Let's Talk Taxes

With the revised tax bill signed into law this past summer, there are key changes for the next few years.  The changes that are focused on in this writing are in reference to individuals' income deductions and contributions to employer sponsored retirement savings plans 401(k), 403(b), or 457(b).  

Let's review the changes to itemized and standard deductions which are used to reduce taxable income. The changes alter both, providing increased benefits for many taxpayers. 

Standard Deductions-  A person can elect to keep track of expenses throughout the year and then use the allowable deductible expenses to reduce taxable income. This is called 'itemized' deductions.  If a person does not want to go through the process to itemize, then there is a base amount that is set by Congress which is called the 'standard' deduction. The standard deduction is much easier than itemizing.  

Standard deductions (see chart below) usually increase each year because the amounts are indexed to inflation.

However, for 2025 and 2026, in addition to the inflation indexed increase, the amounts will increase due to the changes in the latest tax law. New in 2025, individuals over the age of 65 can take an additional $6k for the standard deduction.  So potentially, a single 65-year-old could reduce their taxable income by as much as $23,750 ($15,750+$2,000+$6,000) depending on income level.

Standard Deductions Chart

• New bonus deduction for Seniors age 65 and older, income phase-outs starts at $75k for singles & $150k married. Phase-outs are gradual reductions or eliminations of tax benefits as a taxpayer's income reaches or exceeds a specific income threshold.

** $1,600 for married filing jointly(each person) and $2,000 for singles or head of household

Itemized Deductions- If the total expenses that can be deducted exceed the amount of standard deduction, then it is more beneficial to itemize. Usually, the expenses that yield the largest deductions are real estate taxes, mortgage interest, and state and local taxes.  However, over the past few years, there was a maximum of $10k that could be taken for the combined total of state and local taxes (SALT) plus real estate taxes. 

So, if a person’s real estate taxes were $20k, and state income taxes paid were $10k, the maximum deduction for these two items would have been $10k as opposed to $30k, a loss of $20k of deductions.

State & Local Tax (SALT)- For individuals who elect to itemize, the SALT Cap increases from $10k to $40k.  This amount will increase 1% every year through 2029 and then in 2030, it will revert back to $10k. There is a phase-out for high-income earners with modified adjusted gross income over $500K.

Retirement Contributions- Making contributions to Traditional employer-sponsored 401(k)s, 403(b)s, or 457(b)s will lower taxable income and overtime, grow funds for retirement tax-free. Contributions are considered pre-tax, and taxes are not due until funds are withdrawn later (hopefully after retirement).

If Roth accounts are offered by employers, and contributions are made to the Roth, the contributions do not reduce the taxable income and are considered post-tax. Contributions are made after taxes are taken out, and then the funds will grow tax-free. With Roths, although the taxes are paid at a person’s current tax rate, the growth and later withdrawals will be tax-free. Roth contributions tend to be more advantageous when a person is in a lower tax bracket.

Due to the changes, individuals will be able to contribute more to their retirement accounts. Totally new, if a person is between ages 60-63, in 2025 they will be able to contribute an additional $3,750 for catch-up in 2025 and an additional $3,500 for catch-up in 2026.

There is a major caveat for both classes of catch-up contributions.  In 2025, all catch-ups can be made to Traditional employer-sponsored retirement plans. However, starting in 2026, for individuals with income of $145k and higher, catch-up contributions can only be made to employer-sponsored Roth retirement accounts. If an employer does not offer a Roth account as an option, then individuals with income over $145k will not be able to make catch-up contributions. Therefore, they will be limited to only the standard contribution.

Employer-Sponsored Contributions Chart

In 2026, for individuals with income of $145k and more, catch-up contributions can only be made to employer-sponsored Roth retirement accounts.  If an employer does not offer a Roth account as an option, then individuals with income over $145k, will not be able to make catch-up contributions. 

There are many changes for the upcoming tax year. It is highly recommended to consult with a tax accountant and/or tax preparer before the end of this year.  In summary, will itemized or the standard deduction be most beneficial; does the employer offer a Roth option for catch-ups; and will income trigger phase-outs for deductions and contributions.