As 2026 winds down, the planning window for this tax year is narrowing, and the 2027 numbers are starting to land. This month's briefing covers education savings strategies that can still be used before December 31, the new federal scholarship credit and a surprise in its proposed rules, changes to health-care credits, the 2027 payroll tax figures, and several reminders on charitable giving and IRS enforcement.
1. 529 Plans: Five-Year Bunching & the Roth IRA Rollover
Contributions to a 529 account count as gifts to the beneficiary, so the annual gift tax exclusion normally caps what you can put in without gift tax reporting. For 2026 that exclusion is $19,000 per beneficiary. A special election lets you bunch five years of gifts into one year, which means up to $95,000 per beneficiary before year-end. You are treated as having made $19,000 of gifts in 2026 and in each of the following four years, 2027 through 2030.
Qualified distributions are tax-free when used for college or university costs and for certain apprenticeship and postsecondary credentialing programs. Up to $20,000 a year can also be used tax-free for K-12 expenses, including tuition, online learning materials, tutoring, college admission exam fees, and educational therapies provided by a licensed provider for students with disabilities.
If the money isn't needed for education, the earnings portion of a non-qualified withdrawal is taxable and carries a 10% penalty. Before taking that route, consider the alternatives:
- Keep it invested for graduate school or a credentialing program.
- Change the beneficiary or roll funds to a 529 for a sibling or parent.
- Transfer to an ABLE account for a beneficiary with a disability.
- Repay student debt: up to $10,000 of college loans (lifetime limit).
- Roll over to a Roth IRA for the beneficiary, subject to the rules below.
The 529-to-Roth IRA Rules
- The 529 must have been open for at least 15 years with the same beneficiary.
- Contributions made in the prior five years, and their earnings, are ineligible.
- There is a $35,000 lifetime cap on transfers, made trustee-to-trustee.
- Each year's transfer cannot exceed the annual IRA contribution limit ($7,500 for 2026), reduced by any contributions the beneficiary has made to an IRA that year.
- The beneficiary must have earned income at least equal to the amount transferred.
A bipartisan Senate proposal would remove the $35,000 lifetime cap while keeping the other guardrails. It is only a proposal for now.
A common question: if someone is the beneficiary of two 529 accounts, can each plan transfer $35,000? It doesn't appear so. The statute applies the $35,000 aggregate limit to the designated beneficiary, and tax experts read that as a per-person cap. Two accounts means $35,000 in total, not $70,000.
Pro Tip: Five-year bunching is an election made on a gift tax return, and a large 529 contribution is an irrevocable gift. Talk to us before funding so the election and the estate-planning effects are handled correctly.
2. New Scholarship Credit Details & Adoption Credit Changes
Proposed IRS regulations on the new federal scholarship tax credit (sometimes called the education freedom credit) contain a surprise. The credit is a nonrefundable credit for cash gifts to scholarship-granting organizations (SGOs) in states that opt in, and it first applies on 2027 returns filed in 2028. Donors may give to an eligible SGO regardless of their own state of residence, and you can't both claim the credit and deduct the same gift.
Many practitioners assumed the maximum credit was $1,700 for single and joint filers alike. The proposed rules say the cap is doubled to $3,400 for joint filers if each spouse donates to an SGO.
There are also changes to the adoption credit:
- $5,120 is refundable for 2026 out of a maximum credit of up to $17,670, even for taxpayers with no federal income tax liability. The refundable amount is inflation-adjusted; it was $5,000 in 2025.
- Any unused credit can be carried forward five years.
- The IRS reversed its position on 2025 carryforwards of pre-2025 adoption expenses, which are now refundable up to $5,000 per qualifying child. Affected filers do not need to amend; the IRS is paying them automatically, with most refunds expected by year-end, and is mailing letters to eligible filers.
3. Medicare Rebates & Premium Tax Credit Changes
Medicare Part B rebates. About 21 million people on Medicare Part B are receiving $90 rebates this month ($180 for a couple if both spouses qualify). Eligible individuals generally pay Part B premiums, live in the U.S., do not pay the income-related monthly adjustment amount, do not receive Medicaid premium assistance, and are not in a Medicare Advantage plan. Payment comes by direct deposit or check after a notification letter. The rebate is not taxable because it helps cover Part B premiums.
Premium tax credit (PTC) proposed regulations. The IRS has proposed rules implementing the 2025 "One Big Beautiful Bill" changes to the marketplace subsidy. They add verification, immigration-status and documentation requirements that applicants must satisfy to qualify for advance payments of the credit. Because most enrollees take the credit in advance, these changes are expected to affect many households.
A second change applies starting with 2026 returns. Filers who received advance PTC payments must reconcile them on Form 8962 attached to Form 1040. Before 2026, those with income below 400% of the federal poverty level repaid only part of any excess advance payments. Beginning with 2026 returns, all filers must repay the full excess regardless of income.
Planning Point: If you receive advance PTC payments and your income changed this year, review your marketplace estimate now. An income increase late in the year can now produce a full repayment with no cap.
4. 2027 Payroll Taxes, Social Security & Card Payments
The 2027 figures have been announced:
- Social Security wage base: $192,300, up $7,800. The rate stays at 6.2% each for employer and employee.
- Medicare tax remains 1.45% each on all wages with no cap. Self-employed individuals pay 12.4% Social Security tax up to the cap and 2.9% Medicare tax on all net self-employment earnings.
- Additional Medicare tax: 0.9% on wages and self-employment income above $250,000 (joint) or $200,000 (others).
- Nanny tax threshold: $3,100 in 2027, up $100.
- Social Security benefits: a 3.6% cost-of-living increase for 2027.
- Earnings test: people reaching full retirement age in 2027 lose no benefits on earnings up to $67,920 before that month; those younger than full retirement age can earn up to $25,560 before benefits are reduced. There is no earnings limit after full retirement age.
Paying federal taxes by card should also get easier. Today, taxpayers must use an IRS-approved processor and pay that processor's fee. Final regulations allow the IRS to collect card payments directly. A fee will still apply, but it should be lower.
5. Charitable Giving, Disaster Losses & IRS Enforcement
Disaster giving. Give only to IRS-recognized 501(c)(3) organizations, and be wary of bogus charities that appear after major disasters. Keep your records: canceled checks or card receipts, a contemporaneous written acknowledgment for gifts of $250 or more, Form 8283 for noncash gifts over $500, and a qualified appraisal for property valued above $5,000.
Qualified charitable distributions. If you are 70½ or older, you can transfer up to $111,000 in 2026 directly from a traditional IRA to charity. A QCD can satisfy all or part of your required minimum distribution and, unlike other IRA distributions, is excluded from adjusted gross income.
No casualty loss for an insured fire. A couple deducted a $315,000 casualty loss after a fire damaged their newly purchased home. The loss was not tied to a federally declared disaster, the home was insured, and the insurer began paying in 2022. The Tax Court disallowed the deduction and upheld a 20% accuracy-related penalty (Predmore).
Two tax-fraud cases. In Mitchell, the Tax Court held the IRS was time-barred from assessing 2015 taxes because it could not prove fraud by clear and convincing evidence, so the ordinary three-year assessment period applied. In Abramson, a lawyer who paid a long-term companion's expenses from his wholly owned company and disguised them as loans and commission advances was convicted of criminal tax fraud, sentenced to 30 months, and the Seventh Circuit affirmed.
Identity-theft backlog. Treasury inspectors report that identity-theft cases took about 20 months on average to resolve in fiscal years 2023-25, against a 120-day goal, with 315,740 cases in inventory as of September 30, 2025. Refunds are held until a case is resolved, so file early and use an Identity Protection PIN if you have been affected.
Ghost preparers. Government auditors say the IRS lacks a comprehensive strategy against paid preparers who don't sign returns or who use someone else's PTIN, often to inflate credits or divert refunds. A Senate-passed bill would raise penalties. Always confirm your preparer signs your return and includes a valid PTIN.
Refundable credits and immigration status. Proposed regulations issued in August would treat the earned income credit, refundable portions of the child tax credit and adoption credit, and the American Opportunity Tax Credit as federal public benefits, limiting them to U.S. citizens, nationals and "qualified aliens." The IRS received nearly 15,000 comments, most opposed, and plans to finalize quickly for the 2027 filing season. A draft Schedule 3-A for 2026 returns would require a checkbox verifying status. These are proposals and may change.
Bottom Line: Year-end is when education funding, charitable giving and health-credit decisions are still adjustable. Schedule a session with our team to review which of these apply to you before December 31.
Questions? Contact our CPAs for personalised guidance.
