New Tax Rules Have Been Set: Start Planning Now

Individual taxpayers faced significant tax planning uncertainty for the first six months of the year. Many provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) were scheduled to expire at the end of this year. However, after the One Big Beautiful Bill Act (OBBBA) became law in July, the federal tax rules for individuals are generally set, at least for the next few years. Here’s an overview of some key changes, followed by tips to help you optimize your tax results going forward.   

Permanently Reduced Individual Rates

The new law makes the favorable TCJA individual federal income tax rates permanent. (See “2025 Federal Tax Rates and Brackets for Individuals” below.) The seven individual tax rates under the TCJA are now permanent, and the brackets will continue to be adjusted annually for inflation. The inflation adjustments for 2026 will likely be modest.   

There are no changes to the favorable federal income tax treatment of long-term capital gains and qualified dividends. They’ll continue to be taxed at 0%, 15% or 20%. Certain long-term gains attributable to real estate depreciation can still be taxed at up to 25%, and long-term gains from collectibles can still be taxed at up to 28%. Higher-income taxpayers may also owe the 3.8% net investment income tax (NIIT) on all or part of their capital gains and dividends.       

Standard and Itemized Deductions

The TCJA dramatically increased standard deduction amounts. Now the OBBBA makes the enhanced standard deduction permanent and provides small additional increases for this year:

• $15,750 for single filers (up from $15,000 before the OBBBA),
• $23,625 for heads of households (up from $22,500), and
• $31,500 for married couples filing jointly (up from $30,000).

These amounts will be adjusted for inflation for 2026 and beyond.

As before, additional standard deductions are allowed for individuals age 65 or older or blind. For 2025, the additional amounts are:

• $2,000 for an unmarried individual who’s 65 or older or blind, or
• $1,600 for a married individual who files jointly and is 65 or older or blind.

For taxpayers both over 65 and blind, the additional deduction is doubled.

New Deduction for Seniors

For 2025 through 2028, the OBBBA allows people age 65 and older to claim an additional deduction of up to $6,000, subject to an income-based phaseout rule. This deduction is available whether or not you itemize.

For eligible seniors, the deduction can effectively shield more Social Security benefits from federal income tax, but it’s available even if a taxpayer isn’t currently receiving Social Security benefits. If both spouses of a joint-filing couple are 65 or older, each spouse is potentially eligible for a separate bonus deduction of up to $6,000, for a combined total of up to $12,000.  

The deduction begins to phase out when modified adjusted gross income (MAGI) exceeds $75,000 for unmarried individuals ($150,000 for joint filers). It’s completely phased out when MAGI exceeds $175,000 ($250,000 for joint filers).

If you won’t be itemizing for 2025, you can potentially reduce your taxes significantly with your standard deduction combined with the new senior deduction. For example, Pat, a single taxpayer who just turned 67, has MAGI of $70,000 for 2025. She can claim deductions totaling $23,750 ($15,750 + $2,000 + $6,000).

Expanded SALT Deduction

If you itemize deductions, you can deduct state and local tax (SALT) expenses, including property taxes (for homes, vehicles and boats) and either income tax or sales tax. The TCJA limited SALT deductions to $10,000 ($5,000 for separate filers). The TCJA limit was scheduled to expire after 2025. However, the OBBBA extends it.

But there’s some good news for taxpayers with large SALT liabilities: For 2025 through 2029, the OBBBA increases the SALT deduction cap to $40,000 ($20,000 for separate filers). The new limit is subject to 1% annual increases going forward. So, for 2026, the cap will be $40,400 ($20,200 for separate filers).

Starting in 2030, the SALT deduction cap is scheduled to revert to $10,000 ($5,000 for separate filers) unless Congress takes further action. 

Important: Deducting general state and local sales taxes instead of state and local income taxes is a helpful option if you owe little or nothing for state and local income taxes. 

For 2025, the higher OBBBA SALT deduction limit begins to be reduced when MAGI exceeds $500,000 ($250,000 for separate filers). For 2026 through 2029, the thresholds will be adjusted for inflation.

If your MAGI exceeds the applicable threshold, your otherwise allowable SALT deduction cap will be reduced by 30% of MAGI above the threshold, but not below $10,000 ($5,000 for separate filers). Your tax advisor can help assess whether the reduction will affect you.

SALT Deduction Workarounds

The OBBBA doesn’t limit or address pass-through entity SALT workarounds, commonly referred to as “PTET” (pass-through entity tax) laws, that many states have established. Generally, these workarounds allow certain entities to pay SALT bills on their income and then pass through the SALT payments as deductible expenses to their individual owners. As a result, SALT deduction caps that would otherwise apply to the owners are avoided.

These workarounds may apply to the following types of businesses:

• Partnerships,
• Limited liability companies that are treated as partnerships for tax purposes, and
• S corporations.

If you could be eligible for a SALT workaround but haven’t yet taken the necessary steps to take advantage of it, contact your tax advisor.  

7 Tax Planning Tips

Now that you’re familiar with the OBBBA’s key individual tax provisions, here are six tips to potentially lower your tax obligation for 2025.

1. Game the standard deduction. Will your total itemizable deductions for this year be close to your standard deduction? If so, consider making enough additional expenditures for itemized deduction items between now and year end to surpass your standard deduction.

The extra expenditures will allow you to benefit from itemizing for 2025, thereby reducing this year’s income tax bill. Next year, you can claim the standard deduction (which will be higher thanks to the annual inflation adjustment) instead of itemizing if that gives you a better tax outcome.

Examples of additional itemizable expenses you might incur before year end are:      

• Mortgage interest (by prepaying your house payment that’s due in January 2026, you’ll have additional itemized home mortgage interest to deduct for 2025),
• SALT bills (by prepaying SALT bills that are due in 2026, you’ll have more itemized deductions for 2025 — but watch out for potential alternative minimum tax issues as well as the SALT cap),
• Donations to qualified charities, and
• Elective medical procedures, dental work and vision care expenditures, if your total medical expenses for the year will exceed 7.5% of your 2025 adjusted gross income (AGI) — only expenses in excess of that floor are deductible.  

Your tax advisor can explain which prepayment or “bunching” strategies are right for your situation.

2. Manage gains and losses in taxable investment accounts. So far this year, you might have already collected some gains and have some unrealized gains. However, you might also have sustained some losses and have some unrealized losses.  

If you hold investments in taxable brokerage firm accounts, consider the tax-saving advantage of selling appreciated securities that have been held for over 12 months. The federal income tax rate on net long-term gains recognized this year is 15% for most individuals, but it can reach the maximum 20% rate at higher income levels. When the additional 3.8% NIIT kicks in, the maximum effective federal income tax rate on long-term gains is 23.8% (20% + 3.8%). However, that’s much lower than the maximum effective rate on short-term capital gains of 40.8% (37% + 3.8%).  

If you’re holding some investments that are currently worth less than you paid for them, consider selling them to trigger the resulting capital losses. These harvested losses can absorb capital gains on sales from earlier in the tax year. Absorbing short-term capital gains with harvested losses is an especially tax-smart move because net short-term gains are taxed at higher federal income tax rates.

If harvesting losses would cause your 2025 capital losses to exceed your recognized 2025 capital gains, the result would be a net capital loss for the year. Any net capital loss can be used to offset up to $3,000 of higher-taxed 2025 ordinary income ($1,500 for separate filers). Examples of ordinary income are salaries, bonuses, self-employment income, interest income and royalties. You can even offset some or all of a taxable home sale gain with harvested capital losses.  

Any excess net capital loss is carried forward to next year and potentially beyond. In fact, capital loss carryforwards can give you extra investing flexibility in those years, because you won’t have to hold appreciated securities for over a year to get a lower tax rate. You’ll pay 0% to the extent you can absorb future gains with your loss carryover.

3. Give appreciated investments to loved ones in lower tax brackets. If you’re feeling generous, you might consider using gifting strategies to minimize taxes from investments held in your taxable brokerage accounts. For example, if you have adult children in the 10% or 12% ordinary income tax brackets, consider transferring appreciated investments to them so they can sell the assets and enjoy the 0% long-term capital gains rate. However, the 0% rate applies only to the extent that capital gains “fill up” the gap between your child’s taxable income and the top end of the 0% bracket. For 2025, the 0% bracket for singles tops out at $48,350 (just $125 less than the top of the 12% ordinary-income tax bracket).

Even if your loved one’s rate would be 15%, transferring appreciated investments to him or her might still save tax. This would be the case if your long-term capital gains rate would be 20% plus the NIIT, or if your rate would also be 15% but you’d be subject to the NIIT and the gift recipient wouldn’t be.

Warning: If your child will be under age 24 on December 31, first make sure he or she won’t be subject to the “kiddie” tax. Also consider any gift tax consequences.

4. Donate to charity. If you’re charitably inclined, consider the following tax-smart strategies:

• Donate stock and mutual fund shares that are currently worth more than you paid for them. This approach allows you to avoid any capital gains tax on those shares. Plus, if you itemize, you can claim a charitable contribution deduction equal to the full market value of the shares at the time of the gift, as long as you held the shares for more than one year before donating them.
• Sell investments that are currently worth less than you paid for them, then donate the resulting sales proceeds. This approach allows you to benefit from the resulting capital losses. And, if you itemize, you can claim a charitable contribution deduction.

Important: Starting in 2026, two unfavorable OBBBA changes can reduce allowable itemized deductions for charitable contributions. But the changes don’t affect 2025 charitable contributions. So, charitably inclined people who itemize should consider making additional charitable gifts before year end. But nonitemizers have something to look forward to starting in 2026 under the OBBBA: a deduction of up to $1,000 ($2,000 for joint filers) for cash donations to qualified charities.    

5. Make charitable gifts from your IRA. If you’ve reached age 70½ and are an IRA owner or IRA beneficiary, you can make 2025 cash donations totaling up to $108,000 to qualified charities directly out of the IRA. These qualified charitable distributions (QCDs) are excluded from your taxable income, but you get no itemized charitable deduction. This means they reduce your AGI and MAGI, which can help preserve your eligibility for certain tax breaks and possibly even reduce or eliminate NIIT liability. Plus, you won’t have to worry about AGI-based charitable deduction restrictions that can force you to carry forward charitable deductions. Contact your tax advisor for the full details.

6. Convert a traditional IRA to a Roth IRA. The OBBBA doesn’t change the rules for traditional-to-Roth conversions, but the permanent extension of the TCJA’s favorable tax rates makes conversions appealing for some taxpayers. (However, Congress could increase tax rates in the future, so the opportunity might not last.) The best scenario for converting a traditional IRA into a Roth account is when you expect to face the same or higher tax rates during retirement. 

While doing a Roth conversion can be a tax-smart long-term move, there’s a current tax cost for converting: A conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth account. To avoid having the additional taxable income triggered by conversions push you into a higher tax bracket, consider staggering partial conversions over several years.    

After a conversion, all income and gains that accumulate in the Roth account and all qualified withdrawals will be exempt from federal income tax. In general, qualified withdrawals are those taken after you:

• Have had at least one Roth account open for more than five years, and
• Reach age 59½, become disabled or have died.

So you (or your heirs if you die) avoid having to pay tax on what would otherwise be traditional IRA withdrawals, potentially at higher federal income tax rates that might be in effect in future years. So, while the current tax hit from a Roth conversion is unwelcome, it could be worthwhile for some insurance against higher future tax rates.

Also, Roth IRAs aren’t subject to required minimum distributions. So if you don’t need the funds during retirement, you can let your entire Roth IRA balance grow tax-free for the benefit of your heirs.

7. Take advantage of soon-to-expire “green” energy credits. The OBBBA rolls back some clean energy tax incentives for individuals. In particular, it accelerates the termination dates for the following federal tax credits to:

• September 30, 2025, for clean vehicle (CV) credits (was December 31, 2031, under prior law),
• June 30, 2026, for the alternative fuel vehicle refueling property credit (was December 31, 2031), and
• December 31, 2025, for the two energy-efficient home improvement credits (was December 31, 2031, for the Section 25C Energy Efficient Home Improvement Credit and December 31, 2033, for the Section 25D Residential Clean Energy Credit).

If you’ve been considering purchasing a CV or upgrading your home’s energy efficiency, you may want to act soon to take advantage of the current incentives before they disappear.    

Ready, Set, Plan

The OBBBA provides some welcome certainty for individual taxpayers for the next few years. It also creates or enhances some tax planning opportunities. Consult your tax advisor to learn about these ideas and other tax-smart moves that make sense for your situation.