Hamill: Managing effective dates for the new tax law

This column continues a discussion of some of the key provisions in the new tax legislation. Most provisions are a simple continuation of existing law.

The 2017 tax changes were generally scheduled to expire at the end of this year. The new law continues most of those provisions to 2026 and beyond. Effective dates are always an important issue to consider with tax law changes. This “big” bill has some strange effective dates compared to past legislation.

There are some enhancements to present tax law benefits that apply in 2025. There are also some new tax benefits that apply immediately. But this “big bill” includes many non-tax provisions also. Some of the painful provisions of the bill are delayed beyond the 2026 midterm elections.

For example, the Medicaid work requirements are generally delayed until 2027. Shifting SNAP food benefit costs to the states occurs in October 2027. Terminating provider taxes and payments to states for Medicaid will generally be deferred until 2028. New costs for Medicaid services will begin October 2028. Shortly after that, the tax exclusion for tips and overtime will end (after President Donald Trump leaves office).

So, prepare for a diet of candy and cakes in the near term, followed by the delivery of a laxative after the next election cycle.

Beginning in 2025, the child tax credit will increase from a maximum of $2,000 per child to $2,200 per child. This credit continues to be phased out for high-income individuals. It adds a requirement that not only the child, but also the parent’s Social Security number be provided.

The standard deduction will also increase in 2025, to $15,750 for single taxpayers and $31,500 for married filing jointly. Very-high income taxpayers, paying at the maximum 37% rate, will see their itemized deductions reduced slightly in 2026 and beyond. The cutback in itemized deductions is not likely to be known until early in 2027, when these people file their tax returns.

The special 20% deduction for business income of individuals has been extended to 2026 and beyond. The House bill would have increased this deduction to 23% of business income, but the final bill kept it at 20%.

A new angle on this deduction allows a minimum deduction of $400 for those with qualified business income of at least $1,000. That is, if business income is $1,200, the deduction will be $400 instead of the $240 computed using the 20% rate. The benefit of this minimum deduction rule is small. But the minimum applies only if the taxpayer materially participates in producing the business income.

In some cases, the complexity of determining whether the taxpayer materially participates (there are seven tests) may be more trouble than it is worth. Business taxpayers will get some relief from information reporting requirements beginning in 2026.

Currently, a business must provide Form 1099 to those people to whom they pay $600 or more in connection with operating the business. In 2026, this reporting will only be required if the payment is $2,000 or more. Remember also that no reporting is required for payments not related to a business.

In 2026, the dependent care exclusion will increase from $5,000 to $7,500. The dependent care credit rate will also increase.

People who use the standard deduction will be able to deduct $1,000 (single) or $2,000 (joint filers) of charitable contributions beginning in 2026.

Also in 2026, Section 529 plans will be able to pay for tutoring costs. The higher exemption for the alternative minimum tax will be extended to 2026 and beyond.

Beginning in 2026, paying tax due from a sale of qualified farmland, which includes ranches, can be spread over four years at the taxpayer’s election. An election to defer capital gain into an opportunity zone, scheduled to expire at the end of 2026, has been extended to 2027 and beyond.

There is a new definition of low-income communities, and an enhanced benefit is available for qualified rural opportunity zones. The extension of the benefit includes a new 5-year tax deferral period and allows the renewal of a rule that allowed some of that gain to be excluded.

If you come across any young people, be sure to thank them for their eventual payment of the cost of this big, beautiful bill.