Working Families Tax Cuts Update: Trump Account Contribution Safe Harbor and Paid Family and Medical Leave Credit

The Working Families Tax Cuts legislation, enacted as part of Pub. L. 119-21, added and modified several taxpayer- and employer-facing tax provisions. Two areas now warrant particular attention: a new IRS safe harbor for certain cash contributions to Trump accounts and important changes to the employer credit for paid family and medical leave under IRC § 45S.

This article summarizes the latest available guidance, key effective dates, eligibility rules, limits, and practical compliance considerations. It is intended as a general overview and should not be relied on as individualized tax advice.

1. Trump Accounts: Gift Tax Reporting Safe Harbor for Certain Contributions

Overview

IRC § 530A establishes Trump accounts, a type of tax-favored individual retirement account for individuals who have not reached age 18. Contributions are subject to special rules, including restrictions on distributions until the beneficiary turns 18.

Because beneficiaries generally cannot access the funds until age 18, questions arose about whether contributions could be treated as gifts of a future interest. That distinction matters because, under IRC § 2503(b), gifts of future interests do not qualify for the annual gift tax exclusion and must be reported on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

To address that concern, the IRS issued Rev. Proc. 2026-25, announced in IR-2026-80, creating a gift tax reporting safe harbor for certain contributions to Trump accounts.

What the safe harbor does

Under Rev. Proc. 2026-25, qualifying individual cash contributions to Trump accounts are treated as completed gifts of present interests for gift tax, GST tax, and gift tax reporting purposes. If the safe harbor requirements are satisfied, the donor generally does not need to file Form 709 solely to report those contributions.

Safe harbor eligibility conditions

To qualify for the safe harbor for a calendar year, all  the following must be satisfied:

1. Individual donor only. The donor must be an individual.

2. Cash contributions only. The donor’s only taxable gifts for the year must be cash contributions to one or more Trump accounts for beneficiaries under age 18.

3. Annual exclusion limit. The donor’s total gifts to each beneficiary, including Trump account contributions and any other gifts, must not exceed the annual gift tax exclusion amount. For 2026, that amount is $19,000 per recipient..

4. No gift or GST tax liability after credits/exemptions. The contributions must not generate gift tax or generation-skipping transfer tax liability after application of the donor’s remaining applicable credit amount and GST exemption.

5. No other gift tax return filing. Disregarding the Trump account contributions, the donor must not otherwise be required to file a gift tax return for the year and must not otherwise file one.

What happens if the safe harbor does not apply?

If any safe harbor requirement is not met, the donor cannot use the safe harbor for that calendar year. In that case, the donor must file a gift tax return reporting all Trump account contributions for that year as gifts of future interests.

This rule makes coordination important. Trump account contributions are not a separate annual exclusion “bucket;” they must be coordinated with the donor’s other gifts to the same child or grandchild.

Contribution timing and limits

Key account contribution rules include:

Practical takeaways for taxpayers and families

• Track all gifts to the same beneficiary. The safe harbor depends on total gifts to each beneficiary staying within the annual exclusion. ‍
• Keep records. Taxpayers should retain documentation sufficiently to substantiate compliance with the safe harbor rules. ‍
• Watch the calendar-year deadline. Before the beneficiary turns 18, contributions generally must be completed by December 31. ‍
• Coordinate with estate and GST planning. Contributions for grandchildren or other skip persons may have GST implications if the safe harbor requirements are not met.

Governing authorities: IRC §§ 530A and 2503(b); Rev. Proc. 2026-25; Pub. L. 119-21.

2. Employer Credit for Paid Family and Medical Leave Under IRC § 45S

Overview

IRC § 45S provides a business tax credit for eligible employers that provide paid family and medical leave to qualifying employees. The credit was originally temporary, but Pub. L. 119-21 made the credit permanent and modified it beginning with tax years after 2025.

The principal IRS guidance historically has been Notice 2018-71, along with IRS FAQs. For the new insurance premium-based (“premium”) method added by Pub. L. 119-21 for tax years beginning after December 31, 2025, Notice 2018-71 remains relevant as modified by Notice 2026-28 to address premium-method administration and compliance (with the statute as amended remaining the primary authority). Forthcoming proposed regulations will provide broader guidance to address the statute comprehensively and provide certainty to taxpayers.

Effective date of the latest statutory changes

The amended version of IRC § 45S applies for tax years beginning after December 31, 2025.

Two ways to calculate the credit beginning in 2026

For tax years beginning after 2025, eligible employers may elect to calculate the credit using one of two methods:

1. Wage-based credit. The applicable percentage of wages paid to qualifying employees while they are on family and medical leave.

2. Insurance premium-based credit. If the employer has a paid family and medical leave insurance policy in force during the year, the applicable percentage of premiums paid or incurred for that policy.

If the employer uses the insurance premium method, the applicable payment rate is determined without regard to whether or not any qualifying employees take leave during the year.

Credit percentage

The credit starts at 12.5% when the employer’s paid leave program replaces 50% of normal wages. The credit percentage increases by 0.25 percentage points for each percentage point by which the rate of pay exceeds 50%, up to a maximum credit percentage of 25%.

Leave limit

For wage-based calculations, the amount of family and medical leave taken into account for any employee is limited to 12 weeks per taxable year.

Premium method: what to know (new for 2026+)

For tax years beginning after December 31, 2025, Pub. L. 119-21 made IRC § 45S permanent and added an employer election to compute the credit either using qualifying leave wages or, under the premium method, the applicable percentage of premiums paid or incurred for a paid family and medical leave (PFML) insurance policy that is in force during the tax year.

Key premium-method mechanics include:

• Credit applies even if no one takes leave. The applicable payment rate under the policy is determined without regard to whether any qualifying employees take family and medical leave during the year. ‍
• Applicable percentage mirrors the wage method. The applicable percentage is 12.5%, increased by 0.25 percentage points for each percentage point, the policy’s payment rate exceeds 50%, capped at 25%. ‍
• Deduction reduction applies to premiums. Employers must reduce the otherwise deductible premium amount by the credit amount (the “no double benefit” rule), reflected for post-2025 years in amended IRC § 280C(a). ‍
• Existing eligibility rules still matter. The premium method is still subject to the statutory written policy requirements, qualifying employee requirements, the 12-week cap concept, and the state/local coordination rules under the amended statute.

Eligible employer requirements

To qualify, an employer must have a written policy that satisfies the statutory requirements. The policy generally must provide:

• At least two weeks of annual paid family and medical leave for each full-time qualifying employee;
• A proportionate amount of leave for part-time qualifying employees;
• A payment rate of at least 50% of the wages normally paid to the employee for services performed for the employer; and
• For certain employers, noninterference protections required under the statute for employees not covered by Title I of the Family and Medical Leave Act.

Aggregation rule for controlled groups and related employers (new/clarified for 2026+)

For tax years beginning after December 31, 2025, employers treated as single employers under IRC §§ 414(b) and (c) generally are treated as single employers for purposes of the credit. An exception applies in situations where there is a substantial and legitimate business reason for failing to provide the required written policy.

Qualifying employees

Beginning under the amended rules, a qualifying employee is an employee who:

• Has been employed by the employer for one year or more, or, if the employer elects, for not less than six months;
• Had compensation for the preceding year, determined on an annualized basis and pro-rated for part-time employees, not exceeding the statutory compensation threshold; and
• Is customarily employed for not less than 20 hours per week.

What counts as family and medical leave?

For IRC § 45S purposes, family and medical leave generally includes leave for purposes described in the Family and Medical Leave Act, including:

• Birth, adoption, or fostering of a child, and care for that child;
• Care for a spouse, child, or parent with a serious health condition;
• The employee’s own serious health condition that prevents the employee from performing job functions;
• Qualifying needs arising from certain military service of a spouse, child, or parent; and
• Care for a spouse, child, parent, or covered servicemember with a serious injury or illness.

Paid leave provided as vacation, personal leave, or general medical or sick leave does not count unless it is specifically provided for one or more qualifying family and medical leave purposes.

Coordination with state and local paid leave rules

For tax years beginning on or after January 1, 2026, leave paid by a state or local government, or required by state or local law, is taken into account when determining whether the employer’s overall paid leave program qualifies. However, that mandated or government-paid leave is not counted in determining the amount of the IRC § 45S credit.

Deduction reduction

Employers claiming the credit must reduce the otherwise deductible amount by the credit amount. If the credit is based on wages, the wage deduction is reduced. If the credit is based on qualifying insurance premiums, the premium deduction is reduced.

For tax years beginning after December 31, 2025, this “no double benefit” rule is reflected in amended IRC § 280C(a), which disallows a deduction equal to the credit amount for credited wages and (for the premium method) for the portion of premiums giving rise to the credit.

Practical takeaways for employers

• Review written leave policies now. The credit depends on the employer having a compliant written policy. ‍
• Evaluate the six-month employee election. Beginning in 2026, employers may elect to treat employees with at least six months of service as qualifying employees, rather than requiring one year. ‍
• Compare wage and insurance methods. Employers with paid family and medical leave insurance should model whether the premium-based credit produces a better result than the wage-based credit. ‍
• Coordinate with state programs. State-mandated paid leave may help satisfy eligibility requirements but generally cannot be counted in the credit amount after 2025. ‍
• Do not rely on outdated summaries. Notice 2018-71 remains important historical guidance, but employers should verify how prior guidance applies under the amended statute. ‍
• Confirm controlled-group implications. Controlled group and affiliated service group rules can affect whether the written policy and other requirements are tested on an aggregated basis, subject to the “substantial and legitimate business reason” exception.
• ‍Apply the 20-hours-per-week rule. Beginning in 2026, qualifying employees generally must be customarily employed at least 20 hours per week (and must meet the service and compensation requirements). ‍
• Recheck what leave counts. General vacation/personal/sick leave still does not qualify unless specifically provided for a qualifying FMLA purpose. ‍
• Remember the 12-week cap and wage proration. Wage-based credit computations remain subject to the per-employee 12-week limitation. ‍
• Plan for deduction disallowance. Coordinate credit computations with the IRC § 280C(a) deduction reduction (wages and, if applicable, premiums).

Compliance Checklist

For Trump account contributors

• Confirm the beneficiary is under age 18.
• Track all gifts to the same beneficiary for the year.
• Confirm total gifts to each beneficiary do not exceed the annual exclusion if relying on the safe harbor.
• Make contributions by December 31 for years before the beneficiary turns 18.
• Retain contribution confirmations and annual gift records.
• Consider whether any GST tax considerations apply.

For employers considering the IRC § 45S credit

• Confirm the paid leave policy is in writing and meets the statutory requirements.
• Identify qualifying employees under the amended service, compensation, and hours requirements.
• Determine whether to calculate the credit based on wages or insurance premiums.
• Confirm the leave qualifies as family and medical leave, not general vacation, personal, or sick leave.
• Coordinate federal credit calculations with state and local paid leave requirements.
• Reduce the applicable wage or premium deduction by the credit claimed.

Bottom Line

The Trump account safe harbor is designed to reduce gift tax reporting burdens for many individual donors making modest cash contributions for minors, but it requires careful coordination with the donor’s other gifts to the same beneficiary. Meanwhile, the IRC § 45S paid family and medical leave credit is now permanent and more flexible beginning in 2026, especially for employers that use paid leave insurance.

Taxpayers and employers should review their records, policies, and contribution or leave program designs in light of the amended statutory rules and the latest available IRS guidance.

As always, we suggest you discuss your personal situation with your trusted tax advisor.

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