Federal Tax Developments
LAW CHANGE: Proposed Regulation
Trump Account Proposed Regulations Clarify $2,500 Per-Employee Limit and Cafeteria-Plan Treatment — Journal of Accountancy
Development: Proposed regulations (REG-101355-26) implementing Sec. 128 clarify that the $2,500 annual exclusion for employer contributions to Trump accounts applies per employee rather than per child or per employer, and address how self-employed owners are treated under the program.
Practice Implication
Payroll teams may want to evaluate W-2 coding for clients with multiple employers or multiple children — the aggregate exclusion caps at $2,500 regardless of how many Trump accounts the employee funds. The regulations also permit salary-reduction contributions through Sec. 125 cafeteria plans (with monthly election changes required). Self-employed individuals can maintain Trump account contribution programs for their W-2 employees, but partners, sole proprietors, directors serving solely as directors, and 2% S corporation shareholders would not be treated as employees eligible for tax-favored employer contributions themselves, creating a planning gap for owner-operators who employ W-2 staff.
LAW CHANGE: Final Regulation
Final Regulations Restore $20,000/200-Transaction Threshold for Backup Withholding on Third-Party Network Payments — Journal of Accountancy
Development: Final regulations (T.D. 10053) reflecting changes made by H.R. 1, P.L. 119-21 (OBBBA) revert the Sec. 3406 backup withholding threshold for third-party settlement organizations to $20,000 in gross reportable payment transactions and more than 200 transactions, effective for calendar years beginning after Dec. 31, 2024.
Practice Implication
Gig-economy and e-commerce clients who receive payments through PayPal, Venmo, or similar platforms may want to confirm whether backup withholding applies to their 2025 and 2026 transactions — the threshold increase means fewer payees face automatic withholding, but the absence of a Form 1099-K or backup withholding does not change the taxability of the income itself.
Planning & Strategy
PLANNING: Charitable Vehicle
Development: Transferring appreciated stock, mutual funds, or ETFs directly to a donor-advised fund eliminates capital gains tax on the appreciation while allowing a deduction for the full fair market value, compared to selling the stock first and donating cash proceeds, which triggers capital gains tax before the donation.
Practice Implication
HNW clients holding low-basis stock in taxable accounts may want to evaluate bunching two years' worth of charitable giving into one year to clear the itemization threshold, funding a DAF heavily in year one and distributing grants over years one and two — the deduction timing becomes more efficient while the client maintains the same annual distribution schedule. Most major custodians, including Schwab, offer online DAF account opening and share-transfer processes that typically complete within days.
PLANNING: Retirement Strategy
Development: Retirees with pensions often remain in the same or higher tax brackets than during their working years because pension payments, Social Security benefits, and required minimum distributions from traditional retirement accounts combine to produce substantial taxable income, and higher modified adjusted gross income can trigger Medicare IRMAA surcharges.
Practice Implication
Pension recipients may want to model the combined tax impact of pension income, Social Security taxation, and RMDs before required distributions begin — planning the timing of retirement account withdrawals and other income sources can sometimes reduce overall tax burden and avoid crossing IRMAA thresholds that increase Medicare Part B and Part D premiums.
PLANNING: Entity Structuring
Full Expensing for All Capital Investment Delivers 2.7% Long-Run GDP Increase and Largest Growth Impact Among 86 Tax Reform Options — Tax Foundation
Development: Extending full expensing to all capital investment (Option 53 in Tax Foundation's Options for Reforming America's Tax Code 3.0) raises the long-run capital stock by 5.0 percent, GDP by 2.7 percent, wages by 2.2 percent, and hours worked by 706,000 full-time equivalent jobs, with a $1.4 trillion conventional cost over the budget window that declines to a $321.1 billion primary deficit reduction on a dynamic basis after accounting for higher income and payroll tax collections.
Practice Implication
Business clients evaluating capital-intensive investments may want to monitor legislative developments around expensing expansion — while OBBBA made expensing permanent for equipment and domestic R&D and temporary for manufacturing structures, foreign R&D remains on a 15-year schedule and inventories as well as other long-lived assets were left out, creating planning opportunities if Congress extends expensing to additional asset classes.
State Tax & Nexus
STATE UPDATE: California FTB
California Proposition 40 Imposes One-Time 5% Tax on Billionaires' Assets; Competing Ballot Measures Could Nullify Wealth Tax — CPA Practice Advisor
Development: California Proposition 40, on the November 2026 ballot, imposes a one-time 5% tax on billionaires' assets for individuals with net worth of at least $1 billion who resided in California on Jan. 1, with 90% of revenue funding healthcare and 10% funding education and food assistance, but competing Propositions 41 and 42 could nullify the wealth tax if either receives more approval votes than Proposition 40.
Practice Implication
HNW clients with California residency and net worth approaching or exceeding $1 billion may want to evaluate domicile planning before the November election — the Legislative Analyst's Office estimates the state would collect tens of billions of dollars if Proposition 40 passes and survives the competing measures, and the tax applies based on Jan. 1 residency, making year-end domicile changes potentially relevant for future iterations if the measure becomes law.
Compliance & Filing
COMPLIANCE: Reporting Requirement
IRS Staffing Cuts and Technology Problems Delayed Paper Return Processing to 30 Days for Individuals, 72 Days for Form 941 — Journal of Accountancy
Development: A U.S. Government Accountability Office report found that the IRS's 2026 filing season saw average processing time for paper individual returns increase to 30 days from 16 days in 2025, and paper Form 941 processing time rise to 72 days from 45 days in 2025 and 25 days in 2024, due to an 18% reduction in submission processing employees (down to 8,100 from about 11,000) and technology outages that prevented the individual paper return processing system from handling 2025 tax year returns during the first six weeks of filing season.
Practice Implication
Practitioners filing paper returns or advising clients who rely on paper refund checks may want to set expectations for significantly longer processing times — the IRS sent about 4.2 million notices requesting direct-deposit information before issuing refunds electronically, and taxpayers who fail to respond within 30 days receive a paper check after six weeks, compared to 13 days in 2025. E-filing remains the most reliable path to timely processing, with 95% of all returns filed electronically in 2026.
Practice Takeaway
This week's intelligence highlights three distinct planning lanes: federal guidance on Trump accounts and backup withholding thresholds creates immediate payroll and compliance questions for employers; California's Proposition 40 wealth tax puts domicile planning front and center for ultra-HNW clients with California ties; and the IRS's paper-processing delays reinforce that e-filing is no longer optional for timely compliance. For multi-state practices, the charitable-giving and pension-tax strategies from Kiplinger underscore the sustainable planning framework — donor-advised funds funded with appreciated stock and proactive RMD modeling remain the highest-value conversations for clients holding low-basis positions or approaching required distribution age.