Welcome to the 2026 Tax Season!

As your trusted tax advisors, we want you prepared for this year’s tax changes. The newest federal tax law, the One Big Beautiful Bill Act (HR 1), and recent updates from the IRS and California Franchise Tax Board (FTB) bring important changes for individuals, families, and businesses. Here’s what you need to know for a smooth and successful tax season.

Key Federal Tax Law Changes (HR 1, One Big Beautiful Bill Act)

For Individuals & Families

Filing Season opens Monday, January 26, 2026

IRS Phasing Out Paper Checks

For 2026 and beyond, IRS is no longer issuing paper checks for taxpayer refunds. Direct Deposit to an eligible bank or investment account remains IRS and our preferred option, short of avoiding a refund altogether through proper planning of estimated tax payments.

Taxpayers may select an alternative refund method; however, this will add significant processing time to the returns and IRS makes no guarantee the preferred selection will be granted.

Alternatives available this season include:

• Pre-paid debit card mailed to taxpayer

• Mobile apps or digital wallets that utilize a routing number and account number

Standard Deduction Increased

For 2026 returns (filed in 2027), the standard deduction is now:

• $32,200 for married couples filing jointly

• $16,150 for single filers and married filing separately

• $24,150 for heads of household

Tax Brackets Remain Lower

The lower tax rates from the 2017 Tax Cuts and Jobs Act are now permanent, so most taxpayers will continue to see lower effective tax rates than before 2018.

Senior Deduction

If you’re 65 or older, you may claim an extra $6,000 deduction ($12,000 for married couples if both qualify), with phase-outs at higher incomes.

Child Tax Credit

The credit is now $2,200 per child, with stricter Social Security number requirements and annual inflation adjustments.

Trump Savings Accounts for Children

New tax deferred retirement savings plan for eligible children. Contributions are not deductible for the donor and not taxable income to the recipient. Earnings grow tax deferred, and distributions are taxed as ordinary income when taken.

TMG Recommendation: Consider first funding 529 plans, or IRAs in cases where child has earned income, then consider Trump Accounts if excess funds are available or if offered with your employer. We believe the restrictions on this account are less favorable than alternatives already in place. If you have a newborn child who is eligible for the $1,000 pilot funding, we highly recommend establishing a Trump Account to claim this benefit.

• Up to $5,000 per year per eligible child in after-tax contributions.

• Contributions begin July 4, 2026.

• Employers may contribute up to $2,500 toward the $5,000 annual cap.

• Eligible children born in 2025 through 2029 to receive $1,000 from the Treasury, which does not count against the $5,000 cap.

• Distributions restricted until child reaches 18, and subject to penalty before 59 ½.

• Election made under form 4547 and may be filed with the 2025 tax return, or separately if filing prior to the form’s availability.

• Filing may be made electronically via new federal website at trumpaccounts.gov.

529 Plan Expenses

The new tax law significantly expanded the definition of “qualified higher education expenses” for 529 plans, effective for distributions made after July 4, 2025, and increased the annual limit for certain K-12 expenses for tax years beginning January 1, 2026.

• K-12 Expenses $20,000 annual limit per beneficiary.

• New category of eligible expenses for Postsecondary Credentialing.

• Made permanent Rollovers to ABLE accounts.

• Contribution Limits: No federal annual limit, state aggregate limits apply.

• No change to Tax Treatment, tax-free for qualified expenses.

• Roth IRA Rollovers not available for 2026.

No Tax on Tips and Overtime (2025–2028)

• Up to $25,000 in qualified tips and up to $12,500 ($25,000 joint) in qualified overtime pay can be deducted, subject to income limits.

• New reporting rules apply for employers and workers.

For 2025, Employers are NOT required to report this information on the employees’ W2.
Tip: Collect this information from your payroll provider or human resources department.

Car Loan Interest Deduction (2025–2028)

• Deduct up to $10,000 per year in interest on loans for new, U.S.-assembled personal vehicles (not leases), purchased not earlier than 2025, with income phase-outs.

• Lenders are not required to provide a 1098 interest paid form to eligible taxpayers in 2025.

Tip: Gather your year-end payment history for eligible auto loans.

Adoption Credit

• Up to $5,120 of the adoption credit is now refundable, subject to income phase outs, and Indian tribal governments can determine special needs status.

• Maximum credit now $17,670 per child.

• Unused credit may now carry forward up to 5 years.

• Children with qualified special needs now automatically qualify for the maximum credit even if actual adoption costs were lower.

Health Savings Accounts (HSAs) Expanded

• Telehealth services are covered before meeting your deductible.

• Bronze and catastrophic health plans now qualify for HSA contributions.

• Direct primary care arrangements (with a monthly fee cap) do not disqualify you from HSA eligibility.

For Retirees

Estate Tax Exemption

• The federal estate tax exemption is now $15 million per person, indexed for inflation.

Charitable Giving

• New above-the-line charitable deduction of $1,000 ($2,000 joint) for standard deduction taxpayers.

• New itemized filer charitable floors: Only contributions above 0.5% of AGI (individuals) or 1% of taxable income (corporations) are deductible.

For Small Businesses & Professionals

Research Credit

• The federal research credit rules remain; however, California now uses a new “Alternative Simplified Credit” (ASC) at a lower rate (see below).

Business Expensing

• 100% bonus depreciation for qualified business property is now permanent.

• Section 179 expensing limit increased to $2.5 million, with a $4 million business income phase-out.

Qualified Business Income Deduction

• The 20% deduction is permanent, with higher income thresholds and a $400 minimum deduction for active business income.

Employer-Provided Child Care Credit

• Credit increased to 40% (50% for small businesses), up to $500,000 ($600,000 for small businesses).

• Credit is nonrefundable; however, unused credits may be carried back 1 year or forward up to 20 years.

For All Taxpayers

Clean Energy Credits Expire Early

• Credits for new and used clean vehicles, home energy improvements, and certain commercial energy projects end after 2025 or 2026.

Opportunity Zones

• Program made permanent with new rules for designating and investing in Opportunity Zones, with special benefits for rural areas.

California Franchise Tax Board (FTB) Updates

New Federal Conformity Date

• California now conforms to the federal tax code as of January 1, 2025, yet does NOT adopt changes from the One Big Beautiful Bill Act (HR 1). California continues to selectively conform or decouple from federal law.

Research Credit Changes

• The Alternative Incremental Credit (AIC) is repealed for tax years starting in 2025.

• California now uses the Alternative Simplified Credit (ASC) at 3% (or 1.3% if no qualified research expenses in the prior three years).

• If you previously used the AIC, you must elect the regular or ASC credit on your original 2025 return using FTB Form 3523. Prior AIC elections do not carry over automatically.

Business E-Filing Requirements

• Corporations and partnerships must e-file if they file at least 10 returns in a year or have more than 100 partners.

• Exempt organizations with unrelated business income must e-file.

• Trusts and estates are not required to e-file.

• Waivers are available for technology or financial hardship.

Pass-Through Entity (PTE) Elective Tax

• Extended through 2030. New rules allow late or underpaid prepayments, but with a penalty reducing the PTE credit by 12.5% of the unpaid amount.

Wildfire Settlement Exclusion

• Qualified taxpayers can exclude wildfire settlement payments from California income for disasters declared between 2021 and 2030.

IRS Guidance and Reminders

Penalty Relief for 2025

The IRS is providing penalty relief for employers and payors regarding new tip and overtime reporting requirements for 2025.

Interest Rates

IRS interest rates remain unchanged for the first quarter of 2026, compounded daily:

• 7% for individuals & corporations

• 9% for large corporations

In general, the quarterly rate is the prior quarter’s published federal short-term rate + 2 percentage points (+3 for large corporations). For Q1 2026 the federal rate is effective as of October 2025.

401(k) and IRA Limits

• 401(k) contribution limit for 2026: $24,500 ($32,500 for 50+ / $35,750 aged 60-63)

• IRA contribution limit for 2026: $7,500 ($8,600 for 50+)

Action Items for Clients

Review Your Withholding and Estimated Payments

Review your 2026 tax withholding and estimated payments, factoring in the higher standard and senior deductions. If you expect lower taxable income, adjust estimated payments to avoid overpaying.

Gather Documentation Early

Especially for tips, overtime, car loan interest, and research expenses.

Setup your free IRS & FTB taxpayer accounts

Access all documents and information received by the tax agencies, setup and manage Power of Attorney requests, and acquire Identity Theft Protection PINs.

Estate Planning

Consider making gifts up to the new $15 million exemption (or $30 million per couple) before further inflation adjustments. Review beneficiary designations and trust structures.

Business Owners Capital Expenditures

Accelerate purchases of qualified property to take advantage of 100% expensing and higher Section 179 limits.

Retirement and Education Savings

• Maximize 401(k), IRA, and 529 plan contributions.

• Consider Trump Account contributions for children, starting in 2026.

Charitable Giving

Use the above-the-line deduction for cash gifts if you do not itemize; bunch gifts if you itemize to clear the 0.5% AGI floor.

SALT Planning

For high-income families in high-tax states, model the impact of the higher State & Local Tax cap for 2026–2029 and consider bunching property tax payments or using pass-through entity tax elections where available.

Elect Research Credit Options

If you previously used the AIC, make your new election on your 2025 return.

Check Eligibility for New Deductions and Credits

Seniors, families, and business owners should review new and expanded benefits.

Contact Us with Questions

We’re here to help you navigate these changes, optimize your tax benefits, and maximize your desired financial objectives.

Thank you for trusting us as your tax and accounting advisors. We are eager to walk with you this season. Allons y!

-Team Mattox