As 2025 approaches its final quarter, it’s time to review your financial strategies and ensure you are taking advantage of every available opportunity. This month’s update covers six key tax areas that could make a meaningful difference in your 2025 tax bill: eliminating IRS penalties, qualifying for the new tips deduction, taking advantage of revived Opportunity Zone benefits, easing business interest deduction limits under new rules, making tax-efficient charitable gifts from your IRA, and understanding the risks of selling a term life insurance policy.
How to Eliminate 2025 Estimated Tax Penalties Instantly
If you have missed estimated tax payments this year, you may face a 7 percent non-deductible IRS penalty that compounds daily. Because these penalties are not deductible, they can cost more than paying interest or other deductible expenses. Simply sending a payment now will stop additional penalties from accruing, but it will not erase the existing ones.
There is a legal and effective way to eliminate these penalties entirely. You can use your retirement account’s 60-day rollover provision to your advantage. Withdraw funds from your IRA, 401(k), or similar qualified plan, instructing the custodian to withhold federal income tax. Then, repay the full amount, including the withheld taxes, into the same retirement account within 60 days using other available funds. The IRS treats the withheld taxes as if they were paid evenly throughout the year. As a result, any estimated tax penalties are eliminated. Because you redeposit the funds within 60 days, the withdrawal is not taxable and no early withdrawal penalty applies.
Example: Suppose you owe $25,000 in estimated taxes for 2025 but missed two quarterly payments. You withdraw $25,000 from your IRA, direct the custodian to withhold that amount for taxes, and then repay the $25,000 within 60 days using cash from a savings account. The IRS counts those withheld taxes as if they were made quarterly, effectively removing your penalty.
If you are age 73 or older, you may use required minimum distribution (RMD) withholding to cover estimated taxes. Avoid using a W-2 bonus to catch up on estimated payments—doing so triggers payroll taxes and may reduce your Section 199A deduction, often more expensive than the penalty itself.
Does the IRS List You as Qualifying for the Tips Deduction?
From 2025 through 2028, workers in certain tipped occupations may exclude up to $25,000 in tips from federal taxable income, thanks to the One Big Beautiful Bill Act (OBBBA). However, this deduction applies only to qualified tips received in occupations that customarily and regularly received tips before December 31, 2024, as defined by the IRS.
The IRS recently released a preliminary list of 68 occupations across eight industry sectors that qualify for the deduction. These include not only traditional service roles like bartenders, waitstaff, and hotel employees, but also entertainers, musicians, and even digital content creators such as social media influencers and podcasters.
To qualify, you must confirm that your occupation appears on the IRS list. If your role is not included, you are not eligible for the “no tax on tips” deduction. The IRS will publish a final list after reviewing public comments, so affected professionals may wish to work with a trade association or advisor to submit feedback requesting inclusion.
Two key takeaways:
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Only workers in occupations that received tips before 2025 and are listed by the IRS qualify for the deduction.
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The list is preliminary and subject to minor revisions before finalization.
This new deduction offers significant relief for millions of service and entertainment professionals—potentially saving thousands in taxes each year.
The OBBBA Revives and Expands Opportunity Zone Benefits
Since 2018, Qualified Opportunity Funds (QOFs) have allowed investors to defer and reduce capital gains taxes by investing in Qualified Opportunity Zones (QOZs). These zones direct capital into low-income areas and have attracted over $160 billion in investments. The One Big Beautiful Bill Act (OBBBA) has made the program permanent and adjusted its provisions to encourage continued participation.
Beginning in 2027, new Qualified Opportunity Zones will replace the current ones, using stricter low-income standards. There will be roughly 25 percent fewer zones nationwide. Investors will still be able to invest in the original QOFs through 2028 and qualify for the new treatment rules.
When you invest capital gains in a QOF within 180 days, you can receive several advantages. You can defer paying tax on your original capital gains for five years. You receive a 10 percent step-up in basis after five years, reducing your taxable gain. You pay no tax on appreciation of your QOF investment if you hold it for at least 10 years. You can maintain your investment for up to 30 years and still avoid tax on any appreciation through that year.
The OBBBA also introduced Qualified Rural Opportunity Funds, which must invest at least 90 percent of assets in rural Opportunity Zones. Investors in these funds receive a 30 percent step-up in basis after five years.
Example: If you sell a stock in 2027 with a $100,000 capital gain and reinvest that gain in a Qualified Rural Opportunity Fund within 180 days, $30,000 of that gain becomes permanently tax-free after five years. If you hold the investment for 10 years, the appreciation on the fund itself is completely tax-free.
Before committing to a QOF, carefully evaluate the fund’s management, strategy, expected returns, and fees. These are long-term investments and may involve considerable risk.
Beginning in 2025: OBBBA Eases Business Interest Deduction Rules
The One Big Beautiful Bill Act (OBBBA) also brought major relief for business owners by permanently relaxing the business interest deduction limitation under Internal Revenue Code Section 163(j).
Under prior law, the deduction for business interest expense was limited to the sum of the taxpayer’s business interest income, 30 percent of adjusted taxable income (ATI), and floor plan financing interest. Any disallowed amount was carried forward to future years.
Starting with the 2025 tax year, the OBBBA makes two important improvements:
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Adjusted taxable income (ATI) is now calculated before depreciation, amortization, and depletion, aligning the rule with the EBITDA (earnings before interest, taxes, depreciation, and amortization) concept. This increases allowable interest deductions by raising the ATI base.
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Floor plan financing now includes financing for trailers and campers designed for recreational or seasonal use, expanding eligibility for more industries.
Businesses with average annual gross receipts of $31 million or less over the past three years remain exempt from these limitations altogether. The new law gives larger companies the flexibility to deduct more business interest expenses while maintaining safeguards against excessive leverage.
Example: A dealership that finances inventory of motorhomes and trailers can now deduct more of its floor plan interest under the expanded definition. Combined with the EBITDA-based ATI rule, many mid-sized businesses will see immediate tax relief.
Tax planning tip: If you operate a real property or farming business, evaluate whether to elect out of the limitation entirely by accepting longer depreciation periods. In some cases, Section 179 expensing can offset slower depreciation.
The OBBBA’s Hidden Advantage: Bigger Tax Breaks for IRA Charitable Giving
If you are age 70½ or older, you can make charitable donations directly from your IRA to qualified charities using a Qualified Charitable Distribution (QCD). The OBBBA made this strategy even more valuable starting in 2025.
A QCD allows you to direct your IRA custodian to transfer funds directly to a qualified charity. Because the money never enters your income, it is completely excluded from taxable income. You cannot claim it as an itemized deduction, but avoiding taxation provides a greater benefit than a standard deduction.
For 2025, the annual QCD limit is $108,000 per person. If both spouses have IRAs, each may contribute up to this limit separately.
QCDs offer several important benefits. They lower taxable income (AGI and MAGI), which helps avoid higher tax brackets. They also allow you to avoid new 2026 OBBBA restrictions that reduce itemized charitable deductions based on income. If you are 73 or older, QCDs can satisfy required minimum distributions (RMDs). They preserve other tax breaks by keeping AGI and MAGI lower, such as avoiding Medicare premium surcharges or the 3.8 percent net investment income tax. Finally, they reduce your taxable estate, which may lower future estate tax liability.
Example: A married couple, both age 73, want to donate $50,000 to their church. Instead of withdrawing from their IRA and donating the proceeds, they direct their IRA custodians to send $50,000 directly to the church as a QCD. The transfer counts toward their RMD, is excluded from income, and prevents an increase in Medicare premiums.
Understanding the Tax Risks of Selling a Term Life Insurance Policy
Selling a term life insurance policy to investors is rarely possible unless you are terminally ill. One alternative is to transfer ownership of the policy to a family member in exchange for payment and their agreement to continue paying premiums. However, such arrangements can create significant tax issues.
The IRS may consider the transaction a “transfer for value.” You must recognize taxable income if the payment exceeds your cost basis in the policy (the total premiums you have paid). If you have held the policy for more than one year, this gain may qualify for long-term capital gains rates. If you die while the policy is in effect, your beneficiary may have to pay tax on the death benefit. The amount excluded from income is limited to the total amount the beneficiary paid for the policy plus any premiums they paid after the transfer. The remainder is taxed as ordinary income. If you outlive the policy and it expires without paying out, the IRS does not allow a deductible loss for either party.
Example: Assume you have paid $20,000 in premiums on a term policy with a $1 million death benefit. You sell the policy to a nephew for $25,000. You recognize $5,000 of taxable gain. If you die while the policy is active, your nephew will owe tax on $975,000 of the death benefit—the total benefit minus his basis in the policy. In most cases, it is best to retain or convert a term policy rather than attempt to sell it, unless there are extraordinary circumstances.
Final Thoughts
The 2025 tax landscape offers both new opportunities and complex rules. The strategies discussed here—including the tips deduction, expanded interest deduction, and improved charitable and investment provisions—can significantly reduce tax exposure when applied correctly. Before taking action, consult with Allied Tax Advisors to ensure each approach fits your individual or business circumstances.