roth IRA and 401(k) Expansion: Recent legislation has allowed more individuals to contribute to Roth IRAs by raising income limits, making it easier for higher earners to access tax-free growth.
What You Should Do: Maximize your retirement contributions. Take advantage of higher contribution limits to reduce taxable income, and consider diversifying between traditional and Roth accounts based on your current and expected future tax situation.
Conclusion: Stay Informed, Plan Ahead
The changes in U.S. taxation present both opportunities and challenges for small and medium-sized entrepreneurs, as well as individual taxpayers. Whether it’s optimizing your business structure, taking advantage of tax credits, or planning for retirement, being proactive is key. Consulting with a tax professional is always a wise decision, as these rules can be complex, and the last thing you want is to miss out on potential savings.
As always, the key to successful tax planning is staying informed and adjusting your strategy as new laws and regulations emerge. By making the right moves now, you can protect your financial future and keep more of your hard-earned money.