On July 4th, a sweeping tax bill was made law, and many people are rightfully wondering what impact it will have on their specific tax situation. In this post, we highlight 5 big changes. We’ll cover more in the coming months.
- Current tax brackets have been made permanent.
As part of the 2017 Tax Cuts and Jobs Act, the tax brackets were going to revert to 2017 levels in January 2026. However, as part of this latest bill, the 10%, 12%, 22%, 24%, 32%, 35% and 37% brackets have been made permanent. This doesn’t mean that brackets won’t be changed with new legislation in the future, but for the time being we do not have any known changes on the horizon.
There are still many reasons to continue to maximize tax brackets in any given year, especially when there are large Social Security payments or Requirement Minimum Distributions (RMDs) that will be starting in a future year. Each year, we run an analysis for many of our clients to attempt to determine the optimal bracket maximization or minimization techniques for that year.
- More State and Local Taxes can be deducted!….maybe.
First, the standard deduction was permanently doubled, and is now indexed to grow with inflation, which will make it less likely that taxpayers will itemize their deductions. Taxpayers who do itemize their deductions have experienced the $10,000 cap on “SALT” (state and local taxes) since 2018. With the new bill, that limit has been increased to $40,000. Then, at incomes over $500,000, the $40,000 cap is lowered, until incomes of $600,000, when it drops back to the $10,000 limit.
So, for taxpayers who itemize and make less than $500,000, the SALT deduction has been raised! For standard deduction claimers or those will substantial income, there will not be any significant change.
Side note: apart from a few changes during Covid, the deduction of charitable donations has only been allowed for those who itemize their deductions. The new tax bill changes that, and those claiming the standard deduction can now deduct up to $1,000 for individuals, or $2,000 for married couples filing jointly.
- Roth Conversions are still an important strategy. The new law makes them more complicated.
Several of the changes included in this bill will now impact the decision to make a Roth Conversion. First, the current tax brackets were made permanent and will not revert to the 2017 rates in 2026. While this means it is not as pressing for taxpayers to try to accelerate conversions to pay at a lower rate, there are still opportunities to save tax dollars by converting now to reduce Required Minimum Distributions (RMDs) in the future.
New considerations for Roth Conversions have been added with the new additional senior deduction of $6,000 ($12,000 for a married couple). This deduction is lowered as income rises above phaseout ranges and therefore becomes a relevant factor.
The limitation on State and Local Taxes (SALT deduction) has been increased to $40,000, but again is phased out for incomes over $500,000, and at incomes of $600,000, the SALT deduction is capped at $10,000.
While we would not typically recommend a Roth Conversion when taxable income is over $500,000, every situation is unique. Roth Conversions are very much still a viable strategy, but one that requires more careful review with the new law.
- Business Owners: Qualified Business Income (QBI) deduction is here to stay.
Put simply, the 20% deduction that pass-through business owners were able to take advantage of is sticking around, but with the same limitations on who can qualify depending on income level and business type. For business owners, this will remain a very important piece of yearly tax planning.
- Estate exemptions increased to $15 million per person.
Trust planning is still very important, but for different reasons. Previously, trusts were considered in situations where an estate tax liability was present. Trusts are still very important estate planning strategies, and they apply to many situations where estate taxes aren’t a worry.
For many people, an estate tax exemption of $15 million (and indexed for inflation) means that estate tax planning will not be a relevant topic. For some of our clients, it remains a very important part of the conversation.
For others, priorities during the estate planning process might change, but trust planning and implementation remains an essential piece of our estate planning approach.
If you have any questions on the specifics of how these or other items in the new tax bill impact your tax situation for 2025 and beyond, please let us know. We would be happy to answer questions you might have.