Month: October 2025

Are you considering cashing out your term life insurance policy? Unfortunately, selling a term life policy to investors is nearly impossible unless you are terminally ill and unlikely to outlive the policy.

You do have one potential option: you could name a relative as the beneficiary in exchange for a payment and their agreement to take over all future premium payments.

This type of arrangement creates significant tax consequences:

• Taxable transfer. The IRS will likely treat the transaction as a “transfer for value.” You, as the transferor, must recognize taxable income if the payment you receive exceeds your basis in the policy. Your basis equals the total premiums you paid before the transfer. If you owned the policy for more than one year, you’ll pay tax at long-term capital gains rates.
• Taxable death benefit. If you die while the policy is still in effect, the beneficiary will be required to pay tax on the death benefit. Typically, life insurance proceeds are tax-free. However, in this situation, the beneficiary can exclude only the amount equal to what they paid for the policy, plus any premiums paid after the transfer. The IRS taxes the rest at ordinary income rates.
• No deductible loss. If you outlive the policy and the beneficiary receives nothing, the IRS will not allow a deductible loss.

If you want to discuss the sale of a life insurance policy, please call me directly at 408-778-9651  

• By Leon Clinton
• October 23, 2025

Here’s good news beginning in 2025. The One Big Beautiful Bill Act (OBBBA) permanently eases the rules that limit the deduction for business interest expense.

Background

The deduction for business interest expense is generally limited to the sum of

• business interest income,
• 30 percent of adjusted taxable income (ATI), and
• floor plan financing interest expense.

You carry disallowed business interest forward to future years. While these rules remain in place, the OBBBA makes two key changes that expand deductions.

OBBBA Improvements (Effective 2025)

1. More generous ATI calculation. ATI will now be determined before depreciation, amortization, or depletion. This EBITDA-style approach boosts ATI, increasing allowable deductions.
2. Expanded floor plan financing. The definition now covers financing for trailers and campers designed as temporary living quarters. Businesses in the recreational vehicle and camper industries may especially benefit.

Exemptions Remain

Many businesses are exempt from these rules, including those with average annual gross receipts of $31 million or less (for 2025). Real property and farming businesses can also elect out, though this choice trades faster interest deductions for slower depreciation.

If you would like to discuss business interest expense deductions, please call me directly at 408-778-9651  

• By Leon Clinton
• October 21, 2025

Congress recently passed the One Big Beautiful Bill Act, or OBBBA, which introduces a new tax deduction for tips beginning in 2025. This provision, called “No Tax on Tips,” sounds broader than it really is. The deduction is both temporary and limited in scope, and many tips will still be subject to taxation.

Who Qualifies for the Deduction?

Only workers in occupations where tips are customarily received can claim this deduction. Examples include waitstaff, bartenders, hotel staff, hairstylists, barbers, taxi and rideshare drivers, baristas, and casino dealers.

The IRS has published a comprehensive list of qualifying occupations.

Workers in fields such as healthcare, law, accounting, consulting, financial services, the performing arts, and athletics are not eligible to claim the deduction.

What Counts as a Tip?

The IRS defines tips as voluntary cash payments or those made by charging a credit card. The tipper—not the worker—must determine the amount. Negotiated payments and service charges do not qualify as tips.

How Much Is the Deduction?

• The deduction applies from 2025 through 2028.
• Workers can deduct up to $25,000 per year in tips.
• Self-employed workers cannot deduct more than their net business income.
• The deduction phases out for taxpayers with modified adjusted gross income above $150,000 (or $300,000 for joint filers).

The value of the deduction depends on your tax bracket. For example, a taxpayer in the 22 percent bracket who earns at least $25,000 in tips saves $5,500 in income tax. But if you owe little or no income tax, the deduction provides little or no benefit.

This deduction does not reduce Social Security or Medicare taxes.

What Must Tipped Workers Do?

The tip deduction can be claimed only for tips reported to the IRS. Employees who receive cash should report to their employer the total amount of tips they receive.

What Must Employers Do?

Beginning in 2026, employers, third-party payors (such as PayPal), and platforms like Uber must separately report the worker’s occupation and any cash tips eligible for the deduction.

Employers will report this information on Form W-2 for employees.

Non-employees will receive Form 1099-NEC or Form 1099-K.

For the rest of 2025, employers should continue withholding income and payroll taxes from all wages. Starting in 2026, the IRS will update its withholding tables to reflect the new tax deduction for tips.

If you want to discuss the tips deduction, please call me directly at 408-778-9651  

• By Leon Clinton
• October 17, 2025