While there had been discussion of eliminating tax on Social Security, a compromise in Congress was to provide individuals over age 65 with a $6,000 Senior Deduction added to the standard deduction. This added deduction is available for 2025 through 2028. The $6,000 Senior Deduction phases out at a rate of 6% of the excess amount for single taxpayers with incomes over $75,000 and married couples filing jointly with incomes over $150,000. The deduction is fully phased out for single taxpayers with incomes over $175,000 and married couples filing jointly with incomes over $250,000.

The effect of this $6,000 deduction will reduce taxes for many taxpayers. Here are some scenarios to consider:

Susan/Single. Susan is age 78, has Social Security of $28,000 and other income for a total of $34,000. A single senior has a 2025 standard deduction of $15,750, an existing $2,000 deduction for those 65 and over, plus $6,000, for a total of $23,750. Because her combined income is over $25,000, part of her Social Security is tax-free and part is taxable. With her standard deduction, tax-free portion of Social Security and the added $6,000 Senior Deduction, Susan will pay zero federal income tax.

Helen/Single. Helen, age 82, has Social Security of $36,000, a large IRA payout and other income for a total of $100,000. A senior filing as a single taxpayer has a 2025 standard deduction of $15,750, as well as the existing $2,000 additional deduction and the new Senior Deduction. However, Helen’s Senior Deduction is reduced because she has over $75,000 in income. Her Senior Deduction is reduced to $4,500, for a total of $22,250. Because her income is over $34,000, a larger portion of her Social Security is taxable. While her $4,500 Senior Deduction saves some tax, Helen is likely to pay over $5,000 in income tax.

Jim and Kate/Married. Jim is age 80 and Kate is age 78. They receive Social Security of $44,000 and other income for a total of $75,000. A married couple filing a joint tax return can claim a 2025 standard deduction of $31,500, the existing senior deduction of $3,200, plus the new Senior Deduction of $12,000, for a total of $46,700. Because their income is over $32,000, part of the Social Security is tax-free and part is taxable. With their standard deduction, tax-free portion of Social Security and the added $12,000 Senior Deduction, Jim and Kate will pay zero federal income tax.

Joe and Alice/Married. Joe is age 84 and Alice is age 79. They receive Social Security of $64,000, a pension, two large IRA payouts and investment income for a total of $200,000. A married couple filing a joint tax return benefits from a 2025 standard deduction of $31,500 plus a Senior Deduction. Because their income is over $150,000, the $12,000 Senior Deduction is reduced to $6,000. The standard deduction, existing $3,200 deduction, plus the Senior Deduction equals $40,700. Because their income is over $32,000, part of the Social Security is tax-free and part is taxable. With their standard deduction, tax-free portion of Social Security and the added $6,000 Senior Deduction, Joe and Alice are likely to pay over $11,000 in income tax.

This content is for informational purposes only and does not constitute legal or tax advice. Individuals should consult with a qualified tax professional or advisor for advice specific to their personal financial situation.

IRS and National Religious Broadcasters Propose a Church Exception for Johnson Amendment

In Nat'l Religious Broadcasters v. Long; No. 6:24-cv-00311 (2025), the plaintiffs and the Internal Revenue Service (IRS) filed a joint motion for a consent judgment. This motion is under consideration by the United States District Court for the Eastern District of Texas, Tyler Division.

The National Religious Broadcasters (NRB) notes that Section 501(c)(3) includes the "Johnson Amendment," that requires nonprofits and churches to not support or oppose candidates in elections. The statute indicates that nonprofit organizations are prohibited from endorsing candidates. The NRB claims the Johnson Amendment is a violation of the First Amendment’s rights of freedom of speech and free exercise of religion.

Plaintiffs note that a house of worship in good faith may speak to a congregation on matters of faith. This also could include "electoral politics viewed through the lens of religious faith." Plaintiffs claim that this intervention, including endorsement of political candidates, is permitted. They state, "Bona fide communications internal to a house of worship, between the house of worship and its congregation, in connection with religious services, do neither of those things, any more than does a family discussion concerning candidates."

Plaintiffs also note the IRS generally has not enforced the Johnson Amendment against houses of worship. The basic principles of constitutional avoidance indicate the Johnson Amendment should not "reach communications from a house of worship to its congregation." Houses of worship are entitled to "exercise of their religious beliefs" which "includes teaching or instructing their congregations regarding all aspects of life, including guidance concerning the impact of faith on the choices inherent in electoral politics."

Therefore, the NRB and the IRS jointly agreed that a proposed order enjoining the government from acting against a house of worship that exercises its First Amendment rights should be granted. The proposed order is deemed "both eminently reasonable and in furtherance of the public interest."

The National Council of Nonprofits (NCN) has consistently urged the government to uphold the Johnson Amendment. Diane Yentel is President and CEO of NCN. She stated, "This court filing is deeply concerning, furthering an assault on the bedrock principle that charitable organizations must remain nonpartisan in law, fact, and purpose in order to serve their missions and communities." She notes charities are a trusted space that permit people with great differences to solve important community problems. If charities are no longer nonpartisan, that would significantly reduce the positive impact on society.

Yentel supports the Johnson Amendment, because "The law prohibits tax-exempt charitable organizations from endorsing or opposing political candidates, helping preserve public trust and protect these institutions from partisan pressure and manipulation." She closes by noting that nonprofits need to protect their status as a trusted space where individuals with divergent political preferences can join together.

Editor's Note: The outcome of this ruling request will be determined by the District Court. If the consent judgment is accepted, both parties have agreed not to appeal.

Split-Dollar Policy Value Included in Taxable Income

In Peter E. McGowan et al. v. United States; No. 24-3228 (6th Cir. 2025), the Sixth Circuit determined that a split-dollar policy returned to a sub-trust was taxable as a capital gain distribution to the taxpayer.

Toledo dentist Peter McGowan was a regular supporter of the Toledo Zoo. He and his tax advisors determined that it would be a good tax planning strategy to create a split-dollar insurance plan with two sub-trusts. The Death Benefit Trust (DBT) purchased a whole-life insurance policy from Penn Mutual on the life of McGowan. The dental practice corporation (the Company) paid $37,222 to the DBT annually to pay the base premium on the insurance policy. The second trust was a Restricted Property Trust (RPT). The RPT received $12,778 each year from the Company and transferred it to the DBT. The funds were used to purchase "paid-up additions" for the policy.

The plan was based on five-year increments. If McGowan died, the RPT would release a security interest and the death benefit would be paid first to the DBT and then to the designated beneficiary, the wife of McGowan.

If the plan expired, the plan would terminate, and the policy would be returned to McGowan. If the Company did not contribute the base premium to the DBT, then the DBT would surrender the policy and transfer it to the RPT. The RPT would then donate the proceeds to the designated charity, which was the Toledo Zoo.

After reviewing the plan with his tax advisors, McGowan established the plan and acquired a new policy with a $2,057,613 death benefit and $37,222.22 base premium. McGowan reported the $12,778 contribution to the RPT as income and the Company claimed deductions for the full $50,000. In 2016, the Company did not elect to continue making premiums and the policy was returned to McGowan. He reported taxable income of $115,227 on the cash value of the policy.

The IRS audited and claimed that McGowan should have reported the accumulation of cash value as income each tax year and the Company should not have taken the deductions. It assessed taxes and penalties against McGowan and the Company. McGowan and the Company paid the taxes and filed for a refund in the District Court. The court granted summary judgment to the IRS in McGowan v. United States, 694 F. Supp. 3d 992, 1005 (N.D. Ohio 2023).

The Sixth Circuit noted Reg. 1.61-22 is referred to as the "split–dollar regulation." It states the policy value is taxable to an owner with "any interest in the policy cash value." The taxpayer claimed that because the DBT had an independent trustee, McGowan and the Company were not owners.

However, the court determined that the DBT and the RPT sub-trusts were not economically substantive. McGowan was able to designate his wife as beneficiary under the DBT and the Toledo Zoo as the contingent charity. Therefore, under the split-dollar regulation, McGowan had retained two valuable rights.

Taxpayer claimed this split-dollar regulation was not valid because it conflicted with the Internal Revenue Code. However, the issue was not timely raised and therefore disregarded. In addition, the Court noted the split-dollar regulation was based on Section 61(a). Taxpayer also claimed the Company could qualify for an "ordinary and necessary” expense deduction under Section 162(a). However, this is qualified only if there is an active trade or business. Payment of premiums to a sub-trust for the eventual benefit of a spouse or charity is not a business purpose.

Finally, the Sixth Circuit had previously determined that distributions from a corporation could be deemed a shareholder distribution, rather than service compensation. The IRS has opposed this interpretation because a shareholder distribution is capital gain and service compensation is ordinary income. Because the issue had not been raised by the two parties, the Sixth Circuit declined to reconsider its position. Because the distribution was capital gain rather than ordinary income, the tax and penalty were substantially reduced.

Applicable Federal Rate of 5.0% for July: Rev. Rul. 2025-13; 2025-28 IRB 1 (16 June 2025)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2025. The AFR under Sec. 7520 for the month of July is 5.0%. The rates for June of 5.0% or May of 5.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2025, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”