The New Tax Law & Retirees
The IRS tax code is 6,871 pages long. However, tax professionals and others also need to consult a vast amount of supplementary material, including IRS regulations, revenue rulings, and case law. When you include these additional components, the total length can increase dramatically, with some estimates reaching approximately 75,000 pages.
Unfortunately, the new tax bill does not appear to be intended to reduce the number of pages or simplify the tax code. The new tax legislation, “One Big Beautiful Bill” contains over 100 tax sections. The changes:
a) permanently extend most tax provisions in the 2017 Tax Cuts and Jobs Act that were slated to expire on December 31, 2024.
b) enhance and modify some of the provisions in the 2017 TCJA.
c) provide new tax breaks, and make additional modifications.
Most are permanent. Some are temporary.
Below is a brief list of the main aspects of the bill I believe will impact many retirees.
Tax Rates
Income Tax rates for C corps, individuals, trusts, and estates stay the same. C corporations are taxed at a 21% rate, and individuals have a top rate of 37%. The individual alternative minimum tax breaks are permanent, with a few changes.
Standard Deduction
The standard deduction amount has increased to $31,500 for married couples and $15,750 for single individuals. Fewer people will itemize their deductions because of the increased standard deduction. The IRS is giving a married couple $31,500 in lieu of adding up various allowable itemized deductions – property and income taxes, mortgage interests, medical expenses, charitable contributions, and more.
Example:
Joe and Lisa, a married couple, pay $35,000 annually for qualifying itemized deductions, including $20,000 of mortgage interest and $6,000 property taxes. They will use $35K as their itemized deduction amount.
Mike and Kelly, a married couple, have paid off their mortgage and only have a total of $15,000 qualifying deductions. They will be allowed to use $31 500 for their itemized deductions.
Additional Senior Standard Deduction
An additional deduction is available for individuals who are 65 years old or older as of December 31, 2025. Filers aged 65 and older receive an extra $1,600 per spouse on joint returns and $2,000 more on single and head-of-household returns. In the example above with Mike and Kelley, their standard deduction would be increased to $34,700 ($31,500 plus $3,200). Note: This additional standard deduction for adults 65 and over is separate from the increased “senior deduction” - see below.
State And Local Taxes (SALT)
The cap on deducting state and local taxes as itemized deductions rises to $40,000 for 2025 through 2029 and then returns to $10,000 beginning in 2030. Filers with modified AGI over $500,000 (MFJ) will be subject to a phaseout of the deduction.
Example
Steven and Cindy, a married couple, paid property taxes on their home of $10,000 and paid California taxes (withholding and paid) of $30,000. Instead of losing $30,000 ($10,000 from 2018 to 2024), they can deduct the entire $40,000 (provided they make less than $500,000).
Estate Tax Exemption
The higher lifetime estate and gift tax exemption is now permanent. A married couple could potentially leave 30 million dollars to their heirs tax-free.
Four New Above-the-Line Tax Breaks
The following deductions are available to those who claim the standard deduction or itemize their deductions.
1) Senior Deduction of $6,000 – Married spouses who both are over 65 receive $12,000 worth of deductions, including the increased $1,600 senior standard deduction.
2) Qualified tips of $25K can be excluded from income. There are numerous rules and complexities, and guidance from the IRS will be necessary.
3) $12,500 of overtime is deductible ($25,000 for joint filers). Deduction begins to phase out at AGI over $300,000 on joint returns. Another one with many rules and requirements.
4) Interest on personal auto loans up to $10,000 is deductible. The loan can be for a new car, minivan, SUV, pickup truck, or motorcycle after 2024. Final assembly of the vehicle must take place in the U.S. The write-off begins to phase out at modified AGI over $200,000 for joint filers.
There are many other impacted areas, including donations, itemized deductions, “Trump” accounts, Small Business Stock sales, Green Energy, and generous business tax deductions. I have never recalled such colorful descriptions as “Big and Beautiful” on any legislation proposed before in the U.S. (or anywhere, for that matter). While most people will likely enjoy a reduced tax bill, the long-term impact of all the modifications in the bill will not be known for some time. However, projections made by bipartisan groups have forewarned of a less-than-beautiful path, which means that the tax code will likely continue to grow.
Please feel free to contact me at (925) 484-1671 to discuss your financial situation and how these changes will affect your income, taxes, and investments.
Sincerely,
Anthony B. Carr, CPA, CFP®, MBA
