Cordasco & Company

New information return and payroll tax reporting rules require attention

The One Big Beautiful Bill Act (OBBBA) introduced or updated numerous business-related tax provisions. The changes that are likely to have a major impact on employers and payroll management companies include new information return and payroll tax reporting rules. Let’s take a closer look at what’s new beginning in 2026 — and what businesses need to do in 2025.

Increased reporting thresholds go into effect in 2026

Businesses generally must report payments made during the year that equal or exceed the reporting threshold for rents; salaries; wages; premiums; annuities; compensation; remuneration; emoluments; and other fixed or determinable gains, profits and income. Similarly, recipients of business services generally must report payments they made during the year for services rendered that equal or exceed the statutory threshold. This information is reported on information returns, including Forms W-2, Forms 1099-MISC and Forms 1099-NEC.

Currently, the reporting threshold amount is $600. For payments made after 2025, the OBBBA increases the threshold to $2,000, with inflation adjustments for payments made after 2026.

Reporting qualified tip income and qualified overtime income

Effective for 2025 through 2028, the OBBBA establishes new deductions for employees who receive qualified tip income and qualified overtime income. Because these are deductions as opposed to income exclusions, federal payroll taxes still apply to this income. So do federal income tax withholding rules. Also, tip income and overtime income may still be fully taxable for state and local income tax purposes.

The issue for employers and payroll management companies is reporting qualified tip and overtime income amounts so that eligible workers can claim their rightful federal income tax deductions. In August, the IRS announced that for 2025 there will be no OBBBA-related changes to federal information returns for individuals, federal payroll tax returns or federal income tax withholding tables. The 2025 versions of Form W-2, Forms 1099, Form 941, and other payroll-related forms and returns will be unchanged.

Nevertheless, employers and payroll management companies should begin tracking qualified tip and overtime income immediately and implement procedures to retroactively track qualified tip and overtime income amounts that were paid going back to January 1, 2025. The IRS will provide transition relief for 2025 to ease compliance burdens.

Proposed regulations list tip-receiving occupations

In September, the IRS released proposed regs that include a list of tip-receiving occupations eligible for the OBBBA deduction for qualified tip income. Eligible occupations are grouped into eight categories:

Beverage and food services,
Entertainment and events,
Hospitality and guest services,
Home services,
Personal services,
Personal appearance and wellness,
Recreation and instruction, and
Transportation and delivery.

The IRS added three-digit codes to each eligible occupation for information return purposes.

2026 Form W-2 draft version

The IRS has released a draft version of the 2026 Form W-2. It includes changes that support new employer reporting requirements for the employee deductions for qualified tip income and qualified overtime income and for employer contributions to Trump Accounts, which will become available in 2026 under the OBBBA.

Specifically, Box 12 of the draft version adds:

Code TA to report employer contributions to Trump Accounts,
Code TP to report the total amount of an employee’s qualified cash tip income, and
Code TT to report the total amount of an employee’s qualified overtime income.

Box 14b has been added to allow employers to report the occupation of employees who receive qualified tip income.

Stay on top of the latest guidance

The OBBBA makes some significant changes affecting information returns and payroll tax reporting. The IRS will likely continue to issue guidance and regulations. We can help you stay informed on any developments that will affect your business’s reporting requirements.

Is a custodial account right for your family?

If you’re considering opening an investment account for your minor child or grandchild to help him or her save for the future, a custodial account can be a useful option. Indeed, for many families, a custodial account strikes the right balance between gifting assets to a child and maintaining oversight until the child is legally an adult. It also has some benefits compared to a Trump Account, which the One Big Beautiful Bill Act will make available beginning in 2026.

What is a custodial account?

A custodial account is a financial account that an adult manages on behalf of a minor child until the child reaches the age of majority (typically 18 or 21, depending on the state). These accounts are often set up under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), which provide a legal framework for transferring assets to minors without requiring a formal trust.

The adult custodian — often a parent or grandparent — has control over the account, but the assets legally belong to the child. Once the child comes of age, the account is transferred into his or her full control. Trump Accounts will be similar in that, generally, the child won’t be able to access the account funds until reaching age 18.

Custodial accounts can hold a wide range of assets, including cash, stocks, bonds, mutual funds, and, in the case of UTMA accounts, even real estate or other property. Trump Accounts, on the other hand, will generally be limited to investing in exchange-traded funds or mutual funds that track the return of a qualified index and meet certain other requirements.

Custodial account funds can be used for any purpose and often are used to save for future expenses such as a first car or a down payment on a home. Trump Account funds also can be used for any purpose. Both types of accounts can be used to fund education expenses, but they don’t offer some of the tax benefits of education-specific savings options.

What are the pluses and minuses?

One of the most significant advantages of using a custodial account is its flexibility. Indeed, unlike some savings vehicles, such as Coverdell Education Savings Accounts (ESAs), anyone can contribute to a custodial account, regardless of their income level, and there are no contribution limits. (Trump Accounts will have annual contribution limits.)

Also, as noted earlier, there are no restrictions on how the money in custodial accounts or Trump Accounts is spent. In contrast, funds invested in ESAs and Section 529 education savings plans must be spent on qualified education expenses — withdrawals not used for qualified expenses may be partially subject to a 10% penalty. (Trump Account withdrawals could also be partially subject to a 10% penalty if taken before age 59½).

Contributions to custodial accounts can also save income taxes. A child’s unearned income up to $2,700 (for 2025) is usually taxed at low rates. (Income above that threshold is usually taxed at the parents’ marginal rate.)

On the downside, other savings vehicles can offer greater tax benefits. Although custodial accounts can reduce taxes, ESAs, Section 529 plans and Trump Accounts allow earnings to grow on a tax-deferred basis. Also, ESA and 529 plan withdrawals are tax-free provided they’re spent on qualified education expenses. There may also be financial aid implications, as the assets in a custodial account are treated less favorably than certain other assets.

Trump Accounts provide another potential benefit that custodial accounts don’t: U.S. citizens children born between Jan. 1, 2025, and Dec. 31, 2028, can potentially qualify for an initial $1,000 government-funded deposit to a Trump Account.

It’s important to be aware that there’s a loss of control involved with both custodial accounts and Trump Accounts. After the child reaches the age of majority (or age 18 for Trump Accounts), he or she gains full control over the assets and can use them as he or she sees fit. If you wish to retain control longer, you’re better off opening an ESA or a 529 plan or creating a trust.

Consider all your options

Custodial accounts can be a valuable tool to build your child’s financial foundation while teaching him or her about money management. Still, it’s important to weigh the tax implications, college planning considerations and your long-term goals before opening one. Depending on the situation, another type of account may better fit your goals. Contact us with questions.

5 potential tax breaks to know before moving a parent into a nursing home

Approximately 1.3 million Americans live in nursing homes, according to the National Center for Health Statistics. If you have a parent moving into one, taxes are probably not on your mind. But there may be tax implications. Here are five possible tax breaks.

1. Long-term medical care

The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income (AGI).

Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual that are provided by a licensed healthcare practitioner.

To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify an individual as unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing and continence) for at least 90 days due to a loss of functional capacity or severe cognitive impairment.

2. Nursing home payments

Amounts paid to a nursing home are deductible as medical expenses if a person is staying at the facility principally for medical, rather than custodial care. If a person isn’t in the nursing home principally to receive medical care, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense. But if the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.

If your parent qualifies as your dependent, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction.

3. Long-term care insurance

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limitations explained below) to the extent they, along with other medical expenses, exceed the percentage-of-AGI threshold. A qualified long-term care insurance contract covers only qualified long-term care services, doesn’t pay costs covered by Medicare, is guaranteed renewable and doesn’t have a cash surrender value.

Qualified long-term care premiums are includible as medical expenses up to certain amounts. For individuals over 60 but not over 70 years old, the 2025 limit on deductible long-term care insurance premiums is $4,810, and for those over 70, the 2025 limit is $6,020.

4. The sale of your parent’s home

If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. To qualify for the $250,000 exclusion ($500,000 if married), the seller must generally have owned and used the home for at least two years out of the five years before the sale. However, there’s an exception to the two-out-of-five-year use test if the seller becomes physically or mentally unable to care for him- or herself during the five-year period.

5. Head-of-household filing status

If you aren’t married and your parent meets certain dependency tests, you may qualify for head-of-household filing status, which has a higher standard deduction and, in some cases, lower tax rates than single filing status. You might be eligible to file as head of household even if the parent for whom you claim an exemption doesn’t live with you.

These are only some of the tax issues you may have to contend with when your parent moves into a nursing home. Contact us if you need more information or assistance.

2026 Forecast: The “Hangover” Year (And Why The IRS Is Smiling)

2026 Forecast: The “Hangover” Year (And Why The IRS Is Smiling)

The One Big Beautiful Bill Act (OBBB) is “old news.” The champagne corks popped in July, the ink is dry, and we all patted ourselves on the back for dodging the sunset.

But here is the deal: 2026 isn’t about legislation; it’s about implementation.

If 2025 was the “Year of the Bill,” 2026 is shaping up to be the “Year of the Bite.” We are moving from a political war in Washington to a compliance war in your backyard—and frankly, the landscape looks a lot more treacherous than just tax rates. The legislative dust has settled, but the regulatory mud is just getting started.

Here is my forward-looking, “boots on the ground” forecast for what the world of tax actually looks like in 2026. These are professional predictions so don’t take them as gospel. However, we will be monitoring them closely as the year unfolds.

The Rise of the “Robo-Auditor” (Hot)

You think I’m joking? I wish I was. While we were all distracted by tax brackets, the IRS quietly spent its war chest building the “Death Star” of audit algorithms. The IRS recently deployed advanced algorithmic and AI driven audit selection tools. The IRS has transitioned from legacy statistical sampling (like the Discriminant Function System or DIF) to sophisticated machine learning models that utilize unsupervised learning. These models do not just look for outliers; they analyze the relationships between line items to detect “invisibly” aggressive tax positions.

The 2026 Projection:
The IRS has officially signaled that 2026 is the year they unleash AI-driven enforcement on High-Net-Worth individuals and large partnerships.

What’s happening: They aren’t using humans to scan returns anymore. They are using AI to cross-reference your lifestyle with your reported income, check your crypto wallets against your 1040, and flag “anomalies” in real-time.
The Danger Zone: If you make over $10 million, your audit risk just jumped from ~11% to a projected 5% . Large partnerships (hedge funds, real estate syndications) are seeing a triple increase in scrutiny.
My Take: The days of “flying under the radar” are over. The radar is now everywhere. If your K-1s don’t match exactly, expect a letter.

The “State” of Chaos (Very Hot)

Here is the sleeper issue that is going to bite people in the rear end. The OBBB fixed the Federal rules, but it didn’t fix the states. In fact, it made them mad.

The 2026 Projection:
States are broke. They see the Feds handing out 100% bonus depreciation and high exemptions, and they are saying, “Not on my watch.”

The Decoupling Disaster: Expect a wave of states to “decouple” from OBBB provisions in their 2026 legislative sessions. You might have a federal tax loss and a massive state tax bill because New Jersey or California refuses to recognize the new expensing rules.
The “Rolling Conformity” Trap: Some states automatically follow the Feds (Rolling), others pick a specific date (Static). In 2026, this gap widens. We are going to see a “balkanization” of tax strategy where what works in Texas gets you penalized in New York.

The International “Cold War” (Pillar Two)

While we were celebrating the OBBB, the rest of the world moved on to the OECD’s “Pillar Two” global minimum tax.

The 2026 Projection:
The “Safe Harbors” are ending. Starting in 2026, the Undertaxed Profits Rule (UTPR) kicks in for real.

The Impact: If you have international operations, foreign countries might start taxing your US profits if they think you paid less than 15% here. The US is still trying to negotiate a “side-by-side” deal, but if that fails in early 2026, we could see double taxation on US multinationals.
Political Climate: This is going to be the new political football. Expect lots of rhetoric about “Foreign countries stealing our tax base.”

What’s “Not” Hot (The Flops of 2026)

The Corporate Transparency Act (CTA)

Remember the panic over filing those BOI reports for every LLC you own? Dead. (Mostly).

The Update: The Treasury has effectively paused enforcement against US citizens and domestic companies. It was a regulatory overreach that collapsed under its own weight. If you are a US citizen, you can breathe easier—but keep an eye on foreign entities, they are still on the hook.

“Panic” Estate Planning

In 2025, we did things fast. In 2026, we do things right .

The Shift: The “SLAT” (Spousal Lifetime Access Trust) craze is cooling off. With the exemption permanently high ($15M+), we don’t need to lock up assets just to save tax. The focus in 2026 is shifting to Governance : How do we keep the kids from blowing the money? The conversation is moving from “Tax Savings” to “Legacy Building.”

The 2026 Political “Vibe Check”

You asked about the political climate. Here is the deal: The Deficit is the new villain.
The OBBB was expensive. “One Big Beautiful Bill” came with “One Big Beautiful Price Tag.”

The 2026 Midterm Narrative: Expect the deficit hawks to come out of hibernation. We likely won’t see tax hikes in 2026 (politicians aren’t suicidal), but we will see a freeze on any new breaks. The “Technical Corrections” bill that usually follows major legislation might get stalled by budget fights.

Cordasco’s “Crystal Ball” Conclusion

2026 is going to be the year of the “Silent Tax.”
You won’t see it in the headline rates (which are safe). You will see it in:

Compliance costs (fighting the AI audits).
State taxes (diverging from federal rules).
International friction .

My Advice:
Stop looking at the tax tables—they haven’t changed. Start looking at your structures and systems. Is your data clean enough for an AI auditor? Is your entity structure flexible enough for a rogue state legislature?

The storm has passed, friends, but the floodwaters are rising. Let’s build your ark.

Buon Anno!

Why 2026 Will Be the Most Chaotic Filing Season (And What It Means for You)

Holy Cannoli: Why 2026 Will Be the Most Chaotic Filing Season (And What It Means for You)

Friends, grab your espresso—because we need to have a serious conversation about what’s actually happening with the IRS right now. And I’m going to be straight with you: the system that processes your taxes is literally falling apart.

I’ve been doing this a long time and, I have never seen the IRS this unprepared to actually function. Not during the pandemic. Not during the 2008 financial crisis. Not ever.

This matters to you because when the IRS breaks, your taxes become complicated. Understanding what’s happening and why will help you navigate it.

Let me explain what’s actually going on and why it’s not just “delays.”

The Perfect Storm: Why the IRS Is Crumbling Right Now

The Long Decay: 40 Years of Underfunding and Neglect

Before we talk about the current crisis, understand this: the IRS has been systematically starved of resources for four decades. While every other federal agency modernized their technology, the IRS is still running computers from the 1980s and 1990s. Their systems literally cannot talk to each other. They process tax returns with software that’s older than the internet as we know it.

In 2010, Congress started cutting IRS funding. Then 2013. Then 2015. Then 2019. By 2022, the IRS had 28% fewer employees than they did in 2010 —despite a significantly larger taxpayer base and a massively more complex tax code.

The IRS was already drowning. Then everything got worse at once.

Congress Just Rewrote the Entire Tax Code (And the IRS Has No Infrastructure to Handle It)

On July 4, 2025, Congress signed the One Big Beautiful Bill Act (OBBA) into law. This wasn’t a minor tweak. This was a fundamental rewrite of major parts of the tax code. We’re talking about:

Estate tax exemptions jumping to $15 million per person
New deductions for tip income, permanent senior deductions
Modifications to charitable giving, Child Tax Credit, Opportunity Zones
Changes to business deductions and standard deductions

Now here’s the problem: the IRS has to reprogram ancient computer systems to handle all of this. These aren’t systems from 2015. These are systems from the 1980s that have been patched and modified a thousand times. They’re fragile. They’re not designed for massive changes.

The IRS has to:

Update their core processing systems to handle new tax computations
Create new guidance for taxpayers and professionals
Train staff on rules that literally didn’t exist three months ago
Reprogram their matching systems (the computers that verify your income matches what your employer reported)
Update their refund systems to handle new credit calculations

All of this with systems that are fundamentally broken and a workforce that’s about to shrink by 25%.

The IRS’s own projections show they won’t implement these changes smoothly. What that means: expect incorrect notices, processing errors, misclassified returns, and delays on anything outside the most basic filing.

They Lost a QUARTER of Their Workforce—and All the Right People Left First

Here’s the real kicker: the IRS didn’t just lose employees randomly. Starting in late 2024, when layoffs looked likely, the best and brightest started jumping ship immediately. These are people with 20, 30 years of experience. These are the auditors, the technicians, the supervisors who actually know how things work.

By mid-2025, they were gone.

The numbers are staggering:

26,000+ employees eliminated (25% of their entire workforce)
21% of frontline tax processing staff gone
59% of their IT personnel eliminated (the people who maintain those ancient computer systems)
Experienced auditors, managers, and subject matter experts walked out the door

When you lose the experienced people, the system doesn’t just slow down. It breaks differently. New hires make mistakes experienced people would catch. Systems aren’t maintained properly. Knowledge gets lost.

Think about what it means operationally: if 21% of the people processing returns are gone, and they’re replaced by brand-new hires who don’t know the job, processing time doesn’t just increase 21%. It multiplies.

A 43-Day Government Shutdown Killed Preparation (Right Before Filing Season)

And then, October 1 – November 12, 2025: a 43-day government shutdown. During that time:

35,000 IRS employees were sent home (most without pay)
All taxpayer assistance centers closed completely
Zero mail processing happened
Zero training of new staff occurred
Zero preparation for filing season happened

Think about the timing. Filing season ramps up in January and goes full-throttle from February through April. October and November are supposed to be when the IRS trains new employees, tests systems, and prepares infrastructure.

Instead, they were closed.

The shutdown ended November 12. Filing season starts January 24. That’s 10 weeks to:

Bring 35,000 people back to work
Get systems running again
Train new hires on OBBA changes they just learned
Catch up on the massive pile of 2025 mail that sat unopened for 43 days
Process the returns that came in during the shutdown
Get infrastructure ready for 2026 returns

With 25% fewer experienced people than they had last year.

It’s not possible. The math doesn’t work.

Here’s What This Actually Means for Your 2026 Tax Filing

Processing Will Be Significantly Slower—And Errors Will Be More Common

When you file your 2025 tax return in 2026, understand what’s happening on the other end:

The IRS will scan it, enter data into systems that can’t properly handle the new OBBA rules, and process it through an organization that’s understaffed, undertrained, and using outdated technology.

Expect:

Longer processing times (we’re not talking about weeks—think months for anything that doesn’t fit a standard pattern)
More incorrect notices (the IRS will send you letters saying you owe money, or asking for clarification, on things that are technically correct on your return)
More mismatches (your W-2 didn’t match their records, your 1099 data got entered wrong, your business income didn’t reconcile)
Slower resolution times (fixing a mistake that used to take 90 days could take 6 months or more)

You Can’t Rely on Customer Service

The Treasury Inspector General warned Congress that IRS customer service could drop from 85% (already bad) to just 16%. That means if you call with a question, there’s an 84% chance you won’t reach anyone.

Here’s what that means practically:

If you filed something unusual and they send you a notice, you might not be able to call and clarify
If there’s an error on your return, reaching the IRS to fix it becomes extremely difficult
If you’re trying to qualify for a new credit or deduction under OBBA and need guidance, you’re on your own

“Compliance Risk” Gets Real in a Different Way

With fewer auditors and more processing errors, here’s what happens:

The IRS makes mistakes. They send incorrect notices. They disallow deductions they should allow. They over compute your taxes.

Normally, you’d get a notice, call them, explain the situation, and they’d fix it. Not anymore. You’re stuck either accepting an incorrect determination or fighting through their broken system to prove you’re right.

And here’s the thing: if you don’t respond correctly to an IRS notice, or you miss a deadline, or you don’t have perfect documentation, the IRS will assume they’re right.

Your documentation has to be airtight. Your return has to be defensible. You can’t assume “we’ll clear this up later.”

The New Tax Code Creates Processing Complexity (Beyond Just “It’s New”)

The OBBA rules interact with existing tax law in ways that are genuinely complicated. Here’s an example: the new $15 million estate tax exemption interacts with prior year carryovers in specific ways. The new charitable deduction rules interact with the Alternative Minimum Tax. The new Opportunity Zone rules interact with real estate tax treatment.

These interactions have to be programmed into the IRS’s systems correctly. And these systems are fragile.

When the IRS’s computers misapply these rules, you get an incorrect refund calculation, an incorrect notice, or a notice asking for clarification on something you filed correctly.

The IRS’s staff also has to apply these rules correctly. But they’re new employees, trained in a rush, using systems they don’t fully understand, applying rules they just learned.

Errors become more likely. Processing becomes slower.

What This Means for Your Filing in 2026

File Electronically—No Exceptions

Paper returns go into a physical mail processing system that’s already backed up and now even more understaffed. Electronic returns get processed by computers, which is faster and more reliable (relatively speaking, given the circumstances).

If you file paper, expect your return to sit in a pile for months before anyone even opens it.

If You’re Expecting a Refund, Adjust Your Timeline

Normally, you might get a refund within a few weeks of filing. Add several months to that timeline. August or September for refunds is becoming realistic. Don’t make financial decisions assuming you’ll get your refund in April.

If You Paid Quarterly Estimated Taxes, Make Sure They’re Documented Correctly

With the new rules, quarterly estimated tax calculations got more complicated for some people. Make sure your estimated tax payments are properly credited. If they’re not applied correctly, you’ll get an incorrect notice. Fixing it will take forever. Always make payments electronically.

If Anything on Your Return is Non-Standard, Expect Questions

New business structure? Different deduction than last year? First time using a new credit? You’re more likely to get an IRS notice.

Have documentation. Don’t assume you can explain it later. Assume you’ll need to respond in writing.

Amended Returns Are Going to Take a Really Long Time

If you filed your 2024 return and discover you need to amend it, understand that amended returns go to the back of the line. Processing times that used to be 6-8 months are now 12-18 months, maybe longer. This will be a problem for the new R&D rules that require an amendment.

Don’t file something incorrect hoping you’ll just amend it later. Get it right the first time.

The Bigger Picture: This Affects Your Entire Tax Situation

The filing challenges aren’t just about delays. They’re about a system that’s less reliable. When a system is less reliable, you have to be more careful, more thorough, and more strategic about how you file and what you claim.

Years like this are when tax planning matters most—not because of aggressive strategy, but because you need to be crystal clear about what’s defensible and what’s not. You need to anticipate how the IRS might interpret your return. You need documentation that speaks for itself.

These are the years when having professionals who understand both the law and the IRS’s practical limitations makes a real difference.

The Bottom Line

The 2026 filing season will be the most chaotic in decades. The IRS is unprepared. Their systems can’t handle the new law. Their staff is inexperienced. Their customer service will be nearly nonexistent.

Your filing won’t just take longer. It will be more complex to get right, riskier to get wrong, and harder to fix if something goes sideways.

Understanding what’s happening—why it’s happening—and what that means for how you file, what you claim, and how you document everything is essential.

This is the year to take filing seriously. Really seriously and bring extra patience.

Reach out to us at info@cordasco.cpa if you want to talk through your specific situation and what you need to do to prepare. Ciao!

Cordasco & Company

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