If you are a retiree or are planning for retirement, the new tax law will affect your income, cash flow, and the amount you pay in taxes.

When President Trump took office, he said he would make sweeping reforms and tax changes. There were promises of removing taxes on Social Security, removing taxes on overtime, and removing taxes on tips. Legislation was recently passed that gives us some of that.

On the 4^th of July, the president signed into law the “One Big Beautiful Bill Act”, or the OBBBA for short. I am looking at the law specifically on how I think it will affect most retirees. Specifically:
®     New(ish) tax brackets
®     Special standard deduction for seniors (a roundabout way to cut tax on Social Security?)
®     SALT deductions
®     Estate Tax exemptions
®     Medicare

There is a lot more in the bill. It’s an 870-page doozy, and includes topics like QBI 199A updates, tax changes on overtime (not as good as one might hope), AMT changes, changes to clean energy, and more. However, I am going to focus on what I think are the most important areas for those in or planning for retirement.

At the end of the day, I think these changes leave room for good tax planning. If you feel all of the changes will affect your tax strategy, we encourage you to reach out.

A quick point of clarification

#1

Before we begin, there has been a lot of talk on “permanent” changes. Similar to most people’s January diet statements, “permanent” really just means “for now”.

When the law states that the tax deductions are permanent, it means Congress would have to cast a vote to change it. And with the frequent political landscape changes and the tight majority control, a party change could happen every two years.

So don’t get caught up on the word permanent.

With this in mind, remember that the tax code likely could go up. The US spends a lot of money. This bill is believed to be adding trillions of dollars to the federal deficit.

#2

I think the name of the law, which includes the word “bill”, is grammatically incorrect. It doesn’t really matter, but I still think “One Big Beautiful Bill Act” is a bit much. So I will frequently shorten it to just “OBBBA”.

If you are so inclined, you could pronounce it as “The Oh-Buh-Buh-Bay Act”, but that would be silly.

#3

There are tax strategies you could review now that would set you up to manage the pain if taxes do indeed go up in the future. Keep that in mind.

Taxes!

Back in 2017, during the first Trump Presidency, Congress passed the Tax Cuts & Jobs Act (TCJA) that included massive cuts to taxes. These tax cuts were designed to “sunset” at the end of this year. So on 12/31/2025, unless Congress did something about it, our taxes would have gone back to the old rates. The OBBBA largely continued these tax cuts. Which was not surprising.

I really wanted to show that our taxes are lower, so I pulled the tax cuts from the TCJA and stacked them next to the new tax plans from the OBBBA. The OBBBA rates look a lot like last year’s rates, yes. But don’t forget, unless Congress did take action, we were going to go back to the old Pre-TCJA rates!

Here are the new tax rates as broken down by tax filing type:

Now we can compare the new law vs. what it was back before the Tax Cuts & Jobs Act (TCJA) had been passed:

As you can see, for mostly all levels of income, the new tax act had lowered taxes.

Senior Bonus Deduction

I think politicians would have loved to have excluded all Social Security checks from taxes. That would have been a huge win for retirees. Instead, they made a slightly more complicated, roundabout way of basically getting around the tax for most seniors.
(Politics, I know…)

The OBBA had created a new “Senior Bonus Deduction” of $6,000. This is for ALL SENIORS age 65+.

Important note, you do NOT need to have collected Social Security to get this deduction. Which is a great planning opportunity if you are trying to delay.

In addition, this “Senior Bonus Deduction” is applied whether you take the standard deduction or itemize. So the new standard deductions for 2025 should look like this:

 For a married couple, both over 65 in 2025, their new standard deduction is essentially $42,000.

 So, this isn’t exactly the tax-exemption on Social Security we were looking for, but it does come close to what effectively will feel like a tax cut for most seniors.

 I know that it will not help everyone. But it does help a lot.

There’s a catch

Though we would love to see this for everyone, that additional senior deduction phases out by income.

The new deduction phasesout at a rate of 6% of Modified Adjusted Gross Income (MAGI) at $75,000 single, or $150,000 joint. By the time a single filer hits $175,000 the $6,000 “Senior Bonus Deduction” is gone, or $250,000 joint.

State and Local Tax Deduction – aka SALT Cap

I just looked up a home in my neighborhood on Zillow. For a property valued at $664,900, the estimated property tax is $7,908. Now add in some income from IRA withdrawals, RMDs, a pension, or even the taxable portion of Social Security, and it’s easy to see how your total state and local tax bill could exceed $10,000.

Unfortunately, the IRS currently limits the deduction for state and local taxes (SALT) to just $10,000. That cap makes it difficult for many Californians to fully benefit from itemizing their deductions.

Not surprisingly, the SALT cap was one of the most contentious issues debated during the drafting of the new tax legislation.

Starting in 2025, the OBBBA temporarilyincreases the SALT cap to $40,000.

This is for a limited time only.

The SALT increase is only in effect for the years 2025-2028.

Can you think of any other big change in 2028…?

I think someone will be moving from Washington down to Florida that year.

In 2029, the SALT cap will sunset, or revert back to the $10,000 cap. That is of course, unless Congress does something about it.

There’s a catch

(Sorry. I know I just pulled the rug on you once. Here it comes again)

There is a phase out of the $40,000 SALT cap.

This portion of the law is a little technical. There is a 30% limit after $500,000 MFJ/$200,000 S to a phasedown range of $600,000 MFJ/$300,000 Single.

Basically, if you are close to these phase-out ranges, you should be doing tax planning!

Finally, the last two points I want to cover will be quick.

Estate limit increase

If your net worth was getting close to $5.6 million for a single person, or $12.2 million for married couples, you were worried about estate taxes.

Now, the limit increased to $15,000,000 PER PERSON. That’s $30,000,000 per couple.

This is significant for those who fall in that area and want to avoid the 40% estate tax.

Ouch!

Last point: Medicare

There are a lot of folks who are upset about the cuts to public service programs geared toward low-income assistance.

Thankfully, it does not seem like Medicare is getting cut.

The House version of the proposed bill got our hopes up leading us to believe those who have signed up for Medicare, and are still working, can continue to contribute to Health Savings Accounts (HSAs).

The final version of the bill cut this provision.

 A working spouse who is properly eligible for an HSA can still contribute at the family level, but once you sign up for Medicare, that contribution is gone. Bye-bye.

Takeaways

At the end of the day, financial planning should incorporate tax planning.

Tax planning is an ongoing process.

They say the only constant in Washington is change and that the tax code is written in pencil.

The “I” in our firm name, IWM Financial, stands for Intentional. We should do just that in tax planning: be intentional. Work with a qualified CFP® Pro to determine how this bill should fold into your financial plan.

The information contained herein is based on our understanding of current tax law. The tax and legislative information may be subject to change and different interpretations. This presentation is for information purposes only and is not intended to be financial, legal, or tax advice. We recommend that you seek professional legal advice for applicability to your personal situation.