Tax Changes Are Coming In 2026
The tax law changes in the “One Big Beautiful Bill” extend most tax provisions in the 2017 tax law that were set to end after 2025, and enhance some, giving new breaks, clean energy credits, and more. Many of the tax changes take effect in 2025. Others will begin next week (Jan 2026).
Here are some of the major changes taking effect in 2026:
Itemized Deductions
Itemizers can shift write-offs from one year to another. State and local taxes (SALT). Now that the SALT deduction cap on Schedule A is $40,000…up from $10,000 in prior years…more filers are expected to itemize.
More Tax Breaks Based On Income
Attempts to lower your adjusted gross income are more important than ever… Thanks to the OBBB (One Big Beautiful Bill). Several popular new breaks begin to phase out at MAGI (modified AGI) over a certain amount. They include the $6,000 deduction for filers 65 and older, the $40,000 SALT deduction cap on Schedule A, and the new write-offs for up to $12,500 of overtime pay, $25,000 of tips, and $10,000 of car loan interest.
If you have Medicare, consider how taxes could affect the premiums you pay. Joint filers with modified AGIs exceeding $212,000 and singles with over $106,000 of modified AGI pay higher monthly premiums for Medicare Parts B and D coverage in 2025. The surcharges increase as modified AGI rises. Monthly premiums for 2027 will be based on modified AGIs reported on your 2025 tax returns. So think about how any tax moves you make now could affect your premiums in 2027.
Required Minimum Distributions
IRAs & PLANS Pay attention to the required minimum distribution rules for traditional IRAs. Owners 73 and older must take annual payouts. To arrive at the 2025 RMD, start with your IRA balances as of Dec. 31, 2024, and use the tables in IRS Pub. 590-B. If 2025 is your first RMD year, you have until April 1, 2026, to take the RMD. If you opt to defer your first RMD to 2026, you will be taxed in 2026 on two payouts: The deferred one for 2025 and the RMD for 2026. This will hike your 2026 income. Similar rules apply to 401(k)s. However, people who work past age 73 can generally delay taking RMDs from their current employer’s 401(k) until they retire.
The rules for non-spousal beneficiaries of IRAs inherited after 2019 are a bit confusing - there is a 10-year cleanout rule. Funds must be fully distributed within 10 years of death. Eligible designated beneficiaries are exempt from the 10-year rule. They include surviving spouses, minor children (until 21), beneficiaries who are disabled or chronically ill, and people who are no more than 10 years younger than the decedent. These people can do stretch IRAs according to their life expectancies. A spouse can also take an IRA as his or her own.
Charitable Donations
Charitable donations made directly from a traditional IRA can save taxes. People 70½ and up can transfer up to $108,000 in 2025 from IRAs directly to charity. Qualified charitable distributions can count as RMDs, but they are not taxable, and they’re not added to your adjusted gross income. The QCD strategy is a good way to get tax savings from charitable gifts for taxpayers who take the standard deduction instead of itemizing, and for taxpayers who want to keep their AGI down to qualify for various tax breaks and to mitigate Medicare premium surcharges.
Roth Conversions
Consider whether a Roth conversion makes sense this year. You’ll pay tax on the converted amount, but future earnings are tax-free. There are lots of factors in determining whether converting a traditional IRA to a Roth IRA is a good strategy for you. One key thing to note is that you don’t have to convert the entire amount in one full swoop. It’s best to view Roth conversions as a multi-year planning tool. Conversions in increments over time space out the tax hit.
IRA Contributions
Max out your 2025 401(k) and IRA contributions. You have until Dec. 31 to put money in 401(k)s and other workplace retirement plans, and until April 15, 2026, to contribute to an IRA for 2025. You can stash up to $23,500 in a 401(k). People 50 and up can contribute an additional $7,500. If you’re 60-63, the catch-up amount jumps to $11,250. The 2025 contribution limit for IRAs is $7,000, plus $1,000 more if age 50 or older. WITH- HOLDING Boost your federal income tax withholding if you expect to owe tax for 2025.
Investments
Your investment portfolio provides plenty of tax-saving opportunities. See if you qualify for the 0% rate on long-term gains and qualified dividends. If taxable income other than long-term gains or dividends doesn’t exceed $48,350 on single returns, $64,750 for head-of-household filers, or $96,700 for joint filers, then your qualified dividends and gains on sales of assets owned more than a year are taxed at a 0% federal tax rate until they push you over the threshold amounts. Some words of caution on 0% long-term capital gains and dividends. They might not be taxed at the federal level, but they do increase your AGI. Also, capital gains are not recognized in computing California income. If you’re not eligible for the 0% rate, there’s always the 15% or 20% rate. The 20% rate on long-term capital gains and qualified dividends begins at incomes of $533,401 for singles, $566,701 for household heads, and $600,051 for joint filers. The 15% rate applies to filers with taxable income between the 0% and 20% break points. Estates and trusts have less leeway to reach the highest capital gains rate. The 0% rate applies to income up to $3,250, and the 20% rate begins at $15,901.
Tax planning for retirees is becoming more critical since many deductions, credits, and Medicare premiums are based on taxable income received. Please feel free to call me at (925) 484-1671 for a no-charge consultation or contact us by email.
