NEW Tax Law Changes for 2025 and 2026 – What You Should Know

What should you know about the tax law changes for 2025 and 2026? In this episode of Friends Talk Financial Planning, John and Bridget discuss the new tax law changes that you should know about for the final quarter of 2025 and the entirety of 2026. There’re lots of tax planning strategies to consider at this time of year, especially given the recent tax law changes. Don’t miss this opportunity to learn how you can make the most of these changes!

Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com

- Find us on Facebook: https://www.facebook.com/friendstalkfinancialplanning

- Link to article mentioned in video: https://www.kitces.com/?s=OBBA&submit=&by-author=&by-category=&from-date=&to-date=

TRANSCRIPT:

Bridget: Hi, I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And before we jump into today's episode about tax planning under the new tax bill, I just want to remind everybody to hit that subscribe button, click on that like, and help other people find this information on YouTube. And with that, I'm excited to talk about taxes.

I'm not sure if those two things go together, but I'm interested in hearing your thoughts. We’ve been doing tax planning for our clients, and I know you have too. I’m interested to share some ideas and hear what you see as the biggest impacts, what the value is for our clients, and what viewers should be paying attention to here as we go through the fourth quarter of 2025.

Bridget: Yeah. So we get all the information from clients, put it in our software, and then we want to make sure we tell them what's new and what applies to them. So that's kind of what I want to go over today. So the first thing is this handout, because there's a lot of things that have been passed and they sound good, but the way that they got so many different things passed that helped so many different people is to have income limits and qualifications on them. And the big thing is income limits. So it's important to understand what your income is going to be and then what the income limits are.

And then let's talk through what the actual items are. The first one is the SALT deduction. If you are salty, you pay state and local income tax. And that’s called SALT. And there's a lot of debate about that because previously in 2024, the most you could take, and this is an itemized deduction, was $10,000. Now they've increased that to $40,000. And if you're single or if you're married filing jointly, it's the same amount, $40,000. Okay. But if you're making a bunch, it gets phased out and then goes away. And then you go back to $10,000.

And that phase out right now, I believe, is between $500,000 and $600,000 in income. And again, if you're single or married filing jointly, no problem. Now, this impacts a lot of people in Illinois because our state tax is about 5%. Let's say a single person is making $300,000. That means they're going to pay $15,000 in state and local tax. So that almost gets them to itemize just with their income tax. And if they own a home, they've got property tax. And if they give some money to charity, they've got some deductions there. So this will get more people to itemize.

John: Yeah. And just to be clear, I want to make sure that I'm following and that viewers see what’s going on. We mentioned income limits, which makes sense. And phase out ranges are the income limits. Those two things are connected. And I love this diagram. First of all, I think this is awesome.

Bridget: And that’s from Michael Kitces, just so you know.

John: Oh yeah, kitces.com. So on that SALT deduction, the income limit is basically under $500,000 it works the way it works.

Bridget: You get 40 grand.

John: Between $500,000 and $600,000, that number gets phased out, and then to the right of that over $600,000, then you don't get it.

Bridget: $10,000. It's not zero, but it's $10,000.

John: Yeah. Back to the old lot. Yep. Perfect. So it's that phase out. The left side’s totally in. The right side’s out or different rules. And in between, it's scaled back.

Bridget: Right. So it's definitely helping people who are making less than $500,000. And if you're around the $300,000 to $500,000 mark, it's got more of a likelihood to help you. Okay, next thing.

John: And that one's going to be a major change. Some of these other things are additions, but if nothing changes in your life, your tax situation could change dramatically if you fall into that situation, right?

Bridget: Right. And it takes effect in 2025.

John: So this year.

Bridget: Yeah, this year. And it keeps going in 2026 as well. So that's an important part too. The next one we've got is the itemized deduction limitation. And this is basically to say if you're making a lot, say if you're in the 37% bracket, then starting next year, your itemized deductions will only count like 35%.

John: So you don't get full credit for them.

Bridget: Yeah, you don't get full credit. But it's a kind of a chipping away. And this is one that would be a little bit harder to plan for. And then here's another biggie. So the other biggie besides the SALT, is 6,000 bucks to everybody over 65. Here you go. And it's not a credit, it's a deduction. However, we’ve got income limitations, and that's the biggest part about this one. And so, if you're single, the phase out starts at $75,000. And if you're married filing jointly, it's at $150,000.

And if you're getting Social Security, this includes how much Social Security is getting in there. So this has been helping some of my clients a lot. And it also is one of those factors to consider if someone's in a situation where we're thinking about doing some Roth conversions and that type of thing. It's another factor when we're thinking about not doing Roth conversions, because income limits so it will impact more people. So I don't know if you've seen that impact people, John.

John: Yeah, absolutely. And just looking at those top four or five items here. These are a lot of the things that we've been talking about with folks. The SALT deduction increase makes a big difference for people that maybe didn't itemize last year but now you will be, or did itemize, and it's going way up, a big delta on those things, a big change. But not if you're above $600,000, if you're one of those lucky people making a whole lot of money, it doesn't affect you. Or maybe you sold a business or did something and you're in that situation. So many variables.

Bridget: It could be a one-year thing.

John: Right. And then on the other end of things we got the folks who are retired now and all the limits on those things. And the rules on that, there’s the $250,000 and under range where you get this credit except for if you don't get the credit. And the diversity is very great. This is why you have to look at this every year. It's not one stop shopping.

The one rule applies to everybody. And the one rule might not even apply to you based on what we just said. Maybe you did a big Roth conversion, you sold a business, or you retired and now your income is way lower. It just changes every year. And those are the ones that we're really seeing the SALT deduction, looking at itemized deductions really closely.

And then that, 65 and over. It's a deduction, but it's kind of separate from your itemized deductions. So it's two different things on there. But those are the places to pay attention. We like doing Roth conversions, meaning when somebody retires, and they don't have to take money out of their IRAs yet, but they might want to, because of taking advantage of lower tax brackets. I think they call it a Senior Citizen Credit, which is just a weird name for it.

Bridget: It's a deduction.

John: Deduction. Yeah. Thank you. That makes a difference. But we have had people in the 10% or 12% tax bracket. We go, “Oh cool, we want to pay more taxes at that low rate.” But we had one situation in which after adding like $10,000, that next $10,000 was actually taxed at like 30%, because you lose this deduction, then this, then Social Security gets taxed more. But if they did $50,000, the tax rate actually was only 15%.

Bridget: Right.

John: So a little bit is taxed a lot, while more was taxed less, and then the tax rate went up. You have to look at this is the one big takeaway. You have to run the numbers and see what it looks like, because you can't say, “Oh, I fit this category. Great, that's my whole situation.” There’re so many moving levers in this.

Bridget: Yeah. And then we've got some others. The no tax on tips, the no tax on overtime. You want to look into the details. And there are income limits on that. And then auto loan interest. Again, we had a viewer ask about it. You just got to look. You got to dig in a little bit. And we'll have a link in the show notes to Michael Kitces’ website. They call the writers the senior nerd. They write clearly about all the details, and so that's what we look at when we're trying to advise people. Often, not always. I love the IRS website, but a lot of times this gives a little bit of interpretation, and it's helpful.

Then we get the child tax credits and that's just an increase. And there’re no actions that you can take. I guess you could have a kid but that would have to be done already. So let's talk about the other itemized deductions. And this is more about 2025 versus 2026. And we got another chart again from Michael Kitces that talks about the TCJA. That's the old law. OBBBA. That's the new law. Yeah, that's the new law. And then the year the changes take effect. And so, this gets a little bit more into if you're itemizing. And I added a little post it just so I remember something too.

So medical and dental expenses, no change. Same deal. 7.5% of your AGI is what you use. You have to take that amount off whatever your medical and dental expenses are. I do want to mention though that this does include if you're paying Medicare or Medigap and long-term care insurance. All those things can get included here. So sometimes people who are retired think, “Well, I don't pay anything for this.” But all that stuff can add up. Next is SALT. We just talked about that a lot. State and local income tax. And the fact that that happens in 2025.

Mortgage interests, pretty much the same as before. I think PMI counts in 2026. Great. Whatever. We did an episode on charity, but I'll just mention it here. Starting in 2026, two things happen. One is if you're itemizing, you're subject to a 0.5% of your adjusted gross income. Who even knows what the heck that is? Who can do that kind of percentage work in her head? But I'll tell you this, if you make $100,000, that's a $500 deduction. So if you donated $2,000, you'd say $2,000 minus $500 equals $1,500, which would be our actual deduction.

It starts in 2026. A little bit of motivation to move if you're going to donate to donate this year if you're itemizing in both years, because that's the itemizing. But if you don't itemize, starting in 2026, it's $1,000. You can get $1,000 deduction per person for charitable contributions. So if you're married filing jointly, that's $2,000. If you're single, that's 1,000. So charity is always a hot issue. Casualty and theft. I don't keep casualty and theft itemized deduction in my brain, because if it happens, then you look it up and figure out what the current rules are.

That's what I would say. Because it's something you just do reactively, not proactively. For miscellaneous itemized deductions, there’s not much there anymore. We think the educator expenses might be there, but I don't know. And then overall limit. And this is something that we talked about previously. If you're making a lot, it doesn't count as 37% deduction. It counts as 35%.

John: Yeah. I love what you said about theft loss. You can't plan for that. Just know t's there. But you can plan for those charitable giving things. And take a look, that new floor comes into play in 2026, but also the new $1,000 per person, if you don't itemize, comes in in 2026. So that might make a difference in somebody's charitable giving if they choose in 2025 to avoid the floor or if they choose to wait until January 1st of 2026 to get that $1,000. So that's one of the action items we've been seeing with folks.

Bridget: Right. And we've even had a big stock run up. We had another episode on that. Maybe I should donate some of my appreciated stock in my Donor-Advised Fund. Maybe I'll do it this year instead of next year to avoid the 0.5% reduction. But those are pretty subtle changes, and again, we had an episode on it.

John: Yeah, that's great. I think that's a great place to wrap things up. There’re lot of tax changes. Be prepared for it here in the fourth quarter of 2025. Again, I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. Both John and I are taking clients, so you can contact us if you're interested. If you're looking for an advisor in your area, we're both proud members of ACP or the Alliance of Comprehensive Planners and you can find that at acplanners.org.

John: Don’t forget, hit that subscribe button.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation.  We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.