Mutual funds offer an easy way to invest in a diversified portfolio compared to buying individual stocks and bonds. But the tax treatment of mutual funds isn’t so simple.

How are mutual funds taxed?

If you sell appreciated mutual fund shares, the resulting profit will be taxable. If you’ve held the shares for one year or less, you have a short-term gain subject to your marginal ordinary-income rate, which might be as high as 37%.

If you’ve held the shares for more than one year, your lower long-term capital gains rate applies. The maximum federal long-term gains rate is 20%. But most taxpayers pay a long-term gains rate of 15%, and some may even qualify for a 0% rate.

However, whether it’s a short- or long-term gain, you may also be subject to the 3.8% net investment income tax. Taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married couples filing jointly and $125,000 for married individuals filing separately) are subject to this extra 3.8% tax on the lesser of their net investment income or the amount by which their MAGI exceeds the applicable threshold.

When you sell mutual fund shares, your gain (or loss) is measured by the difference between the amount realized from the sale and your tax basis in the shares. This is generally the amount you paid for the shares, with certain adjustments.

When does a sale occur?

One challenge is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. It’s obvious that a sale occurs when you sell all shares in a mutual fund and receive the proceeds. Similarly, an obvious sale occurs if you direct the fund to sell the number of shares necessary for a specific dollar payout.

It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, let’s say you surrender shares of an income fund for an equal value of shares of the same company’s growth fund. No money changes hands, but this is considered a sale of the income-fund shares.

Another example is when investors write checks on their funds. While this was much more common 20+ years ago, some mutual funds still provide check-writing privileges to their investors. Although it may not seem like it, if you write a check on your mutual fund account, you’re making a sale of shares.

What’s your basis?

Another challenge may be determining your basis for shares sold. If you sell all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments), including commissions or sales charges. Then, add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.

The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of these methods to identify the shares sold and determine your basis:

First-in, first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.

Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on June 1, 2025.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis, reducing the taxable gain.

Average basis. The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent. This is easier than the specific identification method and may reduce your taxable gain compared to the first-in, first-out method.

More to consider

There are tax factors to consider beyond what we’ve discussed here. For example, mutual fund capital gains distributions are also generally taxable, even when reinvested in the fund. If you have questions about the tax treatment of mutual funds, contact us. We can help you be a tax-smart mutual fund investor.

Have you already made contributions to charity this year? Are you considering making more between now and year end? If so, it’s important to be familiar with the tax rules for different types of donations so you can maximize your tax benefit — or at least avoid finding out at tax filing time that your charitable deductions are smaller than you expected.

For example, be aware that a new limit goes into effect this year: a 0.5% floor on the charitable deduction for itemizers. This generally means that only charitable donations in excess of 0.5% of your adjusted gross income (AGI) will be deductible if you itemize deductions. So, if your AGI is $100,000, your first $500 of charitable donations for the year won’t be deductible.

Let’s take a look at some of the other significant rules, limits and changes affecting different types of donations.

Giving cash

When you make a cash or cash-equivalent contribution to a qualified charitable organization, if you don’t itemize deductions, you can claim the new charitable deduction for nonitemizers of up to $1,000 ($2,000 for married couples filing jointly). Only cash donations qualify.

If you do itemize deductions, you can generally deduct the full amount of cash contributions once you’ve surpassed the new 0.5% floor. But, your annual deduction is generally limited to 60% of your AGI. Any excess may be carried forward for up to five years.

Be aware that the IRS imposes strict recordkeeping rules for cash contributions. For instance, for cash donations of $250 or more, you must obtain a contemporaneous written acknowledgment from the charity before filing your income tax return.

Donating property

Several special rules apply to charitable gifts of property. For starters, property donations are subject to lower annual deduction limits (which we’ll detail shortly).

On the plus side, there’s a big tax break if you donate certain appreciated property you’ve held longer than one year that would have qualified for long-term capital gains rates had you sold it instead of donating it. In this case, you can deduct the property’s current fair market value. Thus, any appreciation in value while you owned the property will be untaxed. Examples of eligible property include publicly traded securities and mutual funds. However, your annual deduction for such donations is typically limited to 30% of AGI.

For tangible property, how the charity uses the property may affect the amount of your deduction. For example, if you donate a car, unless it’s being used by the charity to further its charitable mission (such as a social services charity using a van to deliver meals to the elderly), you generally may deduct only the amount the charity receives when it sells the vehicle. But a 50% of AGI limit typically applies to deductions for donations where you can’t deduct the fair market value, rather than the 30% limit.

These are just a few examples of rules that apply to deductions for property donations. Contact us to find out the rules for specific property you’re considering giving to charity.

Making quid pro quo contributions

Generally, if you receive a benefit in return for making a donation, your deduction amount is reduced. For such a “quid pro quo contribution,” the charity must provide a good-faith estimate of the goods and services you received. You can deduct the difference between the amount you donated and the value of the benefit you received — nothing more.

For example, let’s say you attend a fundraising dinner cruise costing $300. If the charity values the meal and boat ride at $100 per person, your deduction is limited to $200. However, most low-cost items and nominal gifts, like coffee mugs or pens featuring the charity’s logo, don’t have to be subtracted from your deduction.

Volunteering

You can’t deduct the value of the time you spend helping a charity. But you can write off related out-of-pocket expenses, such as supplies and mileage, if you itemize deductions. The deductible mileage rate for charitable miles driven is 14 cents per mile.

Travel and lodging expenses can qualify, such as if you attend a convention as a delegate for the charity. However, travel expenses can’t be deducted if the trip is merely a disguised vacation.

Achieving your goals

If you itemize deductions, charitable donations can be a powerful tax-saving tool. But, as you can see, there’s much to consider as you plan your giving for the rest of the year. We can answer your questions and help you create a charitable giving strategy for the remainder of 2026 that aligns with your philanthropic and tax goals.

It’s easy to focus on the excitement of a big win. But federal tax law generally treats lottery prizes, gambling winnings and other awards as taxable income. Knowing the basic rules can help you avoid surprises when you file your 2026 return next year.

Lottery prizes

Of course, the chances of winning big in the lottery are slim. But many people win smaller, yet not insignificant, amounts that can increase their tax liability — in some cases, substantially.

Lottery winnings are taxable for federal purposes. This is the case for both cash prizes and the fair market value of noncash prizes, such as a car or vacation. Depending on the amount won and your other income, the winnings could push you into a federal tax bracket as high as 37%. Your winnings may also be subject to state income tax.

You must report lottery winnings as income in the year, or years, you actually receive them. In the case of noncash prizes, this would be the year you receive the prize. With cash, if you take the winnings in annual installments, you report each year’s installment as income for that year.

Gambling winnings

For federal tax purposes, it doesn’t matter if you win at the casino, a bingo hall or elsewhere. You must report 100% of your gambling winnings as taxable income. They’re reported on an “Other income” line of your 1040 tax return. To measure your winnings on a particular wager, use the net gain. For example, if a $50 bet at the racetrack turns into a $150 win, you’ve won $100, not $150.

You must separately keep track of losses. They may be deductible, but only if you itemize deductions. Therefore, if you take the standard deduction, you can’t deduct gambling losses.

In addition, you can deduct only 90% of gambling losses, and only up to the amount of gambling winnings. So if your losses exceed your winnings, you might be able use losses to “wipe out” gambling income — but you can’t offset other income with the losses.

Maintain good records of your losses during the year. Keep a detailed diary in which you note the date, place, amount and type of loss, as well as the name of anyone who was with you. Save all documentation, such as checks or credit slips.

Note: Different rules apply to people who qualify as professional gamblers.

Withholding and estimated tax payments

If you win more than $5,000 in the lottery or certain types of gambling, 24% must be withheld for federal tax purposes. You’ll receive a Form W-2G from the payer (lottery agency, casino, etc.) showing the amount paid to you and the federal tax withheld. (The payer also sends this information to the IRS.) If state tax is withheld, that amount may also be shown on Form W-2G.

Because your federal tax rate can be up to 37%, which is well above the 24% withheld, the withholding may not be enough to cover your federal tax bill. Therefore, you may have to make estimated tax payments to cover the rest of the liability — and you might be assessed a penalty if you fail to do so.

Have you won big?

Lottery, gambling or other winnings can increase income taxes and create estimated tax obligations. (There might also be state and local tax consequences.) If the winnings are large enough, you may need to revisit your wealth management strategy and revise your estate plan. Please contact us if have questions. We’ll help you understand the tax impact and meet your tax obligations.

Small business owners must answer an important question: Should we use the cash or accrual accounting method for federal income tax purposes? Larger entities are required to use the accrual method. But certain small businesses can elect to use the cash method. You may want to consider this option if it will help lower your taxes. However, it’s not right (or even available) for every situation.

Does your business qualify for the cash method?

Under Internal Revenue Code Section 448(c), your business may be eligible for the cash accounting method if it had average annual gross receipts that don’t exceed a specific, inflation-adjusted threshold for the prior three-year period. For 2026, businesses with average annual gross receipts up to $32 million are eligible.

Some businesses may be eligible for cash accounting even if their gross receipts are above the threshold. Examples include S corporations, partnerships without C corporation partners, farming businesses and certain personal service corporations.

In addition, the Sec. 448(c) gross receipts test serves as the eligibility standard for several other tax provisions available to qualifying small businesses, such as:

• Simplified inventory accounting,
• An exemption from the uniform capitalization rules,
• An exemption from the business interest deduction limit, and
• The option to use the completed contract method (rather than the percentage-of-completion method) for certain long-term contracts.

When determining your business’s gross receipts, you may need to include those earned by certain related entities, such as those under common control. Special rules apply to organizations that have existed for less than three years. Also, tax shelters, including syndicates, don’t qualify for small business status, even if their gross receipts are below the threshold.

How do the methods differ?

The cash method often provides significant tax advantages. Because cash-basis businesses recognize income when received and deduct expenses when paid, they have greater control over the timing of income and deductions. For example, toward the end of the year, they can defer income by delaying invoices until the following tax year or shift deductions into the current year by accelerating expense payments.

In contrast, accrual-basis businesses recognize income when earned and deduct expenses when incurred, regardless of the timing of cash receipts or payments. Therefore, they have little flexibility to time the recognition of income or expenses for tax purposes.

The cash method also provides cash flow benefits. Because income is taxed in the year received, it helps ensure that a business has the funds needed to pay its tax bill.

However, for some businesses, the accrual method may be preferable. For instance, if your accrued income tends to be lower than your accrued expenses, the accrual method may result in a lower tax liability. Other potential advantages of the accrual method include the ability to deduct year-end bonuses paid within the first 2½ months of the following tax year and the option to defer taxes on certain advance payments.

Is it time for a change?

Even if your business would benefit from switching its accounting method, you should consider the administrative costs. Changing accounting methods for tax purposes may require IRS approval. And, if your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles, using the cash method for tax purposes would require you to maintain two sets of books (cash-basis tax records and accrual-basis financial reporting records).

Fortunately, you don’t have to make this decision by yourself. We can help determine the right method for your situation. Contact us to learn more.

Last year, the new tax deduction for taxpayers 65 and older was sometimes referred to as “no tax on Social Security.” In actuality, this up-to-$6,000-per-individual deduction, also known as the “senior” deduction, is generally available whether or not someone receives Social Security benefits. (But other limits do apply, such as an income-based phaseout.)

Of course, the senior deduction can help reduce taxes on Social Security benefits. However, some retirees are already exempt from tax on Social Security, while others may have to report benefits that far exceed their senior deduction. How much of your Social Security benefits must be reported as taxable income depends on your provisional income, your overall income and IRS thresholds.

How much is your provisional income?

The first step in calculating provisional income is subtracting your Social Security benefits from your adjusted gross income (AGI). AGI is your income from taxable sources after certain so-called “above-the-line” adjustments but before the standard deduction or itemized deductions and certain other deductions, such as the senior deduction, are applied.

Examples of above-the-line adjustments include traditional IRA contributions, Health Savings Account contributions and student loan interest. Because many Social Security recipients have fewer of these adjustments (or none at all), their AGI is often close to (or even the same as) their total income from taxable sources.

After your Social Security benefits have been subtracted from your AGI, the following are added to it:

• 50% of Social Security benefits,
• Any tax-free municipal bond interest income,
• Any tax-free interest on U.S. Savings Bonds used to pay college expenses,
• Any tax-free adoption assistance payments from your employer,
• Any deduction for student loan interest, and
• Any tax-free foreign earned income and housing allowances, and certain tax-free income from Puerto Rico or U.S. possessions.

The result is your provisional income. Once you know your provisional income, you can see what portion, if any, of your Social Security benefits will be subject to income tax.

Will all your benefits be tax-free?

Generally, your Social Security benefits will be federal-income-tax-free if:

• Your provisional income is $32,000 or less and you file a joint return with your spouse, or
• Your provisional income is $25,000 or less and you don’t file jointly — unless you’re married and file separately from your spouse who lived with you at any time during the year (in which case, see “Will up to 85% of your benefits be taxable?” below).

These thresholds went into effect in 1984 and have never been adjusted for inflation. As a result, the number of retirees subject to federal tax on some of their Social Security benefits has been increasing over the years.

Also keep in mind that you might owe state income tax even if you don’t owe federal tax, depending on your state.

Will up to 50% of your benefits be taxable?

Generally, up to 50% of Social Security benefits must be reported as taxable income on Form 1040 if:

• Your provisional income is over $32,000 but not more than $44,000 and you file jointly, or
• Your provisional income is over $25,000 but not more than $34,000 and you don’t file a joint return (again — unless you’re married and file separately from your spouse who lived with you at any time during the year).

In general, the taxable portion of Social Security benefits gradually increases as provisional income rises. So if your provisional income is near the bottom of the range, you may have to report only a small portion of your benefits as taxable income. If your provisional income is near the top, you may have to report close to 50%. However, the reportable percentage also is affected by the amount of your Social Security benefits relative to other income.

Will up to 85% of your benefits be taxable?

Generally, up to 85% of Social Security benefits must be reported as taxable income on Form 1040 if:

• Your provisional income is over $44,000 and you file jointly, or
• Your provisional income is over $34,000 and you don’t file a joint return (unless you file a separate return from your spouse who lived with you at any time during the year, in which case you must report up to 85% of your benefits if your provisional income is above $0).

The exact percentage depends on the amount by which your provisional income exceeds the applicable threshold and the size of your Social Security benefits relative to other income.

Project provisional income and plan

If you have to report a portion of your Social Security benefits as taxable income, smart tax planning can potentially reduce or even eliminate the liability. We can help you accurately project your provisional income, assess your eligibility for the senior deduction and review your overall tax situation to identify strategies that make sense for you.

Home values have risen significantly in many areas of the country over the last several years, leaving some homeowners with substantial gains when they sell. Of course a large profit is generally a good thing. But, depending on the amount of your gain, how long you’ve owned and resided in the home, and your income level, a sale may trigger capital gains tax and, in some cases, the net investment income tax (NIIT).

Save tax with the gain exclusion

If you’re selling your principal residence and meet certain requirements, you can exclude from tax up to $250,000 of gain ($500,000 for married couples filing jointly).

To qualify for the exclusion, you must:

1. Have owned the property for at least two years during the five-year period ending on the sale date.
2. Have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

Be aware of ineligible gain

What if you have more profit than your gain exclusion? Any gain in excess of the exclusion generally will be taxed at your long-term capital gains rate (typically 15% or 20%), as long as you owned the home for more than one year. If you didn’t, the gain will be considered short-term and subject to your marginal ordinary-income rate (usually 22% to 37%).

If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion and the entire gain generally will be subject to capital gains tax. But if the home qualifies as a rental property, it can be considered a business asset. In that case, you may be able to defer tax through an installment sale or a Section 1031 like-kind exchange.

Watch out for the NIIT

When does the NIIT apply to a home sale? If you sell your principal residence and qualify for the gain exclusion, the excluded gain isn’t subject to the 3.8% NIIT.

However, gain that exceeds the exclusion is subject to the NIIT if your modified adjusted gross income (MAGI) is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, may also be subject to the NIIT.

The NIIT applies only if your MAGI exceeds $200,000 ($250,000 for joint filers or $125,000 for married taxpayers filing separately). If your MAGI is above the applicable threshold, additional factors will affect your NIIT liability. Be aware that the NIIT kicks in before the top long-term and ordinary-income rates apply.

Keep track of your basis

Gain on your home is calculated by subtracting your tax basis in the home from the sale price. Your basis generally includes what you paid for the home plus major improvements you made to it.

To support an accurate basis, be sure to maintain complete records, including information about your original cost and subsequent improvements (such as a kitchen remodel or a new roof). But basis-increasing improvements don’t include maintenance and repairs (such as painting your kitchen or fixing a leak in your roof). Also, you must reduce your basis by any casualty losses or depreciation claimed for business use (such as if a portion of your home was rented out or you claimed the home office deduction).

If your basis is more than what you sell your home for, your loss generally won’t be deductible. But if a portion of your home was rented out or used exclusively for business, the loss attributable to that part may be deductible.

Plan for the tax impact

A home sale can be tax-free or create a sizable tax liability — or result in a tax bill between those extremes. If you’re thinking about selling your home, it’s important to know the potential tax impact. Contact us before putting your home on the market so we can help you estimate the tax impact and discuss possible planning opportunities.

If you’re a real estate developer or a small business owner who owns commercial real estate, you might be thinking about selling a property. If it has appreciated significantly, a Section 1031 like-kind exchange may allow you to defer tax on some or all of the gain. With this transaction, you exchange one property for another qualifying property rather than sell the property outright. You generally don’t pay tax on the gain on the relinquished property until you sell the replacement property.

You may be familiar with the basics of a Sec. 1031 exchange, but you might not understand all the rules and restrictions. Here are four common myths to be aware of so you can avoid missing planning opportunities or facing unexpected taxes.

Myth 1: The replacement property must be identical to the property you give up

The definition of like-kind property is surprisingly broad. To qualify for Sec. 1031 exchange treatment, you may exchange any real property held for investment or productive use in your trade or business (relinquished property) for like-kind investment, trade or business real property (replacement property).

For these purposes, most real property is considered like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale.

Myth 2: You never have to pay current-year tax in a like-kind exchange

A properly structured Sec. 1031 exchange can defer gain. But that doesn’t mean every exchange is completely tax-free.

If it’s a straight property-for-property exchange, you generally won’t have to recognize any gain from the exchange. You’ll take the same basis (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you must report it on Form 8824, “Like-Kind Exchanges.”

However, the properties aren’t always equal in value. In these situations, some cash may be added to the deal. This cash is known as “boot.” If you receive boot, you’ll have to recognize gain up to the amount of boot received.

For example, let’s say you exchange a building with a basis of $100,000 for a building valued at $125,000, plus $10,000 in cash. Your realized gain on the exchange is $35,000 because you received $135,000 in value for an asset with a basis of $100,000. However, because it’s a Sec. 1031 exchange, you have to currently recognize (and pay tax on) only $10,000 of your gain — the amount of cash (boot) you received.

It’s also important to remember that no matter how much boot you receive, you’ll never recognize more than your actual realized gain on the exchange. In addition, your basis in the like-kind replacement property you receive equals the basis you had in the relinquished property reduced by the amount of boot you received but increased by the amount of any gain recognized.

Myth 3: Cash is the only type of boot

Boot can take forms other than cash. If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is generally treated as boot. The reason is that if someone takes over your debt, it’s equivalent to that person giving you cash.

Of course, if the replacement property is also subject to debt, then you’re treated as receiving boot only to the extent of your net debt relief — the amount by which the debt you become free of exceeds the debt you pick up.

Myth 4: You must have the replacement property lined up immediately

It’s possible — but rare — to find someone who wants to simultaneously swap like-kind properties with you. Fortunately, you don’t have to acquire the replacement property from the same party you relinquish your property to. And you don’t have to acquire the replacement property on the same day you transfer the relinquished property.

In most Sec. 1031 exchanges, the relinquished property is sold first, and the taxpayer uses the exchange proceeds to acquire a replacement property. However, a qualified intermediary must hold the proceeds from the relinquished property until they’re transferred to acquire the replacement property. And deadlines apply: Generally, you must 1) identify a potential replacement property within 45 days after transferring the relinquished property, and 2) complete the acquisition of the replacement property within 180 days.

These deadlines are strictly enforced. Missing either one can cause the entire transaction to lose tax-deferred treatment. While you don’t need to have the replacement property lined up immediately, you do need a plan. Begin evaluating replacement property options as early as possible and work closely with your professional advisors throughout the process.

Don’t let misconceptions derail your Sec. 1031 exchange

Like-kind exchanges can be a tax-savvy way to dispose of investment or business real property — and retain working capital for your business or investment activities. But you’ll need to meet all the requirements. If you’re considering selling investment or business real estate, contact us to discuss this strategy further.

Many parents don’t know that the so-called “kiddie tax” exists. Others assume it affects only minor children. But it also can apply to full-time students through age 23 and 18-year-olds even if they aren’t full-time students. When it applies, most of the child’s unearned income may be taxed at the parent’s higher tax rate.

The purpose of the kiddie tax is to minimize the ability of parents to significantly reduce their family’s taxes by transferring income-producing assets to their children in lower tax brackets. If your child has investment income from custodial accounts or other assets, understanding these rules can help you avoid unexpected tax consequences.

Who it affects

The kiddie tax generally applies to most unearned income of individuals who, at the end of the tax year, are:

• Under age 18,
• Age 18 (unless they provide more than half of their own support from earned income), or
• At least age 19 but under age 24 and full-time students (unless they provide more than half of their own support from earned income).

So, for a student, the kiddie tax can be an issue until the year that he or she turns age 24. For that year and future years, even full-time students who are still supported by their parents are kiddie-tax-exempt.

How it works

Earned income from a job or self-employment is never subject to the kiddie tax. And the tax is assessed on a child’s (or young adult’s) unearned income only to the extent that it exceeds the applicable threshold, which is $2,700 for 2026.

Unearned income usually means interest, dividends and capital gains. These types of income often come from custodial accounts that parents and grandparents set up and fund for younger children.

For 2026, the first $1,350 of unearned income is taxed at 0%. The second $1,350 is taxed at the child’s (or young adult’s) rate. This might also be 0% for some or all of the second $1,350, depending on 1) how much of the unearned income is made up of long-term capital gains and qualified dividends, and 2) whether the child’s (or young adult’s) taxable income is low enough for him or her to qualify for the 0% rate.

Then the excess is taxed at the parent’s rate. This could be up to 20% on long-term capital gains and qualified dividends and as much as 37% on interest, short-term capital gains and nonqualified dividends — depending on the parent’s taxable income.

When it applies

For 2026, Form 8615, “Tax for Certain Children Who Have Unearned Income,” must be filed and kiddie tax paid for any child (or young adult) who:

• Has more than $2,700 of unearned income,
• Is required to file Form 1040,
• As of December 31, 2026, is under age 18, is age 18 and didn’t have earned income in excess of half of his or her support, or is age 19, 20, 21, 22 or 23 and a full-time student and didn’t have earned income in excess of half of his or her support,
• Has at least one living parent, and
• Isn’t married and filing a joint return for the year.

The kiddie tax threshold is annually adjusted for inflation, but generally only in increments of at least $100. So it doesn’t necessarily go up every year. It didn’t increase for 2026, so it may be more likely to increase for 2027.

Planning opportunities

The kiddie tax can increase a family’s overall tax liability if investment income is generated in a child’s name. In some situations, it may make sense to review the types of investments owned in custodial accounts and the timing of investment sales. For example, growth-oriented investments that generate little current income may help reduce exposure to the kiddie tax until your child is old enough that this tax no longer applies. At that time, appreciated investments can begin to be sold, with the gains taxed at your child’s own, potentially lower, rate.

If you’d like help evaluating your family’s situation, contact us. We can assess potential kiddie tax exposure and suggest tax-efficient investment strategies.

If you participate in a company 401(k) plan, you already know that you can make pre-tax contributions up to the annual elective deferral limit to a traditional, tax-deferred account. If your 401(k) plan offers a Roth option, you can use part or all of your limit to make after-tax contributions to a Roth account instead. But you may have a third option, if your 401(k) plan allows it: Make after-tax contributions to a traditional account.

Traditional vs. Roth deferrals

For 2026, 401(k) elective deferral contributions are generally limited to $24,500. If you’ll be 50 or older at year end, you can make additional elective deferral contributions, called “catch-up” contributions. The 2026 catch-up contribution limit is either $8,000 or $11,250, depending on your age. However, if your 2025 salary exceeded $150,000, any catch-up contributions must be made to a Roth 401(k) account.

When you make pre-tax elective deferrals to a traditional 401(k), the contributions aren’t included in your taxable income for the year, but they’re still subject to Social Security and Medicare taxes (collectively called FICA tax). The account funds can grow on a tax-deferred basis, and you’ll owe income taxes on distributions — both those attributable to contributions and those attributable to growth.

When you make after-tax Roth 401(k) elective deferrals, the contributions don’t reduce your taxable income. So, they’re subject to both income tax and FICA tax. The payoff is that earnings in your Roth 401(k) account are allowed to accumulate income-tax-free and you can take income-tax-free qualified withdrawals from the account once you meet the requirements. (Generally, qualified distributions are those after age 59½ if the account has been open at least five years.)

How after-tax contributions are different

If your 401(k) plan allows non-Roth after-tax contributions, they’re treated as part of your taxable wages. Therefore, these contributions are subject to income tax and FICA tax. You may owe state and local income taxes, too. Because they don’t go into a Roth account, they aren’t eligible for all the tax benefits Roth accounts offer.

So, you might be thinking, “why would I want to make after-tax contributions?” The answer is to get more money into your 401(k) account, where it can accumulate income and gains without being taxed until you start taking withdrawals. These contributions aren’t subject to the annual elective deferral limit. So you can make them after you’ve maxed out that limit, including catch-up contributions, if applicable.

However, there’s still a limit on total additions that can be made each year to your 401(k). Including your elective deferrals (except for any catch-up contributions), your after-tax contributions and any employer contributions, 2026 contributions can’t exceed the lesser of: 1) $72,000 or 2) 100% of your compensation.

Also, after-tax contributions create tax basis in your account, which means that the after-tax amount contributed can eventually be withdrawn tax-free. (But withdrawals attributable to growth on that amount will be taxable, a significant difference from qualified Roth distributions.)

After-tax contributions in action

To illustrate how these contributions work, here’s an example: Let’s say your employer sponsors a 401(k) plan with a 50% company match, your 2026 salary is $150,000 and you’re under age 50. The plan allows employees to make after-tax contributions. You max out your elective deferral limit by contributing $24,500 to your traditional 401(k) account. Your employer makes a matching contribution of $12,250. That means you’re allowed to make up to $35,250 in after-tax contributions ($72,000 – $24,500 – $12,250) this year. You decide to make $10,000 of after-tax contributions.

• Your $24,500 of elective deferral contributions aren’t included in your taxable wages for federal income tax purposes but they are subject to FICA tax withholding.
• Your employer’s $12,250 matching contribution is exempt from federal income tax and FICA tax.
• Your $10,000 after-tax contribution is included in your taxable income and is subject to federal income tax and FICA tax. But it creates $10,000 of tax basis in your 401(k) account, which can be withdrawn tax-free.

Be aware that 401(k) plans are subject to complicated nondiscrimination rules intended to prevent plans from operating in favor of highly compensated employees as opposed to rank-and-file workers. In most cases, nondiscrimination rules won’t impact the ability of an employee to make after-tax contributions, but there may be exceptions.

Beyond elective deferrals

If you’ve been maxing out your elective deferrals, after-tax 401(k) contributions can be a tax-efficient way to add to your retirement nest egg. We can review your situation and help you determine whether you might benefit.

Tax scammers continue to target taxpayers through email, text messages, phone calls and regular mail. They often try to create urgency or fear to trick victims into sharing sensitive information or sending money. The IRS warns taxpayers to remain cautious because scammers continually change tactics to steal personal and financial information.

IRS impersonation scams

First and foremost, know that the IRS will never contact you by email, text or social media channels about a tax bill or refund. Most IRS initial communications are sent through regular mail. So if you get a call or message saying it’s the IRS and asking for your Social Security number, it’s someone trying to steal your identity and defraud you. Remember that the IRS already has your Social Security number.

Here are some common impersonation-related schemes to be aware of:

Phone calls. AI-generated voices and spoofed caller IDs to impersonate IRS agents are becoming more common. Scammers may leave urgent messages threatening arrest, penalties or legal action unless immediate payment is made. The IRS stresses that it won’t demand immediate payment over the phone.

Text messages and emails. Scammers use text messages and emails containing fake IRS links or QR codes to direct taxpayers to fraudulent websites designed to steal personal or financial information. These messages often claim there’s a problem with a refund, tax return or IRS account to try to create panic and pressure taxpayers into responding quickly.

Fake IRS notices. One current scheme takes advantage of growing confusion about the IRS CP53E notice. This is a notice related to tax refunds and bank account information. As the IRS shifts from paper checks to direct deposit, it’s mailing these notices to taxpayers who may need to add or update their banking details. Unfortunately, the IRS is sometimes mistakenly sending the notices when a taxpayer has already provided this information, creating confusion. Now fraudsters are sending fake versions of the notice in an attempt to steal taxpayers’ sensitive information. If you receive an IRS CP53E notice, verify its authenticity before acting. Don’t click links or scan QR codes.

Malware. In scams to infect computers and phones with malicious software, a phony email claims to come from the IRS. The subject line often states that the message is a notice of underreported income or a refund. There may be an attachment or a link to a bogus web page with your “tax statement.” When you open the attachment or click on the link, malware is downloaded to your device. This malware can give criminals remote access to your device and allow them to search for passwords, banking information and other sensitive data to help them steal your assets or your identity.

Other tax scams

The IRS recommends that taxpayers create an account to securely access their tax information. The account lets you view your refund status, make payments, check your balance and more. But be cautious. Scammers may offer account setup “help” so they can collect your sensitive data. Or they may use stolen personal information to access your account without authorization. Once inside an account, they may attempt to redirect refunds, obtain tax records or use the information to commit additional identity theft. Create and always access your account directly through IRS.gov, don’t share your information with unsolicited third parties, and check your account regularly.

Also watch out for fake online tax deduction calculators. These digital tools are intended to steal personal information and money from unsuspecting users. They’re often accompanied by false promises about new or expanded tax credits and deductions. The IRS says you should use calculators only on sites that end in .gov (such as irs.gov) or of well-known tax software companies. Also, be wary of any calculator that guarantees its result. Legitimate calculators can only produce estimates. And, as always, be suspicious of claims that seem “too good to be true,” such as unusually large tax savings.

The IRS also warns taxpayers to avoid other schemes involving questionable refund claims or credits promoted online or through social media. Promoters may encourage taxpayers to file inaccurate forms or claim credits they don’t qualify for. Improper claims can lead to refund delays, audits, penalties and other enforcement actions.

Reporting fraud

The IRS has launched a “Report fraud” webpage to simplify confidential reporting of suspected tax fraud or scams. It consolidates multiple IRS fraud-reporting options into a single location, allowing taxpayers to report suspected scams, tax evasion or other tax-related misconduct in one place: irs.gov/help/report-fraud.

If you’ve been a victim of identity theft, consider obtaining an Identity Protection Personal Identification Number (IP PIN). Issued by the IRS, this unique six-digit number helps prevent criminals from filing a fraudulent tax return using your Social Security number. It’s valid for one year and is automatically replaced after expiration. You can expect to receive a new one each year in mid-December to early January. You can apply online or get one at a Taxpayer Assistance Center. Once you receive your IP PIN, be sure to safeguard it. Use it only on Forms 1040.

Stay alert

Tax-related scams continue to evolve, so it’s important to be cautious when receiving unexpected phone calls, messages or even letters involving taxes, refunds or financial information. If you receive a questionable communication related to a tax return we prepared, contact us before responding. We can also answer other questions you have about protecting yourself from tax-related fraud.