Latest from Kiplinger in Income-tax

Ask the Tax Editor, June 26: Amended Returns and Late-Filed Returns

joy.taylor@futurenet.com (Joy Taylor) — Fri, 26 Jun 2026 12:20:00 +0000

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at four tax questions on amended returns and penalties for filing your tax return late. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Refund on amended return

Question: I filed Form 1040-X in early May to amend my 2024 federal tax return. I am expecting a refund, and I haven't received it yet. What is the delay?

Joy Taylor: I generally advise taxpayers to have lots of patience when filing an amended federal tax return with the IRS. The agency says you should allow at least 8 to 12 weeks for your Form 1040-X to be processed. However, in some cases, processing could take up to 16 weeks. Note that the IRS website also says that the Service is beginning to process paper-filed Forms 1040-X that were filed in April.

Maybe the processing speed will pick up later this year. The IRS's CEO, Frank Bisignano, testified before Congress that the IRS is using artificial intelligence to reduce processing times of amended returns to as little as three days. We'll see how this plays out over time.

You can use the IRS's "Where's My Amended Return" online tool to check the status of your amended return filing.

2. Amended return filing deadline

Question: I am thinking of amending my 2023 Form 1040, which I filed in February 2024. When is the due date for filing Form 1040-X to amend that return?

Joy Taylor: You generally have (1) three years from the due date of your original Form 1040 or (2) two years from the date you paid any tax due, if later, to amend it by filing an amended return on Form 1040-X. If you filed your original Form 1040 before its due date, it is considered filed on April 15. So, in your case, you would have to file an amended return no later than April 15, 2027.

3. Filing a late refund return

Question: I haven't yet filed my 2024 Form 1040. I plan to do so soon. I know I will get a refund when I do file. But will I have to pay any penalties for my late filing?

Joy Taylor: No, you will not have to pay any delinquency penalties for filing your 2024 Form 1040 late. That’s because taxpayers owe late-filing or late-payment penalties only if they owe tax, and you say you will receive a tax refund. Note that you must file your 2024 return by April 15, 2028, to get your refund. Otherwise, you have essentially ceded the money to the government.

4. Penalty abatement

Question: I haven't yet filed my 2025 Form 1040. I know I will owe tax, and I didn't request a filing extension nor did I pay the tax by the April 15 due date. I hope to file my return next month. This is the first time I have ever filed a late return with the IRS. How much will the agency penalize me for my late filing?

Joy Taylor: You may be in luck. The IRS has a little-known first-time penalty abatement policy. It will approve a waiver of the late-filing and late-payment penalties for filers who pay or arrange to pay the tax due and have been tax-compliant for the past three years. The penalties for late payroll-tax deposits and delinquent returns of S corporations or partnerships are also eligible for the waiver if the conditions are satisfied. But the estimated-tax penalty (also called the underpayment penalty) doesn't qualify for this penalty abatement program.

You may have to request the waiver. If you get a notice from the IRS showing a late-payment or late-filing penalty due but not abated, follow the instructions in the letter or call the phone number on the notice. The IRS has said that it will begin to automatically provide first-time penalty abatement to taxpayers who qualify for relief, starting with 2025 tax returns filed this year. But I am not sure whether the IRS has yet implemented this automatic procedure, which the agency will refer to as automatic exemption of penalties. If the IRS has implemented this program, then you should receive a letter after you file your late 2025 tax return, noting that the IRS didn't assess a penalty.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor roundups. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not, and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

Ask the Tax Editor, June 19: Estimated Tax Payments and Withholding

joy.taylor@futurenet.com (Joy Taylor) — Fri, 19 Jun 2026 12:20:00 +0000

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at five tax questions on federal estimated tax payments and federal income tax withholding. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Underpayment penalty

Question: How much federal income tax must be withheld to avoid paying a tax penalty to the IRS when I file my Form 1040 each year?

Joy Taylor: You are off the hook from the underpayment penalty if you prepay, through estimated tax payments or withholding, at least 90% of your current year's tax bill or 100% of the tax that you owed for the immediately preceding year (110% if your adjusted gross income for the immediately preceding year exceeded $150,000).

2. Due dates for estimated tax payments

Question: I have to start making estimated tax payments to the IRS this year. What are the due dates for the payments, and how can I make them?

Joy Taylor: Estimated tax payments are for people with income that is not subject to withholding. Taxpayers usually make estimated tax payments to the IRS in four equal installments. The first remittance for 2026 was due April 15. The other dates are June 15, September 15 and January 15, 2027. Victims of federally declared disasters may have more time to pay their estimated taxes.

There are several ways to make estimated tax payments.

If you have an online individual account set up with the IRS, you can log in and pay through the account.
You can pay online with the IRS's Direct Pay or, if you currently have an account, with the Treasury Department's Electronic Federal Tax Payment System.
You can use your phone to pay with the IRS's app.
You can pay by debit or credit card, but know that you will be charged a fee.
Payment by paper check is also accepted for now, but this option will soon disappear.

3. IRS withholding calculator

Question: Do you know whether the IRS has a federal income tax withholding calculator on its website, and is the calculator updated for changes in tax laws?

Joy Taylor: The IRS does have a withholding estimator on its website. It helps you figure out whether you are having the right amount of federal income tax withheld from wages and pensions. The tool asks about various sources of income, provides tips on credits and deductions, and estimates how much withholding to request. And it is usually updated to account for tax law changes.

4. IRS forms to request withholding

Question: Can you tell me the various IRS forms I would use to request more or less income tax withholding from Social Security, wages, IRA distributions, etc.?

Joy Taylor: Employees who want more or less income tax withheld from their wages can submit a new Form W-4 to their employers. People receiving pension or annuity payments can submit Form W-4P. IRA owners use Form W-4R. Social Security recipients have two options. They can fill out Form W-4V and mail it in. Or, if they have an online Social Security account, they can request through their account that more or less tax be withheld from their monthly Social Security payments.

5. Withholding tax from a late-year IRA distribution

Question: I am retired, and most of my income is from IRA required minimum distributions (RMDs), Social Security, and dividends and capital gains from taxable investments. Someone told me that I don't have to make quarterly estimated tax payments. I can instead wait until year-end and request that my IRA custodian withhold a lump sum amount of income tax from my year-end IRA distribution to satisfy my federal income tax liability for the year. Is that true?

Joy Taylor: Pretty much, yes. For federal income tax purposes, tax withheld at any point in the year is treated as if evenly paid throughout the year. Some retirees rely on this rule to have federal income taxes that they expect to owe for a year withheld from a December RMD instead of making quarterly estimated tax payments. Kiplinger regularly advises retirees who are falling short on their tax withholding to have more tax withheld from a year-end IRA payout. Read more in our article on RMD withholding strategies.

State tax rules may differ, and some sponsors don't withhold state income taxes, so be sure to check your specific state law.

About Ask the Editor, Tax Edition

Could Your ZIP Code Cut Your Federal Taxes? New Bill Explains How

Kate Schubel — Wed, 17 Jun 2026 13:17:00 +0000

It's a tale as old as time: If you live in a high-cost area like Long Island, San Francisco, or Seattle, your paycheck doesn't stretch nearly as far as it would in, say, Pittsburgh. Yet, the IRS taxes your income exactly the same.

A new bill from lawmakers on Capitol Hill would flip that script by linking your federal tax obligations to your home address.

The Cost of Living Tax Cut Act, introduced by House Reps. Laura Gillen (D-NY-04) and Mike Lawler (R-NY-17) would adjust federal income tax brackets based entirely on where a taxpayer lives.

"This bipartisan bill would help lower taxes for families in high-cost areas [like Long Island] by accounting for regional differences in the cost of living and ensuring taxpayers can keep more of what they earn," Gillen said in a recent release.

Lawler echoed the sentiment for his constituents in Hudson Valley, New York, arguing that the tax code should reflect the economic reality of high-cost regions.

Yet while the prospect of localized tax relief sounds promising to families in expensive ZIP codes, the proposal is likely to face heavy scrutiny over who will ultimately foot the bill for the corresponding drop in federal revenue.

Here is a breakdown of how this plan could change your take-home pay, which areas stand to benefit, and what this means for the upcoming mid-term election season this fall.

How the bill adjusts the tax brackets

The Cost of Living Tax Cut Act is designed to prevent households in more expensive regions from being pushed into higher tax brackets when their real purchasing power is relatively low compared with the rest of the U.S. If passed, the bill would take effect after December 31, 2026.

The bill's framework relies on localized data to determine your federal tax liability:

The index: The bill directs the Secretary of Commerce to use regional price parities (RPPs) to calculate an annual cost-of-living index for metropolitan and rural areas.
The adjustment: Instead of applying uniform national tax thresholds as it does now, the IRS would expand tax brackets in regions with an above-average cost of living.
The savings: By widening the lower tax brackets, more of a household's income would be shielded from higher tax rates.

Here's the data. According to data from Gillen's office citing Moody's Analytics, Long Island's cost of living at 32% above the national average. Using this formula, a Long Island resident earning $105,000 a year could see up to $1,100 in annual federal tax savings.

Who wins the affordability contest?

An aerial view of a suburban community in Long Island, New York. (Image credit: Getty Images)

If passed, the Cost of Living Tax Cut Act would provide the most significant relief to major metropolitan statistical areas (MSAs) where the local purchasing power of a dollar is typically lower than the national average.

Per the most recent regional economic metrics from the Tax Foundation, the primary beneficiaries of this new bill would live in regions where a typical $100 has the real purchasing power of only $84 to $90. For example:

California metros: The San Francisco Bay Area (Oakland, Berkeley, San Jose, Santa Clara), Los Angeles, Orange County, San Diego, and Santa Barbara.
The Pacific Northwest: The greater Seattle-Tacoma-Bellevue metro area in Washington.
Northwest corridor: The broader New York-Newark-Jersey City metro area (spanning NY, NJ, and PA), Boston-Cambridge-Newton (MA/NH), and high-cost zones in Connecticut.
Hawaii and South Florida: Urban Honolulu and the Miami-Fort Lauderdale-Pompano Beach metroplex.

Under the proposed framework, families in the affected ZIP codes would see their tax brackets widened proportionally. Conversely, regions where the cost of living is at or below the national average — like parts of Arkansas, Louisiana, or Ohio — would see no changes to their baseline brackets.

However, federal policy historically requires an offset for targeted tax cuts. Since the legislation bars lawmakers from adjusting tax brackets downward in lower-cost regions, the federal government would have to absorb the resulting deficit, which could eventually lead to spending cuts or the search for alternative federal revenue sources.

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The hidden cost of geographic tax cuts

Data published by the Rockefeller Institute of Government reveals that high-wage coastal states subsidize spending in the rest of the nation. For instance, in a single fiscal year, New York residents paid $19.4 billion more to the federal government than the state received, while California taxpayers contributed an extra $72 billion.

So if the federal tax code were to cut taxes for some areas and not others, that might lead to several potential long-term risks:

A structural drop in federal revenue. Think tanks like the Center on Budget and Policy Priorities often note that targeted tax cuts substantially reduce federal funding for key national obligations like infrastructure, Social Security, and defense.
Ripple effects in the tax code. Drops in federal revenue could lead to raising baseline tax rates nationwide, implementing broad surtaxes, or risking an increase in the national deficit. This fiscal pressure isn't unique to the federal government; for example, a state-level structural deficit was one reason Washington enacted a millionaire's tax on its wealthier residents.
Porous boundaries and "tax cliffs." Relying on regional price indexes could create tax spikes right at city borders. For example, a taxpayer living just outside a high-cost metropolitan boundary line who works inside it could face a higher federal tax burden than a neighbor living just one mile away. A similar dynamic already plays out with commuters who live in one state and work in another.
Increased regulatory burdens. Shifting to an address-based tax system forces the IRS to track, audit, and dynamically update tax brackets across hundreds of MSAs. In an era of $1 billion IRS funding cuts, managing localized federal brackets would heavily strain resources. Furthermore, tax preparation software would need to become more complex, potentially driving up filing costs for everyday taxpayers and increasing the risk of location-reporting errors or geographic fraud.

Bottom line: Will the legislation pass?

Even though the Cost of Living Tax Cut Act addresses a very real financial pressure point for millions of voters, it will most likely face a steep climb to become law.

The proposal must compete against much broader fiscal blueprints, like the 2025 Trump Tax Bill, which focused on making previously enacted individual tax cuts permanent and revamping the federal standard deduction. Adding a localized layer to the IRS tax code could complicate revenue projections and require extensive bipartisan negotiation and spending offsets.

But the bill might just be a taste of what's to come this election season.

With several congressional seats on the ballot this November and a recent 3.8% inflation surge reported by the U.S. Bureau of Labor Statistics, targeted affordability proposals may take center stage. Even if this specific bill stalls, it highlights a growing legislative focus on how your ZIP code impacts your wallet.

So, before making any sudden moving plans for a cheaper area, wait to see how these fall tax proposals shake out. Your bracket might not change, but your vote could shape future local tax policy.

Ask the Tax Editor, June 5: Tax Rules for Landlords

joy.taylor@futurenet.com (Joy Taylor) — Fri, 05 Jun 2026 12:05:00 +0000

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at five tax questions for landlords who own residential rental property. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Taxes if you sell rental property

Question: I own a condo that I have been renting out to tenants for over 20 years. I plan to sell the condo this year. Will I qualify for the home sale exclusion?

Joy Taylor: Unfortunately, it doesn't sound like you will qualify for this break. Homeowners who own and use their home as their principal residence for at least two out of the five years before selling it get to exclude $250,000 of the gain when they sell. The gain exclusion is $500,000 for married couples who file a joint return.

Since you have owned the condo as rental property and not your primary residence, you would not qualify for the home sale gain exclusion. The gain or loss when you sell would generally be characterized as capital gain or loss. And, since you owned the condo for more than one year, it's considered a long-term capital gain or loss.

The capital gain will generally be taxed at 0%, 15%, or 20% — plus the 3.8% net investment income tax (NIIT) for people with higher incomes. However, a special rule applies to gain on the sale of rental property for which you took depreciation deductions.

When depreciable real property held for more than one year is sold at a gain, the federal tax law requires that previously deducted depreciation be recaptured into income and taxed at a top rate of 25%. This is known as unrecaptured Section 1250 gain, the number of its federal tax code section.

2. Inheriting rental property and taxes

Question: I own rental property. When I die, I plan to leave it to my child. Does he get a step up in basis in the property upon my death? Also, what happens to the depreciation that I had previously deducted on the property?

Joy Taylor: The answer to your first question is yes, your beneficiary would take a stepped-up tax basis in the rental property when you die. That means your child's basis in the inherited property would be its fair market value on the date of your death.

I haven't looked at the depreciation issue before, but it is my impression that your depreciation essentially disappears when you die. Again, your beneficiary takes a stepped-up tax basis in the property. If he decides to keep renting the property, he would depreciate it over 27.5 years, beginning in the year he inherited it and using the stepped-up tax basis.

3. The net investment income tax for landlords

Question: I own a triplex, and I rent out all three apartments in the building. I am thinking of selling the property in the next year or so. I know I will pay capital gains tax on the sale. Will I also have to pay the 3.8% net investment income tax?

Joy Taylor: Maybe. The additional 3.8% net investment income (NII) tax applies to single filers with modified adjusted gross income (AGI) over $200,000 and to joint filers with modified AGI above $250,000. The modified AGI threshold is $125,000 for married people filing separate tax returns. These modified AGI amounts aren’t inflation-indexed, leading to more filers paying the NII tax each year.

The NII tax, which is added to the regular income tax, is due on the smaller of NII or the excess of modified AGI over the threshold amounts. NII includes dividends, capital gains, taxable interest, annuities, royalties, passive rents and certain income from other passive activities.

4. Selling a rental that you previously lived in

Question: I own a home that I lived in from 2014 to 2017. I then married and moved into my wife's new home. I rented out my old home from 2017 until now. I plan to sell it this year. How do I establish my tax basis for purposes of determining gain or loss when I sell?

Joy Taylor: Your tax basis in the rental home is as follows: (1) the lesser of your original cost or fair market value of the home at the time you started renting it, plus (2) the cost of improvements to the home, less (3) depreciation taken on the home. IRS Publication 544, Sales and Other Dispositions of Assets, has more information.

5. Selling a duplex

Question: My wife and I own a duplex. We live in the upstairs unit, and a tenant lives in the downstairs unit. The upstairs and downstairs units each have separate addresses. We are now considering selling the full duplex. Can we take the full $500,000 home-sale exclusion when we sell?

Joy Taylor: The up-to-$500,000 gain exclusion applies only to the portion of your duplex that you used for residential purposes (not rental or business purposes). Below is relevant language from IRS Publication 523, Selling Your Home:

"You generally can’t exclude gain on the separate portion of your property used for business or to produce rental income. Examples are: (1) a working farm on which your house was located, (2) a duplex in which you lived in one unit and rented the other, or (3) a store building with an upstairs apartment in which you lived."

"[A]n allocation of the gain is required. For this purpose, you must allocate the basis of the property and the amount realized between the residential and nonresidential portions of the property using the same method of allocation that you used to determine depreciation adjustments. Report the sale of the business or rental part on [IRS] Form 4797."

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Ask the Tax Editor, May 29: Will Congress Enact More Tax Changes?

joy.taylor@futurenet.com (Joy Taylor) — Fri, 29 May 2026 12:15:00 +0000

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at four questions on whether Congress will enact more tax changes before November's mid-term elections and related topics.(Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Congress and tax changes

Question: Do you think Congress will enact more tax changes before this November's midterm elections?

Joy Taylor: No, we really don't expect any big federal tax changes to pass before November's midterm elections. That's not to say that many in Congress wouldn't like to see more tax changes. Republican taxwriters are pushing for tax legislation to supplement last year's "One Big Beautiful Bill." Meanwhile, some Democrats are offering sweeping tax plans, while others are introducing narrower proposals to curb what they see as tax schemes for the wealthy.

Some Republicans in Congress want to use budget reconciliation to shove their tax priorities through Congress. This process has lots of technical and arcane rules, but it lets lawmakers circumvent the 60-vote filibuster rule in the Senate. Budget reconciliation requires only a simple-majority vote. Congressional Republicans used it to pass the OBBB and the 2017 Tax Cuts and Jobs Act, among other laws. Democrats have also used it when they controlled Congress and the White House.

Republicans are currently working on a new budget reconciliation measure, but President Trump and congressional GOP leadership want to limit its parameters to funding Immigration and Customs Enforcement (ICE) and Customs and Border Protection (CBP). There is talk on Capitol Hill about trying to push through a third reconciliation bill, but the odds of this happening before the midterm elections are middling at best.

2. Capital gains indexing

Question: I heard that Republicans are pushing to index capital gains to account for inflation each year. Can you explain what this would do and whether Congress would enact such a law?

Joy Taylor: Republican lawmakers and conservative free-market groups are pushing the White House to index capital gains to inflation each year. Essentially, this would let taxpayers increase their tax basis in appreciated assets, such as stocks and real estate, by the rate of inflation between the asset’s purchase date and the time of sale. Having a higher asset basis would result in a lower capital gain when the person sells the property, and thus a lower tax.

This idea has been bandied about for decades but is gaining steam again during President Trump’s second term in office. Over 25 organizations asked that Trump use his executive authority to annually index capital gains to inflation. And Senator Ted Cruz (R-TX) has introduced a bill in Congress to index capital gains to inflation.

We don't think Congress will enact a law this year to index capital gains to inflation. But the concept might make Trump's regulatory agenda. If Trump does this through the Department of the Treasury, and not with legislation, it would be controversial and would almost certainly face legal backlash. We don’t know where Trump stands on the idea. During his first term in office, he first supported capital gains indexing, and later he opposed it.

3. Gain on home sales

Question: I heard there were bills in Congress to fully eliminate the taxation of gain when homeowners sell their primary residence. What are the odds that Congress would pass such a proposal?

Joy Taylor: Under current law, if you have owned and lived in your principal residence for at least two out of the five years before you sell the home, up to $250,000 of the gain is tax-free. The tax-free home sale gain exclusion is $500,000 for married couples filing a joint return. Any gain in excess of these amounts is taxed at long-term capital gains rates of 0%, 15% or 20%, with possibly an extra 3.8% tax.

Many sellers won't crack the gain exclusion limits. But homeowners living in pricey areas or who have owned their home for a long time may. One reason for this is that the home-sale exclusion, unlike many other breaks in the tax code, isn't indexed to inflation each year. The gain-exclusion amounts of $250,000 and $500,000 have stayed the same since 1997, when they were first enacted into law. They have never been adjusted for the skyrocketing appreciation in value of residential real estate during the nearly 30 years this tax break has been in effect.

It is true that some Republican lawmakers want to make all gain on home sales tax-free and have introduced proposals in Congress to this effect. President Trump has even dangled this idea. But we don't see this coming to fruition any time soon. These types of proposals would put a huge dent in federal revenue and would mainly benefit upper-income individuals.

A more feasible legislative option might be to raise the current $250,000 and $500,000 gain-exclusion amounts. Two bills would increase the exclusion to $500,000 ($1 million for joint filers). The identical bipartisan proposals, which were introduced by House Representative Jimmy Panetta (D-CA) and Senator John Cornyn (R-TX), would also index the amounts to inflation each year. The odds of enactment are better than they have been in past years, but it is still a steep climb. Neither of these bills will be enacted as a stand-alone law, so it must be attached to a bigger piece of must-pass legislation.

4. Health premium tax credit

Question: Do you think Congress will bring back the pre-2026 expansions to the health premium tax credit?

Joy Taylor: We think the odds of Congress reaching a deal on health premium tax credits ("PTC") are quite slim. The PTC is for eligible people who buy insurance through the marketplace. Temporary easings, which were enacted during the height of the COVID-19 pandemic and later renewed, ended after 2025. Prior to 2021, the PTC was available to people with modified adjusted gross incomes ranging from 100% to 400% of the poverty level. For 2021-25, some people with higher modified AGIs also qualified, and the credit was bigger for many individuals. Beginning January 1, 2026, the PTC rules reverted to those in place for pre-2021 years.

Democrats want the pre-2026 PTC expansions cleanly extended. Republicans want changes made to narrow the scope of the PTC. The parties appeared close to an agreement earlier this year, but talks have stalled as Congress’s attention is diverted elsewhere.

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Ask the Tax Editor, May 22: Roth IRAs and the Five-Year Rule

joy.taylor@futurenet.com (Joy Taylor) — Fri, 22 May 2026 12:00:00 +0000

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at four questions on Roth IRAs and the five-year rule, including contributions and conversions. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. What is the Roth IRA five-year rule?

Question: I understand that to withdraw money from a Roth IRA without paying tax or a penalty on the earnings, the account owner must have had the money in the Roth IRA for at least five years and be age 59½ or older. My question relates to when the five-year clock starts when contributions are made over several years. Also, do the rules differ for Roth IRA conversions?

Joy Taylor: The five-year rule your question refers to applies to Roth IRA contributions, rollovers and conversions, and whether distributed earnings are tax-free to you. Under this rule, distributions of earnings after age 59½ aren’t taxed if at least five tax years have passed since the year the owner first put money into a Roth IRA. For this first five-year rule, the five-year clock starts on January 1 of the year you first deposited money into any Roth IRA that you own, through either a contribution or a conversion from a traditional IRA. The clock doesn’t restart for later Roth contributions, conversions, or newly opened Roth IRA accounts.

Note there is another five-year rule that applies specifically to Roth IRA conversions, and whether the 10% early distribution penalty hits pre-age-59½ payouts. This rule is an anti-abuse rule to prevent people who are younger than 59½ from circumventing the early IRA withdrawal penalty by first doing a Roth conversion and soon thereafter taking the money out of the Roth IRA. This second five-year rule doesn’t apply to new contributions to Roth IRAs, but to conversions of pretax income from traditional IRAs to a Roth. Under this rule, if someone who is younger than 59½ does a Roth conversion, and later takes a distribution within five years of the conversion and before turning 59½, then the amount of conversion principal that is withdrawn is hit with the 10% penalty. Once you turn 59½, you needn’t worry, even if you take a payout before your conversion meets the five-year period. Under this second five-year rule, each conversion has its own separate five-year period, which differs from the first five-year rule discussed above.

For more on both of the five-year rules applicable to Roth IRAs, see our article, "What to know about the five-year rules for Roth IRAs."

2. When does the five-year rule start?

Question: I am 68 and have been doing Roth IRA conversions for the past three years. My first Roth conversion was in 2023. When does the clock start for the five-year rule? And are there separate five-year clocks for each Roth IRA conversion that I do?

Joy Taylor: In your situation, the five-year clock for withdrawing Roth IRA earnings tax-free begins on January 1 of the year that you first put money into any Roth IRA that you own, whether through contributions, rollovers or conversions. So if you first started funding a Roth IRA in 2023, and you don't have other pre-existing Roth IRAs, the five-year period begins on January 1, 2023. It doesn't restart after each conversion.

3. Another question on when the five-year rule starts

Question: I am 70 years old, and I have been doing Roth conversions over the past 10 years. My initial conversion was in 2017, and each year thereafter I converted more money. Does each conversion date have its own separate five-year period or does the five-year period start when I made my first conversion in 2017? I have no other Roth IRAs other than the one I opened in 2017.

Joy Taylor: In your situation, the applicable five-year rule begins on January 1 of the year you first put money into any Roth IRA, via contribution or conversion. And it doesn’t restart. Since your first Roth conversion was in 2017, you are in the clear, and your Roth distributions should be fully tax-free.

4. How does the five-year rule apply to transfers from a Roth 401(k) to a Roth IRA?

Question: I am 64, and I recently retired from my full-time job. While working, I contributed for many years to a Roth 401(k) account. A few months ago, I transferred the funds in that designated Roth 401(k) account to a Roth IRA. Can I start withdrawing money from my Roth IRA tax-free?

Joy Taylor: The general rule for Roth IRAs is that distributions of earnings are nontaxable, provided you are 59½ or older. There is an exception, what experts refer to as the five-year rule. Distributions of earnings taken out within five years of January 1 of the year you first contributed to a Roth IRA are taxed.

You may have had the Roth 401(k) for five or more years, but unfortunately, that time period doesn't transfer to the Roth IRA. So, if this is your first Roth IRA, and you don't have any other Roth IRAs that you had contributed to in the past, the five-year rule would apply. The five-year period begins on January 1 of the year you first put money into any Roth IRA, either through contributions, rollovers or conversions. The ordering rules that apply to distributions from Roth IRAs may mitigate some of the negative tax consequences in your situation. I would suggest speaking with a CPA or your financial planner for more information.

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Ask the Tax Editor, May 15: Deductions for Self-Employed Retirees

joy.taylor@futurenet.com (Joy Taylor) — Fri, 15 May 2026 13:45:00 +0000

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at four questions on available tax breaks for retirees with a side hustle. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Medicare premiums

Question: I am 72 years old, and I pay monthly Medicare premiums. I retired from my full-time job four years ago. I am now a part-time consultant and file Schedule C, reporting my income and deductions from my part-time gig, with my federal tax return. My financial advisor said I can deduct my Medicare premiums that I pay, even though I don't itemize on Schedule A. Is that true?

Joy Taylor: Yes. As a general rule, medical expenses, including premiums paid for medical insurance and Medicare premiums, are deductible only by itemizers on Schedule A, and only to the extent that total medical expenses exceed 7.5% of adjusted gross income. There is an exception for self-employed individuals who file Schedule C. They can deduct premiums that they pay for medical and dental insurance and qualified long-term-care insurance without itemizing on Schedule A. They claim the self-employed health insurance deduction on Form 1040, Schedule 1, part II, line 17. Parts A, B and D Medicare premiums that you pay for insurance in your name are part of that deduction.

2. Business driving

out expenseQuestion: I retired from my full-time job a few years ago and receive a pension. I decided this year to take on part-time work as a dog walker. I work for myself, and I drive to my clients' homes to walk their dogs. I plan to file Schedule C with my 2026 Form 1040. Can I deduct the standard mileage rate for my business driving?

Joy Taylor: Yes. The cost of business driving for self-employed individuals is a deductible business expenses. You can claim either your actual expenses, including gas, repairs and depreciation on your car, or the IRS's standard mileage allowance. For 2026, the standard mileage rate for business driving is 72.5 cents per mile. If you use the IRS's standard mileage rate, you can also deduct the cost of any tolls or parking fees that you pay.

Be sure to keep a contemporaneous mileage log detailing each of your dog-walking trips. It will make it much easier for you to figure your total business mileage when you are preparing your tax return. It will also help you if you are ever audited by the IRS. Sloppy recordkeeping makes it easy for an IRS revenue agent to disallow your deduction.

3. Qualified business income deduction

Question: I recently retired from my full-time job, and I am now an independent freelance writer. I plan to file Schedule C with my 2026 Form 1040. Can I claim the 20% qualified business income deduction?

Joy Taylor: Generally, yes. Self-employed people, independent contractors and owners of LLCs, S corporations and other pass-through entities can deduct 20% of their qualified business income (QBI), subject to limitations for individuals with taxable income in 2026 of more than $403,500 for joint filers and $201,750 for single filers and head-of-household filers. This tax break, first enacted in the 2017 Tax Cuts and Jobs Act, was slated to end at the end of 2025. But last summer's "One Big Beautiful Bill" permanently extended the QBI write-off.

Note that you don't claim the QBI deduction on Schedule C. Instead, you would attach Form 8995 or 8995-A to your return and take the write-off on line 13a of Form 1040.

4. Home office

Question: I am a lawyer. I retired five years ago from my law firm. Even though I'm retired, I still do legal work for some clients on a part-time basis. I am an independent contractor now and file Schedule C with my tax return. I recently turned one of the bedrooms in my house into a home office where I can do my work. Can I claim the home office deduction on Schedule C?

Joy Taylor: Yes, if you meet all of the rules for claiming the write-off. Even though employees can't take a deduction for home office expenses, the write-off is available to self-employed people or independent contractors who file Schedule C with their 1040 and use a room or space in their home or apartment exclusively and regularly as their principal place of business. If you qualify for the write-off, there are two ways to figure the deduction. You can allocate your actual costs on Form 8829. Or you can use a simplified option by deducting $5 per square foot of space used exclusively for business, up to 300 square feet, resulting in a $1,500 maximum write-off.

About Ask the Editor, Tax Edition

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

I'm a Financial Planner: This Is Why Your 2025 Tax Bill Shocked You (Plus, 5 Tips to Keep This Year's Taxes Under Control)

marketing@francisfinancial.com (Stacy Francis, CFP®, CDFA®, CES™) — Mon, 04 May 2026 09:40:00 +0000

(Image credit: Getty Images)

If you felt shocked when you filed your taxes this year, you're not alone.

In the months leading up to April 15, the promise of a higher tax refund was splashed all over the media. However, many Americans found themselves writing a check instead. It's frustrating, confusing and, honestly, it might feel like the rules changed overnight.

In some ways, they did.

Between misunderstandings about recent tax legislation from the One Big Beautiful Bill Act (OBBBA) and higher capital gains in portfolios, many Americans unknowingly underpaid their taxes throughout the year. The result? A painful surprise in April.

Why refunds turned into tax bills

One of the biggest drivers was withholding. Many people had too little tax taken out of their paychecks. Even if nothing "changed" in your job, updated tax rules and withholding tables didn't always keep pace with new laws. That gap adds up over 12 months.

At the same time, new deductions and tax benefits from the OBBBA added a layer of confusion that caught many people off guard. On the surface, it sounded simple.

About Adviser Intel

The author of this article is a participant in Kiplinger's Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

Many taxpayers believed certain types of income, such as tips or overtime, would be completely tax-free. But that's not how it actually works. These benefits come with limits and still require proper reporting.

Tip income, for example, is capped at a $25,000 deduction, while overtime income is limited to $12,500. And these benefits don't last forever. They begin phasing out once income exceeds modified adjusted gross income (MAGI) of $150,000, which means many households see only a partial benefit, or none at all.

For those age 65 and older, the headlines sounded promising. An additional $6,000 deduction was meant to help offset taxes and put more money back in their pockets.

But the reality has been very different for many retirees. Once you factor in investment income, Social Security and pensions, their total income often climbs higher than expected.

Many seniors never received any benefit from this deduction, with eligibility phasing out above MAGI of $75,000.

The biggest tax planning mistake

The most common mistake we see is simple: Reacting instead of planning.

Taxes are not just what happened last year. They're about what you do now to shape what happens next. Even small changes can make a meaningful difference, if you act early enough.

Smart moves to make now for 2026

If you want to avoid another surprise, here are a few high-impact steps to focus on:

1. Update your withholding immediately. If you owed money this year, don't wait. Updating your W-4 now spreads the impact across the rest of the year instead of creating another large bill.

2. Take advantage of tax-advantaged accounts. Health savings accounts, retirement plans and flexible spending accounts can all reduce taxable income while helping you build long-term security. For example, HSA contribution limits increase again in 2026, giving you even more opportunity to save tax-efficiently.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel, our free, twice-weekly newsletter.

3. Be intentional about investments. Tax-loss harvesting, holding investments longer than one year and being mindful of capital gains can significantly reduce taxes. Short-term gains can be taxed as high as ordinary income, while long-term gains are often much lower.

4. Think strategically about charitable giving. Donating appreciated assets instead of cash or using donor-advised funds can create powerful tax benefits while supporting causes you care about.

5. Don't ignore new tax law changes. Recent legislation introduced new deductions and expanded others, including higher SALT caps and additional above-the-line deductions. But these benefits are nuanced and don't apply equally to everyone. Read the fine print, so that you aren't surprised.

The bottom line

Taxes are not straightforward. The good news is that with the right planning, most surprises are avoidable.

At Francis Financial, we work with clients to look at the full picture, including your income, investments, retirement and life transitions. We help them build a proactive tax strategy to save thousands in taxes, and we do this not just once a year, but continuously.

If this past tax season didn't go the way you expected, it's a sign to take a closer look, now, not next April.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Ask the Tax Editor, April 24: How Can I Resolve My IRS Tax Debt?

joy.taylor@futurenet.com (Joy Taylor) — Fri, 24 Apr 2026 10:50:00 +0000

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at four questions relating to how individuals can resolve their IRS tax debt. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. IRS alternatives for resolving tax debt

Question: When I filed my 2025 federal tax return this month, I unexpectedly owed taxes. But I don't have the money to pay the bill. What can I do to resolve my IRS tax debt?

Joy Taylor: Try not to worry too much because you are not alone. Millions of individuals owe tax debt to the IRS. The agency has a number of alternatives to help individuals resolve their tax debt.

If you have a financial hardship, you can contact the IRS to request a temporary collection delay until your financial condition improves. Also, look into submitting an offer in compromise to settle your tax debt at less than what you owe or applying for an IRS online payment plan.

The IRS has a new online tool for individuals and businesses with federal tax debt. The tool provides them a simple way to explore payment options for unpaid taxes and to identify next steps based on their circumstances. If you decide to use the tool, you will need to answer a series of questions about your financial situation and your tax debt, and the tool will guide you to potential payment alternatives.

2. Should I submit an offer in compromise?

Question: I owe tax debt to the IRS. A friend told me I should submit an offer in compromise to the IRS, and it will automatically reduce the taxes that I owe. Is it really that easy?

Joy Taylor: Unfortunately, no. Your friend is correct that the IRS accepts offers in compromise (OIC) to settle tax debt at less than what the taxpayer owes. But the process isn't automatic. The key factor that the IRS takes into account when reviewing an OIC application is the taxpayer's ability or inability to pay the balance in full, and whether full payment would result in financial hardship. That's why you must disclose your income and your assets to the IRS in your OIC application.

If you're thinking of submitting an OIC to the IRS, you will want to review the IRS's Offer in Compromise Form 656 Booklet for the rules and the forms. There are two payment options you can choose from when submitting your OIC. The lump sum cash option requires you to pay 20% of the total offer amount up front, with the remaining balance to be paid in five or fewer installments within five months of the date your offer is accepted. There is also the periodic payment option, which requires that you make your first payment with the offer, with the remainder remitted monthly over a period of six to 24 months.

Here are some more tips if you're thinking about making an OIC:

Be sure you have filed all required federal tax returns. Otherwise, the IRS will return your application and the filing fee, and apply any initial payment included with your submission to your tax debt.
Continue to timely file your tax returns and pay taxes even after the IRS accepts your OIC.
Individuals or businesses in bankruptcy cannot apply for an OIC.
There is a $205 application fee. Low-income individuals are exempt from paying this.
The IRS has an online tool for individuals to check preliminary eligibility for filing an OIC with the IRS.

3. Avoid offer-in-compromise "mills"

Question: I owe tax debt and I'm thinking of submitting an offer in compromise. Can I prepare the OIC application myself or should I use a tax professional?

Joy Taylor: It is up to you whether you want to try preparing the OIC application yourself and submitting it to the IRS or use a tax professional. It depends on your knowledge of taxes and finances. Note that a reputable tax professional who is familiar with submitting OICs and dealing with IRS collection employees can help guide you through the process, which may make it less stressful for you. You can also ask for IRS assistance with the process.

Whatever you do, avoid offer-in-compromise "mills," the IRS's term for companies and promoters that hawk tax-debt relief plans with promises to settle your debts at steep discounts. I'm sure you've seen the commercials on TV or heard ads on the radio from firms promising to settle your tax debt for pennies on the dollar. These companies charge big up-front fees and churn out applications for offers in compromise that most of their clients cannot qualify for, the IRS says.

4. The IRS used my refund to offset taxes I owed

Question: I owe tax debt to the IRS from prior years. I filed my 2025 tax return this year, and the IRS took my refund and applied it against my prior-year taxes. Is this legal?

Joy Taylor: Yes. If you owe back income taxes, the IRS can grab your current-year refund and apply it against the amount you owe. The same can happen if you owe nontax debts to a federal agency, state income taxes, certain unemployment compensation debts owed to a state or past-due child support. The IRS can take your current-year federal income tax refund and apply it against any of these past-due obligations.

About Ask the Editor, Tax Edition

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

Ask the Tax Editor, April 17: Questions on Tax Refunds and Penalties

joy.taylor@futurenet.com (Joy Taylor) — Fri, 17 Apr 2026 10:20:00 +0000

Each week in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week, she's looking at four questions on tax refunds, how to get the IRS to abate a penalty and related topics. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Erroneous bank account information for tax refund

Question: I helped my granddaughter prepare her tax return and claim a refund. I filed her 2025 Form 1040 using the same bank account information shown on her 2024 Form 1040. However, I was unaware that my granddaughter had changed banks. How do I notify the IRS of her correct bank account information?

Joy Taylor: The best answer to your question comes directly from the IRS. The IRS has a web page that answers the question "what should I do if I entered an incorrect routing or account number for direct deposit of my refund?"

For example, if a taxpayer omits a digit in the account or routing number of an account and the number doesn't pass the IRS's validation check, then the IRS says it will send you a notice asking for more information. Note that if you catch the bank account error early enough, before the return has been posted to the IRS's system, then you can call the IRS on their 1-800 line and ask the agency to stop the direct deposit. Here is more information directly from the IRS on what you can do:

"Generally, if the financial institution recovers the funds and returns them to the IRS, the IRS will send you a notice providing the next steps."

"If you have contacted the financial institution and 5 calendar days have passed with no deposit, you will need to file IRS Form 3911, Taxpayer Statement Regarding Refund, to initiate a trace. This allows the IRS to contact the bank on your behalf to attempt recovery of your refund. Banks are allowed up to 90 days from the date of the initial trace input to respond to our request for information, but it may take up to 120 days for resolution."

"If funds aren't available or the bank refuses to return the funds, the IRS cannot compel the bank to do so. The case may then become a civil matter between you and the financial institution and/or the owner of the account into which the funds were deposited."

2. Refunds by paper check delayed

Question: I have a bank account, but I don't like using it for electronic payments or receipts. I filed my 2025 Form 1040, which claimed a refund. I didn't include my bank account information on the return because I want to receive my refund as a paper check. I got a letter from the IRS asking for my bank account information. What can I do if I still want a paper check?

Joy Taylor: The IRS is in the process of phasing out paper refund checks in accordance with President Trump's March 2025 executive order. Individuals who request paper refund checks when filing their Form 1040 are seeing their refunds delayed. The IRS is mailing letters to filers whose 1040s claim a refund but omit bank account details for direct deposit. These notices ask the filers to supply their bank account information within 30 days or say why they can’t. I am guessing this is the letter that you received from the IRS.

If you don't respond to the IRS notice, you will eventually get your refund check in the mail, but it will take time. According to the IRS, it will issue a paper check to nonresponders six weeks after the date it sent the original notice.

3. How the IRS calculates the underpayment penalty

Question: I am filing my 2025 Form 1040, and I know I am going to owe an underpayment penalty. How does the IRS calculate this penalty?

Joy Taylor: Generally, taxpayers will escape the underpayment penalty if they prepay, through estimated tax payments or withholding, at least 90% of their current-year total tax bill or 100% of what they owed for the prior year (110% if prior-year adjusted gross income exceeded $150,000). Taxpayers who owe an underpayment penalty use IRS Form 2210 to calculate the amount owed. I am aware that calculating the underpayment penalty can be confusing.

The IRS calculates the underpayment penalty based on the tax shown on your original return or on a more recent return that you filed on or before the due date. The tax shown on the return is your total tax minus your total refundable credits. The IRS calculates the penalty based on: (1) the amount of the underpayment, (2) the period when the underpayment was due and underpaid, and (3) the unpublished quarterly interest rates for underpayments.

Note that the IRS also charges interest on the underpayment penalties.

4. First-time penalty abatement

Question: For the first time ever, I am going to have to file my Form 1040 late. I know I will end up owing taxes when I file the return. Will the IRS be lenient in assessing penalties since I have always been tax-compliant?

Joy Taylor: You may be in luck. The IRS has a little-known first-time penalty abatement policy. It will approve a waiver of the late-filing and late-payment penalties for filers who pay or arrange to pay the tax due and have been tax-compliant for the past three years. The penalties for late payroll-tax deposits and delinquent returns of S corporations or partnerships are also eligible for the waiver if the conditions are satisfied. But the estimated-tax penalty (also called the underpayment penalty) doesn't qualify for this penalty abatement program.

About Ask the Editor, Tax Edition

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

Why the IRS Can Reject Smartwatch Mileage Logs

Kate Schubel — Thu, 02 Apr 2026 14:07:00 +0000

If you're a ride-share driver, delivery person or other gig worker, a simple smartwatch habit could land you in hot water during a tax audit. That's because fitness app users who track business miles might not be aware of the in-app limitations.

For instance, many free versions of distance-tracking apps cap the number of trips you can take, forcing you to record them later. But if you aren't logging your miles correctly at the time of the trip, the IRS can disallow your entire deduction under the contemporaneous record rule.

At the 2026 IRS business mileage rate of 72.5 cents per mile, those trips through Uber, DoorDash, real estate clients, and supply stores can quickly add up to a significant tax deduction.

By incorrectly recording miles, you could be leaving some serious cash on the table — or worse, raising an IRS audit red flag if you include inaccurate trips on your return.

Don't wait until tax season to discover your smartwatch logs are insufficient. Before you file your 2026 return, ensure your tracking meets these non-negotiable IRS standards.

IRS mileage rate and log requirements for 2026

The 2026 IRS mileage rate of 72.5 cents per mile has strict requirements for what constitutes a valid business mileage log. You must meet four specific data points for every single trip to be eligible for a deduction:

The date of the trip
The destination (address or city)
The business purpose (e.g., picking up an order for a delivery)
The total mileage logged

Additionally, to help support your claim to an IRS mileage deduction, you must follow these specific requirements:

"Contemporaneous" logs. You must create your record at or near the time of your trip. ("Estimating" a log from memory or bank statements later is a major red flag for the IRS.)
No commuting. Remember that driving from your home to your primary workplace (and back) is considered a personal expense and is not deductible. (For this reason, a Reddit user drives to a "central place in town" before starting their route.)
Odometer readings. You should record your vehicle's odometer reading on January 1 and December 31 each year to establish the total distance driven for the year.

GPS 'dead zones', data gaps and bad reports — oh my!

Though many mileage apps offer "one-tap" tracking from a smartwatch, users should exercise caution when using them (pun intended). Not all convenient features meet the IRS's rigorous standards for a business expense deduction. For instance, GPS-based apps can:

Lack specific "why" details. If you fail to categorize a trip in the app with a specific business purpose (e.g., dropped off a customer at 123 Main St.), the IRS might disallow the deduction.
Have no exportable audit reports. Some free or "lite" versions of apps track distance but don't generate reports that might be helpful during an IRS audit. Paid versions of apps such as MileIQ or Stride are popular because they build these logs, but you must ensure you're using a version that exports full data.
Experience technical "dead zones." GPS relies on satellite signals. In "concrete jungles" with high-rise buildings or rural dead zones, your smartwatch might lose the signal, resulting in inaccurate distance measurements or missed trips entirely.

To mitigate the risk of data gaps, look for mileage apps that offer offline functionality. Apps such as Timeero continue to track GPS coordinates even in "dead zones," syncing the data once your connection is restored.

Beyond live tracking, maintaining redundant digital backups of your logs is a critical — yet often overlooked — step. In the event of a smartwatch malfunction or a lost device, these backups can significantly bolster your contemporaneous records during an IRS inquiry.

Building an 'audit-proof' backup

GPS tracking is a powerful tool, but it shouldn't be your only line of defense in substantiating your IRS mileage deduction. Consider these two backup methods to supplement your smartwatch capabilities:

The odometer snapshot. In addition to your mileage app, snap a photo of your odometer on January 1 and December 31. This helps ensure you aren't reporting business miles that exceed the number of possible miles in a given year.
The "analog" backup. Although it feels old-fashioned, a simple notebook in your glovebox is still an IRS-sanctioned way to track mileage. If your smartwatch dies or hits a GPS "dead zone," a quick pen-and-paper entry ensures your contemporaneous log remains unbroken.

However, it's important to note that odometers can be inaccurate, as well, especially if you have worn tires, incorrect tire pressure or nonstandard tire sizes. Having two methods of recording each business trip promotes a complete record of your mileage.

The bottom line? Your smartwatch is a great tool, but like all tools, it can have flaws. If you use your watch to drive professionally and for personal fitness, the burden is on you to prove which specific miles were strictly for business. If your watch breaks, you might be out of luck.

Not Even Death Can Cheat the IRS: Lessons From a Massachusetts Estate

Roxanne Bland — Mon, 09 Mar 2026 13:35:00 +0000

Most of us think in terms of before we die, and after we die — that stark division. Once we die, all that came before is erased.

Except that can be a misleading notion. Unfortunately, some things that came before, like taxes, for example, live on after death.

And when it comes to outstanding tax liabilities, the IRS can be relentless in pursuing them. The agency can take steps to ensure unpaid taxes are settled with the estate, which can complicate matters for heirs and executors.

Understanding this is important for effective estate planning. Here's more of what you need to know about how to deal with the tax liabilities of a deceased person.

Meet the Whittemores: A case study

Historic Townsend, Massachusetts, was incorporated in 1732. Quaint and picturesque, the church, original meeting house, and town commons retain their 18th-century charm.

James W. Whittemore and his wife, Carlene R. Whittemore, lifelong residents of Townsend, were married in 1972. The couple raised a family of five children.

In 2008, the Whittemores filed their federal tax return, listing their status as married filing jointly.

They did not pay the taxes due.
Filing their return but leaving their tax liabilities unpaid became a yearly pattern through 2014.
The IRS repeatedly issued notices and demands to the Whittemores for payment of their tax liabilities, but the couple never responded.

James Whittemore passed away unexpectedly in 2017 without a will.

After Whittemore’s death, neither Mrs. Whittemore nor anyone else started probate proceedings in the Massachusetts court. Because there was no probate, no one was appointed as executor of James Whittemore’s estate.

The IRS pursues the Whittemores

In 2024, the IRS filed a complaint in a Massachusetts federal court against Mrs. Whittemore, in her capacities as an individual and as the executor of her husband’s estate. The agency asked the court to award them $241,000 in unpaid tax liabilities owed by the Whittemores.

Mrs. Whittemore responded to the IRS’s complaint in her individual capacity.

She denied that she was the executor of her late husband’s estate.
No probate proceeding had been started after his death.
Because the estate wasn’t probated, she argued, couldn’t be the executor.

About half a year passed before the court took up the matter again. This time, the IRS asked the court to find that Mrs. Whittemore was the estate’s de facto executor.

The court determined Mrs. Whittemore was the de facto executor, but not for the reasons the IRS advanced. The court pointed out that the Internal Revenue Code defines the term "executor" broadly, to include persons who are in actual or constructive possession of a decedent’s estate.

Second, under Massachusetts’s law, if a spouse dies without a will and the children are descended from both spouses, the surviving spouse is the estate’s sole heir if the surviving spouse has no other children. The Whittemores had five children, and all are descendants of both spouses. Mrs. Whittemore had no other children.

Between the federal and Massachusetts laws, the court concluded that Mrs. Whittemore was the sole heir and was in actual possession of her late husband’s entire estate. She therefore qualified as the estate’s de facto executor.

The court ordered the parties to submit a joint order as to the IRS’ claims against the estate and against Mrs. Whittemore in her executor and individual capacities.

The case is: United States v. Estate of Whittemore, Dkt. No. 1:24-cv-11670 (D. Mass. Dec. 16, 2025).

Please note that Whittemore is a single case based on a particular set of facts and should not be taken to apply to other instances concerning estates and taxes.

The dead pay taxes, too

If nothing else, United States v. Estate of Whittemore is a reminder that death isn’t a tax loophole. If you’re handling a loved one’s final affairs, here are a few points to keep in mind.

1. Death doesn't erase a tax debt. A tax liability isn’t extinguished when the debtor dies. The debt is transferred to the estate and must be satisfied from estate assets. If assets were held jointly and a federal tax lien was filed against the debtor before death, the lien can still attach to the debtor’s former interest in the asset.

2. Probate is important. It may be tempting to skip probate of an estate because it can be time-consuming and expensive. But probate’s primary purpose is to see that debts are paid, assets are distributed to the right beneficiaries, and disputes are resolved.

3. The executor is the person with the legal authority to act on behalf of the estate. Under normal circumstances, without that authority, no one has the legal standing to access bank accounts or transfer assets. If the deceased owed taxes to the federal government and there was no executor, the government could bring a suit as it did in Whittemore.

4. When someone dies, it’s important to consider their final tax return. That would involve listing their income and expenses in the year they died, much as if they were living, including marital filing status and dependents. File the decedent’s final Form 1040 (joint if married). Estates with $600 or more in gross income after death must file Form 1041; consult IRS Publication 559.

If you have questions about or are dealing with a deceased’s estate, it’s important that you consult an attorney experienced in handling estate matters.

U.S. Congress to End Emergency Tax Bill Over $6,000 Senior Deduction and Tip, Overtime Tax Breaks in D.C.

Kate Schubel — Thu, 19 Feb 2026 14:57:00 +0000

What's worse than filing your taxes once? Having to do it twice. But that may be the startling reality for roughly 42,000 District of Columbia residents who were proactive enough to file their tax returns early this year.

As reported by Kiplinger, the D.C. Council recently enacted an emergency bill to decouple local tax laws from the federal 2025 Trump tax bill. That move would have effectively blocked residents from claiming the $6,000 "senior bonus," the "no tax on tips" deduction, and other new federal tax breaks on their District returns.

However, the United States Congress, which holds final review authority over D.C. laws, has struck back. A joint "disapproval" from both the U.S. House of Representatives and the Senate overturned the city's emergency tax law.

"It's just a mess, it didn't have to happen," D.C. Council Chairman Phil Mendelson told reporters earlier this month, following a Senate vote to overturn the District's emergency legislation.

Now, "early bird" filers might need to refile their income tax returns to capture local tax relief, and all D.C. filers could be forced to finish their income taxes in the fall.

Bonus deduction for older adults and overtime tax breaks are (almost) final in D.C.

Although the newly enacted Trump tax law sets federal policy, states generally have the right to conform their local tax policies or move away from federal law. The act of "moving away" is known as decoupling.

Facing projected revenue shortfalls, the D.C. council passed an emergency law in November to decouple the city's budget from the federal tax overhaul, citing budgetary concerns amid a then-government shutdown.

By opting out of the federal tax breaks, city officials anticipated using the almost $600 million in tax revenue to create a new local Child Tax Credit and bolster the District's version of the federal Earned Income Tax Credit (EITC).

However, Congress has moved to block the District's decision.

Capitol Hill lawmakers challenged the city's maneuver through House Joint Resolution 142, which explicitly "nullifies [recently passed decoupling] legislation enacted by the District of Columbia," effectively forcing the city to realign its local tax code with the new federal standard.

This intervention is possible because, unlike states that have decoupled, Congress maintains ultimate authority over the nation's capital (more on that later).

So, what happens next?

Since the resolution passed both the U.S. House and Senate, it moved to President Donald Trump's desk, where it was signed.

The resolution has drawn sharp criticism from some officials who argue that the District is being used as a pawn at the expense of taxpayers.

“The truth is, this city has already been under unrelenting assault by this [Trump] administration. The amount of bureaucracy in terms of refiling taxes puts another burden as well.” U.S. Senator Mark Warner (D-Virginia) remarked during Senate floor proceedings in February 2026.

The sentiment was echoed by Mendelson, as reported by WAMU, “There’s nothing fair about what’s going on. All they are doing is causing pain to the District government and to taxpayers.”

Taxpayer impact: Should you submit an amended tax return in D.C.?

The Congressional intervention is set to disrupt a tax filing season that is already in full swing. And the impact won't just be legislative, but a potentially massive technical hurdle for the District’s tax infrastructure.

D.C. Chief Financial Officer Glen Lee outlined the negative consequences of the disapproval resolution in a joint letter to congressional leaders.

"Forms and systems for tax year 2025 will no longer be consistent with District law," Lee wrote. ".... adjustments will likely require several months, which would extend District income tax filing deadlines into fall 2026." The financial impact of the decoupling is not only expected to result in lost revenue but, as Lee explains in the letter, "also generate millions of dollars of additional expenses."

The news comes after the District of Columbia anticipates losing up to $1 billion over the next four years due to the projected loss of 40,000 federal government-related jobs from the Trump administration staffing cuts, according to the D.C. Fiscal Policy Institute. Further erosion of the budgetary outlook could force cuts to public services and may negatively impact overall economic health, according to local officials.

Yet some warn that 2026 filers will bear the brunt of these fiscal shifts first.

"I just can't even imagine what it's like to tell thousands of tax filers, 'Oh, I know you filed, you did what you were supposed to do, but, oops, can you do it again?" D.C. Mayor Muriel Bowser, who is not seeking another term, said at a news conference earlier this month.

D.C. officials say changing local tax policy mid-season forces taxpayers who already filed to re-file, causing significant filing delays, and possibly lowering taxpayer compliance.

What does that mean for taxpayers?

Well, for the more than 42,000 residents who have already filed in D.C., they might now need to do the following since Trump signed the decoupling resolution (to take advantage of any applicable federal tax breaks on their local returns):

Wait until D.C.'s new tax systems and forms are up and running.
Use Form D-40 and check the box that it's an amended return.
Include an explanation of the changes and any required forms that were missed.
File online through MyTax.DC.gov or mail the completed amended return within 3 years of the original filing date, or 2 years after paying tax (whichever is later).

For the approximate 361,000 D.C. residents expected to file, processing delays could slow down tax refunds, depending on how long it takes the D.C. Office of Tax and Revenue to update applicable forms and systems.

Is a legal battle looming over the Trump tax law?

While the current fight may be in legislative buildings and press conference meetings, it could soon move to the courtroom.

The District of Columbia Home Rule Act of 1973 gives Congress the authority to review and potentially block any bill passed by the D.C. Council. But that block must occur within a specific window — typically 30 days.

That's why Mendelson recently contended that time stopped ticking at 12 pm on February 12, 2026, which was hours before the House and Senate finalized Joint Resolution 142. On that day, Mendelson posted a formal notice declaring that the review period had expired without federal intervention, effectively making the "decoupling" law permanent.

Congress, however, disagrees. Federal lawmakers argue that the Home Rule Act's definition of "days" is more flexible, accounting only for the days when both congressional chambers are in session. This would mean the review period hadn't expired before the resolution was passed.

D.C. officials haven't filed a lawsuit yet. But tax season is in full swing, a new city budget is due in April, and so the D.C. Council has decisions to make soon. Stay tuned.

Ask the Editor, February 6: Questions on Federal Income Tax Deductions

joy.taylor@futurenet.com (Joy Taylor) — Fri, 06 Feb 2026 11:30:00 +0000

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week she's looking at five questions on the whether moving expenses and more are tax-deductible. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Moving expense deduction

Question: Can I deduct moving expenses on my 2025 Form 1040? I'm talking about the cost of the moving van, mileage, food, lodging, etc.

Joy Taylor: Unfortunately, moving expenses are generally not deductible. It used to be that when you relocated for a new job, you could deduct the cost of your move on Form 1040. The 2017 Tax Cuts and Jobs Act temporarily eliminated the write-off from 2018 through 2025. And the One Big Beautiful Bill that lawmakers enacted in July 2025 made this repeal permanent.

There is one exception. Active-duty military personnel who move pursuant to military orders can still deduct their moving costs.

2. Interest write-off

Question: Rather than obtaining a mortgage when I bought my primary home last year, I borrowed against my investment securities at my brokerage firm with the intention of paying off a portion of the borrowed funds within a year or a bit more. I paid monthly interest on the borrowed funds until I paid off the debt after 15 months. Is the interest on the borrowed funds tax-deductible as home mortgage interest?

Joy Taylor: I don't think you would be able to take a federal tax deduction for the interest on the borrowed funds unless your home secured the loan. According to the IRS in Publication 936, Home Mortgage Interest Deduction:

"Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home, or a second mortgage."

The IRS goes on to say: "Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. The loan must be secured by the taxpayer’s main home or second home (qualified residence), and meet other requirements."

You said you borrowed against your securities. That makes it sound to me that your home didn't secure the loan. As a result, I don't think the interest qualifies as home mortgage interest.

Individual taxpayers can also deduct investment interest in certain cases. But again, I don't think your situation would qualify. That's because you didn't use the proceeds from the loan to acquire investment property. The tax rules allow, subject to limitations, a deduction for investment interest for people who borrow money to buy property held for investment. Here is how the IRS defines investment property for this purpose in Publication 550, Investment Income and Expenses:

"Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity)."

Unfortunately, a personal residence generally is not investment property for this purpose.

3. Senior deduction

Question: What is the $6,000 write-off for filers age 65 and older? Can you furnish me with detailed information?

Joy Taylor: The One Big Beautiful Bill that federal lawmakers enacted last July includes various tax changes for individuals. One of them is the $6,000 senior deduction. This write-off is for taxpayers who are 65 and older. Married couples with both spouses 65 and older can deduct $12,000 on a joint return. The deduction is available to taxpayers who claim the standard deduction and to those who itemize on Schedule A. The deduction is temporary, first taking effect on 2025 tax returns filed this year and ending after 2028.

Not every senior will qualify for the deduction. It begins to phase out at modified adjusted gross income (AGI) above $150,000 on joint returns and $75,000 on other returns. It is fully phased out once modified AGI reaches $250,000 for joint filers and $175,000 for others. Modified AGI for this purpose is AGI plus any foreign earned income exclusion, foreign housing exclusion, and certain income excluded from gross income because it was received from sources in Puerto Rico, American Samoa, Guam and the Northern Mariana Islands.

Each filer 65 and older must have a Social Security number to claim this tax deduction. And if married, you must file a joint return to claim the deduction.

Taxpayers who qualify for the $6,000 senior deduction use the new IRS Schedule 1-A to claim it. Fill out Part I of Schedule 1-A to calculate your modified AGI, and then complete Parts V and VI. Transfer the amount on line 38 of Schedule 1-A to line 13b of the 2025 Form 1040 (or line 13c of the 2025 Form 1040-SR). You can find the instructions for this Schedule in the Form 1040 instructions.

4. No deduction for gifts

Question: I gifted $5,000 to each of my grandchildren last year. Where do I deduct the gift on my federal tax return?

Joy Taylor: Gifts are not deductible to the donor for federal income tax purposes. So you can't deduct the gifts to your grandchildren on your Form 1040. The gifts are also not taxable to your grandchildren.

5. Charitable contribution deduction

Question: I donated publicly traded securities to a tax-exempt charity. The charity gave me a letter acknowledging the donation and describing what I gave, but didn't indicate the value of the contribution. Is this correct?

Joy Taylor: The charity is correct. The written acknowledgment letter that a charity gives you when you make a donation only includes the amount of a cash contribution. If you make a non-cash contribution, the letter is only required to provide the description of the contribution, but not the value.

For a donation of publicly traded securities, including shares in mutual funds, your charitable contribution amount is the fair market value of the securities on the date of the donation. The fair market value of the donation is the average between the highest and lowest quoted selling price on the date of the contribution.

About Ask the Editor, Tax Edition

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

Ask the Editor, January 30: Questions on Social Security Benefits Taxation

joy.taylor@futurenet.com (Joy Taylor) — Fri, 30 Jan 2026 12:50:00 +0000

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week she's looking at six questions on the taxation of Social Security benefits. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

Question: I am retired and receive monthly Social Security benefits. I heard they are now fully tax-free for federal income tax purposes. Is that correct?

Joy Taylor: Unfortunately, no. President Trump promised to make the benefits fully tax-free. But the complex process that Republican lawmakers in Congress used to pass the "One Big Beautiful Bill" last July didn't allow for this change.

Question: I receive monthly Social Security benefits. How much of the benefits will be taxed when I file my 2025 Form 1040?

Joy Taylor: It depends on whether you file a single return or a joint return and on the amount of your provisional income. Provisional income is generally equal to the combined total of (1) tax-exempt interest, (2) 50% of your Social Security benefits and (3) other non-Social Security income items that make up your adjusted gross income, minus certain deductions and exclusions.

For single filers, if provisional income is less than $25,000, then the full amount of Social Security benefits are tax-free. If provisional income is between $25,000 and $34,000, then up to 50% of the benefits is taxable. If provisional income is over $34,000, then up to 85% of the benefits is taxed.

For joint filers, if provisional income is less than $32,000, then the Social Security benefits are fully tax-free. If provisional income is between $32,000 and $44,000, then up to 50% of the benefits is taxable. If provisional income is over $44,000, then up to 85% of the benefits is taxed.

3. Why are the provisional income figures so low?

Question: I have been receiving Social Security benefits for many years. I noticed while figuring the tax on my benefits that the $25,000, $34,000, $32,000 and $44,000 provisional income thresholds never change. Why is that?

Joy Taylor: Many tax breaks and income levels are indexed to inflation each year. But not the provisional income thresholds for taxing Social Security benefits. For decades, they have stayed static at $25,000, $34,000, $32,000 and $44,000. Democrats have proposed bills over the years to raise the thresholds, but they never pass. That’s because the bills also include payroll tax hikes on upper-incomers, which make the bills a nonstarter with Republicans.

4. How do I calculate taxable benefits when I have Medicare premiums taken out?

Question: I am retired and receive Social Security benefits. I have my monthly Part B Medicare premiums paid from my Social Security benefits, thus lowering the amount of benefits I receive each month. Which figure do I use to determine the amount of my Social Security benefits that might be subject to federal tax?

Joy Taylor: You are not alone. Most Social Security beneficiaries have their Medicare premiums deducted from their monthly Social Security checks. To calculate the amount of Social Security benefits for federal income tax purposes, you would use the amount prior to the reduction for Medicare premiums. You can find this number in box 5 of the Form SSA-1099 that you receive.

Question: I live in Virginia and I just started receiving Social Security benefits last year. I know I have to pay federal tax on the benefits, but how does Virginia tax them?

Joy Taylor: Most states, including Virginia, exempt Social Security benefits from state income tax. But not all do. The eight outliers that tax all or part of the benefits are Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah and Vermont. Many of these states have exceptions based on income figures.

See States That Tax Social Security Benefits in 2026

Question: I want to have federal income tax withheld from my Social Security benefits. How do I request this?

Answer: Fill out Form W-4V to voluntarily request that federal tax be withheld from your Social Security benefits, and mail it to your local Social Security office or drop it off in person. You can elect to have 7%, 10%, 12% or 22% of your monthly Social Security benefits taken out.

Alternatively, if you have an online Social Security account, you can request changes to your withholding at: https://www.ssa.gov/manage-benefits/request-withhold-taxes

About Ask the Editor, Tax Edition

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

Don't Overpay the IRS: 6 Tax Mistakes That Could Be Raising Your Bill

Kate Schubel — Thu, 29 Jan 2026 15:17:00 +0000

Nobody likes a tax season surprise — especially when it's a bill instead of a check. While the House GOP has projected $1,000 payouts for many taxpayers under the new 2025 laws, the reality for some will be a higher income tax bill or a shockingly lower refund.

Why the discrepancy? It can come down to life changes or missed opportunities. Maybe you no longer qualify for the student loan interest deduction, or perhaps you’re leaving money on the table by taking the standard deduction instead of itemizing.

To help you avoid a shock on filing day, here are six common ways you could be paying more income taxes than necessary.

New tax law from 2025 introduced key temporary tax breaks. (Image credit: Getty Images)

1. You overlooked the new 2025 tax credits and deductions

The 2025 Trump/GOP tax and spending bill introduced a wave of temporary tax incentives that could significantly alter your income return this filing season.

For instance, new car owners might be eligible for a car loan interest deduction, and workers earning tips or overtime might now qualify for targeted tax breaks. With the federal tax code in such a state of flux, it’s easier to overlook a major deduction or credit.

However, new and continuing tax breaks come with strict eligibility requirements, most notably income phase-outs. If your earnings exceed specific thresholds, certain tax breaks disappear, leading to a higher tax bill than anticipated.

Here are a few common tax deductions and credits with income phaseouts:

Student loan interest deduction. For 2025 income taxes, the phase-out begins at a modified adjusted gross income (MAGI) of $85,000 for single filers and $170,000 for married couples filing jointly.
Traditional individual retirement account (IRA) deductions. If you're covered by a retirement savings plan at work, your ability to deduct traditional IRA contributions starts to phase out at a MAGI of $79,000 for single filers and $126,000 for married couples filing jointly (for tax year 2025).
"Senior bonus" deduction. Adults age 65 and older might qualify for this temporary tax break, but their income phase-out is $75,000 for single filers and $150,000 for joint returns.

What should you do next year? Start by reviewing various tax deductions and credits you might be eligible for. Next, look for ways to lower your adjusted gross income (AGI) so you can maximize your eligibility for tax breaks. For instance, you might increase contributions to pre-tax accounts — such as a 401(k), FSA or HSA — to directly reduce your taxable income.

The 2025 standard deduction might be lower than your itemized deductions. (Image credit: Getty Images)

2. You claimed the standard deduction when you should have itemized

Roughly 90% of taxpayers claim the standard deduction, but this "path of least resistance" might not get you the most bang for your buck. For the 2025 tax year, several shifts in federal policy have made itemizing more attractive than it's been in years. For instance:

The SALT cap increase. Until recently, the state and local tax (SALT) deduction was capped at just $10,000. But under the 2025 tax legislation, that cap has been raised to $40,000 for many filers. If you live in a high-property-tax state or pay significant state income taxes, this change alone could push your itemized total well past the standard deduction.
Larger charitable contributions. New tax changes for 2026 charitable donations caused many taxpayers to donate larger gifts last year. If you increased your giving in 2025, those contributions could significantly tip the scales in favor of itemizing.

What should you do next year? Don't file out of habit. In a shifting tax policy environment, choosing whether you itemize or claim the standard deduction can change from year to year. Gather your property tax statements, mortgage interest summaries and receipts for donations and medical bills, and run the math on whether an itemized return could save you more on taxes.

Federal withholding tax is important to update annually. (Image credit: Getty Images)

3. Your W-4 withholding is too low and outdated

Whether you’re starting a new role or settled into a long-term position, you should regularly review your Form W-4 (Withholding). This document tells your employer exactly how much to send to the IRS and state authorities on your behalf throughout the year.

If your tax withholding is out of date and too low, you might be build a debt to the IRS. Various life changes can increase your tax bill if your withholding isn't adjusted at least annually, like:

Getting divorced or separated. Single and married-filing-separately statuses typically carry a lower standard deduction than those available to joint filers. Additionally, married separate filers might not qualify for certain tax breaks (like certain education tax breaks).
Getting a pay raise. While a promotion, bonus, or raise is great news, that extra income could push you into a higher tax bracket, making your current withholding levels insufficient.
Having a child leave home. When a child turns 17, they no longer qualify for the $2,200 child tax credit, even if they still live at home (though temporary absences, such as college, are exempt from this rule).

What should you do next year? Reviewing your withholding annually can help you avoid a surprise tax bill filled with interest and fees. Currently, the IRS failure-to-pay penalty is 0.5% of your unpaid taxes for every month (or part of a month) the balance remains, capping at 25%. Don't forget that most state agencies can apply their own underpayment penalties, adding another layer of cost to your tax bill.

Side hustle jobs mean you must pay income taxes on this "extra income." (Image credit: Getty Images)

4. Your side hustle income was underreported, or you missed estimated tax payments

Taking on a new side hustle during the past year means you probably owe taxes on the income generated from that work. Many freelancers and gig workers are surprised to learn that the IRS expects quarterly estimated tax payments if you anticipate owing $1,000 or more in federal taxes at year-end.

Whether you’re an Etsy seller, an Uber driver, or a freelance consultant, you'll probably receive some combination of the following tax forms when determining your income tax bill for the year:

Form 1099-K: Reports payments received through third-party processors like PayPal, Venmo, or specialized gig platforms.
Form 1099-NEC: Reports non-employee compensation for services you’ve performed as an independent contractor.
Form 1099-MISC: Reports income not covered in the NEC category, like rental income.

*Note: All earned income is typically taxable regardless of whether you receive a tax form.

Failing to report your earnings throughout the year doesn't just lead to a higher bill come tax time, but can also trigger IRS underpayment penalties and interest.

Furthermore, if you aren't tracking your business expenses as you go, you might miss valid breaks (such as the home office deduction) and other overlooked tax deductions for the self-employed.

What should you do next year? Take time now to review the rules for reporting self-employment income. Depending on whether you're a full-time contractor or just a casual freelancer, your tax requirements might differ. For a deeper dive into maximizing your savings, check out Kiplinger’s report, 12 Tax Strategies Every Self-Employed Worker Needs in 2026.

Investment income tax may be higher than you expect due to tax-inefficient investments. (Image credit: Getty Images)

5. Your tax-inefficient investments hurt your return

Did you sell a stock, bond, or piece of real estate for a profit last year? If so, that capital gain likely boosted your taxable income and potentially contributed to a higher tax bill. However, it isn't just what you sell that matters — it's where and how long you hold your investments.

Your income tax bill might be higher than expected because of these common oversights:

Poor asset location. Keeping "tax-heavy" investments — such as high-yield bonds or actively managed mutual funds that payout frequent dividends — in a taxable brokerage account instead of a tax-deferred 401(k) or IRA.
Frequent trading. Gains on assets held for less than a year (short-term) are taxed at ordinary income rates, which can reach as high as 40.8% when you include the net investment income tax (NIIT).
Missing out on tax-loss harvesting. If you have winning investments, you can offset those gains by selling "losers" at a loss. If your losses exceed your gains, you can use up to $3,000 to offset your ordinary taxable income.

What should you do next year? Aim to maximize your contributions to 401(k)s, 403(b)s and IRAs to keep more of your growth tax-deferred until retirement (when your income tax rate might be lower). For your taxable accounts, try to hold investments for at least one year to qualify for lower long-term capital gains rates. Finally, make "tax-loss harvesting" a year-end habit to ensure you aren't paying more on your winners than you have to.

More: The Wash Sale Rule: Six Things to Know to Avoid Tax Pitfalls

State income tax refunds might be lower (or state tax bill higher) if you're not taking advantage of applicable credits, deductions, and exemptions. (Image credit: Getty Images)

6. You overlooked state-specific tax credits and deductions

While not every state has its own tax rules (and some states have no income tax at all), ignoring state-level credits and deductions is one of the easiest ways to overpay your year-end income tax bill.

Taking advantage of every tax break available to you could help save on state income taxes. To ensure you aren't leaving state money on the table, consider these tax resources and strategies:

Stay current on state tax changes. Review applicable rules and any upcoming local changes to better prepare for your state income return.
Look for how retirement taxes work in every state. If you're retired, how your state treats Social Security or pension income is vital — and could help you save on your next income tax bill.
Check out the best low-tax states for middle-class families. Is your state a high-tax state? For some, a move across state lines might be the most effective tax strategy of all.

What should you do next year? Visit your state’s Department of Revenue website before you file. Many states have tax deductions, credits, and exemptions that can significantly reduce your state income tax liability.

Ask the Tax Editor, January 23: Questions on Residential Rental Property

joy.taylor@futurenet.com (Joy Taylor) — Fri, 23 Jan 2026 12:50:00 +0000

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter editor, answers questions on topics submitted by readers. This week she's looking at five questions on reporting income and loss from residential rental property. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Can I deduct interest paid on a HELOC?

Question: I own a rental home that I lease to a tenant. Every year, I attach Schedule E to my Form 1040 to report the income or loss from the property. I have a mortgage on the property and deduct the interest I pay on Schedule E. Last year, I took out a home equity line of credit (HELOC) on the house. In addition to deducting the interest I pay on the primary mortgage, can I also deduct the interest that I pay on the HELOC?

Joy Taylor: It appears that you can deduct interest paid on the HELOC on Schedule E if you used the HELOC proceeds for use in your rental activity. For example, if you used the HELOC proceeds to renovate or improve the home, you can deduct the interest on Schedule E. If you used the HELOC proceeds for other purposes not related to your rental activity, then the interest is not deductible. If you used the proceeds for mixed use (a portion for rental property improvements and a portion for personal use), then you'll need to trace the interest to how the proceeds were used. Here is language from the IRS's Schedule E instructions.

"In most cases, to determine the interest expense allocable to your rental activities, you must have records to show how the proceeds of each debt were used. Specific tracing rules apply for allocating debt proceeds and repayment. In general, you allocate interest on a loan the same way you allocate the loan proceeds. You allocate loan proceeds by tracing disbursements to specific uses."

2. Do landlords qualify for the QBI deduction?

Question: I own rental property and generate a profit from the activity. Can I claim a 20% qualified business income (QBI) deduction for my rental income that I report on Schedule E of my Form 1040?

Joy Taylor: It depends. Self-employed individuals and owners of LLCs, partnerships, S corporations and other pass-through entities can deduct 20% of their QBI, subject to limitations for individuals with incomes in 2025 of more than $394,600 for joint filers and $197,300 for single filers and head-of-household filers. (For 2026, these figures are $403,500 for joint filers and $201,750 for others.)

Rental income reported on Schedule E of the Form 1040 may be eligible for the deduction in certain cases. There are two ways to qualify for the 20% QBI write-off for rental income. The first is whether the rental activity rises to the level of a trade or business. For this purpose, the IRS’s regulations refer to the standard under tax code Section 162, the statute that generally governs the deductibility of trade or business expenses.

There is no statutory or regulatory definition of a Section 162 trade or business. Instead, this is based on each taxpayer’s specific facts and circumstances. Some relevant factors are the type of property (commercial or residential), lease terms, extent of day-to-day involvement by the lessor or his or her agents, the significance and type of ancillary services provided under the lease, and the number of rentals.

A second way to qualify rental income as QBI is to meet an IRS safe harbor. At least 250 hours in a year must be devoted to the rental activity by the taxpayer, employees or independent contractors. Time spent on repairs, collecting rent, negotiating leases, tenant services, property management, advertising and supervising workers counts. Hours put in for driving to and from the property, arranging financing and constructing long-term capital improvements on the property aren’t included. If you own multiple properties, you can treat each property separately or aggregate similar rental activities into commercial or residential categories.

Taxpayers who use the safe harbor must meet strict recordkeeping requirements and attach an annual statement to their tax returns. Contemporaneous records must detail hours, dates and descriptions of the services and who performed them. If the services are done by contractors or employees, the taxpayer must keep logs of the work done by them, as well as proof of payment.

Note that the safe harbor doesn’t apply to rental income from property leased under a triple net lease or if the owner’s personal use of residential property exceeds the greater of 14 days or 10% of the days rented.

Treating rental income as QBI doesn’t change how you report that income on your Form 1040. Real estate rental income is usually reported on Schedule E of the 1040. Also, the rental income generally isn’t subject to self-employment tax.

Read more questions on QBI answered by Joy.

3. Can I deduct travel expenses on Schedule E?

Question: I owned a rental home for 25 years that I sold last year. Over the last 25 years, I made two visits per year to the property to do maintenance on it. For example, I upgraded the landscape, trimmed the grass, and did other small things. Can the cost of these trips be added to my home's tax basis in calculating my gain on the sale? Or can I otherwise now deduct those travel costs?

Joy Taylor: IRS Publication 527, Residential Rental Property, says this about travel expenses to and from rental properties that you own:

"Travel expenses. You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. You must properly allocate your expenses between rental and non-rental activities. You can’t deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. The cost of improvements is recovered by taking depreciation."

Since your trips to the rental property were for maintenance, and not to substantially improve the property, you should have deducted mileage and/or other travel expenses on your tax returns for the years of the visits. The amounts cannot now be added to the basis of your property.

4. What are the tax consequence when I sell?

Question: I plan to sell a rental home that I have owned for many years. I'm sure I will have a gain from the property. How will that gain be taxed on my federal income tax return?

Joy Taylor: If you hold rental property, the gain or loss when you sell is generally characterized as a capital gain or loss. If the property was held for more than one year, it's a long-term capital gain or loss, and if held for one year or less, it's a short-term capital gain or loss.

The gain or loss is the difference between the amount realized on the sale and your tax basis in the property.

The capital gain will generally be taxed at 0%, 15%, or 20%, plus the 3.8% net investment income tax for people with higher incomes. However, a special rule applies to gain on the sale of rental property for which you took depreciation deductions. When depreciable real property held for more than one year is sold at a gain, the federal tax law requires that previously deducted depreciation be recaptured into income and taxed at a top rate of 25%. This is known as unrecaptured Section 1250 gain, the number of its federal tax code section.

5. How is rental income taxed?

Question: I just bought a home that I am going to rent out to tenants. How is the rental income I receive taxed? Is it ordinary income or capital gain?

Joy Taylor: Rental income from real estate that you rent out is taxed at ordinary income tax rates, which vary depending on your taxable income. If you eventually sell the rental property at a gain, then that gain is generally treated as capital gain.

About Ask the Editor, Tax Edition

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

12 Tax Strategies Every Self-Employed Worker Needs in 2026

Roxanne Bland — Wed, 21 Jan 2026 15:17:00 +0000

Congratulations, you've decided to launch a new business or a side hustle. You're in good company.

According to the Bureau of Labor Statistics, nearly 16.9 million Americans are self-employed as of mid-2025, representing approximately 10% of the U.S. workforce.

Whether owners, freelancers, or sole proprietors, the self-employed span every field — from skilled tradespeople and creatives to real estate agents and consultants in every niche.

But being self-employed carries financial risks, especially with the federal self-employment tax. This 15.3% tax is your responsibility.

To meet your obligation, you must carefully plan and set money aside for payment.

Unlike a traditional job where your employer pays half of your Social Security and Medicare taxes, you are responsible for the entire amount.
For many small business owners, this tax liability is generally reported on their individual return (Form 1040 with Schedule C), not a separate business return.

There is much to manage, so we’ve compiled a list of 12 tips to help you navigate your tax responsibilities. Let's start with establishing your business identity.

1. Help protect your identity with an EIN

An Employer Identification Number (EIN) is a unique nine-digit number the IRS assigns to identify your business for tax purposes.

Do you need one?

If you're a sole proprietor or single-member limited liability company (LLC), you generally don't need an EIN. The IRS treats these entities as a single entity with the owner and requires you to use your Social Security number for tax filings.

Multi-member LLCs, however, must obtain an EIN because they're treated as partnerships or corporations.

When you must get an EIN:

You hire employees (even part-time or seasonal)
You set up a retirement plan like a SEP-IRA or solo 401(k)
You withhold taxes on payments to a nonresident alien

Why you might want to get one anyway:

Banks typically require an EIN to open a business account
Vendors and clients expect it and it looks professional
It protects your identity by keeping your Social Security number private

You can apply for an EIN online for free at IRS.gov.

2. Separate your business and personal bank accounts

It's good practice to keep your personal and business accounts separate. If you use one account, you’re forced to reconstruct the entire year at tax time, separating your personal and business expenses manually.

Mixing your finances makes bookkeeping more difficult, as you have to keep track of both personal and business expenses.

Then there’s the audit risk. If you’re audited by the IRS, the lack of clarity in your business records means it’s much harder to prove a deductible expense to the IRS if your personal and business expenditures are mixed.

Bottom line: having separate personal and business accounts makes your business life easier.

3. Understand how self-employment tax differs from regular income tax

It’s important to understand that self-employment and income taxes are not the same. The self-employment tax is 15.3% in 2026, and covers Social Security and Medicare taxes. The levy is due in addition to the personal income tax.

Also, the self-employment tax isn't calculated on your business's income but on its net earnings (or net income). Net earnings are your gross revenue minus all your business expenses.

The tax is calculated on 92.35% of this amount.

4. Lower your tax bill through business expense deductions

The importance of keeping meticulous business records to substantiate expenses cannot be overstated. Not only will this lower your self-employment tax liability, but it’ll lower your income tax liability, too. More than that, you need these records to support any expenses you’ve claimed should the IRS audit you.

What’s a legitimate business expense? It varies greatly depending on your business type.

Generally, what you purchase for use in your business activities, whether products or services, is a business expense and deductible on your return. They're the ordinary and necessary things you need to run a business:

Office supplies
Computers and printers
Postage
Copy services

Home Office Deduction

There's a deduction you can take if your business is located in your home.

The home office deduction can be calculated using either the simplified or the actual expense method. To qualify for the deduction, the space must be used regularly and exclusively for your business operations:

"Regularly" means a space that you routinely use for business. Incidental and occasional use doesn't count
"Exclusively" means a space that you only use for business

If you use your home office for only part of the year, your deduction is limited to the period when you regularly and exclusively use the space.

Calculating the deduction using the simplified method, multiply the square footage of your office space (up to 300 square feet) by $5. The maximum deduction permitted in 2025 (and 2026) is $1,500.

The actual expense method is more involved. It can include the appropriately divided parts of your:

Mortgage interest
Rent
Utilities
Insurance
Repairs
Depreciation

5. If you're eligible, claim up to $25,000 in tip tax relief

If you're self-employed in a traditionally tipped occupation, like as a freelance hairstylist, rideshare driver, food delivery worker, or personal service provider, you may be eligible for a significant new tax break.

The 2025 Trump tax bill, often also called the "big beautiful bill," allows eligible self-employed workers to deduct up to $25,000 in qualified tips from their taxable income for tax years 2025 through 2028.

This deduction is available whether you take the standard deduction or itemize.

To qualify, you must:

Work in an occupation that customarily and regularly received tips before December 31, 2024
Have a valid Social Security number (not an ITIN)
Have net self-employment income for the year
Not work in a Specified Service Trade or Business (SSTB) under Section 199A, which excludes fields like law, accounting, health, consulting, and financial services

The deduction begins to phase out for single filers with modified adjusted gross income (MAGI) above $150,000 and for married couples filing jointly with modified adjusted gross income above $300,000.

If eligible, you'll claim this deduction on Schedule 1-A, which flows to line 13b of your Form 1040.

6. Claim up to 20% of qualified business income with the QBI deduction

Qualified business income, or QBI, is the net income from your qualified trade or business, after deductions for ordinary business expenses. A "qualified" trade or business is:

A sole proprietorship
A partnership
An S corporation
Some trusts and estates

The QBI deduction, also known as the Section 199A deduction, allows the self-employed to deduct up to 20% of their qualified business income, and is available whether they take the standard deduction or itemize.

Example: Let's say your business profit is $80,000 for the 2025 tax year. To find your actual QBI, the IRS generally has you subtract the deductible part of your self-employment tax, health insurance premiums, and retirement contributions.

If those items total $10,000, your QBI is $70,000. At 20%, your deduction would be $14,000, subject to income-based phase-out limits.

Note: This is a "below-the-line" deduction, meaning it reduces your taxable income (not your adjusted gross income) whether you take the standard deduction or itemize.

7. Deduct 100% of your health insurance premiums

This is one of the most valuable deductions for the self-employed. You can usually deduct 100% of your health insurance premiums, without having to itemize your deductions. This applies to:

Medical Insurance
Dental Insurance
Long-term care insurance
Coverage for your spouse and dependents

To qualify, you must:

Have net self-employment income
Not be eligible for employer-sponsored coverage (including through a spouse).

8. Manage quarterly estimated tax payments

Yes. For the self-employed, tax time comes not once a year, but four. The IRS has a pay-as-you-go system for self-employment taxes, and they’re due every quarter.

As for the rule, if you think you’ll owe at least $1,000 in federal taxes for the tax year — self-employment or income — you’ll have to make quarterly estimated tax payments. Due dates are

April 15
June 15
September 15
January 15 of the following year

Do your best not to miss any payments, as this can result in underpayment penalties and interest. For more information, see our report: When Are Estimated Tax Payments Due?

9. Know why self-employment tax is high

Don’t be shocked by what you see after calculating your self-employment tax.

For wage earners, the Social Security and Medicare taxes are split evenly between the employer and the employee. That’s not true for the self-employed. You’re responsible for the tax in full.

However, you do get a break — you can deduct half of the tax due from your income taxes.

10. Set aside self-employment and income tax money

Always remember to set aside money for both the self-employment tax and the income tax to avoid cash shortfalls at tax time.

A generally accepted rule of thumb is to reserve at least 25%-30% of your gross earnings to cover the self-employment tax, the income tax, and state and local taxes.
Consider setting aside an even larger percentage if your business is profitable.

Tax Tip

To help you save, it’s worth opening a business savings and/or checking account just for taxes. Start by setting up automatic transfers to move a percentage of every payment you receive into your business account. You’ll create a disciplined saving habit and build a financial cushion.

11. Consider reinvesting in your business to lower your tax bill

Your self-employment tax is based on net profit, not what you personally withdraw or keep in the business. It doesn't matter whether you leave money in your business account, withdraw it to your personal account, or reinvest it — all those funds came from your business's net profit.

However, reinvesting profits can reduce your self-employment tax if the expenditure is a legitimate, deductible business expense. For example, buying equipment and office supplies, or hiring contractors, reduces your net profit and lowers your self-employment tax.

Simply leaving money in the business account or saving for future expenses does not reduce your business's net profit or your tax liability.

12. Navigate 1099-K and 1099-NEC reporting requirements

Being self-employed means 1099-K and 1099-NEC are two of the most important 1099 reporting forms you'll deal with, and they work very differently.

Form 1099-NEC reports nonemployee compensation, that is, what clients pay you for work.

Starting in 2026, reports payments of at least $2,000 (will be indexed for inflation each subsequent year)
It reports the services you performed, not goods

Form 1099-K reports payment processing transactions from 3rd-party payment networks, like Venmo, PayPal, eBay, etc. It does not come from your clients.

A 1099-K reports all gross payments processed on your behalf through payment platforms
It includes all payments processed, even if some were refunds or fees taken out
Under the 2025 Trump tax bill, a 3rd-party payment platform will send you a 1099-K form only if your gross sales exceed $20,000 AND the number of transactions exceeds 200. (Both conditions must be met.)

It is worth repeating that a 1099-K reports only gross receipts, that is, before fees, refunds, and chargebacks. This means the 1099-K you receive can sometimes overstate your income. You will have to reconcile it with your actual business income as shown in your books and records.

Note: Keep in mind that the 1099-K and 1099-NEC are information returns that third-party processors and clients must file with the IRS. Even if you do not receive these forms from a processor or a client, you are still required to report the income. This is especially important for 1099-K if you are not a high-volume seller.

Working for yourself: Bottom line

As mentioned, there’s a lot to know about being self-employed and more to learn. If you're new to the game, it’s tempting to turn to family, friends, and social media for free financial advice. But tax is complicated, so you might need expert guidance.

If you have the funds, reserve an hour with a CPA and ask targeted questions. If you don’t, or think you need more than an hour, small business development centers (SBDCs) can help.

SBDCs offer no-cost and low-cost coaching and training for the self-employed on how to run a business.

The U.S. Small Business Administration also offers classes, and states sponsor their own SBDCs.

Trump's Plan to Eliminate Income Tax: 7 Things to Know Now

Roxanne Bland — Tue, 16 Dec 2025 14:57:00 +0000

Since the start of his second term, President Donald Trump has repeatedly proposed abolishing federal income taxes in favor of tariff revenues. As Kiplinger has reported, he has previously spoken about jettisoning taxes completely and mused about eliminating tax on the first $150,000 of income.

Last November Thanksgiving video, Trump said, "Over the next couple of years, I think we’ll … be cutting income tax — could be almost completely cutting it, because the money we’re taking in is going to be so large."

And more recently, in his State of the Union address delivered February 24, Trump once again talked of tariff revenues replacing income taxes.

"As time goes by, I believe the tariffs paid for by foreign countries will, like in the past, substantially replace the modern income tax taking a great financial burden off the people that I love," the president said.

Update: Many of Trump's tariffs, levied under the International Emergency Economic Powers Act (IEEPA), were struck down on February 20, 2026, as illegal by the United States Supreme Court. For more information, see our report: Supreme Court Tariffs Ruling: What's Next for Retailers and Consumers?

Maybe you’re someone who thinks eliminating the tax is a good idea. Who likes paying income taxes? Not to mention the extra cash that would be in your pocket if you didn't have to pay taxes on your hard-earned income.

But while eliminating income tax might sound appealing, some of its consequences might make you reconsider.

Income taxes brought in about $2.7 trillion to the federal government in 2025, according to the U.S. Treasury. That amount towers over the $257 billion in tariff revenues raised last year. A big question is how the U.S. government would make up the difference.

Something else to consider is that for every country to which the U.S. imposes a tariff on imports, each of those nations could impose a retaliatory tariff on U.S. exports. That means some consumer goods might be priced out of reach or unavailable on the market. Depending on what product you have your sights on, that could put a crimp in your shopping budget.

Basically, if Trump eliminates federal income tax, the fallout would likely be wide-ranging and could have profound impacts on everyday life. Here are seven key things you need to know.

What happens if Trump eliminates income taxes?

1. Inflation. Tariffs raise the cost of imported goods, and the U.S. is a net importer of consumer goods. To help offset the loss of the income tax, tariff rates would have to skyrocket to levels “well over 60%,” as Douglas Holtz-Eakin, president of the policy organization American Action Forum, told Louis Jacobson of PolitiFact. Imports are likely to diminish, forcing tariff rates to rise higher.

Everyday consumer items such as electronics, clothes and cars would likely become further out of reach for U.S. buyers.

2. Impact on domestic industries. Some domestic industries stand to gain from eliminating federal income tax.

The steel and aluminum industries have reportedly complained for decades that cheap imports undercut domestic production. Without imports from China and Latin America, the U.S. textile and garment manufacturing industries might revive due to reduced competition.

Still, it’s a mixed bag. Besides the steel and aluminum industries, U.S. automakers could benefit from higher tariffs on foreign cars and parts. But they import many of the components built into their own autos, and they’ll likely pay tariffs on those. U.S. appliance makers such as Whirlpool and smaller electronics manufacturers could see benefits. However, they also rely on global supply chains and will be impacted by foreign tariffs.

3. Food. The U.S. imports a significant amount of fresh produce to guarantee a year-round supply. Although we might not realize it, much of the fruit we eat is seasonal.

Grapes are an example. In the U.S., grapes aren’t normally available in the winter months. The grapes you buy in December and January come from South America. But if grower nations impose retaliatory tariffs, it could likely make grapes and other seasonal fruits unattainable, due to price or availability.

Not just tariffs: Unintended costs of a U.S. government cash shortfall

(Image credit: Getty Images)

Although not a direct result of the U.S. imposing tariffs on imported goods, the following are consequences of the inability of tariff revenues to cover the loss of income taxes.

4. Social Security and Medicare. These programs wouldn't disappear because they’re funded in significant part by other sources.

But when there are revenue shortfalls, federal income taxes help to cover the gap (PDF). What it means is that if there were no federal income tax in the U.S., monthly Social Security benefits could shrink, and Medicare premiums could rise.

5. Defense. Unlike Social Security and Medicare, defense spending has no backstop. It lives and dies on general revenues. The government could borrow to maintain defense spending but would sharply increase the deficit.

If Trump eliminated federal income taxes, the government would likely have to scale back operations (PDF), reduce troop levels, delay or eliminate weapons programs and possibly more.

Additionally, several policymakers suggest that from a global perspective, a weakened defense budget would likely reduce U.S. influence abroad, including limiting NATO commitments, and slow the modernization of military technology.

6. National Debt. Debt interest payments, such as defense, are funded by federal income tax revenue. The immediate threat of eliminating interest payments is the risk of the government’s default.

According to several reports, the economic fallout could be dire, including things such as spiked interest rates, a weakened dollar and the destabilization of financial markets worldwide.

7. Discretionary spending programs. These are the types of government expenditures that we take for granted. Infrastructure projects such as highways, bridges, airports and others could stall without sufficient revenue to fund them.

Federal support for education and affordable housing could disappear, widening the inequality between the wealthier and poorer regions of the United States.

Agencies such as NASA, and the National Institutes of Health (NIH) depend on discretionary spending. Without it, funding for medical research and technological innovation could shrink, reducing U.S. leadership in science and slowing progress in health and technology.

These are only a few of the programs affecting our daily lives that could be adversely impacted if federal income taxes went away.

Eliminate federal taxes? Bottom line

Eliminating federal income tax might sound like a good idea on the surface. Some taxpayers might have visions of dollars fattening their wallets.

But data and studies show that more tariffs will likely raise the cost of everyday consumer goods, maybe to the point of unaffordability. Other impacts, though indirect, could also conspire to keep taxpayer wallets flat.

Ask the Editor, November 21: Home Sale Tax Break

joy.taylor@futurenet.com (Joy Taylor) — Fri, 21 Nov 2025 12:33:00 +0000

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she's looking at five questions on the gain exclusion tax break when you sell your home. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Will my home sale be taxed?

Question: My husband and I are thinking of selling our home next year that we have owned for many years. Will the gain be taxed?

Joy Taylor: It depends. Generally, if you have owned and lived in your main home for at least two out of the five years before the sale date, up to $250,000 ($500,000 for joint filers) of your gain when you sell the home is tax-free. Any gain above the $250,000/$500,000 exclusion amounts is taxed at long-term capital gains rates of 0%, 15% or 20%, depending on the amount of your taxable income. Losses from sales of primary homes are not deductible.

Here are a couple of examples to illustrate the rule. Say you bought your home in 1995, have a tax basis of $250,000, and are selling the home for $650,000. The entire $400,000 gain is tax-free since you are filing a joint return. Let's now take the same example, but instead of selling the home for $650,000, you sell it for $900,000. Since you are married and, provided you file a joint return, the first $500,000 of the gain is tax-free, and the remaining $150,000 is taxed at long-term capital gains rates.

2. What if I change jobs and sell my home early?

Question: I am married, and I bought my home 14 months ago. My company is relocating, and I must move out of state for work. I plan to sell the home next month. Can I exclude any gain from the home sale?

Joy Taylor: In your case, you don't meet the two-out-of-five-year ownership and use periods to qualify for the full $500,000 gain exclusion for joint filers. However, you are not out of luck. Some people who sell a home early may still be eligible for a portion of the exclusion, depending on the circumstances.

For example, early sales due to job changes, illness or unforeseen circumstances qualify for the partial exclusion. The percentage of the $250,000 or $500,000 gain exclusion that can be taken is equal to the portion of the two-year period that you used the home as a residence. You can use days or months for this calculation.

For example, say you bought your home for $740,000 in September 2024 and you sell it for $790,000 in December 2025 because of your out-of-state job move. The maximum gain exclusion in this instance is $312,500 ($500,000 x (15/24)). So, your $50,000 gain would be fully excluded from income and would be tax-free.

3. What if my unmarried partner and I jointly own a home?

Question: My partner and I own our primary residence together and have lived here for 10 years. We plan to sell it next year. We aren't married and file our taxes separately as single filers.

When we sell the home, can each of us claim a $250,000 gain exclusion? And since there is lots of appreciation in the home since we bought it, are we allowed to split the remaining taxable gain so that we each pay capital gains tax on half of the amount?

Joy Taylor: Since your partner and you would have each owned and used the home as your primary residence for at least two out of the five years before the sale date, then each of you would qualify for the $250,000 home-sale exclusion. Any excess capital gain would be split between you. Each of you on your single-filed tax returns would report your share of the selling price and tax basis in your home to arrive at gain.

Here is a simple example. Say you sell your home for $1.5 million next year, and you have a total tax basis in the home of $200,000. Each of you would calculate your separate gain based on 50% of these figures. On your single-filed tax return, you would calculate gain before the home-sale exclusion of $650,000 ($750,000 sale price - $100,000 tax basis). Your taxable gain is $400,000 ($650,000 total gain - $250,000 home-sale exclusion). You would then report the $400,000 long-term capital gain on your Form 1040. You would use IRS Form 8949 to calculate the taxable gain and transfer the amount to Schedule D of your Form 1040. Your partner would do the same thing on his or her single-filed tax return.

4. Will Congress make all home-sale gains tax-free?

Question: Someone told me there is a congressional proposal in the House to make all gain on home sales tax-free. Is this true, and if so, do you think it will pass?

Joy Taylor: Some Republican lawmakers advocate making the full gain on home sales tax-free. House Representative Marjorie Taylor Greene (R-Ga) has introduced a bill, the "No Tax on Home Sales Act," to end the tax on sales of primary homes, saying her proposal would lead to increased housing supply. And President Trump has chimed in, saying he would be open to ending the tax on home sales.

This idea might sound wonderful, but I don't think it will come to fruition. The proposal would be very expensive and would mainly benefit upper-income individuals.

A more feasible option is a one-time increase in the current $250,000/$500,000 gain-exclusion amounts. Another potential alternative is to annually index the gain-exclusion amounts to inflation. The $250,000 and $500,000 figures have never been adjusted for the appreciation in residential real estate during the 28 years this popular tax break has been in effect. Both alternatives would require congressional action.

5. What is my gain exclusion if I sell my house after my husband dies?

Question: My husband and I jointly owned our home together for many years. He died last year, and I plan to sell my home in 2026. How much of my gain will be nontaxable?

Joy Taylor: If you sell the home in 2026, your home-sale exclusion would be $500,000. A spouse who sells the family home within two years after the death of the other spouse gets the full $500,000 exclusion that is generally available only to joint filers, provided the two-out-of-five-year use and ownership tests were met before death.

There is also a welcome added tax benefit since you owned the home jointly with your spouse. If you don't live in a community property state, half the home will get a step-up in tax basis upon the death of the first-to-die spouse. The rule is more generous if the house is held as community property. The entire tax basis is stepped up to fair market value when the first spouse dies.

Here's an example. Let's say you and your husband bought your home for $150,000 many years ago in a non-community property state, and it was worth $980,000 when your husband died in 2024. Your tax basis in the home jumps to $565,000 (your half of the original $150,000 cost basis plus half of your husband’s $980,000 date-of-death value). Twenty months later, you sell the home for $1,085,000. Of the $520,000 gain from the home sale ($1,085,000 - $565,000), $500,000 is tax-free and $20,000 is taxed at long-term capital gains rates.

About Ask the Editor, Tax Edition

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, IRAs and more. We will continue to answer these in future Ask the Editor round-ups. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

Ask the Editor, November 14: 20% Qualified Business Income Deduction

joy.taylor@futurenet.com (Joy Taylor) — Fri, 14 Nov 2025 12:05:00 +0000

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at five questions on the 20% tax deduction for qualified business income or QBI. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Did the OBBB extend the QBI deduction?

Question: I know the qualified business income (QBI) deduction was going to expire at the end of 2025. Did the “One Big Beautiful Bill” (OBBB) extend this federal income tax break?

Joy Taylor: Yes. The OBBB not only extended this popular tax break that was otherwise set to expire after 2025 but also made it permanent. Self-employed individuals, independent contractors, gig workers who aren’t employees, farmers, some landlords and owners of pass-through entities, such as partnerships, LLCs and S corporations, claim the 20% QBI write-off on line 13 of their Form 1040 and attach IRS Form 8995 or 8995-A.

QBI is one’s allocable share of income less deductions from a business. The rules can get complicated, especially for individuals with 2025 incomes that exceed $394,600 for joint filers and $197,300 for other filers.

This tax deduction was first enacted in the 2017 Tax Cuts and Jobs Act to provide some federal income tax parity between C corporations, which are taxed at a 21% rate, and pass-through entities, in which the individual owners pay income tax on earnings up to a 37% tax rate. Many congressional Republicans wanted to make the 20% QBI permanent, and they got their wish in the OBBB.

Note that making this tax break permanent cost the government lots of money. That’s because it is in the top 10 largest federal individual income tax expenditures, rounded up by the staff of the bipartisan congressional Joint Committee on Taxation.

2. Can freelancers claim the QBI deduction?

Question: I recently left my full-time job, and I am now an independent freelance consultant. Can I claim the 20% QBI deduction on my 2025 Form 1040?

Joy Taylor: Generally, yes. The QBI deduction applies not only to individual owners of pass-through entities, such as partnerships, S corporations and LLCs, but also to self-employed individuals who file Schedule C with their returns.

An important limitation applies to high earners in certain service fields. They include health, law, accounting, consulting, financial and brokerage services, performing arts, athletics, actuarial science, investing or trading in securities, or any business where the principal asset is the reputation or skill of its employees. If you are in one of the affected fields and your income for 2025 exceeds $394,600 for joint filers or $197,300 for single filers and head-of-household filers, the 20% deduction begins to phase out.

3. Do landlords qualify for the QBI write-off?

Question: I own rental property and generate a profit from the activity. Can I claim a 20% qualified business income deduction for my rental income that I report on Schedule E of my Form 1040?

Joy Taylor: It depends. Self-employed individuals and owners of LLCs, partnerships, S corporations and other pass-through entities can deduct 20% of their QBI, subject to limitations for individuals with incomes in 2025 of more than $394,600 for joint filers and $197,300 for single filers and head-of-household filers.

Rental income reported on Schedule E of the Form 1040 may be eligible for the deduction in certain cases. There are two ways to qualify for the 20% QBI write-off for rental income. The first is if the rental activity rises to the level of a trade or business. For this purpose, the IRS’s regulations refer to the standard under tax code Section 162, the statute that generally governs the deductibility of trade or business expenses.

Treating rental income as QBI doesn’t change how you report that income on your Form 1040. Rental estate rental income is usually reported on Schedule E of the 1040. Also, the rental income generally isn’t subject to self-employment tax.

4. Do REIT investors get the 20% QBI write-off?

Question: I am thinking of buying shares in a real estate investment trust (REIT). My financial advisor told me that REIT investors qualify for the 20% QBI deduction. Is this true?

Joy Taylor: Yes. The 20% QBI deduction also applies to holders of publicly traded partnership units and REIT shares. Individuals can deduct 20% of qualified REIT dividends, which are distributions not taxed under the favorable rules for capital gains and dividends, and 20% of their share of a PTP’s QBI.

5. How do LLC members know the amount of the entity’s QBI?

Question: I own membership interests in a multi-member LLC. How do I know if the LLC has QBI, and if it does, my allocable share of the LLC’s QBI?

Joy Taylor: The Schedule K-1 that you receive from the LLC will include your allocable share of the LLC’s QBI, if any, in the “Other Information Box” of the K-1 under a special code. Similar information will be shown on Schedule K-1s given to S corporation shareholders and to partners in partnerships.

About Ask the Editor, Tax Edition

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill and more. We will continue to answer these in future Ask the Editor round-ups. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

Emergency Tax Bill Ends $6,000 Senior Deduction and Tip, Overtime Tax Breaks in D.C.

Kate Schubel — Tue, 11 Nov 2025 14:57:00 +0000

New: For the first time in history, the United States Congress has overturned a local D.C. budget and tax law. The move strikes down an emergency policy enacted by the D.C. City Council, which sought to "decouple" District tax rules from federal breaks included in the 2025 Trump tax and spending bill. For more information, check out Kiplinger's report, Trump Ends Emergency Tax Bill Over $6,000 Senior Deduction and Tip, Overtime Tax Breaks in D.C..

Amid a record-breaking federal government shutdown, Washington, D.C. leaders made an emergency move that impacts key tax breaks for residents.

The D.C. City Council decoupled from the new 2025 Trump tax law, thereby removing local income tax savings tied to the new "no tax on tips" deduction and the $6,000 "senior bonus" deduction. This means District of Columbia residents who qualify for these federal tax breaks won't be able to claim them on their local tax returns.

While difficult, the choice certainly wasn’t surprising. The District of Columbia is expected to lose up to $1 billion in revenue over the next four years, due to the projected loss of 40,000 federal government-related jobs, according to the D.C. Fiscal Policy Institute (DCFPI). Although the federal shutdown may be coming to an end, its effects could be felt long-term in the nation’s capital.

City Chief Financial Officer Glen Lee wrote in a letter to the mayor and council chairman late September, citing that a prolonged government shutdown could “place significant strain on the economy” in D.C., as previous shutdowns had “a range of impacts on revenue.”

The Council’s temporary decision to separate its income tax laws from federal tax provisions also underscores a broader, continuing state-level debate: Should states adopt all of the “Trump tax law,” and if not, which provisions will get bumped? Read on.

D.C. ends tax-free overtime and bonus deduction for older adults

Although the BBB is federal law, it doesn’t have to be part of state tax laws. That’s because states have three options when it comes to adopting current federal tax policy (or any combination thereof):

Rolling conformity. States can automatically follow the latest federal rules for the current tax year.
Static conformity. States can update their conformity date every year through legislation.
Selective conformity. States can “pick and choose” which parts of the federal tax law to follow, rather than adopting the tax code in its entirety.

In the past, the District of Columbia has typically accepted federal tax law on a rolling basis. However, just this month, the City Council approved “emergency legislation” to decouple from federal tax code changes enacted in July, including:

The $6,000 bonus deduction for older adults.
The “no tax on tips” provision and the overtime pay deduction.
Immediate expensing of research and development (R&D) costs.
Special depreciation allowances for businesses.

By excluding these provisions from D.C. income taxes, the Council is hoping to save $95 million in fiscal year 2025 and $567 million through fiscal year 2029.

Retained revenue will be used to create a new local Child Tax Credit of $1,000 per child and expand the city’s Earned Income Tax Credit from 85% to 100% of the federal level.

Supporters of the measure, like the DCFPI and DC Guaranteed Income Coalition pointed out the growing child poverty rates in the District of Columbia. The city faces a significant challenge with child hunger, affecting approximately one in seven children. Furthermore, D.C.'s child poverty rate for those aged 6 to 17 is the fifth-highest when compared to other states, according to the DCFPI.

Federal vs. state: The complex rules of tax conformity

The “emergency amendment” that the City Council passed did not require voter approval. The effect will only last 90 days, at which point a “temporary amendment” clause will also kick in, extending the law for 225 days. After that, the law must be approved through the normal, permanent state legislative process.

Yet while D.C. is unique in how it temporarily decoupled from federal law, other former rolling conformity states are decoupling from individual tax law via more “traditional” methods:

New York has rejected the federal "no tax on tips" and overtime deductions. The state achieved this by adhering to its tax code's static date (an enactment date before the new bill was signed), effectively ensuring these federal tax breaks do not apply to state income taxes.
Even before the BBB was signed, Colorado passed a law requiring all overtime pay to remain subject to overtime tax. This means the overtime provision in the BBB will not benefit Colorado overtime workers on their state returns.

With COVID-era federal aid depleted and Trump tariffs raising economic uncertainty, many states are looking for ways to protect state budgets by decoupling from federal corporate tax law, too.

For instance, Michigan, Rhode Island, and Illinois decoupled from specific business tax cuts, like the 100% bonus depreciation and R&D provisions. If all states conformed with these provisions, the total projected cost would be $38.2 billion in 2026, according to the Tax Foundation.

However, in an already slowing national economy, further reduction in economic growth could be a red flag. The Tax Foundation has advocated for “judicious decoupling” of federal tax cuts that could promote economic prosperity, particularly in the nation’s capital.

The Institute of Taxation and Economic Policy also reports that greater conformity to federal rules makes state tax returns more “practical” for taxpayers, with “fewer calculations to make.”

How state tax conformity will alter your 2025 income tax bill

As the debate continues, several states have decided to either decouple from federal provisions or simply continue with existing state tax laws. Here’s a breakdown of where various states stand in adopting BBB tax provisions, according to Reuters:

At least four states will accept most BBB individual return provisions in 2025, including Iowa, Montana, North Dakota, and Oregon.
Several states will not conform to BBB provisions, including California, Connecticut, Hawaii, and Massachusetts.
Waiting in the wings are states like Georgia, Maryland, and South Carolina, which plan to address changes to their state tax codes in the 2026 legislative session.

So when you file your 2025 taxes in the 2026 filing season, you should pay extra attention to your state return. The tax breaks you thought you were getting may only apply to your federal taxes, and your state tax liability may be unaffected by the new Trump tax law provisions.

Ask the Editor, November 7: Deducting Car Loan Interest

joy.taylor@futurenet.com (Joy Taylor) — Fri, 07 Nov 2025 12:33:00 +0000

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at four questions on the new tax deduction for paying interest on vehicle loans. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. What are the general rules for the deduction?

Question: I hear that individuals can now deduct interest paid on their car loans. Can you explain this tax break?

Joy Taylor: The “One Big Beautiful Bill” law that was enacted on July 4 provides several new tax breaks for individuals. One of those is the up-to-$10,000 deduction for interest paid on loans to buy a new vehicle for personal use. This deduction is temporary, first taking effect on 2025 tax returns that you file next year, and ending after 2028. It is available to people who itemize on Schedule A of Form 1040 and to filers who claim standard deductions. This is a “below-the-line” deduction, meaning it is subtracted from adjusted gross income to arrive at taxable income.

The write-off begins to phase out at modified adjusted gross income (MAGI) over $200,000 on joint returns and $100,000 on other returns, and ends at MAGI of $250,000 on joint returns and $150,000 on others.

Interest paid on the purchase of a new qualified passenger vehicle is eligible for the deduction. A qualified passenger vehicle is a car, minivan, van, SUV, motorcycle or pickup truck with a gross vehicle weight rating of less than 14,000 pounds that is bought for personal use. Also, the vehicle’s final assembly must take place in the United States. You must purchase the vehicle in 2025 or later, and you cannot deduct interest paid on a loan to buy a used vehicle.

The lender must generally file an information return with the IRS, reporting the amount of interest received from the buyer of the car and send a copy to the purchaser. The IRS is providing some transitional relief from this reporting rule. For the 2025 year, the business receiving the car loan interest may satisfy its reporting obligations by making a statement available to the car buyer stating the total amount of interest received on a qualified passenger vehicle loan. This can be provided on an online portal, in a monthly statement or annual statement given to the buyer, or something similar.

This relief gives lenders extra time to comply with the normal reporting obligations and lets the IRS make necessary program changes and updates to its tax forms, while also giving car buyers the information they need to claim the new deduction.

2. What is MAGI?

Question: I know the deduction for interest paid on car loans begins to phase out at MAGI over a certain amount. What is the definition of MAGI for this deduction?

Joy Taylor: As stated above, the tax break begins to phase out at MAGI over $200,000 on joint tax returns and $100,000 on other tax returns, and ends at MAGI of $250,000 on joint tax returns and $150,000 on other tax returns.

MAGI is often used by the IRS to determine your eligibility for certain tax benefits or tax breaks, or to determine whether you are subject to surtaxes or surcharges. True to the complexity of the federal tax code, the definition of MAGI often differs, depending on what it is used for.

MAGI for this purpose is your adjusted gross income shown on line 11 of your Form 1040 or 1040-SR, plus any foreign earned income exclusion, foreign housing exclusion, and certain excluded income received from sources in Puerto Rico, American Samoa, Guam or the Northern Mariana Islands.

3. Can I deduct interest on my 2023 car loan?

Question: I bought a new car in 2023 for personal use, and I took out a loan to finance the purchase. Will I be able to deduct the interest that I pay this year on my 2025 tax return that I file next year?

Joy Taylor: Unfortunately, no. To qualify for the deduction, you must purchase the vehicle in 2025 or later. Since you bought the vehicle in 2023, you cannot deduct the interest that you pay on the car loan in 2025 or in later years.

4. How do I report this on my tax return?

Question: I bought a new car for personal use this past March, and I took out a loan to finance the purchase. How do I deduct the interest that I paid on the car loan on my 2025 Form 1040?

Joy Taylor: You would use new IRS Schedule 1-A to compute your MAGI and to calculate the amount of the car loan interest deduction. You would then transfer the deduction amount to line 13 of your Form 1040. Note that you will need to also put in the vehicle identification number on Schedule 1-A.

About Ask the Editor, Tax Edition

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

Ask the Editor, October 31: Modified Adjusted Gross Income

joy.taylor@futurenet.com (Joy Taylor) — Fri, 31 Oct 2025 10:24:00 +0000

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at four questions on the meaning of modified adjusted gross income, or MAGI. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. MAGI — general rules

Question: I keep seeing references to modified adjusted gross income in stories about federal income tax breaks. What is modified adjusted gross income?

Joy Taylor: The IRS and other federal agencies often use a taxpayer’s modified adjusted gross income (MAGI) to determine eligibility for certain benefits or tax breaks, or to figure out whether a taxpayer owes surtaxes or surcharges. True to the complexity of the federal tax code, there is not just one definition of MAGI. The meaning differs, depending on what it is used for.

However, the one constant of MAGI is that it always starts with adjusted gross income, which is the amount shown on line 11 of your Form 1040 or Form 1040-SR.

To learn more, see The Many Definitions of Modified Adjusted Gross Income (MAGI)

2. MAGI and five OBBB deductions

Question: What is the definition of MAGI for the new $6,000 senior deduction?

Joy Taylor: The “One Big Beautiful Bill” (OBBB) provides five new or enhanced temporary tax breaks for individual taxpayers that first take effect on 2025 tax returns filed next year. All of these deductions begin to phase out for taxpayers with MAGI over a certain amount, as shown below.

The $6,000 deduction for filers age 65 or older ($12,000 on joint returns if each spouse is 65 or older) begins to phase out for taxpayers with MAGI over $150,000 on joint returns and $75,000 on single and head-of-household returns.
The up-to-$12,500 ($25,000 on joint returns) deduction for qualified overtime compensation begins to phase out for taxpayers with MAGI over $300,000 on joint returns and $150,000 on other returns.
The up-to-$25,000 deduction for qualified tips begins to phase out for taxpayers with MAGI over $300,000 on joint returns and $150,000 on other returns.
The up-to-$10,000 deduction for interest paid on a loan to buy a new vehicle begins to phase out for taxpayers with MAGI over $200,000 on joint returns and $100,000 on other returns.
The $40,000 cap on deducting state and local taxes (SALT) on Schedule A of the 1040 begins to phase out (but not below $10,000) for taxpayers with MAGI over $500,000 on joint, head-of-household and single returns, and $250,000 for married couples who file separate returns.

For purposes of all five of these new OBBB deductions, MAGI is your adjusted gross income shown on line 11 of your tax return, plus any foreign earned income exclusion, foreign housing exclusion, and certain excluded income received from sources in Puerto Rico, American Samoa, Guam or the Northern Mariana Islands.

3. MAGI and Medicare premiums

Question: I’m planning to enroll in Medicare in the next couple of years, and I want to avoid paying higher monthly Medicare premiums. What is the definition of MAGI for Medicare purposes?

Joy Taylor: Most people on Medicare pay the basic fee for Medicare Part B coverage, which for 2025 is $185.00 per month. Many also sign up for Part D prescription drug coverage. Some Medicare enrollees pay higher Part B and D monthly premiums if their MAGI exceeds a certain figure. For 2025 Medicare coverage, monthly premium surcharges (also known as IRMAA surcharges) kick in for joint filers with MAGI over $212,000, and for single filers with MAGI over $106,000. Updated amounts have not yet come out for 2026. The surcharges increase as MAGI rises.

The Medicare premium surcharges are calculated using MAGI reported on the most recently filed federal income tax return. For most people, 2025 Medicare premium surcharges are based on MAGI from 2023 returns, the amounts for 2026 will be based on MAGI from 2024 returns, and the amounts for 2027 will be based on MAGI from 2025 tax returns that you will file next year.

MAGI for this purpose is AGI shown on line 11 of your Form 1040 or 1040-SR plus any tax-exempt interest income.

4. Qualified charitable distributions

Question: I am 74 and am enrolled in Medicare. If I make a $25,000 qualified charitable distribution directly from my traditional IRA to charity this year, will this impact my MAGI that is used to calculate surcharges on my 2027 monthly Part B and D Medicare premiums?

Joy Taylor: For traditional IRA owners 70½ or older, a tax-smart way to give to charity is a qualified charitable distribution (QCD). You can transfer up to $108,000 directly from your IRA to charity in 2025. These QCDs are not taxable to you, they are not added to your adjusted gross income, and they can count toward your annual required minimum distribution (RMD) if done correctly. Note that you cannot deduct the QCD as a charitable contribution on Schedule A of the Form 1040.

As I stated in the prior paragraph, one of the benefits of doing a QCD is that it will not be included in your adjusted gross income and thus won’t affect your MAGI. So, if done right, doing a QCD can keep you under the MAGI threshold for higher Medicare premiums.

Let’s use your example of a $25,000 charitable contribution. Say you have a $75,000 RMD for 2025. If you take the full RMD as a taxable transfer, you will have $75,000 of income added to both your 2025 MAGI and taxable income. If you then make a $25,000 charitable contribution by personal check, you would be able to claim that as a deduction on Schedule A of your tax return, which would reduce your taxable income, but not your adjusted gross income or MAGI. If instead, you make the $25,000 charitable contribution through a QCD, and you do it in a timely manner so that it offsets $25,000 of your $75,000 RMD for 2025, you would be treated as receiving only a $50,000 taxable RMD, which would be added to both your adjusted gross income (and MAGI) and to your taxable income.

About Ask the Editor, Tax Edition

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

Social Security Tax Limit Rises Again: Who Pays More in 2026?

Kelley R. Taylor — Tue, 28 Oct 2025 14:07:00 +0000

The Social Security Administration (SSA) just announced two key updates for 2026: the new cost-of-living adjustment (COLA) and the updated Social Security tax wage base.

You’ve probably heard a lot about the COLA, but fewer people realize there’s a cap on how much of your earnings are subject to the Social Security payroll tax. This “wage base" (also known as the Social Security tax limit or wage cap) sets the maximum amount of income that can be taxed to help fund the program each year.

That's important since payroll taxes help fund Social Security, which more than 68 million Americans rely on for retirement, disability, or survivor benefits.

But the higher the wage cap, the more income is taxed, which particularly affects higher earners.

Here’s how that limit is changing for 2026 and what it could mean for your paycheck.

The Social Security tax limit (aka wage base) will increase by about 4.8% to $184,500 for 2026.

The amount is adjusted annually for inflation. However, it’s important to note that the wage base and SS COLA are calculated using distinct methods and data sets.

The tax limit changes are particularly significant for high-income earners, who may pay more Social Security tax on their earnings next year. So, understanding the adjustment is crucial for effective financial planning.

As noted, the 2026 Social Security tax limit rises to $184,500 for 2026. (The 2025 tax limit was $176,100.)

This 4.77% increase is less than the 5.2% jump from 2023 to 2024 but more than the 4.4% increase from 2024 to 2025.

Still, if you earn more than $176,100 this year, 2025, you haven’t had to pay the Social Security payroll tax on the amount of your income that exceeds that limit.) That can result in considerable tax savings.

Take, for example, an employee with a 2025 annual salary that exceeded the tax limit by $10,000. Since the Social Security tax rate is 6.2% (your employer also pays 6.2%), they would save $620 on Social Security taxes.
On the other hand, someone who earns wages exceeding the base by $30,000 would receive a $1,860 tax break.
The more you make over the tax limit, the more your Social Security tax savings.

However, the Social Security tax limit increases yearly as the national average wage index increases. When that happens, more income is subject to the Social Security tax.

Note: Some people don’t have to pay Social Security taxes. (Exemptions from Social Security taxes may be available if certain requirements are met.)

Also, self-employed individuals pay the full 12.4% rate. However, if you're self-employed, you can deduct the employer-equivalent portion of that amount.

Medicare tax rate 2025 and 2026

It’s also worth noting that, unlike Social Security, the Medicare tax has no income cap.

The standard Medicare tax rate of 1.45% (paid by the employee, 2.9% total when added to the employer portion) applies to all earnings, regardless of income level.

High-income earners can be subject to an additional Medicare surtax of 0.9%. This applies to those with income above $200,000 for single filers or $250,000 for married couples filing jointly.

Self-employed individuals pay the employee and employer portions of Medicare tax but can claim a self-employment tax deduction. The 0.9% on high incomes may apply.

Along with the wage tax base rate, the SSA announced the 2026 COLA increase, which is 2.8%.

On average, according to the SSA, Social Security retirement monthly benefits for an "average retiree" are expected to grow by about $57 as of January 2026.

For more information, see Kiplinger's report: The Social Security COLA for 2026: What You Need to Know.

As Social Security faces mounting long-term funding pressures, some lawmakers and policy groups are reviving calls to scrap the SS payroll tax income cap.

Removing the Social Security tax wage base/limit would mean high earners pay the 6.2% Social Security tax on all their income, not just earnings below the annual limit.

Right now, some wealthy taxpayers in the U.S. reach the wage limit quickly. For instance, someone earning $2 million a year would surpass the 2025 wage base of $176,100 in less than five traditional work days.

After that point, they no longer pay Social Security tax for the rest of the year, while middle-income workers continue contributing on every paycheck.

Supporters contend that eliminating the cap would inject new revenue into the Social Security trust fund and make the tax system fairer by ensuring everyone contributes the same share of their pay.
Some say scrapping the cap would also bring Social Security taxation in line with the Medicare tax, which has no earnings limit.
But opponents argue that lifting the limit would amount to a tax increase on upper-income workers and small business owners.

Additionally, some point out that while high-income individuals might pay more in taxes, the current Social Security benefit calculation formula could result in them eventually receiving higher benefits in retirement. (That could further strain the system.)

For now, the limit remains in place, but continues to rise each year. So, if you're a high earner, plan accordingly or consult a tax professional to see how this shift might impact your bottom line.

Ask the Editor, October 24: What Medical Expenses are Deductible?

joy.taylor@futurenet.com (Joy Taylor) — Fri, 24 Oct 2025 10:32:00 +0000

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at nine questions on the tax deduction for medical expenses. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Can I claim medical expenses and the standard deduction?

Question: I normally claim the standard deduction when I file my Form 1040. This year, I have incurred lots of medical expenses. Can I deduct them and take the standard deduction?

Joy Taylor: No. The medical expense write-off is an itemized deduction claimed on Schedule A of Form 1040. You cannot take the standard deduction if you are itemizing deductions on Schedule A. It’s an either/or situation – either you claim the standard deduction OR you itemize deductions on Schedule A. You can’t do both.

2. Are Medicare premiums deductible?

Question: This will be the first year I am claiming medical expenses on Schedule A of the Form 1040. My spouse and I each pay monthly premiums for our Medicare coverage. Are the premiums we pay deductible medical expenses?

Joy Taylor: Yes. Taxpayers who itemize on Schedule A can deduct qualifying medical expenses to the extent that the total amount exceeds 7.5% of adjusted gross income. You can claim medical expenses that are not reimbursed by insurance for yourself, your spouse and your dependents.

To qualify as a deduction, the expense must be incurred primarily to alleviate or prevent a physical or mental disability or illness. The broad list of eligible expenses includes out-of-pocket payments for medical services rendered by doctors, dentists, optometrists and other medical practitioners; mental health services; health insurance premiums (including Medicare Parts B and D); annual physicals; amounts paid for in vitro fertilization; prescription drugs and insulin (but not over-the-counter drugs); hearing aids; transportation to and from the doctor’s office; the unreimbursed costs of long-term care; and many home improvements to accommodate a disability or illness. For more information about what qualifies, see IRS Publication 502, “Medical and Dental Expenses.”

3. Can we deduct long-term-care costs?

Question: My spouse is going into a long-term-care facility. Can we deduct our unreimbursed costs for the care that is not paid by insurance as a medical expense on Schedule A of Form 1040 if we otherwise itemize?

Joy Taylor: Medical expenses are deductible on Schedule A of the Form 1040 only to the extent the total exceeds 7.5% of your adjusted gross income. You will likely be able to deduct your spouse’s unreimbursed long-term-care costs as medical expenses. Long-term-care expenses include the costs of assisted living, in-home care and nursing home services.

The long-term care must be medically necessary for one who is chronically ill, meaning at least two activities of daily living can’t be performed without help for 90 days or more. Anyone in need of long-term care because of dementia or other cognitive impairment is also considered chronically ill if substantial supervision is needed to protect the individual’s health and safety.

The chronic illness must be certified by a licensed health care practitioner. The cost of meals and lodging at a facility or nursing home counts as medical expenses if a person is mainly there for medical care.

4. Are long-term-care insurance premiums deductible?

Question: I pay annual premiums for a long-term-care insurance policy. Can I deduct the premiums I pay as medical expenses on Schedule A of the Form 1040?

Joy Taylor: The premiums you pay for a long-term-care policy are deductible medical expenses, subject to limitations. For most taxpayers, these premiums are medical costs deductible by itemizers on Schedule A of the Form 1040 to the extent that total medical expenses exceed 7.5% of adjusted gross income. Self-employed individuals can deduct these premiums on Schedule 1 of Form 1040.

The deduction for long-term-care premiums is capped based on age. The older you are, the higher the tax break. For 2025, taxpayers who are 71 or older can deduct as much as $6,020 per person. Filers age 61 to 70 can deduct up to $4,810 per person. People aged 51 to 60 can deduct up to $1,800 each. Individuals who are 41 to 50 can take up to $900. And people age 40 and younger can deduct no more than $480. For 2026, these monetary caps are $6,200, $4,960, $1,860, $930 and $500, respectively.

Note that a tax break related to paying long-term-care premiums takes effect next year. Generally, pre-age distributions from IRAs and workplace retirement plans are hit with a 10% early withdrawal tax, in addition to any regular income tax that is due on the distribution. Beginning in 2026, you can withdraw up to $2,500 from your 401(k) or other plan each year to help pay for long-term-care premiums without having to pay the additional 10% tax if you are younger than 59½.

5. Do costs for a drug rehab program qualify?

Question: Are the costs for a drug treatment program deductible medical expenses?

Joy Taylor: Yes, the cost of treatment for drug use or alcoholism is a medical expense. And many other health and wellness costs also qualify as deductible medical costs. These include the cost of a smoking cessation program, nutritional counseling for a doctor-diagnosed disease, and a weight-loss program to help with the treatment of obesity, hypertension, heart disease or other physical illness diagnosed by a physician. Note thought that the cost of diet foods, weight-loss supplements or reduced-calorie beverages are not deductible medical expenses.

6. Are teeth whitening procedures tax deductible?

Question: I paid a dentist lots of money last year to get my teeth whitened. Can I deduct the cost as a medical expense on Schedule A of my Form 1040?

Joy Taylor: Unfortunately, no. The costs of procedures to improve your appearance generally aren’t deductible. These include, for example, a weight-reduction program, a gym membership or cosmetic surgery to improve your appearance. Teeth whitening and hair transplants don’t count either.

7. Can I deduct costs for service animals?

Question: We are getting a service dog for my child who has epilepsy. Can I deduct the cost of the dog and his veterinary bills?

Joy Taylor: Yes. Amounts you pay to purchase a service dog, and the costs of training, food, grooming and veterinary care, are deductible medical expenses. These animals assist the visually impaired and others who have physical disabilities, so the owner can write off the costs of buying and caring for their dogs on Schedule A of Form 1040 to the extent total medical expenses incurred exceed 7.5% of adjusted gross income.

In some cases, the cost of an emotional support animal may be deducted as medical expenses. The owner must show that he or she is using the animal primarily for medical care to alleviate a mental disability or illness.

Read more on tax breaks for parents of children with disabilities.

8. Is the cost of medicine from abroad deductible?

Question: I am thinking of buying medicine from another country because I cannot get it here in the U.S. Can I deduct the cost of that medicine?

Joy Taylor: It depends. Buying medicine from abroad can come with a hefty tax price. The cost is generally not deductible as a medical expense on Schedule A. That’s because federal law bars importing many drugs from other countries. There are some exceptions to this general rule. For one, you can include the cost of an imported drug in deductible medicals if the drug was imported legally, for example, as announced by the Food and Drug Administration (FDA). You can also include in medicals a drug’s cost if you purchased and used that drug in another country, provided the drug is legal in the other country and in the United States.

9. Do costs for abortion procedures qualify?

Question: Is the cost of an abortion a deductible medical expense?

Joy Taylor: It depends. People who itemize on Schedule A can include in medical expenses the amount paid for a legal abortion, meaning the procedure is performed in a state where abortion is legal. Transportation costs are also deductible. If you drive there, you can deduct out-of-pocket costs or use the standard mileage rate for medical driving, which is 21¢ per mile for 2025. Hotel expenses of up to $50 a night can also be deducted if the abortion is provided by a doctor in a licensed hospital or a medical care facility. You can deduct up to an additional $50 a night for a traveling companion’s lodging. Meals aren’t deductible.

About Ask the Editor, Tax Edition

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

IRS Updates 2026 Tax Deduction for People Age 65 and Older

Kelley R. Taylor — Tue, 14 Oct 2025 14:21:00 +0000

As it does each year, the IRS has announced inflation adjustments to several tax credit and deduction amounts for 2026. This includes new 2026 income tax bracket thresholds, higher standard deduction amounts, and an increase in the additional standard deduction available to taxpayers age 65 and older.

As Kiplinger has noted, this extra standard deduction — which can be claimed in addition to the regular standard deduction — can help lower taxable income for many eligible retirees and older adults.

Adding to those familiar annual adjustments, the Trump/GOP so-called “big, beautiful bill” introduces a new bonus deduction for qualifying older adults. This extra benefit, which is available to itemizers as well, takes effect for the 2025 tax year and remains available through 2028.

Here’s more to know to plan for tax returns you'll file in early 2026 and 2027.

The Extra Standard Deduction for Those 65 and Older: The extra standard deduction can help older adults reduce their taxable income. Here's how.

Over 65 additional standard deduction for 2026 announced

For single filers and heads of households age 65 and over, the additional standard deduction increased slightly — from $2,000 for 2025 (returns you'll file earlier next year) to $2,050 for 2026 (returns you’ll file in early 2027).

For 2026, married couples over 65 filing jointly will also see a modest benefit.

The extra deduction per qualifying spouse increased from $1,600 in 2025 to $1,650 for 2026, a $50 increase per qualifying spouse.
For couples where both partners are 65 or older, this translates to a total increase of $100 in their additional standard deduction.

New: 2026 Extra Standard Deduction Age 65 or Older (Single or Head of Household)

65 or older or blind	$2,050
65 or older and blind	$4,100

New: 2026 Extra Standard Deduction Age 65 and Older (Married Filing Jointly or Separately)

65 or older or blind	$1,650 per qualifying individual
65 or older and blind	$3,300 per qualifying individual

Those 65 or older and blind continue to receive double the additional amount. For 2026, that means an extra $4,100 for single filers or heads of household. (Twice the $2,050 for those 65 or older or blind.)

Meanwhile, the 2026 amount will be $3,300 per qualifying spouse for those married filing jointly (i.e., $1650 x 2).
These changes are typically an issue for those deciding between taking the standard deduction and itemizing.

While the inflation-adjusted amounts may seem small, depending on the financial situation and federal income tax bracket, some taxpayers over 65 may benefit from a modest tax reduction.

It’s also worth noting that the IRS announced inflation-adjusted federal income tax brackets for 2026.

For more information on 2025 tax changes targeted to taxpayers over age 65, see our report: 2025 Tax Deduction Changes Those Over Age 65 Should Know.

Regular standard deduction rises for 2026

The IRS adjustments to the extra standard deduction for older adults come alongside increases in the standard deduction for all taxpayers.

The Tax Policy Center and other groups estimate that around 90% of people take the standard deduction rather than itemizing.)

The new Trump tax bill (enacted July 4, 2025) changed the 2025 standard deduction to $15,750 for single taxpayers, $31,500 for joint filers, and $23,625 for head of household.
With the latest inflation adjustments, the standard deduction amounts are as follows for 2026 (returns filed in early 2027):

New: Standard Deduction 2026 Amounts

Married Filing Joint and Surviving Spouses	$32,200	Increase of $700 from the prior tax year
Single and Married Filing Separately	$16,100	Increase of $350 from the prior tax year
Heads of Household	$24,150	Increase of $525 from the prior tax year

For more information, see: Standard Deduction 2026 Amounts Are Here.

$6,000 bonus deduction 2025-2028

Additionally, as Kiplinger has reported, the big bill introduces a new temporary and separate $6,000 bonus deduction for those age 65 and older.

The bonus deduction is available to individuals age 65 and older, with eligibility set at $75,000 in income for single filers and $150,000 for couples, and phasing above those levels.
But the provision is temporary. It will only be available from 2025 through 2028.
It will supplement, but not replace, the existing extra standard deduction already available to older adults who take the standard deduction.

Note: The new bonus deduction applies regardless of whether you itemize or take the standard deduction.

So, it could help those with sufficient deductible expenses to itemize, but who also want to further reduce their taxable income.

For more information, see our report: How the 'Senior Bonus Deduction' Works.

Impact of 2026 deduction changes for 'seniors'

Because Trump's new tax bill was recently enacted, the IRS is working to issue guidance and regulations to implement the many tax changes in the bill.

And while the new bonus deduction for older adults could help many taxpayers, how it impacts you depends on your specific tax situation.

Consider consulting with a tax professional to understand how new inflation-adjusted amounts may (or may not) affect your overall tax liability for the upcoming tax season and beyond.

Standard Deduction 2026 Amounts Are Here

Kate Schubel — Thu, 09 Oct 2025 17:07:00 +0000

The IRS has released the 2026 standard deduction amounts you’ll use for your 2026 tax return — and they're higher than ever.

The federal tax agency adjusts these amounts for each filing status every year. Since these adjustments are based on inflation and given the key tax changes in the 2025 Trump/GOP tax overhaul, the standard deduction is higher for 2026 than in recent years.

Knowing the standard deduction for your status can help you determine whether you should plan to itemize or claim the standard deduction next year.

Here's more to know.

The standard deduction amount for 2026 (Returns normally filed in 2027)

Standard Deduction For 2026
Married, Filing Jointly and Surviving Spouses	$32,200	Increase of $700 from the prior tax year
Single and Married, Filing Separately	$16,100	Increase of $350 from the prior tax year
Heads of Household	$24,150	Increase of $525 from the prior tax year

2026 standard deduction age 65 and older

Taxpayers age 65 and older, as well as those who are blind, can claim an additional standard deduction. For 2026, that additional amount is $1,650 ($2,050 if unmarried and not a surviving spouse).

Those eligible can add the extra standard deduction to the regular amount for their filing status. A single taxpayer 65 or older (or who is blind) can claim a total standard deduction of $18,150 on their 2026 federal tax return.

Additionally, as Kiplinger has reported, the 2025 Trump tax bill introduces a new bonus standard deduction of $6,000 for those age 65 and older.

This can be added to the 2026 standard deduction for each eligible individual and can be claimed by those who itemize.

However, the "bonus" amount is temporary and phases out for incomes above certain thresholds.

Standard deduction if you're claimed as a dependent

Your standard deduction amount might differ if you can be claimed as a dependent on another taxpayer’s federal tax return.

The 2026 standard deduction for dependents is limited to either $1,350 or the sum of $450 and the dependent’s earned income, whichever is greater.

Note: The standard deduction for dependents cannot exceed the regular standard deduction for your filing status, even if your earned income is higher than the basic standard deduction amount.

What's the highest standard deduction amount possible?

Given the new senior bonus deduction, the existing extra standard deduction for those over age 65, and changes to the base standard deduction, the highest possible 2026 standard deduction amount is a whopping $47,500.

That amount is for married couples filing jointly who are both age 65 or older, qualify for the bonus deduction, and can claim the extra standard deduction for both spouses.

For more information on how to calculate your total standard deduction, see: The Extra Standard Deduction for People Age 65 and Older.

New 2026 Income Tax Brackets Are Set: Has Your Marginal Rate Changed?

Kelley R. Taylor — Thu, 09 Oct 2025 16:17:00 +0000

Managing your finances in a tax-efficient way requires planning and understanding of the current tax laws.

A key aspect of that planning is being aware of federal income tax brackets. These brackets dictate how much tax you’ll pay on different portions of your income and can have a significant impact on your overall tax liability.

Thankfully, the IRS just released the income tax brackets for 2026, allowing you to strategize for the upcoming tax year (returns filed in early 2027).

Here's what you need to know.

New tax brackets 2026

Here are the inflation-adjusted tax brackets for 2026. (Note: These brackets apply to federal income tax returns typically filed in early 2027.)

It's also essential to remember that, for now, the associated tax rates remain the same (currently 10%, 12%, 22%, 24%, 32%, 35%, and 37%).

For federal tax brackets for the upcoming 2025 tax filing season, see Federal Tax Brackets and Income Tax Rates.

Also, the IRS has announced the 2026 standard deduction. For more information, see 2026 Standard Deduction Amounts Are Here.

New IRS 2026 Federal Income Tax Brackets: Single Filers and Married Couples Filing Jointly
Tax Rate	Taxable Income (Single)	Taxable Income (Married Filing Jointly)
10%	Not over $12,400	Not over $24,800
12%	Over $12,400 but not over $50,400	Over $24,800 but not over $100,800
22%	Over $50,400 but not over $105,700	Over $100,800 but not over $211,400
24%	Over $105,700 but not over $201,775	Over $211,400 but not over $403,550
32%	Over $201,775 but not over $256,225	Over $403,550 but not over $512,450
35%	Over $256,225 but not over $640,600	Over $512,450 but not over $768,700
37%	Over $640,600	Over $768,700

New 2026 Tax Brackets: Married Couples Filing Separately and Head of Household Filers
Tax Rate	Taxable Income (Married Filing Separately)	Taxable Income (Head of Household))
10%	Not over $12,400	Not over $17,700
12%	Over $12,400 but not over $50,400	Over $17,700 but not over $67,450
22%	Over $50,400 but not over $105,700	Over $67,450 but not over $103,700
24%	Over $105,700 but not over $201,775	Over $105,700 but not over $201,775
32%	Over $201,775 but not over $256,225	Over $201,750 but not over $256,200
35%	Over $256,225 but not over $384,350	Over $256,200 but not over $640,600
37%	Over $384,350	Over $640,600

It's also important to note that these income tax rates are marginal, meaning they only apply to the income within the relevant tax bracket range for your filing status.

For example, just because a married couple files a joint return with $110,000 of taxable income in 2025 and their total taxable income falls within the 22% bracket for joint filers, it doesn't mean they will pay $24,200 in tax. The 22% rate isn’t applied as a flat rate on the entire $110,000.

Instead, the tax brackets are tied to marginal tax rates. This means that in 2025, for example, the first $23,850 of income is taxed at a rate of 10%. The next portion of income, between $23,851 and $96,950, is taxed at a rate of 12%. Finally, only the income exceeding $96,950 is taxed at 22%.

Note: See Kiplinger's Federal Income Tax Brackets and Rates guide for more examples and information on how tax brackets work.

IRS 2026 tax brackets vs 2025: Do tax brackets go up with inflation?

One of the tax effects of high inflation is that it impacts the tax bracket ranges. This can be seen in the "width" of the 2026 brackets, which have become comparatively wider. ("Width" refers to the difference between the lowest and highest dollar amounts in a tax bracket.)

Wider tax brackets help prevent "bracket creep." Bracket expansion reduces the likelihood of being pushed into a higher tax bracket if your income remains constant or grows slower than inflation.

What's the new 2026 standard deduction?

The IRS also announced an increase in the standard deduction for the 2026 tax year.

The standard deduction will rise, for 2026, to $16,100 for single filers and married individuals filing separately, a $350 increase from the previous year's amount.
The 2026 amount for those married filing jointly will be $32,200.

The increase in the standard deduction means that taxpayers who don't itemize their deductions can reduce their taxable income by a larger amount, potentially resulting in lower tax bills or larger refunds.

For your current 2025 standard deduction, see What's the Standard Deduction?

No TCJA 2025 'tax cliff' to worry about

Many taxpayers wondered what would happen to their income tax brackets and rates after December 31, 2025.

Now that Republican lawmakers passed a tax and spending bill in 2025 (known by some as the "big, beautiful bill,") fears of a so-called "tax cliff" impacting key individual provisions like tax brackets and rates have been averted.

Since President Trump signed a new tax bill into law on July 4, 2025, taxpayers are not looking at a return to higher tax rates for income levels starting in 2026.
The current seven tax brackets, ranging from 10% to 37% remain unchanged.

As always, however, consult a qualified and trusted tax professional to see what these new brackets mean for you.

Seven Things You Should Do Before 2026 Because of One Big Beautiful Bill Changes

kiplinger@futurenet.com (Sandra Block) — Fri, 03 Oct 2025 11:00:00 +0000

The One Big Beautiful Bill Act, signed into law in July, has wide-reaching implications for taxpayers. From an enlarged standard deduction for older adults to more-generous tax credits for families with young children, the legislation contains a plethora of provisions that could lower your 2025 tax bill — or, in some cases, increase it.

Just as noteworthy as the new rules are those that extend provisions from the 2017 Tax Cuts and Jobs Act (TCJA). The OBBBA makes permanent the reductions in federal income tax rates that the TCJA implemented. (Otherwise, those tax rates would have expired on December 31.)

In addition, the OBBBA increases the federal estate tax exemption from $13.99 million per person in 2025 to $15 million per person, or $30 million for a married couple, in 2026. It will be adjusted annually for inflation.

Without congressional action, the exemption would have dropped to about $7 million after 2025. Because of the exemption’s size, the vast majority of taxpayers don’t need to worry about paying federal estate taxes.

You may want to schedule an appointment with your financial planner or tax preparer to discuss how the bill will affect your 2025 tax liability.

“You’ve got to run the numbers, because there’s so much that’s changing,” says Tim Steffen, director of advanced planning at Baird.

To get you started, we have guidance here on how to get the most from some of the significant provisions in the OBBBA.

A BONUS DEDUCTION FOR OLDER ADULTS

Starting with the 2025 tax year, taxpayers who are 65 or older will be eligible for an additional standard deduction of $6,000. The bonus deduction, which is scheduled to expire at the end of 2028, comes on top of an existing extra standard deduction of $2,000 for single filers who are 65 or older or, for married couples who file jointly, $1,600 for each spouse who is 65 or older.

The expanded deduction means a single taxpayer who is 65 or older will be able to deduct up to $23,750 from taxable income, while a married couple who file jointly will qualify for a deduction of up to $46,700, assuming both are 65 or older.

That can translate to significant savings for older taxpayers. For example, an older married couple in the 22% tax bracket (for 2025, that includes income of $96,951 to $206,700) could see tax savings of $2,640 a year, says Marilou Davido, a certified financial planner in Milwaukee.

Older taxpayers in lower tax brackets could save $600 to $1,200 a year, she says.

The legislation won’t eliminate taxes on Social Security benefits. But because the taxability of benefits is based on a calculation involving your adjusted gross income, the OBBBA will reduce the number of beneficiaries who pay the taxes from 36% to 12%, according to the White House Council of Economic Advisers.

Now for the caveats: The bonus standard deduction will affect only eligible taxpayers whose income exceeds the amount of the deduction, so low-income people won’t benefit from this tax break.

At the other end of the spectrum, higher-income taxpayers could see the amount of the bonus deduction reduced or eliminated altogether.

The deduction starts to phase out for couples with modified adjusted gross income of more than $150,000 ($75,000 for single filers) and is fully phased out at MAGI of $250,000 ($175,000 for singles). Your modified adjusted gross income is your adjusted gross income with certain deductions added back.

The higher standard deduction won’t shield Medicare beneficiaries who pay a surcharge, known as the income-related monthly adjustment amount (IRMAA), on their Part B and Part D premiums. The surcharge is based on a version of your MAGI that’s specific to Medicare and is calculated before the standard deduction applies.

Taxpayers whose MAGI is close to surpassing the eligibility threshold for the bonus standard deduction should consider avoiding moves that could reduce this tax break’s value.

For example, converting funds in a traditional IRA to a Roth IRA could reduce or eliminate the bonus deduction by increasing your MAGI, says Davido.

If you want to convert to a Roth, consider spreading out the conversions over several years to keep your MAGI below the threshold, she says.

One argument in favor of doing a Roth conversion is that it protects your nest egg from future tax increases, because Roth withdrawals are tax-free as long as you’re 59½ or older and have owned the Roth for at least five years.

But now that the OBBBA has extended current tax rates, individuals can spread out conversions without fear of a tax increase, at least under the current presidential administration, Davido says.

Timing matters, too: Converting to a Roth before age 65 would avoid the potential loss of the bonus deduction.

Capital gains distributions and withdrawals from traditional IRAs will also increase your MAGI. But there are steps you can take to offset that income and preserve the bonus deduction.

If you’re still working, increasing pretax contributions to 401(k) plans and health savings accounts (HSAs), for example, will reduce your MAGI.

Individuals who are 70½ or older can reduce their MAGI by making qualified charitable distributions from their IRAs, says Todd Calamita, a CFP in Charlotte, N.C.

In 2025, taxpayers can make QCDs of up to $108,000 from their IRAs to qualifying charities. If you’re 73 or older, a QCD will also count toward your required minimum distribution (RMD). A QCD isn’t deductible, but it’s excluded from taxable income.

Davido recommends working with your tax preparer or financial planner before year-end to adjust income-tax withholding and estimated tax payments for 2026. The bonus standard deduction could enable you to reduce the amount of tax withheld from your Social Security benefits and IRA withdrawals; you may also be able to lower your quarterly estimated tax payments.

A BIGGER BREAK FOR HOMEOWNERS

The OBBBA contains a valuable tax break for homeowners who live in high-tax states, and like the bonus standard deduction, the change could affect your 2025 tax bill.

Starting in 2025, those who itemize will be able to deduct up to $40,000 in state and local taxes (SALT), up from a cap of $10,000. The cap will increase by one percentage point each year through 2029, then return to $10,000 in 2030.

The SALT deduction includes state income, property and sales taxes; it’s often most useful for property taxes, which have soared as home values have risen in recent years. The primary beneficiaries will be homeowners in states with high property taxes, such as New Jersey and New York.

The cap is gradually reduced for those with MAGI above $500,000 ($250,000 for a married individual filing separately), and taxpayers with MAGI of $600,000 or more will be limited to deducting $10,000 on their tax returns.

Consequently, homeowners who are eligible for the higher cap need to be even more mindful of their 2025 MAGI, says Robert Keebler, a CFP with Keebler and Associates in Green Bay, Wis. This phaseout is potentially more costly than the phaseout for the bonus standard deduction, he says.

Keebler offers this example: Suppose you’re married, file jointly and have a MAGI of $500,000. Your itemized deductions include $40,000 in state and local taxes. If you convert $100,000 from a traditional IRA or 401(k) to a Roth, your gross income rises to $600,000, and your state and local tax deduction is reduced to $10,000. While your gross income went up by $100,000, your taxable income rose by $130,000.

At a 35% marginal rate, your effective rate on the conversion is 45.5%.

As is the case with older taxpayers, homeowners who are eligible for the higher SALT cap should consider spreading out Roth conversions and taking other steps to keep their MAGI below the thresholds.

Homeowners in high-tax states may get even more out of the higher cap by bunching their itemized deductions.

For example, if you paid your 2025 property taxes earlier this year and receive a bill for 2026 in December, pay it before December 31 so you can deduct both payments on your 2025 tax return, Davido says.

Using the bunching strategy, you would claim the standard deduction in 2026 and make two property tax payments in 2027 so you can itemize in that year.

Bunching your charitable contributions is also an effective way to increase your itemized deductions and lower your tax bill.

A donor-advised fund is a useful tool for this strategy. These funds, offered by major financial institutions, allow you to make a large contribution, deduct the donation on the current year’s tax return, and decide later which charities you want to support.

However, there are other provisions in OBBBA that could reduce the effectiveness of this strategy, which we’ll discuss below.

NEW STRATEGIES FOR CHARITABLE CONTRIBUTIONS

As you consider your year-end charitable contributions, it’s important to understand new tax breaks for givers — along with new limits on how much some donors will be allowed to deduct.

Starting in 2026, taxpayers who don’t itemize can deduct up to $1,000 in charitable contributions, or up to $2,000 for married couples who file jointly. Donations to donor-advised funds and private foundations aren’t eligible for this new deduction.

If you don’t itemize and want to take advantage of this tax break, consider making the charitable contributions you’d ordinarily make by the end of this year in January 2026 instead.

Meanwhile, taxpayers who itemize on their tax returns and deduct charitable contributions will be subject to a new limit on the amount they can deduct. The maximum amount of cash gifts donors can deduct will remain at 60% of AGI.

However, starting in 2026, the deduction will be limited to the amount of charitable contributions that exceed 0.5% of adjusted gross income, Steffen says.

For example, a married couple with AGI of $100,000 who donate $700 to charity will be permitted to deduct only $200.

To avoid that new floor, itemizers may want to make their 2026 contributions in 2025, keeping in mind how that will affect other aspects of their tax bill.

Taxpayers in the top tax bracket (for 2025, that includes income higher than $626,350 for singles or $751,600 for joint filers) may also want to accelerate charitable contributions into 2025 because of a cap on all itemized deductions those taxpayers can claim.

Starting in 2026, the amount of itemized deductions taxpayers in the 37% tax bracket can claim will be limited to 35% of their taxable income.

MORE BENEFITS FOR HEALTH SAVINGS ACCOUNTS

A health savings account can be a valuable tool to set aside money for both current and future health care expenses. An HSA provides a triple tax break: Your contributions are tax-deductible (or pretax if made through your employer), the money grows tax-deferred, and you can use it tax-free for eligible medical expenses in any year.

After you turn 65, you can also withdraw money tax-free from the HSA for Medicare premiums, in addition to other out-of-pocket health care costs.

The new law has three HSA-related provisions. Starting on January 1, 2026, you can withdraw up to $150 per month ($300 for couples) from an HSA tax-free to pay monthly or annual fees for direct primary care arrangements (also known as concierge medicine), in which doctors provide services in exchange for a membership fee.

The law also clarifies that enrolling in a direct primary care arrangement does not disqualify someone from being able to contribute to an HSA if they also have an eligible high-deductible health policy.

Not all concierge practices qualify under the new law as direct primary care arrangements — there are limits to the types of services they can provide beyond primary care.

Additionally, the law permanently exempts telehealth services from the HSA-qualified plan deductible. Most medical care, except for some preventive care, must be subject to the deductible for a health insurance policy to be HSA-qualified.

During the COVID pandemic, you could receive some telehealth services without first paying the plan’s deductible — typically with a $5 or $10 co-payment — but that rule expired at the end of 2024. The OBBBA permanently exempts telehealth from the deductible requirements, retroactive to January 1, 2025.

Finally, bronze plans and catastrophic plans sold on the Affordable Care Act insurance marketplace will automatically be HSA-qualified, starting with the 2026 plan year.

Using an HSA-eligible bronze plan and making tax-free withdrawals from your HSA to pay for direct primary care could be a win-win, says Roy Ramthun, founder and president of HSA Consulting Services LLC in Silver Spring, Md.

You can sign up for direct primary care for your regular doctor’s visits but have a high-deductible bronze plan as a backstop if you end up needing expensive medical care. You’ll be eligible to contribute to an HSA, and you can also use HSA money tax-free to pay the monthly direct primary care fees.

Notably, the version of the OBBBA that originally passed the House of Representatives would have allowed people who sign up for Medicare Part A to contribute to an HSA. But that provision wasn’t included in the final law, so the current rules still stand: You can make HSA contributions only if you haven’t enrolled in either Medicare Part A or Part B.

If you or your spouse is still working and you have health insurance from an employer with 20 or more employees, you can delay signing up for Part A and Part B. But you must enroll within eight months of losing that coverage; otherwise, you could face a lifetime late-enrollment penalty for Part B.

If you sign up for Part A after you turn 65, that coverage takes effect up to six months retroactively. Keep that time frame in mind when calculating your HSA contribution.

CHANGES TO THE HEALTH INSURANCE MARKETPLACE

Several administrative changes are coming to Affordable Care Act marketplace coverage because of provisions in the OBBBA, as well as new rules from the Centers for Medicare & Medicaid Services.

The open-enrollment period to sign up for a marketplace plan will be shorter. Next year, open enrollment for the federal marketplace (HealthCare.gov) will run from November 1, 2026, to December 15, 2026. States that operate their own marketplaces won’t be allowed to extend open enrollment past December 31. Currently, open enrollment goes to January 15, and even longer in some states.

Before you enroll in a marketplace plan, you’ll need to provide evidence of income eligibility for tax credits for your premiums. (Currently, you have 90 days after you enroll to submit the information.)

If your income increases after you enroll and you don’t update your information with the marketplace, you may have to pay back the extra subsidy when you file your income tax return.

Under the previous rules, there were limits to how much you have to pay back if you underestimate your income.

Enhanced subsidies are scheduled to expire

Perhaps the most consequential outcome for ACA plan enrollees is that the OBBBA didn’t extend enhanced premium subsidies for marketplace coverage. The enhanced subsidies are set to expire at the end of 2025, and Congress probably won’t pass additional legislation to extend them.

So the size of the subsidies and the income levels to qualify are likely to shrink significantly on January 1, 2026. People who earn more than 400% of the federal poverty level will no longer be eligible for any subsidies after 2025. For 2026 marketplace plans, 400% of the poverty level is $62,600 for singles and $84,600 for couples.

If you have individual health insurance from the ACA marketplace and you plan to do Roth conversions, you may want to convert more money before the end of 2025 than in 2026, when the extra income may make you ineligible for the subsidy.

“For a retired client, we’ve been able to do about $100,000 of Roth conversions yearly with the enhanced premium tax credits,” says Mark Whitaker, a CFP and founder of Retirement Advice LLC, a fee-only financial planning firm in Provo, Utah.

“Going forward, to hit their ACA subsidy levels, they will only be able to do about $60,000 of Roth conversions a year.”

But be sure to consider other variables, too, such as your tax rate and other income cut-offs. (For more, see the section above on the bonus deduction for older people.)

UPDATES FOR FAMILIES

If you have kids at home, you may benefit from multiple provisions in the OBBBA.

More-generous tax credits for parents

The OBBBA permanently extends the child tax credit and increases it to $2,200 per child, up from $2,000. The credit phases out for singles with modified adjusted gross income of $200,000 or more and married couples who file jointly with MAGI of $400,000 or more.

The OBBBA also makes permanent a separate credit of up to $500 for families with other dependents, such as parents or adult relatives.

The adoption tax credit is more valuable, too. If you adopted a child this year, you can claim a credit for up to $17,280 in eligible expenses. Here’s what’s new: $5,000 of the tax credit will be refundable.

In other words, taxpayers with tax liability of less than $5,000 can still claim that portion of the credit, which means some of that amount could be returned to parents as a refund.

Starting in 2026, the maximum tax credit parents can claim for child and dependent care expenses, such as the cost of day care or a nanny, will increase to 50% of as much as $3,000 in expenses for one dependent and 50% of as much as $6,000 for two or more dependents (both up from 35%).

The credit decreases based on adjusted gross income to as little as 20% of expenses, but OBBBA increased the income thresholds. For married couples with AGI between $150,000 and $210,000, the credit ranges from 35% to 20%. Couples with AGI of $210,000 or more are eligible for a credit of 20% of expenses.

Expanded uses for 529s

Originally designed as a tax-advantaged way to save for college, 529 plans have been expanded over the past several years to permit tax-free withdrawals for certain non-college expenses, too. The OBBBA extends these uses even further.

“The new rules allow up to $20,000 per year to be used for elementary and secondary school tuition, course materials, tutoring, fees for standardized tests, and more,” says Robert Farrington, founder of the website The College Investor.

Previously, tax-free withdrawals of 529 money for K-12 students were limited to tuition, up to $10,000 annually.

The legislation also permits tax-free 529 withdrawals for certain other expenses, such as non-degree credential programs for plumbing, electrical, HVAC and some other trades; certification and licensing expenses; and continuing education required to maintain those licenses.

That means beneficiaries who don’t go to college will have additional ways to benefit from tax-advantaged 529s.

The law permanently allows rollovers from 529 plans to ABLE accounts, where the money can continue to grow tax-deferred for people with disabilities who may not go to college.

Most of the changes related to 529 distributions took effect as soon as the law was signed on July 4, although the increased, $20,000 annual limit for K-12 expenses doesn’t apply until the 2026 tax year.

Keep in mind that not all states have altered their rules to follow the federal expansion. “For example, California doesn’t allow 529 plans to be used for elementary or secondary school expenses,” says Farrington.

Trump accounts for kids

The OBBBA introduces a new investment account — known as a Trump account — for kids younger than 18, and the government will seed the account with $1,000 for children born between January 1, 2025, and December 31, 2028.

Parents and others can contribute up to $5,000 a year to the account until the child turns 18. Contributions are invested in a fund that tracks a broad U.S. stock index, and they grow tax-deferred.

You may have better options for your child’s long-term savings. Annual contributions are not tax-deductible, and earnings are taxed at the beneficiary’s income tax rates when withdrawn.

Unless the money is used for certain expenses, such as education or up to $10,000 for a first-time home purchase, you’ll have to pay a 10% early-withdrawal penalty before age 59½.

“The only advantage of Trump accounts is the $1,000 birthday gift for newborn children. Families should, of course, accept the free money,” says Mark Kantrowitz, a college-savings expert and author of How to Appeal for More Financial Aid.

But for your child’s future college expenses, you’re better off contributing to a 529 plan, because withdrawals for qualified educational expenses are tax-free.

LAST CHANCE TO CLAIM TAX CREDITS FOR THESE ENERGY-SAVING MOVES

The OBBBA speeds up the deadlines to take advantage of certain tax credits related to saving energy.

The Energy Efficient Home Improvement Credit, which provides a 30% tax credit toward the cost of energy-efficient windows, home energy audits, heat pumps and other energy-saving home improvements, was previously scheduled to phase out in 2033. (The law imposed annual limits for certain projects, such as $600 for exterior windows and skylights.)

But now, the credit expires at the end of 2025. The Residential Clean Energy Credit, which provides a tax credit of up to 30% for more-ambitious projects, such as solar electric panels and solar water heaters, will also expire on December 31. The equipment must be installed and operational by year-end to qualify for the credit.

Additionally, the $7,500 EV tax credit to buy or lease qualified electric vehicles, along with the $4,000 credit for eligible used EVs, ends September 30, 2025.

At the same time, however, the OBBBA provides a new tax break for car buyers: a deduction of up to $10,000 in interest on loans for cars purchased between 2025 and 2028.

You don’t have to itemize to claim this deduction, but it’s available only for loans taken out to buy new cars assembled in the U.S., which rules out many popular models. The deduction phases out for individuals earning more than $100,000 or married couples making more than $200,000.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Claiming the Standard Deduction? Here Are 10 Tax Breaks For Middle-Class Families

Kate Schubel — Thu, 04 Sep 2025 13:57:00 +0000

What is “middle-class”? Although definitions might vary, the Pew Research Center might have an answer.

A recent Pew report found that a family of three could be considered in the “middle” of upper and lower incomes when annual household earnings are from $56,600 to $169,800*.

For these middle-income homes, there might be good news come tax time: The IRS has several key tax breaks available for federal income returns, regardless of whether you claim the standard deduction or itemize (which is even better news for the 90% of Americans who opt for the standard deduction).

Here are 10 tax breaks available to eligible middle-income taxpayers who claim the standard deduction on their 2025 income tax return.

*Note: Pew Research is based on 2022 Census Bureau Data and varies significantly by city and state.

New: Tax Refund Alert: House GOP Predicts 'Average' $1,000 Payouts in 2026

What tax deductions and credits can I claim with the standard deduction as a middle-class working family?

Kiplinger used the $56,600 to $169,800 “middle-income” range released by the Pew Research Center to find 10 tax breaks available to middle-class families in 2025.

However, it’s important to note that specific geographic location, number of children and other financial and personal circumstances factor into whether an individual or household might be considered “middle-class.”

Additionally, the list below doesn't include tax-incentivized benefits, such as those for health coverage, tax-free investments, such as municipal bonds, or tax-advantaged savings accounts, such as IRAs.

Only federal tax credits and deductions meeting these income criteria were considered.

Even then, keep in mind this listing is not exhaustive, and it’s important to check with your state Department of Revenue website regarding additional tax breaks for which you could be eligible. Consult with a qualified tax professional when necessary.

Child care and other dependents tax breaks

1. The Child Tax Credit (CTC) for middle-class families

The child tax credit is worth up to $2,200 per qualifying child in 2025. (Image credit: Getty Images)

Single-filer income limit before phaseout begins: $200,000*

Joint-filer income limit before phaseout begins: $400,000*

According to recent data, taxpayers with incomes from $100,000 to $200,000 receive the largest average federal Child Tax Credit (CTC) compared with lower and upper income groups.

If you want to learn more about the CTC as a middle-class taxpayer, here are some fast facts:

For 2025, the credit is worth up to $2,200 per qualifying child under age 17 (age 16 and younger).
The refundable portion of the credit (the amount you receive even if you owe no tax) is $1,700.
For every $1,000 that your income is above the income limits, your CTC is reduced by $50.

Starting in 2025, a Social Security Number (SSN) is also required for parents or guardians claiming this tax break. Households with non-citizen parents are likely to be ineligible to receive the credit.

*Note: “Income” for the CTC is based on a taxpayer’s modified adjusted gross income (MAGI), though other types of excluded income (like foreign earned income) may be added back to calculate your CTC amount.

2. Child and Dependent Care Credit for middle-income families

The child and dependent care credit may be used on day care, after-school care, and other qualifying childcare expenses. (Image credit: Getty Images)

Single-filer income limit before phaseout begins: $15,000*

Joint-filer income limit before phaseout begins: $15,000*

The Child and Dependent Care Tax Credit (CDCTC) is designed to reimburse families for qualifying child care expenses while the parents are working (or looking for work).

The total 2025 CDCTC amount is worth up to $3,000 for one child or $6,000 for two or more children.

Although the CDCTC has a low beginning phaseout limit of $15,000, it might be considered a “middle-class” tax break for two reasons.

First, the CDCTC is nonrefundable (meaning low-income families who are owed a tax refund can't receive the full benefit).
Secondly, higher earners receive a diminished benefit relative to their total income.

Additionally, the CDCTC has no upper phaseout limit, meaning many middle-class families with children might see some potential tax benefit.

Families with an income of $15,000 or less qualify to have 35% of their qualifying child care expenses reimbursed.
A 1% phaseout exists for each $2,000 your income exceeds the $15,000 amount.
Families with $43,000 or more will receive the minimum credit rate of 20% on qualifying expenses. This translates to a CDCTC of $600 to $1,200, depending on the number of qualifying children.

The federal CDCTC is available to those with qualifying child care expenses for children under age 13 (age 12 and younger) (or dependents with disabilities). Qualifying expenses might include before- and after-school care, babysitters, day care, and preschool.

For more information on qualifying expenses, see Kiplinger’s report, The Child and Dependent Care Credit: How Much Is It?.

*Note: “Income” for the CDCTC is based on a taxpayer’s adjusted gross income (AGI).

3. Tax Credit for Other Dependents: The 'Family Tax Credit' for middle-class families

The so-called "family tax credit" is a way for families to save on federal income taxes if their dependent does not qualify for the child tax credit. (Image credit: Getty Images)

Single-filer income limit before phaseout begins: $200,000*

Joint-filer income limit before phaseout begins: $400,000*

The credit for other dependents might be beneficial for middle-income families with qualifying children age 17 and older (so they no longer qualify for the CTC). Other dependents might also be considered “qualified.”

The maximum $500 credit amount is available to taxpayers who have:

Income below $200,000 (single filers) or $400,000 (married filing jointly).
A qualifying dependent. This might include a child, parent, or other qualified individual. (See the IRS website for qualifying dependency rules.)

The credit phases out by $50 for every $1,000 (or fraction thereof) that your income goes beyond the income limits.

For more information, check out Kiplinger’s report How Caregivers for Adults Can Save on Taxes in 2025.

*Note: “Income” for the credit for other dependents is based on a taxpayer’s adjusted gross income (AGI).

4. Adoption Credit for middle-income families

The federal adoption credit was recently made partially refundable under Trump's new tax bill in 2025. (Image credit: Getty Images)

Single-filer income limit before phaseout begins: $259,190*

Joint-filer income limit before phaseout begins: $259,190*

The National Council for Adoption (PDF) surveyed more than 4,200 adoptive parents across all 50 states and Washington, D.C. Of the responses, more than half had income above $75,000, which is within the Pew Research Center’s “middle income” range.

Families who finalize an adoption in 2025 can save up to $17,280 in qualified child expenses. This includes a new refundable portion of the credit worth up to $5,000, meaning that if you owe no federal tax, you might still get up to that amount refunded to you after you file.

Here are some other important facts about the federal adoption credit:

Qualified adoption costs eligible for the credit include adoption fees, court costs or legal expenses, any travel costs, home study fees, and expenditures associated with re-adoption in your home state (if foreign adoption applies).
Families adopting a U.S. child with special needs can claim the full tax credit without having any qualified adoption expenses.
Parents with an income of more than $259,190 will receive a reduced credit, with a complete phaseout at $299,190 or more.

Any remaining nonrefundable adoption credit can be carried forward for up to five years to offset future tax liabilities.

*Note: “Income” for the federal adoption credit is based on a taxpayer’s modified adjusted gross income (MAGI).

Education Tax Breaks

5. The American Opportunity Tax Credit (AOTC) for middle-class families

The "AOTC tax credit" is worth up to $2,500 in 2025. (Image credit: Getty Images)

Single-filer income limit before phaseout begins: $80,000*

Married-filing jointly income limit before phaseout begins: $160,000*

The American Opportunity Tax Credit (AOTC) is designed to help families afford college. This partially refundable tax break phases out completely for single filers with incomes above $90,000 and married couples filing jointly with incomes above $180,000.

You can claim the AOTC on:

100% of the first $2,000 spent on qualified education expenses (such as books, tuition and fees), plus
25% of the next $2,000 you spend on these qualifying expenses.

Thus, the AOTC combined total is worth up to $2,500.

Once more, if the credit amount exceeds your tax bill, you’ll get a refund for 40% of the remaining amount (up to $1,000 per qualifying student).

However, there are various eligibility requirements you must meet to qualify for the AOTC:

You (or your dependent or spouse) must be enrolled in school at least half-time.
The qualifying individual must attend an eligible educational institution, AND
Pursue a degree or other educational credential.

Furthermore, you can only use the AOTC for the first four years of enrollment. For more information on eligibility requirements, check out Kiplinger's report, What Is The American Opportunity Tax Credit (AOTC)?

*Note: “Income” for the AOTC is based on a taxpayer’s modified adjusted gross income (MAGI).

6. The Lifetime Learning Credit (LLC) for middle-income families

Families may save on qualifying educational expenses with the lifetime learning credit. (Image credit: Getty Images)

Single-filer income limit before phaseout begins: $80,000*

Married, filing jointly, income limit before phaseout begins: $160,000*

The Lifetime Learning Credit (LLC) is similar to the AOTC, but with one major difference: The LLC can be used for non-degree courses.

This means that, while you might only use the AOTC four times per tax return, you can claim the LLC as long as you are meeting eligibility requirements:

The qualifying individual must be enrolled for at least one academic period (semester, trimester, etc.) during the tax year at an eligible educational institution.
You don’t need to be enrolled half-time, and the coursework can be used to improve job skills (instead of a degree program). You can also be a graduate student.
Books, tuition, and fees might be qualified expenses if purchased from the educational institution as a condition of enrollment. Room and board, insurance, and transportation are not considered qualifying expenses for purposes of the LLC.

While the credit isn’t refundable, it is worth up to $2,000 per tax return (20% of $10,000 of qualified education expenses).

*Note: “Income” for the LLC is based on a taxpayer’s modified adjusted gross income (MAGI).

7. Student Loan Interest Deduction for middle-income families

The student loan interest deduction may be claimed regardless of whether a taxpayer opts for the standard deduction or chooses to itemize. (Image credit: Getty Images)

Single-filer income limit before phaseout begins: Up to $85,000*

Married, filing jointly, income limit before phaseout begins: Up to $170,000*

Qualifying middle-class earners looking to further save on educational costs might be eligible to claim the student loan interest deduction. To qualify for this tax break, worth up to $2,500, taxpayers must:

Have a private or federal student loan taken out to pay for higher education expenses (room and board, tuition and fees, books, supplies, and other necessary costs).
Pay interest on the loan and be legally responsible for repaying the amount due.

The full $2,500 student loan interest deduction starts to phase out for incomes above $85,000 (single) and $170,000 (married filing jointly).

For tax year 2025, incomes exceeding $100,000 (single) and $200,000 (married filing jointly) are ineligible to claim this deduction.

*Note: “Income” for the student loan interest deduction is based on a taxpayer’s modified adjusted gross income (MAGI).

Income Tax Breaks

8. Tip Income Deduction for working middle-class families

Food servers, plumbers and hairstylists are just a few professions that may qualify for the federal tip income tax deduction. (Image credit: Getty Images)

Single-filer income limit before phaseout begins: $150,000*

Joint-filer income limit before phaseout begins: $300,000*

Due to the passage of the GOP reconciliation bill dubbed the “One Big Beautiful Bill” (OBBB), eligible taxpayers can now claim a new temporary tip income deduction for tax years 2025 through 2028. This could provide tax relief for up to 4 million tipped workers in the U.S..

The tip income tax deduction might be claimed regardless of whether you itemize or claim the standard deduction on your federal income tax return.

The maximum deduction amount for tip income in 2025 is $25,000.
“Qualified” tips include both voluntary cash and charged tips (such as credit card or PayPal).
Payroll taxes still apply (that is, the deduction doesn’t reduce Social Security or Medicare taxes).

For every $1,000 your income exceeds the above limits, your tip income deduction is diminished by $100. The deduction completely phases out for single filers with income of $400,000 and joint filers with income exceeding $550,000.

As first reported by Axios, the U.S. Treasury Department has recently released a list of qualifying professions for this tax break. Qualified professions might include:

Wait staff and bartenders.
Food servers, chefs and cooks.
Dancers, musicians, singers and digital content creators.
Housekeeper cleaners and resort desk clerks.
Home plumbers, electricians and landscapers.
Private event planners, pet caretakers and tutors.
Hairstylists, Tailors, makeup artists and pedicurists.

The total list has more than 65 jobs across eight categories.

*Note: “Income” for the tip income tax deduction is based on a taxpayer’s modified adjusted gross income (MAGI).

9. Overtime Tax Deduction for middle-income families

Married filing joint couples might claim up to $25,000 in overtime pay on their federal income taxes if they meet certain eligibility requirements. (Image credit: Getty Images)

Single-filer income limit before phaseout begins: $150,000*

Joint-filer income limit before phaseout begins: $300,000*

Similar to the tip income deduction, qualifying non-exempt employees might be able to claim an overtime deduction on their 2025 federal income tax return.

This temporary deduction (only available until 2028) is worth up to $12,500 for single filers and $25,000 for joint filers who work more than 40 hours per week.

Here are a few more fast facts about the federal overtime pay tax deduction:

You must be a non-exempt employee who earns overtime under the federal Fair Labor Standards Act (FLSA).
The deduction only applies to the “extra” half of your time-and-a-half rate and not your entire overtime wages.
The deduction is reduced by $100 for every $1,000 of income over the above income thresholds.
You can claim the deduction regardless of whether you itemize or take the standard deduction.
When single filers have income of $275,000 or more (and married filing jointly couples make $550,000 or more), the overtime deduction is completely phased out.

*Note: “Income” for the overtime pay tax deduction is based on a taxpayer’s modified adjusted gross income (MAGI).

Purchasing Tax Breaks

10. Car loan interest tax deduction for middle-income families

The car loan interest deduction is a new tax break for 2025 federal income taxes. (Image credit: Getty Images)

Single-filer income limit begins: $100,000*

Married, filing jointly, income limit begins: $200,000*

The OBBB also introduced a new temporary deduction for car loan interest. The car tax break is available for taxpayers, whether they itemize or claim the standard deduction:

The car loan interest deduction is worth up to $10,000 per year on qualifying vehicles.
Single filers with income exceeding $100,000 (married, filing jointly, with income above $200,000) will face a $200 phaseout of the deduction for every $1,000 of income above the income limit.
When income levels reach $150,000 for single filers ($250,000 for married filing joint couples), the car loan interest deduction is eliminated.

A recent survey indicates that one-third of middle-income households plan to buy a car in 2025.** But while the car loan interest deduction might help some save on car buying costs, there are a couple of caveats to keep in mind:

The personal-use car interest loan deduction only applies to new, American-made vehicles purchased from 2025 to 2028.
Different tax rules apply to vehicles used for business.

For more information, check out Kiplinger’s report, New GOP Car Loan Tax Deduction: Which Vehicles and Buyers Qualify.

*Note: “Income” for the car loan interest deduction is based on a taxpayer’s modified adjusted gross income (MAGI).

**Santander US surveyed 2,200 U.S. households with income levels between $50,000 and $148,000.

Five Ways Trump’s 2025 Tax Bill Could Boost Your Tax Refund (or Shrink It)

Kate Schubel — Thu, 24 Jul 2025 13:57:00 +0000

You’ve heard about the recent “Trump megabill,” but how will it affect your tax refund? While some provisions could increase your tax liability next year, others might give you a serious payday.

For instance, the IRS reports that nine out of 10 taxpayers don’t itemize deductions. If that’s you, a permanently higher standard deduction could give you more money back.

However, new provisions, such as some involving the federal child tax credit, might squeeze your bottom line if you’re a noncitizen, potentially costing you more in taxes.

Several provisions in the new tax law are temporary. Those new tax benefits could go away as early as 2029.

Here are five tax policies in the so-called “One Big Beautiful Bill” (OBBB) that might increase or decrease your bottom line come tax season.

Standard Deduction

1. The standard deduction affects tax refunds

While the IRS already increased the standard deduction last fall due to inflation, the OBBB further raises it. For 2025, the standard deduction amounts are as follows:

Married couples filing jointly receive $31,500.
Single filers receive $15,750.
Heads of household receive $23,625.

If you’re someone who claims the standard deduction (rather than itemizing), you could see a bump in next year’s tax refund or a corresponding reduction in your tax liability.

For instance:

If you’re single, you’ll get $1,150 more in standard deduction dollars on your 2025 federal return compared with last year.
If you’re married and filing a joint return, you’ll see a $2,300 increase in your standard deduction compared with last year’s return.

Note: The above amounts reflect the IRS's change to the 2025 standard deduction plus the OBBB increases.

If you’re an older adult, you could receive even higher savings on next year’s federal return under the new tax law, because the OBBB added a new bonus standard deduction of $6,000 (in addition to the usual extra standard deduction for older adults).

However, the temporary bonus deduction is dependent on modified adjusted gross income (MAGI), so you could miss out on this benefit.

The limits are $150,000 for married, filing jointly couples and $75,000 for single filers. The phaseout is 6% for every dollar above the income limits.

Here's an example to show how this works.

A married, filing jointly couple who earns $150,000 and where both adults are 65 and older could receive a full $12,000 bonus deduction on their return.
Yet, if that same couple were making $160,000 ($10,000 above the limit), the deduction is reduced by $1,200 (6% x $10,000 multiplied by two, since both adults are above 65).
This would result in a deduction of $10,800 for the couple, rather than the full $12,000 benefit.

It’s also important to note that the OBBB permanently ended the personal and dependency exemption, which was $4,050 per qualifying taxpayer, spouse and child (indexed for inflation).

That change is likely to permanently decrease your tax refund, especially if your household has many people who would’ve qualified for the exemption.

SALT Deduction Cap

2. The ‘SALT refund’: How much is it?

If you itemize your federal return and live in a high-cost area, you could see a reduction in your tax liability. That’s because the state and local tax deduction (SALT) changed under the OBBB.

Most taxpayers claim the standard deduction these days. However, more Americans itemized their deductions before the 2017 Tax Cuts and Jobs Act (TCJA) capped SALT at just $10,000. Before that, the deduction was unlimited.

States with high property taxes and/or state income taxes, such as New York, New Jersey or California, might have suffered the most from the $10,000 cap on the SALT deduction, since they haven’t been able to fully deduct these types of taxes on their federal return since the TCJA was enacted.

But the OBBB temporarily increases the SALT cap to $40,000, meaning you could save more on federal 2025 taxes if you live in a high-cost area.

Let’s look at an oversimplified example to see how that might work:

A couple with $200,000 in income claims the standard deduction for tax year 2025 and has no other credits, deductions or alternative minimum tax (AMT) liability. Their taxable income is $168,500 ($200,000 gross income minus $31,500 standard deduction).
If that same couple were to pay $43,000 in state and local taxes that year, they might choose to itemize. This would reduce their taxable income to $160,000 ($200,000 gross income minus the $40,000 SALT cap).
The net effect is an $8,500 reduction in taxable income on their federal return.

It’s worth mentioning that the SALT cap increase is temporary and will revert to $10,000 in 2030.

Taxpayers with $500,000 or more will have a 30% phaseout for every dollar their income exceeds the limit. The SALT cap reverts completely to $10,000 for incomes of $600,000 and higher.

Are you a high-income taxpayer? If so, here’s a simple example of how the new SALT cap deduction might impact you:

A single filer makes $505,000 per year in MAGI and wishes to itemize to take the SALT deduction.
Yet, $505,000 is $5,000 above the income limit, meaning the deduction is reduced by $1,500 ($5,000 times 30%).
The total SALT deduction for this filer would be $38,500.

Child Tax Credit

3. How much money will I get back for a child tax credit?

The OBBB also changed the federal child tax credit (CTC) for qualifying children 17 and under by increasing the maximum amount from $2,000 to $2,200 (adjusted annually starting in 2026).

If you’ve got qualifying kids, the extra $200 you’re getting from the child tax credit could raise your next tax refund (or at the very least, lower your tax bill).

For example, a couple with $350,000 and two children under 17 would see $4,400 in child tax credit savings.
That’s $400 higher than last year’s federal return.
Families with four children could also see an increase in child tax credit breaks from $8,000 to $8,800.

However, the CTC is reduced by $50 for every $1,000 (or fraction thereof) that your MAGI is above specific income thresholds.

These income caps remain at $200,000 or more (for single filers) and $400,000 or more (married filing jointly couples). If you make above those amounts, you’ll likely see less benefit from the new child tax credit in your tax refund:

A single filer with one child age 17 and under and an income of $200,000 would see $2,200 in child tax credit savings.
But if that same filer made $205,000 instead, their maximum child tax credit would be reduced by $250 ($5,000 is five times above the income limit, so $50 times 5 is $250).
The total tax credit would then be $1,950 ($2,200 minus $250).
Before the OBBB, the single filer with $205,000 would’ve seen a total tax credit of $1,750 ($2,000 minus $250).
The net gain under the new law is $200.

While some 2025 tax refunds could be bigger due to the so-called "Trump megabill," others might be smaller or see no change at all. (Image credit: Getty Images)

But the new child tax credit doesn’t benefit everyone. Households with noncitizen parents might see an increase in their 2025 tax bill. That’s because the child tax credit now requires parents to have a Social Security Number (SSN).

As Kiplinger reported, this means that nearly 2.7 million children in the U.S. who previously qualified will no longer be eligible for the credit due to their parents’ immigration status, leading to a potential $5.94 million loss in tax savings ($2,200 multiplied by 2.7 million).

Tax on Tips and Overtime

4. Will I get a bigger tax refund if I work overtime or for tips?

Tax on tips also changed under the new Trump tax bill, though perhaps in an unexpected way. Prior law dictated that cash tips (including credit and debit card charges) were taxed like ordinary income.

Now, under the OBBB, there’s a temporary deduction for tips up to $25,000, subject to an income phase-out (more on that below).

Are you a service worker? Here’s a simple example of what the no tax on tips law might look like for you:

A server at a popular restaurant earns $20,000 in annual tip income.
On last year’s tax return, the server claimed the standard deduction and had no other income or tax breaks. The total taxable income on their federal return was $5,400 ($20,000 minus the $14,600 standard deduction for single filers).
In 2025, that same server could have zero federal income tax if they claim the tip deduction ($20,000 minus $15,750 standard deduction, minus the $25,000 maximum tip deduction).

It’s important to note that the IRS hasn’t yet squared away the definition of what a “tipped employee” is, yet. It’s unclear which workers will be affected.

Once more, workers who don’t ordinarily receive tips, such as retail sales clerks, cooks or childcare workers, will most likely not gain a benefit from this law. Meanwhile, tipped workers earning more than $150,000 (or $300,000 for joint filers) will see a phaseout of the tip tax deduction.

For more information, check out Kiplinger’s report New 'No Tax on Tips' Bill Approved for 2025: What to Know Now.

Similarly, overtime rules changed with the new tax bill. The OBBB created a no tax on overtime deduction worth up to $12,500 for tax years 2025 through 2028. The deduction has the same income phaseouts as “no tax on tips” at $150,000 for single filers and $300,000 for married, filing jointly couples.

Are you an overtime worker? The “no tax on overtime” could increase your tax refund or lower your federal tax liability, regardless of whether you itemize or claim the standard deduction.

Note: Non-cash tips (like artwork) are still fully taxable as ordinary income and not eligible for a tip income deduction. Payroll taxes and state/local income taxes also still apply.

Business tax provisions

5. Key small business taxes: QBI, bonus depreciation and more

Several key tax provisions affecting small businesses are included in the OBBB. Here are a few:

Permanently extending the “Qualified Business Income” (QBI) tax rate. QBI is the income your business earns after deducting qualified expenses (such as rent, utilities, business loan interest, etc.). The OBBB made the 20% deduction rate permanent.
Making permanent “bonus depreciation.” Qualified property that you buy and place into service after January 19, 2025, is now eligible for immediate 100% expensing. Ordinarily, you’d have to wait to expense the asset above five, 10, 15, even 20 years.
Providing more opportunities to use “Section 179” expensing. Similar to bonus depreciation, Section 179 allows businesses to deduct 100% of qualified equipment and software. But there’s a deduction limit, which makes it more beneficial for small businesses vs large corporations. OBBB increased the maximum deduction amount and phase-out threshold for expensing.

All three of these provisions could help small businesses save on their taxes in 2025.

For instance, QBI only applies to businesses set up as a “pass-through entity,” like plumbers, accounting firms, and graphic designers (certain limits might apply). Maintaining the rate allows business owners to deduct more income (compared with before the TCJA), and lower income taxes paid.

Another helpful provision in the OBBB affects Section 179 expensing.

This special type of expense is generally for small to midsize businesses due to its dollar limits.
The OBBB increased these limits, allowing businesses to now deduct up to $2.5 million in property (up from $1.25 million).
Likewise, the phase out is $4 million (up from $3.13 million).

Are you a small business owner? Let’s look at a very simplified example to understand how Section 179 and bonus depreciation can work together to maximize your tax savings:

Pineapple Plane Company purchased one new plane for $2 million in 2025. Under Section 179, the company deducts the entire cost this year, resulting in a $2 million reduction in taxable income.
Now, let’s say Pineapple instead purchased a megaplane for $3 million. Under Section 179, the company can only deduct $2.5 million per year. That leaves $500,000 undeducted.
But bonus depreciation allows Pineapple to deduct the remaining $500,000 if the company started using the plane after January 19, 2025.

Note: The Section 179 deduction cannot exceed the business’s taxable income. The example also assumes the planes have a depreciable life of 20 years or less.

What to watch for next tax season

While we covered five major ways your tax refund might be affected this year, other provisions in the OBBB and IRS changes could affect your taxes. Here are a few more to watch:

New temporary car loan interest deduction, allowing you to deduct up to $10,000 in interest paid on new vehicles, subject to income phase-outs.
New Trump Accounts, which might help your child save for future educational, homeownership, and entrepreneurial costs.
After September 30, the IRS will stop sending paper checks. If you're someone who likes to receive your tax refund via the mail, you'll need to opt for a digital payment instead next filing season.

As always, it’s important to keep an eye on the ever-changing tax landscape, both on Capitol Hill and in your state and local governments. Consult with a tax professional on your specific financial situation.

Several provisions listed above are expected to receive additional clarification from the IRS by October 2025. Stay tuned for more updates.

More OBBB Changes

Could Tax on Overtime End for Your State This Year?

Kate Schubel — Mon, 07 Apr 2025 14:28:00 +0000

You might have heard about the elimination of the tax on overtime at the federal level. Overtime workers are entitled to 1.5 times their regular rate for working more than 40 hours per week.

However, what’s happening with taxes on overtime pay has sparked national debate. There’s talk about whether “no tax on overtime” will help workers or contribute to the federal deficit and incentivize employers to use longer hours instead of hiring additional employees, especially after the so-called "One Big Beautiful Bill" was signed.

But do you know how your state is weighing in on the no tax on overtime debate?

States can follow the federal “no taxes on overtime” movement or decide to continue taxing overtime income.

Here are the states that have proposed bills relating to no taxes on overtime, and where those proposals are now.

States with no income taxes were excluded from this list as they do not tax overtime. These include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Is overtime taxed more in Illinois?

Illinois has four active bills proposing no tax on overtime, “effective immediately” if signed into law:

SB 174, sponsored by Senate Republicans, would deduct any overtime wages paid during the taxable year.
HB 2734, sponsored by Rep. Christopher “C.D.” Davidsmeyer (R-Murrayville), would deduct overtime wages included in the taxpayer’s federal adjusted gross income (AGI).
HB 1899, sponsored by House Republicans, would create a tax deduction for overtime compensation included in a taxpayer’s AGI.
HB 1750, sponsored by Rep. Joe C. Sosnowski (R-Rockford), would not only exclude overtime from wages but also exempt gratuities (tips) from state income taxation.

All four “no tax on overtime” bills are being read in their respective chambers and have yet to crossover.

Does overtime get taxed more in Massachusetts?

Massachusetts might exempt overtime from the Commonwealth’s income taxes with HB 3173.

Sponsored by Rep. Marc Lombardo (R-Billerica), the bill could exclude overtime compensations from income tax in a place among those with the highest income tax rates for retirees.

However, only hourly employees would be included — not salaried. There is no enactment date for Massachusetts’ “no tax on overtime” bill.

Michigan rules for overtime tax on pay

Michigan legislators have proposed a no-tax-on-overtime bill. SB 125, sponsored by state Senate Republicans, seeks to deduct overtime compensation from the state’s taxable income.

The Great Lakes State recently raised base pay for hourly workers. Tipped employees went from $4.01 to $4.74 per hour, while nontipped worker rates went up to $12.48 from $10.56. No tax on overtime could provide further relief for hourly employees in 2025.

Overtime taxed in New Jersey

New Jersey is looking to exempt overtime pay from state income taxes. The Republican-sponsored bill would exclude overtime compensation from gross income as early as January 1 following the date of enactment.

The Garden State has some of the highest taxes in the nation. Not only is New Jersey expensive for homeowners, but the state also has one of the highest income tax rates for retirees. No taxes on overtime could help provide tax relief for some residents.

Over half of full-time American workers work more than 40 hours a week, according to a 2019 Gallup poll. (Image credit: Getty Images)

Overtime pay is taxed in North Carolina

North Carolina has a bill that includes more than no tax on overtime. Republican-led HB 11 would provide:

No tax on overtime pay.
An exemption of state income taxes on tips.
An exemption on the first $2,500 in bonuses from state income taxes.

Bonus pay might include hourly and salaried workers. The bill has been passed to the House Finance Committee for review.

Does no tax on overtime start in Ohio?

Ohio might consider ending state tax on overtime. HB 39, proposed by House Republicans, would amend Ohio’s tax policy to allow a deduction for overtime wages.

This would effectively make overtime pay state tax-exempt. If signed into law, the bill could go into effect as early as January 1, 2026. However, it was only recently referred to the House Ways and Means Committee.

Does overtime get taxed in Pennsylvania?

Pennsylvania lawmakers are seeking to exempt overtime pay from state taxes. Not only that, but the Coal State might implement no tax on tips, too, if signed into law:

HB 1586, a House Republican bill, would provide a tax credit for state taxes on overtime pay.
HB 1514, also Republican-led, would allow for a tax credit to offset taxes collected on tips.

Currently, both bills are in the House Finance Committee for consideration. If signed into law, either bill would be effective after December 31, 2025.

Does Alabama still tax overtime?

Although Alabama used to exempt overtime pay from state income taxes, that key piece of legislation expired earlier this year.

Alabama House Democrats had introduced a bill to preserve the income tax exemption on overtime pay. But House Republicans sought to let the provision expire in favor of other state tax breaks, such as reducing the state’s grocery tax, which is set to be cut from 3% to 2% in September.

State tax on overtime

More states may weigh in on the “no tax on overtime” debate. State legislatures will meet throughout the year, and overtime income could be on the slate of bills proposed. More than just your federal tax bill could be on the line, so stay tuned.

Will Tax on Tips End for Your State This Year?

Kate Schubel — Tue, 18 Mar 2025 14:12:00 +0000

You may have heard about eliminating federal taxes on tips. Often earned by service workers, tips are generally reported as wages on an individual’s tax return.

Despite some speculating that a potential tax exemption could help low-income workers, others say it may lead to systemic abuse.

Either way, the so-called "One Big Beautiful Bill" (OBBB) that was recently signed into law approved no tax on tips. This makes tips under a certain threshold temporarily tax-deductible, although there are phase-out income limits for filers.

But even if your tips are tax-exempt at the federal level, how is your state weighing in on the tax on tips debate?

States can follow the federal “no taxes on tips” movement or decide to continue taxing tip income. They could also choose to instate wage caps on tips, which would mean that only a certain amount of tip income would be excluded from taxes (similar to how it will work federally).

Here are the states that are currently considering bills relating to no taxes on tips, and where those proposals are now.

Note: States with no income taxes were excluded from this list as they do not tax tips.

Tip tax law in Illinois

Illinois has a bill proposing no tax on tips. HB 1750, sponsored by Rep. Joe C. Sosnowski (R-Rockford), would not only:

Exclude tips from wages, but also
Exempt overtime from state income taxation.

The bill would also be “effective immediately” if signed into law.

Another Illinois bill seeks to end the state's tip credit — an amount paid by customers to subsidize employee pay. If the tip credit is eliminated, some speculate that independent and family-owned restaurants across the state would feel the strain from rising payroll costs.

Do you pay taxes on tips in Massachusetts?

Recently, there has been talk of a “no tax on tips” bill in Massachusetts. Proposed by Rep. Marc Lombardo (R-Middlesex), HB 3172 would make tipped wages, including tips from service industry workers, tax-exempt for state tax purposes.

Different types of workers could be impacted by this bill, including:

Bartenders
Restaurant workers
Nail and hair stylists

The no tax on tips proposal in Massachusetts was introduced in February and is currently in the Joint Revenue Committee for review.

New Jersey no tax on tips

New Jersey service workers would pay no tax on tips if S-3741 is signed into law. Proposed by Sen. Vince Polistina (R-Egg Harbor Township), the bill would:

Remove tips from the list of taxable income on New Jersey’s gross income tax.
Begin on or after January 1 next following the date of enactment.

The minimum wage in New Jersey is $15.49 for most employees. However, that number can include tips and base pay, so if an employee earns higher tips, the base pay may be lowered to meet the minimum wage rate. S-3741 could help higher-tip-earning employees potentially make up for lower base pay.

Are tips taxable in New York?

New York is also considering a no tax on tip income proposal, SB 587. Introduced by Senate Republicans, the bill would eliminate state income taxes on cash tips.

Notably, no tax on tips in New York could provide tax relief in a state that is one of the most expensive to live in and has some of the highest sales taxes across all U.S. states. Currently, the proposal is pending a review by the Senate Investigations and Government Operations Committee.

Does North Carolina tax tips?

North Carolina has a bill that includes more than no taxes on tips. Republican-led HB 11 would provide:

An exemption of state income taxes on tips.
No tax on overtime pay.
An exemption on the first $2,500 in bonuses from state income taxes.

Bonus pay might include hourly and salaried workers. The bill has been passed to the state’s House Finance Committee for review.

Oregon ending tax on tips?

Sen. Dick Anderson (R-Lincoln City) has submitted a plan for a “No Tax on Tips” bill in Oregon. The bill would provide tax relief for service industry workers, including waitstaff, bartenders, and other tipped employees, by exempting tips from the Beaver State’s income tax.

Tips are currently taxed as ordinary income, which for Oregon taxpayers is between 4.75% and 9.9%, depending on an individual’s income bracket. If no tax on tips is formally proposed and signed into law, that would mean taxpayers could save at least $4.75 per $100 in tip income.

Is there tax on tips in Pennsylvania?

Pennsylvania lawmakers are seeking to exempt tipped pay from state taxes and no tax on overtime, in two separate bills:

HB 1514, a House Republican bill, would allow for a tax credit to offset taxes collected on tips.
HB 1586, also Republican-led, would provide a tax credit for state taxes on overtime pay.

Currently, both bills are in the House Finance Committee for consideration. If signed into law, either bill would be effective after December 31, 2025.

State tax on tips

More states may weigh in on the “no tax on tips” debate. State legislatures will continue to meet throughout 2025 and into 2026, and tip income could be on the slate of bills proposed. Stay tuned.

Trump’s Latest Pitch: No Taxes If You Earn Less Than $150K?

Gabriella Cruz-Martínez — Mon, 17 Mar 2025 13:47:00 +0000

President Donald Trump has flirted with the idea of abolishing the IRS and creating a revenue stream from tariffs to offset major tax cuts. His latest pitch reportedly calls to end taxes for individuals earning less than $150,000 a year.

“I know what his goal is — no tax for anybody making under $150,000 a year,” Commerce Secretary Howard Lutnick told CBS News. “That’s his goal. That’s what I’m working for.”

Lutnick later walked his assertion back adding that Trump would consider such a massive tax cut if he were able to balance the budget (a feat that hasn't been accomplished since 2001 under the Clinton administration, when the U.S. last experienced a fiscal year-end budget surplus). The U.S. has only experienced a budget surplus four times in the last 50 years, according to the U.S. Treasury Department.

The Trump administration’s tax strategy also aims to eliminate taxes on Social Security benefits, tips, and overtime pay, and implement significant tax cuts that experts argue largely benefit the wealthy.

The likelihood that this proposal to end taxes for such a large portion of the population will move forward is dubious. Though Trump has previously made comments about his wishes to “abolish income taxes,” the Trump administration has not shared any further details.

However, here’s what we know so far.

Related: Check out Kiplinger's tax blog for the 2025 filing season. We're providing live updates, news, information, and commentary to help you navigate your taxes.

How many U.S. taxpayers earn less than $150K?

President Trump's pitch to eliminate taxes for individuals earning less than $150,000 could arguably benefit most of the U.S. population. According to the latest statistics from the U.S. Census Bureau, over 76% of individuals in the country earn less than that income limit. (Though some estimates put that number closer to 90%.)

In 2025, data show the average household income was $80,610. A breakdown of average earnings by age group wasn’t close to $150K. For instance, the median household income was:

$85,780 for those between the ages of 25 to 34
$101,300 for 35 to 44 year olds
$110,700 for 45 to 54 year olds
$90,640 for 55 to 64 year olds

Meanwhile, those 65 and older earned an average of $54,710. That figure may count in retirement earnings such as Social Security benefit checks. A deeper dive into the numbers shows that less than a quarter of individuals in the U.S. earn more than $150,000.

Total U.S. Household Income Distribution 2023
Household Income	Percentage of U.S Population
Under $15,000	7.4%
$15,000 to $24,999	6.7%
$25,000 to $34,999	6.9%
$35,000 to $49,999	10.3%
$50,000 to $74,999	15.7%
$75,000 to $99,999	12.1%
$100,000 to $149,000	17%
$150,000 to $199,999	9.5%
$200,000 and over	14.4%

Source: U.S. Census Bureau, Table A-2 Households by Total Money Income, Race, and Hispanic Origin of Householder: 1967 to 2023.

Trump $150K tax proposal concerns

However, the proposal to end taxes for individuals making under $150K raises several serious practical and economic concerns:

How would ending taxes for certain income groups impact work incentives?
Could this plan result in a nationwide sales tax?
What about tax fairness? Would those earning just above $150K bear a disproportionate tax burden?
How will the U.S. build revenue if it abolishes income taxes for most of its population?

According to Lutnick, offsetting the lack of taxes for that segment of the population would be achieved by implementing tariffs on foreign nations. That suggests the U.S. wouldn't be paying existing deficits due to the tax cuts proposed by Trump.

“His [Donald Trump’s] goal is to have external revenue,” Lutnick said, referring to placing duties on imported goods to the U.S. “...The rest of the world leans on our economy, breathes off our economy. Let them pay a membership fee.”

Who pays for tariffs?

Mr. Lutnick’s statement on tariffs raises other concerns touted by economists. While abolishing taxes for certain income groups sounds like a good idea on paper, tariffs alone may not be enough to drive revenue to fulfill this promise.

For instance, tax policy experts at the Tax Policy Center already doubt that tariffs would be enough to afford Trump’s campaign promises such as addressing the childcare affordability crisis.

As mentioned, the Trump administration added cutting taxes on overtime and tips, as well as potentially extending tax provisions from the expiring Tax Cuts and Jobs Act (TCJA) under ‘one, big beautiful bill’ to his list of pledges.
To make those cuts work and balance U.S. deficits, GOP lawmakers have floated enacting budget cuts to popular tax breaks and programs like Medicare.

It’s worth noting that tariffs on imported goods from Canada, for example, are paid by United States businesses. That import tax is generally passed on to consumers like you. That means that tariffs aren’t external revenue, as the Trump administration is swaying people to believe.

The tax can also cause financial strain.

Tariffs are also known as “regressive taxes” because they disproportionately impact lower and moderate-income households. For instance, during the 2018 trade war with China, the Trump administration authorized $61 billion in emergency relief payments to farmers and ranchers impacted by retaliation.

Trump taxes: What’s next?

The Trump administration hasn't detailed plans to end taxes for those earning less than $150,000. Mr. Lutnick, however, later characterized the proposal as “aspirational” if Trump balances the national budget. As mentioned, a task that has not been achieved since 2001.

Instead, President Trump has been busy doubling down on tariffs.

In his first 50 days in office, Trump's administration has been embroiled in tariff wars with Canada, Mexico, Colombia, China, India, and the European Union.
As reported by Kiplinger, President Trump recently placed global blanket 25% tariffs on all aluminum and steel imports to the U.S. on March 12.
The Trump administration plans to place global reciprocal tariffs on all foreign nations on April 2, and reinstate 25% tariffs on Canadian and Mexican imports.

Additionally, the Trump administration has said it plans to create an External Revenue Service to collect tariffs from foreign nations. The new government agency would seemingly be an effort to replace the IRS and, apparently, the U.S. Customs and Border Protection (CBP).

But stay tuned. The Republican-led Congress is currently working to extend or make permanent the Tax Cuts and Jobs Act (TCJA), which is the signature tax legislation from Trum's first term. Whether promised tax cuts for overtime pay, Social Security benefits, tips, and the newest pledge for those making less than $150K make their way into any final legislation remains to be seen.

This article has been updated to reflect the Commerce Secretary's subsequent statements about Trump's tax plans.

New Iowa Income Tax Rate for 2025: What It Means for You

Gabriella Cruz-Martínez — Fri, 21 Feb 2025 14:47:00 +0000

Iowan’s tax bills took another dip this year, as the state’s individual income tax rate dropped by nearly 2 percentage points in 2025.

The comprehensive tax reform, signed by Gov. Kim Reynolds into law last spring, lowers the individual income tax from its top rate of 5.7% to a single flat rate of 3.8% in 2025. That’s significantly lower than the peak rate of nearly 9% about six years ago when state lawmakers began reducing the personal income tax.

The measure gives Iowa the sixth-lowest income tax rate among the 41 states that have the tax, according to the Tax Foundation. It also adds Iowa to the 14 states that have a flat income tax rate.

Reducing the income tax is estimated to yield nearly $1 billion in tax savings for Iowans within the first two years, according to the governor’s office. Collectively, all the tax cuts enacted since 2018 will save more than $23.5 billion over a decade.

While big tax cuts and flat income structure may sound great on the surface, some lawmakers and policy analysts argue they will likely make Iowa’s “already unfair tax system even more unfair.” Mainly, because the tax cuts would benefit the wealthy and risk reducing critical funding for state programs used by the general public.

Here’s what Iowa’s key tax change for 2025 means for you and your state services.

Iowa adopts flat income tax rate

Iowa’s recent shift toward a single flat individual income tax rate has sparked concerns from tax experts that label these types of taxes as regressive.

A regressive tax policy is one that disproportionately benefits the wealthy, rather than meeting the needs of moderate to low-income earners.

Most states have a graduated or “progressive” personal income tax, which means that rates are split into several brackets and determined by your income level. Higher tax rates are applied to taxpayers with higher incomes.

For instance, in New York, a single taxpayer will pay a 4% tax rate if they are earning under $8,500. Meanwhile, those earning between $80,651 to $215,400 are facing an income tax rate of 6%.

With Iowa’s 3.8% flat personal income tax rate, that means someone earning $8,500 will be taxed at the same rate as someone with a taxable income over $300,000.

Not only is this unbalanced, but lower-income communities generally end up paying more in the long run. According to the Institute on Taxation and Economic Policy (ITEP), a flat tax often has a “surface appeal” that comes with significant disadvantages.

States with regressive taxes often rely on higher sales, property, and excise taxes to drive revenue to fund schools, healthcare, and key public services. Flat income taxes essentially guarantee this burden will fall on middle- to low-income taxpayers.

By the numbers: For instance, when Arizona switched to a new flat tax rate of 2.5%, taxpayers who earned over half a million dollars annually reportedly received nearly $16,000 in tax cuts. Meanwhile, the average middle-income earner received a tax cut of just $58.

Iowa’s flat tax rate risks budget shortfalls

One of the main reasons why Iowa’s income tax cut passed is due to Iowa’s budgetary surplus in recent years, which led to the growth of its Taxpayer Relief Fund.

The fund, created to provide income tax relief for Iowans, holds a balance of about $3.7 billion. Part of Iowa’s latest tax reform allows the government to tap into these funds if the state suffers budget shortfalls due to recent tax breaks.

However, some policy experts are worried that Iowa’s move to lower the personal income tax to 3.8% will “blow a hole” into the state budget.

According to the state’s nonpartisan fiscal estimating panel, the tax revenue collected by the state in the upcoming 2026 fiscal year will fall short of its current spending budget. Local reports point that:

Iowa’s 3.8% flat income tax rate will cause a $687 million drop in personal income tax collections in 2026, down 12.3% from the current annual budget.
The state is projected to bring in $8.7 billion for the 2026 budget, which starts July 1.
So far this year Iowa has spent $8.9 billion.

Overall, economists forecast Iowa will face a $200 million budget shortfall.

That means lawmakers may have to choose between reducing state spending on public services like education, child care, safety programs, and environmental programs or using some of its state reserves to address the revenue gap. Higher taxes may also be on the line.

Iowa taxes: What’s next

As of January 1, 2025, Iowa’s individual income tax rate is set at a flat 3.8%. That’s far from the 8.98% rate back in 2018. There are no income tax brackets, either.

The state also eliminated taxes on retirement income and inheritance. Overall, recent tax breaks are estimated to save Iowans more than $24 billion over the next decade.

Some opponents cite concerns that flat income taxes are regressive because they offer a disproportionate burden on modest earners, and benefit the wealthy. Economists point out that Iowa’s new tax structure may cause a budget shortfall this upcoming year.

To bridge the gap, lawmakers in other states with similar tax policies have increased excise taxes, sales, or property taxes. Reducing spending on public services like healthcare, public schools, and safety programs has also been a potential solution.

For now, we’ll keep on tracking Iowa’s pivot into a flat tax structure and how it may come to impact you.

Why You May Owe More Tax Soon on Popular Employee Benefits

Kate Schubel — Tue, 18 Feb 2025 17:37:00 +0000

A flurry of activity followed the president into his second term, and with all the noise came something perhaps unexpected: The House Committee on Ways and Means agenda slashing certain tax benefits. The 50-page GOP document, first released by Politico and other news outlets, is seen as a roadmap for funding an extension of the Tax Cuts and Jobs Act (TCJA).

Basically, to pay for the “Trump tax cuts” sacrifices have to be made. According to the document, that could mean getting rid of certain employee benefits amounting to $157 billion over 10 years.

But are the estimated savings worth the price to workers?

Why is there a threat to eliminate popular tax breaks?

The tax benefits at risk to workers include employer-provided parking, meals, and lodging “fringe benefits.” These items, along with key tax breaks for families and students, could be in jeopardy as the GOP discusses ways to pay for the TCJA moving forward.

So what are “fringe benefits?”

Fringe benefits are perks offered to employees in addition to salary. While salaries are always taxed, not all fringe benefits are taxable on your federal return.

For instance, the below fringe benefits may be partly or fully excluded from your IRS taxable income:

Athletic facilities.
Lodging on business premises.
Meals.
Commutes (transportation benefits).

Some fringe benefits can also be subject to specific rules to qualify for tax exclusion. For instance, on-site gym access cannot be sold to the general public if the facility is tax-free to employees.

Eliminating “work gym” tax-free status

Currently, athletic facilities can be exempt from federal tax as a fringe benefit exclusion. This may be important, considering data show that about a third of organizations provide onsite fitness centers or subsidized gym memberships to employees for reasons like employee morale and physical fitness.

But the proposal to end this exclusion would make on-site gyms taxable to workers.

Who’s affected?

Generally speaking, employees who use the on-site gyms, but all workers at a company may foot the tax bill.

While studies have shown that only 25% of employees regularly access employer-provided facilities, data suggests morale is tied to programs like athletic programs. Taxing employees on these benefits may not only lower morale but also discourage employees from working for companies that offer on-site gyms due to the increased tax liability.

The provision is expected to provide the government $20 billion over 10 years.

Parking costs for work may be eliminated

Some employer-provided transportation benefits can be excluded from employee income up to a certain amount:

Bus, subway, and similar transit passes.
Parking near or on your company’s premises.

However, the proposal in the list of tax cuts eliminates this exclusion, which means you could see an increase in your future tax liability.

How much?

For tax year 2025, taxpayers can exclude up to $325 per month of qualified employer-provided transportation benefits. Per taxpayer, that’s $3,900 in potential tax liability previously excluded.

The proposal is estimated to save $50 billion in spending over 10 years.

Note: Ending the tax exclusion on employer-provided transportation may not include de minimis travel. “De minimis” means something is considered low in value and frequency, like occasional local office visits. This type of travel may remain tax-free under the proposal.

Are employees taxed on employer lodging?

Currently, employees are not taxed on employer-provided rooms if the lodging is:

On business premises.
For the employer’s convenience.
A condition of employment.

Employees like hotel managers, construction workers, and housekeepers may rely on employer-provided housing to do their jobs. However, that could change if the tax exclusion for lodging goes away, as outlined in the House agenda.

If employer-provided lodging becomes taxable, affected taxpayers may see their future tax bill climb hundreds of dollars (depending on how long and how often they live on a job site). But the proposal does not affect military personnel.

Is employer-paid travel taxable?

Amid all the proposed tax benefit cuts, there may be a silver lining: Business travel. Traveling for business usually qualifies for “working condition fringe benefits” which is not listed on the chopping block for tax proposals. A few potential examples are below:

Airplane travel.
Company vehicles.
Hotel stays (non-local).

Gas mileage reimbursement may also be safe from elimination. The 2025 gas mileage tax rate is $0.70 and there is no proposal in the Republican agenda to eliminate the tax-exempt status of this provision either.

Meals may become taxable to employees

Some employees receive meals tax-free if they are for the employer’s convenience and “on-premise.”

Under current IRS guidelines, on-premise meals may include:

Food provided to service workers, like waitstaff and similar employees.
Meals for emergency call workers, like hospital staff.
Bankers and others who can only eat in “short meal periods.”

However, these workers and others could see their meals become taxable. The House proposal to eliminate the exclusion of lodging and meals is estimated to bring in $87 billion over 10 years. Military personnel would be excluded from this elimination.

Note: Ending the tax exclusion on employer-provided food may not include de minimis meals. “De minimis” means something is considered low in value and frequency, like occasional coffee and doughnuts. So, these types of meals may remain tax-free under the proposal.

Tax cut proposals in 2025

While popular tax breaks are in danger, other proposals could lower your tax bill next year.

For example, President Trump is seeking to end taxes on overtime, a provision that could affect millions of taxpayers. There is also a provision affecting the taxability of tips in this day and age where tips range from 5% to 30%.

Both proposals are reflected in the Committee on Ways and Means agenda. However, neither these nor any of the other proposals on this list are certainties, as the Republican-controlled House considers different options for soon-to-be-decided tax policy.

‘Back to the Old Days’? What’s Wrong With Trump’s Plan to Abolish Income Tax

Kelley R. Taylor — Tue, 28 Jan 2025 18:18:30 +0000

Donald Trump has once again stirred the debate on tax policy, recently advocating for eliminating income tax and returning to a tariff-based revenue system.

"We're going back to the old days. No income tax, just tariffs. It worked before, and it'll work again," Trump said earlier this year in Las Vegas, Nevada. He emphasized his point by adding, "The IRS is a disaster. We don't need it. Tariffs will fund everything we need and more."

The remarks, which came not long after a Republican lawmaker separately proposed abolishling the IRS and rewriting the tax code, reignited discussions about fundamental changes to the U.S. tax system. (It's worth noting that critics argue that heavy reliance on tariffs could lead to trade wars, increased consumer prices, and potential economic instability.)

The idea of abolishing income tax isn't new, but Trump has thrust it into the spotlight, just as the U.S. faces the expiration of the Tax Cuts and Jobs Act (TCJA, aka “Trump tax cuts”) at the end of this year. (His sweeping tariffs on almost all goods from more than 100 countries went into effect April 9.)

This also comes as the Trump administration has unleashed a flurry of executive orders that significantly impact the functioning of federal agencies, including the IRS. And Trump's Department of Government Efficiency, led by Elon Musk of Tesla and SpaceX, has made sweeping workforce cuts across the federal government.

So, what does all of this mean for you? Here’s more to know.

Tariffs over income tax?

The concept of relying primarily on tariffs for federal revenue dates back to the early days of the United States (more than 150 years ago), when customs duties were the government's primary source of income. (The U.S. income tax was implemented in 1913.)

Trump argues that eliminating income tax would simplify the tax code, reduce taxpayers' burdens, and stimulate economic growth. He contends that a tariff-based system would protect American industries and create a more level playing field in international trade.

To that end, Trump has, as of April 9, levied sweeping tariffs on almost all countries, which his former Vice President Mike Pence has called "the largest peacetime tax hike in U.S. history."

However, the feasibility of a tariff-only revenue system in today's economy is questionable. Some economists warn that transitioning to such a system would be incredibly disruptive.

The federal government relies heavily on income tax revenue, and replacing it entirely with tariffs would require a massive overhaul of the U.S. fiscal structure.
Massive tariff hikes could potentially violate international trade agreements and spark retaliatory measures from trading partners.
And let’s not forget: U.S. consumers will bear the brunt of tariffs through increased costs on numerous products.

Note: As of April 9, Trump levied sweeping baseline and some higher tariffs against almost all countries and a 104% tariff on China.

For more information, see Kiplinger's report: What's Happening With Trump Tariffs?

Interestingly, Trump's comments align with recent legislative proposals, like the Fair Tax Act reintroduced by Rep. Buddy Carter (R-GA).

As Kiplinger has reported, that bill proposes replacing the current tax code with a national consumption tax and eliminating the IRS.

What about abolishing the IRS tax agency?

Regarding getting rid of the IRS, Rep. Carter has stated, "The Fair Tax is exactly that – fair. It is the only tax proposal out there that is pro-growth, simple, and allows Americans to keep every cent of their hard-earned money while eliminating the need for the IRS altogether."

While not identical to Trump's tariff-focused plan, the Fair Tax Act also proposes eliminating income tax. Some Republican representatives support the Fair Tax Act, arguing it would simplify tax administration and allow U.S. taxpayers to keep more of their earnings.

Critics of the Fair Tax Act and similar proposals warn that a consumption-based tax system could disproportionately burden lower-income households and potentially widen wealth inequality.
They argue that such a system might be regressive since families with lower incomes typically spend more on consumable goods.

Meanwhile, Trump has floated the idea of a second tax agency, the so-called "ERS or External Revenue Service," that he says would handle tariff revenue.

The debate over these radical tax proposals is set against impending tax changes. With key provisions of the TCJA set to expire at the end of 2025, lawmakers face increasing pressure to address the future of U.S. tax policy.

And if that weren’t enough, a flurry of Trump executive orders are throwing a wrench into the mix.

Trump, DOGE cut IRS workforce amid hiring freeze

For example, in January, the White House Office of Management and Budget (OMB) issued a memo requiring all federal grants and loans that would have been effective January 28, 2025, to be frozen. While not directly targeting taxes, that unexpected and sweeping move would have significantly affected the tax landscape and many programs and activities that rely on federal aid.

However, just before the freeze on government grants and loans was to take effect, a federal judge paused its implementation until February 3. And, not long after, the Trump administration rescinded the OMB memo.

Still, the memo came in addition to executive orders already issued freezing federal hiring for 90 days (indefinitely for the IRS), requiring many federal workers to return to the office, and changing processes for reclassifying federal workers.

Key points of the now rescinded memo:

Would halt distribution of federal financial assistance
Would exclude Social Security, Medicare, and Medicaid benefits
Federal agencies would have to report on affected programs by February 10, 2025

Note: This is a developing situation, so the key aspects of the memo are now impacted by legal orders.

Potential tax impacts of such a freeze:

IRS Operations: A hiring freeze at the IRS could slow tax return processing and impact customer service.
Tax Credits: Uncertainty around grant-supported tax credit programs, especially in clean energy and electric vehicles.
Tax Guidance: Possible delays in issuing guidance on recent tax law changes.
Program Changes: Tax-related federal programs could be affected, potentially altering available incentives and credits.

Notably, the memo didn't specify an end date for this "temporary" pause, which added another layer of uncertainty.

Trump income tax bottom line

While Trump's vision of a tariff-based system and similar ideas like the Fair Tax Act proposal may seem attractive to some, implementing such drastic changes (which require congressional approval) would be complex and challenging, to say the least.

But stay informed and engaged as tax discussions unfold. The decisions Congress and the White House make in the coming days, and months will have far-reaching implications for individual taxpayers, businesses, and the economy.

5 Ways the Second Trump Term Could Affect Your Finances

kiplinger@futurenet.com (Sandra Block) — Sun, 05 Jan 2025 12:00:30 +0000

President-elect Donald Trump proposed a number of personal finance initiatives during the presidential campaign, many of which could have a direct effect on your savings and investments. Here’s a look at what you can expect from the new administration.

Trump's effect on income taxes

Trump has pledged to extend the individual income and estate tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA), and with the House of Representatives and Senate in Republican control, that effort is expected to succeed. Those provisions, which are set to expire at the end of 2025, doubled the standard deduction, lowered income tax rates and increased the estate tax exemption to a level that makes federal estate taxes a nonissue for the vast majority of taxpayers. In 2025, estates of up to $13.99 million will be excluded from federal estate taxes, or up to $27.98 million for a married couple.

The TCJA also doubled the child tax credit from $1,000 to $2,000 per child, and Trump has said he wants to make the increase permanent. The credit phases out for single parents with $200,000 or more in income and married couples who file jointly and have $400,000 or more in income. Vice President-elect J.D. Vance has said he would like to increase the child tax credit to as much as $5,000 per child and extend it to all families regardless of income. However, such a tax break would be enormously expensive and face opposition from Republican lawmakers.

During the presidential campaign, Trump said he supported eliminating the $10,000 cap on the deduction for state and local taxes (SALT), a move supported by lawmakers from high-tax states. However, scrapping the SALT cap would increase the cost of extending the TCJA tax cuts, which would already add $3.9 trillion to the federal deficit through 2035, or $4.5 trillion with interest, according to the Committee for a Responsible Federal Budget, a nonpartisan nonprofit organization.

Trump's second term may impact EV tax credits

Under the 2022 Inflation Reduction Act, eligible buyers can claim a tax credit of up to $7,500 for a new electric vehicle, or $4,000 for a used one, at the point of sale, either as a rebate or as a reduction in the cost of the vehicle. Members of Trump’s transition team reportedly want to scrap the EV tax credit as part of broader tax reform legislation. Elon Musk, founder of EV manufacturer Tesla (TSLA) and a close adviser to Trump, opposes the tax credit, which he says primarily benefits Tesla competitors.

The EV tax credit probably won’t disappear overnight. Congress would need to amend the Inflation Reduction Act or enact a new law to eliminate it. And any effort to get rid of the tax credit faces opposition from U.S. automakers. Still, given the uncertainty surrounding the credit, it’s probably wise to buy soon if you’ve had your eye on an eligible EV. You can research makes and models that are eligible for the credit at www.fueleconomy.gov.

Trump's take on health insurance

During his first term, President Trump tried unsuccessfully to torpedo the Affordable Care Act, aka Obamacare. During the 2024 campaign, Trump said he would preserve the ACA but make changes to the law that could affect the cost of ACA insurance.

One of the most likely scenarios doesn’t require any action by the White House or Congress. ACA subsidies enacted in 2021 in response to the COVID pandemic and extended by the Inflation Reduction Act are scheduled to expire at the end of 2025. If Congress doesn’t extend the subsidies, premiums for individuals who currently receive the subsidies will rise significantly, more than doubling in some states, according to an analysis by health policy research organization KFF (formerly the Kaiser Family Foundation). KFF provides a calculator you can use to estimate eligibility for subsidies in 2025.

Trump's effect on student loans

Trump has made no secret of his opposition to student loan forgiveness, and lawsuits filed by Republican governors blocked some of the Biden administration’s debt-relief initiatives.

While the Trump administration’s position raises questions about the future of loan-relief programs, it won’t affect loans that have already been forgiven, says Mark Kantrowitz, a financial aid expert and author of How to Appeal for More College Financial Aid. Once the federal government discharges a borrower’s debt and the borrower has received notification, “the forgiveness is permanent and final,” Kantrowitz said in an analysis on The College Investor, a website that helps families manage college savings and debt.

For updated information on student loan forgiveness and repayment programs, go to the federal student aid website studentaid.gov.

Trump's effect on credit card late fees

The Trump administration is likely to roll back many of the regulations proposed by the Consumer Financial Protection Bureau, including one that would cap credit card late fees at $8. That proposal has been on hold following a court challenge by the banking industry, and the hold will likely become permanent under the new administration.

However, during the presidential campaign, Trump said he supported capping credit card interest rates at 10%. Such a cap would almost certainly be challenged by the banking industry and is unlikely to pass muster in Congress.

Given that major changes to current credit card late fees and interest rates are unlikely, your best bet is to try to pay off your balance every month and make payments on time. Experian provides a calculator you can use to estimate how long it will take to pay off your credit card balance.

Your MAGI in Retirement: Year-End Tax Strategies to Save Money

Kelley R. Taylor — Wed, 04 Dec 2024 14:37:30 +0000

As 2024 comes to a close, it’s important to consider a key tax planning aspect: managing modified adjusted gross income (MAGI).

This often-overlooked and confusing figure can have significant tax implications for many taxpayers, including retirees. That's partly because your MAGI can impact everything from Medicare premiums and capital gains rates to required minimum distributions and taxes on Social Security benefits.

Here’s more of what you need to know.

What is modified adjusted gross income (MAGI)?

MAGI (modified adjusted gross income) is a financial measure often used by the IRS to determine eligibility for various tax benefits and potential additional charges.

The MAGI calculation begins with your adjusted gross income (AGI) and is modified (with certain deductions and excluded income added back) for different tax provisions or programs. (Meanwhile, your AGI is your total annual income from all taxable sources less specific allowable deductions.)

Strategically managing your MAGI can potentially help you save on taxes and optimize your finances.

So, as you review your year-end tax situation, here are a few important aspects to consider.

Medicare premiums

MAGI determines whether you pay a surcharge on Medicare Part B and D premiums, known as an income-related monthly adjustment amount or IRMAA.

IRMAA is calculated based on your MAGI two years prior.
So, for example, your 2024 Medicare premiums are determined by your 2022 federal income tax return.

“Even a modest increase in income (e.g., due to a large retirement plan withdrawal, sale of an asset, or other taxable event) could push [retirees] into a higher IRMAA bracket, resulting in higher premiums for the next year,” explains Joshua Hanover, a managing director and office lead at accounting firm CBIZ Marks Paneth.

As a result, “retirees should review their expected MAGI with their accountants before year-end to determine if any planned income will push them over the threshold,” Hanover says, adding that some retirees might delay certain transactions to avoid a Medicare premium increase.

Strategies to prevent spikes pushing you into a higher premium bracket include offsetting gains with capital losses or maximizing contributions to tax-deferred retirement accounts.

“If a retiree is required to take a required minimum distribution from their retirement plan, they should consider making part of it a qualified charitable distribution,” Hanover notes.

Note: Using a qualified charitable distribution (QCD) can satisfy your required minimum distribution without increasing your modified adjusted gross income. (A QCD is a direct transfer of funds from an individual retirement account (IRA) to a qualifying charitable organization.)

QCDs are available to those 70½ or older.
Eligible IRA owners can donate to charity up to $105,000 per year as of 2024.
The amount is excluded from your taxable income and can count toward your RMD if you are 73 or older.

Preparing for RMDs

On a related note, don’t let the year end without calculating how required minimum distributions (RMDs) might affect your MAGI.

(RMDs are the minimum amounts that must come out of given retirement plan accounts each year once the account holder reaches a certain age.)

For instance, you may want to avoid doubling required distributions in a single tax year.
(Retirees generally must take distributions starting at age 73.)

Kelly Regan, vice president and Certified Financial Planner™ with wealth management and advisory firm Girard, says, “It is important to remember that for most required minimum distributions, the deadline to withdraw from your IRA is December 31st.”

Also, Regan points out, “You can aggregate RMD distributions, meaning if you have two IRAs, you can withdraw the total RMD from one of the accounts — as long as the total RMD is taken, it is satisfied.”

If you’re uncertain about your distribution options (IRS rules have changed in recent years and inherited IRAs have their own complicated rules), consult a trusted and qualified financial or tax planner to help calculate your distribution and avoid IRS penalties.

Balancing capital gains

Year-end is also a time to consider how your realized capital gains might affect Medicare premiums. Investment gains are factored into your MAGI, which can increase your Part B and Part D premiums through IRMAA.

And don’t forget about calculating taxes on Social Security. Up to 85% of Social Security benefits can be subject to tax depending on your overall income, including capital gains, which are included in your “combined income.”

Regan points to tax loss harvesting to help mitigate impacts: “Capturing losses in your portfolio can offset gains to reduce your tax bill.”

“If you don’t have any capital gains, you can still capture $3,000 of losses to offset your income for the year, Regan explains, but “be mindful of wash sale rules — if you sell a security to capture a loss, you cannot buy back that security in any of your accounts until 30 days have passed.”

Additionally, a 0% long-term capital gains tax rate applies to those in lower tax brackets. Some strategies may keep your total income within the threshold for that favorable rate.

For more information, see IRS Updates Long-Term Capital Gains Tax Thresholds for 2025.

Year-end tax planning in retirement: Bottom Line

With any tax strategy, think about your overall tax situation.

Will you take the standard deduction or itemize? What about tax benefits or credits and your long-term financial goals beyond immediate tax savings?

Also, keep in mind potential tax changes, given that several key aspects of the Tax Cuts and Jobs Act (TCJA) will expire after 2025 if Congress doesn’t act. These could involve marginal federal income tax rates, the standard deduction, the state and local tax deduction (SALT), and the estate tax exemption, to name a few.

As always, your approach should align with your broader financial plan. Consult a trusted tax advisor before you ring in the New Year to determine the best tax moves for you.

Note: This item first appeared in Kiplinger’s Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

This article has been edited to include additional details about QCDS and adjusted gross income.

Managing Capital Gains in Retirement

The Extra Standard Deduction for Those 65 and Over

Taxes on Social Security Benefits

The Wash Sale Rule: Six Things to Know

Could Millions of Taxpayers Be Facing the AMT (Alternative Minimum Tax) in 2025?

joy.taylor@futurenet.com (Joy Taylor) — Tue, 26 Nov 2024 13:31:00 +0000

Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…

A lot has been written on the soon-to-expire tax provisions in the 2017 Tax Cuts and Jobs Act. Many of the provisions in the 2017 tax law that affect individuals, such as the lower income tax rates, higher standard deductions, higher child tax credits and bigger lifetime estate and gift tax exemption, are set to expire after 2025, unless Congress acts.

The individual alternative minimum tax (AMT) is a sleeper tax issue. Similar to other provisions affecting individuals in the 2017 Tax Cuts and Jobs Act, the 2017 easings to the AMT are set to lapse after 2025, unless Congress decides to extend them. But unlike those other provisions, you don't see much coverage on the possible upcoming changes to AMT and how that would impact taxpayers.

AMT is due to the extent it exceeds your regular federal income tax liability. It has two rates: 26% on the first $232,600 of alternative minimum taxable income and then 28%. The income figures are indexed annually for inflation.

Many tax items are treated differently in calculating alternative minimum taxable income when compared with computing regular taxable income, including the following:

Standard deductions aren't allowed in computing alternative minimum taxable income.
If you itemized on Schedule A, you must add back your state and local tax deductions.
Under the rules that were in place for pre-2018 years, you also had to add back personal exemptions, interest on home equity indebtedness not used to buy or improve your home, and most miscellaneous itemized deductions taken on Schedule A. The 2017 Tax Cuts and Jobs Act temporarily nixed many of these write-off through the end of 2025.
For AMT purposes, incentive stock options are taxed when exercised.
Interest received from private-activity municipal bonds is subject to the AMT.
AMT depreciation is slower, with write-offs stretched over longer periods.
Many intangible drilling costs can wind up being added back to alternative minimum taxable income.

Some personal credits are allowed against the AMT, including the child tax credit, the adoption credit, the American Opportunity credit and the dependent care credit.

The 2017 Tax Cuts and Jobs Act kept the individual AMT on the books. But it defanged this oft-lamented tax, albeit only until the end of 2025.

The 2017 law raised the AMT exemption amounts that are deducted when calculating the amount of AMT that you owe. In 2017, the AMT exemption amounts were $84,500 for joint filers, $54,300 for single filers and household heads, and $54,700 for married couples filing separately. For 2024 returns, these figures are $133,300, $85,700 and $66,650. The amounts are adjusted each year for inflation.

It also greatly increased the phaseout zones for the AMT exemptions. On 2017 Form 1040 returns, the exemption phaseout zones started at $160,900 for joint filers, and $120,700 for single filers and people filing as head of household. Compare these numbers with the $1,218,700 and $609,350 figures for 2024 returns. Again, these figures are adjusted each year for inflation.

As a result of the 2017 Tax Cuts and Jobs Act, far fewer taxpayers now pay the AMT. 207,674 filers owed AMT with their 2022 Form 1040, totaling approximately $3.8 billion. Compare this with 5.07 million individual returns reporting $36.4 billion in AMT on 2017 tax returns. That’s a huge decrease in AMT filers. Sometime in 2018 or 2019, the IRS retired its AMT Assistant online tool because of the dwindling number of users.

Unless Congress acts, the AMT rules will revert to those in place in 2017. President-elect Donald Trump often says he wants to see the changes in the 2017 tax law extended, although he hasn’t spoken directly about the AMT. You can expect Republican lawmakers to fight for an extension of the AMT easings, but it’s too soon to tell whether they will be successful. Congressional Republicans and Trump want to enact lots of tax breaks, and not all will make it into any final legislation.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.

Three Often-Overlooked Ways to Cut Your Tax Bill Now

Kelley R. Taylor — Thu, 14 Nov 2024 14:47:10 +0000

As the year draws to a close, many people are looking for ways to reduce their tax burden so as not to be surprised when tax season rolls around. Luckily, there are some strategies you can implement now, before December 31, that can lower your federal income tax bill.

Here are three sometimes overlooked tax moves you may want to consider.

However, remember that tax planning is individual, so consult a qualified tax professional to determine whether these or other tax strategies fit your financial situation and goals.

1. Fine-tune your tax withholding

One relatively simple but sometimes overlooked way to help manage your tax liability is by adjusting your withholding. (Withholding is the amount of money your employer deducts from your paycheck for federal and state taxes.)

Adjusting your withholding helps ensure you're paying the right tax amount throughout the year. That can help you avoid a large tax bill or refund when tax season arrives.

For example, if you've been over-withholding, you essentially give the government an interest-free loan. You can increase your take-home pay for the remainder of the year by reducing your withholding now.

On the other hand, you've been under-withholding. Increasing your withholding can help you avoid a surprise tax bill and potential penalties when you file your tax return.

To adjust your withholding:

Use the IRS Tax Withholding Estimator to determine if you're on track.
Submit a new W-4 form to your employer if adjustments are needed.
For self-employed individuals, consider adjusting your estimated tax payments.

Remember, the goal is to get as close as possible to your tax liability, not necessarily to receive a large tax refund.

2. Leverage clean energy tax credits (while you still can)

The federal government currently offers tax credits for energy-efficient home improvements under the Inflation Reduction Act (IRA).

By taking advantage of these energy-related tax credits, if you’re eligible, you can potentially lower your tax bill while benefiting from energy cost savings.

For example, as Kiplinger reported, the IRS has paid billions in solar tax credits to eligible taxpayers. (Data show that last year was a record-breaking one for solar installations, with 51% more gigawatts of solar energy capacity installed than the prior year.)

Note: Given the outcome of the 2024 presidential election, it’s hard to say whether these clean energy credits will continue to be available beyond the 2024 tax year. (Reuters reports that Donald Trump's transition team plans to eliminate the popular EV tax credit.) For more information, see Kiplinger's report Is the EV Tax Credit Going Away? What You Need to Know.

For now, here are some tax credits to consider:

Energy Efficient Home Improvement Credit

Claim up to 30% of qualified expenses, with a $1,200 annual limit for many energy-efficient home improvements
Eligible upgrades include energy-efficient windows, doors, insulation, and specific HVAC systems
An additional credit of up to $2,000 is available for heat pumps, water heaters, and biomass stoves

Residential Clean Energy Credit

Claim up to 30% of costs for solar panels, wind turbines, geothermal heat pumps, and battery storage technology
No maximum dollar amount applies to this credit

EV Tax Credit

If you purchase a qualifying new electric vehicle before year-end, you could be eligible for an EV tax credit of up to $7,500. For used EVs, the credit can be up to $4,000.

Income limits and vehicle price limits apply.
As of January 1, 2024, you can use the EV tax credit at the point of sale to immediately reduce the vehicle's purchase price.

For more information, see How the 2024 EV Tax Credit Works.

To maximize these energy tax credits:

Obtain quotes for eligible improvements or vehicles.
Ensure installations are completed and paid for before December 31st.
Keep detailed records of all purchases and installations.

3. Bunch itemized deductions

With the higher standard deduction introduced in recent years due to the Tax Cuts and Jobs Act (TCJA), some taxpayers find it challenging to itemize.

However, by "bunching" deductible expenses into a single tax year, you may be able to exceed the standard deduction and realize more significant tax savings.

Here are some examples:

Charitable Contributions: Consider making your next year's planned charitable donations by December 31. Also, donor-advised funds allow some to make a significant tax-deductible contribution now (multiple years of gifts in one year) while using the fund assets to spread gifts over time.

Medical Expenses: If your annual qualified unreimbursed medical expenses are close to the 7.5% adjusted gross income (AGI) threshold for medical expense deductions, consider scheduling and paying for elective procedures before year-end.

Property Taxes: Sometimes, you can prepay next year's property tax. Keep in mind, however, the $10,000 cap on state and local tax deductions (SALT).

Mortgage Interest: Making your January mortgage payment in December might give you an extra month of deductible mortgage interest this year.

To implement these strategies:

Review your financial situation and anticipated expenses for the coming year.
Keep good records of all expenses you plan to deduct.
Consider alternating between itemizing and taking the standard deduction in different years to maximize your overall deductions.

Year-end tax moves: Bottom line

Making certain tax moves at year-end can, in some cases, help reduce your tax bill so you’re not shocked when you file your tax return.

These aren’t the only strategies to consider; the goal is to reduce taxable income, and there are several ways to do that.

However, the best moves for you are those that fit your financial situation. So, it’s a good idea to consult a trusted tax professional to determine the best strategies.

2025 Tax Deduction Changes for Those Age 65 and Older

Kelley R. Taylor — Tue, 29 Oct 2024 13:37:40 +0000

As it does each year, the IRS implemented inflation adjustments to several important credit and deduction amounts for 2025.

This includes (but isn’t limited to) new 2025 income tax brackets and increases to the standard deduction and the additional standard deduction for those age 65 and older. (You'll use these amounts when you file your 2025 tax return in a few months.)

As Kiplinger has reported, the extra standard deduction, which is claimed on top of the regular standard deduction, can help reduce taxable income and the overall tax burden in retirement for millions of older adults.

With the recent passage of the GOP's so-called "big beautiful bill "(BBB), there's a new bonus deduction involved.

Here’s more to know to plan for tax returns you'll file in the upcoming tax filing season.

65 and older additional standard deduction for 2025

For single filers and heads of households age 65 and older, the additional standard deduction increased slightly — from $1,950 in 2024 to $2,000 in 2025 (returns you’ll file in early 2026).

For 2025, married couples age 65 and older filing jointly will also see a modest benefit.

The extra deduction per qualifying spouse increased from $1,550 in 2024 to $1,600 for 2025, a $50 increase per qualifying spouse.
For couples in which both partners are 65 or older, this translates to a total increase of $100 in their additional standard deduction.

Those 65 and older and blind continue to receive double the additional amount. For 2025, this means an extra $4,000 for single filers or heads of household. (Twice the $2,000 for those 65 and older or blind.)

Meanwhile, the 2025 amount is $3,200 per qualifying spouse for those married filing jointly (i.e., $1,600 times two).

These changes are typically an issue for those deciding between taking the standard deduction and itemizing.

While the inflation-adjusted amounts might seem small, depending on the financial situation and federal income tax bracket, some taxpayers age 65 and older might benefit from a modest tax reduction.

It’s also worth noting that the IRS announced inflation-adjusted federal income tax brackets for 2025 and 2026.

The income thresholds for 2025 are up by about 2.8% from 2024 levels.
This increase is smaller than in previous years.

Regular standard deduction increased for 2025

The IRS adjustments to the extra standard deduction for older adults come alongside increases in the standard deduction for all taxpayers.

The Tax Policy Center and other groups estimate that around 90% of people take the standard deduction rather than itemizing.)

That’s especially true given the major increase to the base deduction under President Donald Trump's initial set of tax cuts from the 2017 Tax Cuts and Jobs Act (TCJA).

Initially for 2025, the standard deduction was set to rise by $400 to $15,000 for single filers, $800 to $30,000 for married couples filing jointly, and $600 to $22,500 for heads of household.
Those increases can help offset the more modest bump in the additional standard deduction for some taxpayers age 65 and older.

For example, when combined with the regular standard deduction, the total standard deductions for many older adults in 2025 would have been:

$17,000 for single filers or heads of household age 65 and older
$33,200 for married couples filing jointly in which both spouses are 65 and older

Update: Now that Trump signed his 2025 tax overhaul into law, both the base standard deduction for 2025 and the extra standard deduction for those age 65 and older have changed.

The 2025 Trump tax law changes the standard deduction for 2025 to $15,750 for single taxpayers, $31,500 for joint filers, and $23,625 for heads of household.

Additionally, as Kiplinger has reported, the GOP tax bill introduces a new temporary and separate $6,000 bonus deduction for those age 65 and older.

The new $6,000 "senior" bonus deduction will be available to individuals age 65 and older, with eligibility set at $75,000 in income for single filers and $150,000 for couples, and phasing above those levels.

But the provision is temporary. It will only be available from 2025 through 2028, and will supplement, but not replace, the existing extra standard deduction already available to older adults.

Note: The new bonus deduction applies regardless of whether you itemize or take the standard deduction. It could help those with sufficient deductible expenses to itemize, but who also want to further reduce their taxable income.

For more information, see our report: How the 'Senior Bonus Deduction' Works.

Under Trump's tax megabill, when combined with the newly changed regular standard deduction, the total standard deductions (standard base plus standard extra) for many older adults in 2025 are:

$17,750 for single filers or heads of household age 65 and older
$34,700 for married couples filing jointly where both spouses are 65 and older

The bill's new “senior bonus” deduction would pile on top of those amounts.

For example, under the legislation, a single eligible taxpayer could deduct a total of $23,750 ($15,750 standard plus $2,000 age-based plus $6,000 bonus), while a qualifying couple could potentially deduct more than $46,700 if both are eligible (65-plus).

Note: The full deduction will be available to those with modified adjusted gross income (MAGI) up to $75,000 (single filers) and $150,000 (joint filers), then phases out above those limits, completely phasing out at $175,000 (single filers) and $250,000 (joint).

Here's a chart to help illustrate.

Bonus deduction changes under the OBBB
Filing Status	Base Standard Deduction (BBB)	Normal Extra Deduction for 65-plus	New Bonus Deduction ($6K/$12K)	Total Deduction (Age 65-plus) under the BBB for 2025
Single	$15,750	$2,000	$6,000	$23,750
Head of Household	$23,625	$2,000	$6,000	$31,625
Married, Filing Jointly	$31,500	$3,200 (both 65-plus)	$12,000 (both 65-plus)	$46,700 (both 65-plus)
		$1,600 (one 65-plus)	$6,000 (One 65-plus)	$39,100 (one 65-plus)

Impact of 2025 deduction changes

Because Trump's new tax bill was signed into law on July 4, the IRS hasn't had time to issue all of the relevant guidance and regulations to implement the many tax changes in the bill.

(The tax agency is under new leadership with the confirmation, then the firing of Commissioner Billy Long. Treasury Secretary Scott Bessent is heading the agency along with the current commissioner of the Social Security Administration.)

While the new bonus deduction for older adults could help many taxpayers, how it impacts you depends on your specific tax situation.

Consider consulting with a tax professional to understand how new deduction (and bonus deduction) amounts might (or might not) affect your overall tax liability for the 2025 tax year and beyond.

2025 Standard Deduction Changes Under New Trump Tax Bill

Kate Schubel — Tue, 22 Oct 2024 14:40:20 +0000

In light of the recent GOP tax bill being signed into law by President Trump, many may wonder: What is the new standard deduction?

The reconciliation bill, dubbed the "big beautiful bill" (BBB), includes a bunch of tax cuts and provisions that will impact U.S. taxpayers for years to come.

One of these provisions has to do with the standard deduction you'll use for tax returns you'll file in early 2026. While the IRS increased the standard deduction last fall, the new amounts for 2025 have been increased again under the BBB.

This is in addition to the usual annual adjustment for inflation, which means the newly raised standard deduction will also increase each year.

Plus, the Trump/GOP tax bill introduces a new temporary bonus deduction for those 65 and older. Interested? Read on.

In the news: The 2026 Standard Deduction is Here.

What is the new standard deduction amount for 2025?

The standard deduction amounts have increased under the 2025 Trump tax bill between $1,150 and $2,300 from prior-year numbers.

Below are the 2025 amounts:

Married Filing Joint and Surviving Spouses	$31,500	Increase of $2,300 from the prior tax year
Single and Married Filing Separately	$15,750	Increase of $1,150 from the prior tax year
Heads of Household	$23,625	Increase of $1,725 from the prior tax year

It's important to note that the above chart reflects the IRS's change to the standard deduction in the fall, plus the BBB increase.

So, for example, while the IRS initially increased the 2025 single filer deduction from $14,600 to $15,000 as part of its normal inflation adjustment, the BBB has now further increased that amount to $15,750.

2025 standard deduction over age 65

As Kiplinger has reported, there's an existing extra standard deduction for taxpayers 65 and older and those who are blind. For 2025, that additional amount is $1,600 ($2,000 if unmarried and not a surviving spouse).

Those eligible can add the extra standard deduction to the regular amount for their filing status. So, a single taxpayer 65 or older (or who is blind) can claim a total standard deduction of $17,750 on their 2025 federal tax return.

But the Trump tax overhaul introduces a new bonus standard deduction of $6,000 for those age 65 and older. This may be added to the additional standard deduction for 2025; however, the "bonus" amount is temporary and phases out for incomes above certain thresholds.

For more information on how the additional deduction works, see: The Extra Standard Deduction for People 65 or Older.

What about dependents?

Your standard deduction amount may differ if you can be claimed as a dependent on another taxpayer’s federal tax return.

The 2025 standard deduction for dependents is limited to either $1,350 or the sum of $450 and the dependent’s earned income, whichever is greater.

Note: The standard deduction for dependents cannot exceed the regular standard deduction for your filing status, even if your earned income is higher than the basic standard deduction amount.

2025 Trump tax bill standard deduction changes vs. the TCJA

It’s important to keep in mind that the TCJA, also known as the “Trump tax cuts,” almost doubled the standard deduction about seven years ago. Before the TCJA, the 2018 amounts for single filers and married filing jointly couples jointly were $6,500 and $12,000, respectively.

After the TCJA was enacted, the base standard deduction amounts jumped to $13,000 (single filers) and $24,000 (married filing jointly). As mentioned, the standard deduction is adjusted for inflation each year, and the BBB increases those amounts further.

The new "Trump tax bill," as the BBB is also called, raises each of the 2025 standard deduction amounts from anywhere between $750 to $1,500. The bill also introduced a $6,000 temporary bonus deduction for qualifying adults over 65 ($12,000 if both spouses qualify).

This brings the highest possible standard deduction amount to $46,700 for married filing joint couples who are both over 65 and qualify for the bonus deduction.

For more information on how to calculate your total standard deduction, see: The Extra Deduction for Those Over 65 Changes Again.

What about BBB 2025 tax brackets?

For 2025 (returns you'll usually file in early 2026), the top tax rate of 37% applies to single filers with incomes exceeding $626,350, up from $609,350 in the prior tax year.

While the Trump tax bill didn't raise tax bracket limits, it made the existing thresholds permanent.

This upward revision of income thresholds across all brackets means some taxpayers may find themselves in a lower tax bracket for the same income level compared to the previous year.

For more information, see Kiplinger's report 2025 Income Tax Brackets Are Set: What to Know Now.

IRS Announces 2025 Income Tax Brackets

Kelley R. Taylor — Tue, 22 Oct 2024 14:35:40 +0000

Managing your finances in a tax-efficient way requires planning. Thankfully, the IRS released the income tax brackets for 2025, allowing you to strategize for the upcoming tax year (returns filed in early 2026).

New 2025 tax brackets

Here are the inflation-adjusted tax brackets for 2025. (Note: These brackets apply to federal income tax returns typically filed in early 2026.)

It's also essential to remember that, for now, the associated tax rates remain the same (currently 10%, 12%, 22%, 24%, 32%, 35%, and 37%).

For federal tax brackets for the 2024 tax filing season, see Federal Tax Brackets and Income Tax Rates.

Also, the IRS has announced the 2025 standard deduction. For more information see The New Standard Deduction is Here.

New 2025 Tax Brackets: Single Filers and Married Couples Filing Jointly
Tax Rate	Taxable Income (Single)	Taxable Income (Married Filing Jointly)
10%	Not over $11,925	Not over $23,850
12%	Over $11,925 but not over $48,475	Over $23,850 but not over $96,,950
22%	Over $48,475 but not over $103,350	Over $96,950 but not over $206,700
24%	Over $103,350 but not over $197,300	Over $206,700 but not over $394,600
32%	Over $197,300 but not over $250,525	Over $394,600 but not over $501,050
35%	Over $250,525 but not over $626,350	Over $501,050 but not over $751,600
37%	Over $626,350	Over $751,600

New 2025 Tax Brackets: Married Couples Filing Separately and Head of Household Filers
Tax Rate	Taxable Income (Married Filing Separately)	Taxable Income (Head of Household))
10%	Not over $11,925	Not over $17,000
12%	Over $11,925 but not over $48,475	Over $17,000 but not over $64,850
22%	Over $48,475 but not over $103,350	Over $64,850 but not over $103,350
24%	Over $103,350 but not over $197,300	Over $103,350 but not over $197,300
32%	Over $197,300 but not over $250,525	Over $197,300 but not over $250,500
35%	Over $250,525 but not over $375,800	Over $250,500 but not over $626,350
37%	Over $375,800	Over $626,350

It's also important to note that these income tax rates are marginal, meaning they only apply to the income within the relevant tax bracket range for your filing status.

For example, just because a married couple files a joint return with $100,000 of taxable income in 2024 and their total taxable income falls within the 22% bracket for joint filers, it doesn't mean they will pay $22,000 in tax. The 22% rate isn’t applied as a flat rate on the entire $100,000.

Instead, the tax brackets are tied to marginal tax rates. This means that in 2024, for example, the first $22,000 of income is taxed at a rate of 10%. The next portion of income, between $22,000 and $89,450, is taxed at a rate of 12%. Finally, only the income exceeding $89,450 is taxed at 22%.

Note: See Kiplinger's Federal Income Tax Brackets and Rates guide for more examples and information on how tax brackets work.

New 2025 tax brackets vs 2024: Do tax brackets go up with inflation?

One of the tax effects of high inflation is that it impacts the tax bracket ranges. This can be seen in the "width" of the 2025 brackets, which have become comparatively wider. ("Width" refers to the difference between the lowest and highest dollar amounts in a tax bracket.)

Wider tax brackets help prevent "bracket creep." Bracket expansion reduces the likelihood of being pushed into a higher tax bracket if your income remains constant or grows slower than inflation.

What's the new standard deduction?

The IRS also announced an increase in the standard deduction for the 2025 tax year.

The standard deduction will rise to $15,000 for single filers and married individuals filing separately, a $400 increase from the previous year's amount.

For more information on the 2025 amount, see The New Standard Deduction is Here. For your current 2024 standard deduction, see What's the Standard Deduction?

What will happen to individual income tax rates and brackets after 2025?

As Kiplinger has reported, the Tax Cuts and Jobs Act of 2017 (TCJA, also sometimes known as the “Trump tax cuts”) brought significant changes to tax policy, but many key provisions came with an expiration date. Many taxpayers increasingly wonder what will happen to their income tax brackets and rates after December 31, 2025.

Unless Congress takes action, we're looking at a return to higher tax rates for most income levels starting in 2026.
The current seven tax brackets, ranging from 10% to 37%, would revert to a similar structure but with rates reaching up to 39.6%,

This looming change creates a challenge for financial planning. Should you adjust your long-term savings strategy? How might this affect your retirement plans?

While lawmakers might extend or modify these provisions before they expire, it's good to stay informed and prepare for potential changes. As we move further into 2025, expect taxes to be a hotly debated issue in political debates.

Mark Cuban, Kamala Harris, and Taxing Unrealized Gains

Kelley R. Taylor — Mon, 21 Oct 2024 15:35:50 +0000

Mark Cuban, of Shark Tank and Dallas Mavericks fame, recently endorsed Vice President Kamala Harris in her 2024 presidential bid. Given the former tech executive's history of touting political independence, this endorsement raised some eyebrows.

However, at a campaign event in Arizona, Cuban addressed the controversial topic of taxing unrealized gains. In recent years, proposals involving an unrealized gains tax have been floated in various Democratic proposals, most notably including President Biden’s FY2025 budget.

Cuban’s comments on Harris' supposed stance on an unrealized gains tax have reignited debate, social media chatter, and confusion. Here’s what you need to know.

What did Mark Cuban say?

"Let me be clear," Cuban told the crowd, "Kamala understands that taxing unrealized gains would be devastating for the economy. It's not going to happen."

Cuban's comment is notable given the Biden administration's previous proposals to implement a minimum tax on the ultra-wealthy. Specifically, Biden supported a tax on unrealized gains for those with net worths exceeding $100 million.

Last year, Cuban, a billionaire, said he was proud to pay the $279.5 million in taxes he reportedly owed for 2023.

The idea behind taxing unrealized gains for super-high earners is to address what some see as unfairness in the current U.S. tax system.

Note: An unrealized gain occurs when the value of an asset you own increases, but you haven't sold the asset yet. So, the gains are what some call “paper gains” since they haven’t been realized tangibly but exist on paper.

Data show that billionaires can often accumulate vast wealth through asset appreciation without paying taxes, partly because capital gains are only taxed when assets are sold.

For her part, Harris has proposed a smaller increase in the capital gains tax rate compared to Biden's plan and while not specifically addressing taxing unrealized gains, has expressed support for a "billionaire minimum tax."

However, given the legislative process and potential constitutional challenges, the idea that Harris could single-handedly implement a tax on unrealized gains, even if she wanted to, is unrealistic.

Tax on unrealized gains: Legislative and legal hurdles

Any proposal to tax unrealized gains would need to navigate the complex process of formal tax legislation.

Tax bills must originate in the U.S. House of Representatives and pass through both chambers of Congress.
The process involves multiple stages, including committee reviews, debates, and House and U.S. Senate amendments.
Given the current divided political landscape, achieving consensus to pass such a controversial tax measure would be challenging at best.

An unrealized gains proposal would likely face opposition from Republicans and some moderate Democrats. That would make it difficult to secure even a simple majority, let alone the supermajority sometimes required for significant tax changes.

Then there are legal concerns. Even if a bill proposing to tax unrealized gains were to pass Congress somehow, it would likely face legal challenges. The U.S. Supreme Court could be called upon to determine whether an unrealized gains tax is unconstitutional.

The justices would have to grapple with thorny questions surrounding whether the tax was a “direct tax,” requiring apportionment among the states, and whether a tax on unrealized gains could be classified as an excise tax.

While a majority of the Justices recently upheld a mandatory repatriation tax that many saw as a “wealth tax,” the court left the door open to potentially strike down future so-called wealth taxes — like a tax on unrealized gains.

Also, despite what you may hear about Vice President Harris coming for your paper gains, the complexity of implementing a tax on unrealized gains extends beyond legal and constitutional issues.

That kind of tax would essentially involve overhauling the current tax system, raising questions about everything from valuation methods and liquidity issues for taxpayers to practical IRS administration concerns and potential broader economic impacts.

Bottom line: Unrealized gains taxes aren’t a realistic worry for most

While the idea of taxing unrealized gains might appeal to some as a way to address wealth inequality, practical and legal obstacles make it unlikely to come to fruition anytime soon.

As debate and social media chatter about unrealized gains continue, remember that significant changes to the tax code require more than the desire of any president. (As mentioned, any serious attempt at that kind of reform would require presidential support, a broad consensus in Congress, and navigation of constitutional issues.)

So, the notion of Kamala Harris (if elected) implementing a tax on unrealized gains remains unrealistic, for now, and is not a worry for most. According to the White House, the number of people estimated to have a net worth exceeding $100 million is less than 11,000 in the U.S.

Social Security Tax Limit Rises 4.4% for 2025

Kelley R. Taylor — Thu, 10 Oct 2024 13:26:00 +0000

The Social Security Administration (SSA) just announced two key 2025 adjustments: the Social Security COLA (cost of living adjustment) and the new Social Security tax limit.

While you’ve likely heard a lot about the COLA, did you know there's a cap on the amount of income subject to Social Security payroll tax? This ceiling, known as the Social Security tax limit or "wage cap," sets the maximum earnings that can be taxed to fund the Social Security program.

Social Security provides vital retirement, disability, and survivor benefits to over 68 million qualified individuals across the United States.

For 2025, the SSA has set the COLA at 2.5%.

The Social Security tax limit will increase by about 4.4% for 2025.

Both of these amounts are adjusted annually for inflation. However, it’s important to note that they are calculated using distinct methods and data sets.

The tax limit changes are particularly significant for high-income earners, who may pay more Social Security tax this year. So, understanding the adjustment is crucial for effective financial planning.

Here’s more of what you need to know.

The Social Security tax limit rises to $176,100 for 2025. (The 2024 tax limit is $168,600.) This 4.4% increase is less than the 5.2% jump from 2023 to 2024.

Still, if you earn more than $168,600 this year, you haven’t had to pay the Social Security payroll tax on the amount of your income that exceeds that limit.) That can result in considerable tax savings.

Take, for example, an employee with a 2024 annual salary that exceeded the tax limit by $10,000. Since the Social Security tax rate is 6.2% (your employer also pays 6.2%), they would save $620 on Social Security taxes.
On the other hand, someone who earns wages exceeding the base by $30,000 would receive a $1,860 tax break.
The more you make over the tax limit, the more your Social Security tax savings.

However, the Social Security tax limit increases yearly as the national average wage index increases. When that happens, more income is subject to the Social Security tax.

Note: Some people don’t have to pay Social Security taxes. (Exemptions from Social Security taxes may be available if certain requirements are met.)

Also, self-employed individuals pay the full 12.4% rate. However, if you're self-employed, you can deduct the employer-equivalent portion of that amount.

Medicare tax considerations

It’s also worth noting that, unlike Social Security, Medicare tax has no income cap. The standard Medicare tax rate of 1.45% (paid by the employee, 2.9% total when added to the employer portion) applies to all earnings, regardless of income level.

High-income earners can be subject to an additional Medicare surtax of 0.9%. This applies to those with income above $200,000 for single filers or $250,000 for married couples filing jointly.

Self-employed individuals pay the employee and employer portions of Medicare tax but can claim a self-employment tax deduction. The 0.9% on high incomes may apply.

Along with the wage tax base rate, the SSA announced the 2025 COLA increase, which is 2.5%.

On average, according to the SSA, Social Security retirement monthly benefits for about 68 million people are expected to grow by more than $50 as of January 2025.

You may have heard about proposals to eliminate the Social Security tax limit or wage base.

This debate primarily centers around increasing revenue for the Social Security program trust fund. But there are also concerns about fairness in the current tax approach.

For example, by removing the wage base, high-income earners would contribute Social Security taxes on their entire earnings, potentially injecting significant additional revenue into the system.
Proponents say this could help shore up Social Security for future generations.

Some say removing the tax limit would ensure all workers, regardless of income level, contribute the same percentage of their earnings to Social Security.

However, opponents of removing the wage base contend that increasing taxes on high earners could discourage productivity and economic growth, potentially reducing overall tax revenue.

Additionally, some point out that while high-income individuals might pay more in taxes, the current Social Security benefit calculation formula would result in them receiving higher benefits in retirement, potentially straining the system further.

For now, pay attention to this new 2025 limit.

Also, watch tax policy taking center stage this year. Proposals to shore up Social Security could be key issues throughout 2025 as lawmakers address tax policy to deal with looming expirations of several key Tax Cuts and Jobs Act (TCJA) provisions.

Six Tax Deadlines for October 15 You Don't Want to Miss

Kate Schubel — Thu, 10 Oct 2024 05:04:00 +0000

Even with the uncertainty surrounding the ongoing government shutdown, one thing hasn’t changed: the IRS is still expecting taxpayers who requested more time to file to meet the October 15 federal tax extension deadline.

If you filed for an extension back in April, that means your filing clock officially runs out soon — regardless of the current government funding stalemate.

And that isn’t the only deadline to keep on your radar. October 15 is also the deadline for several other important tax moves that could affect your 2025 return: from excess IRA rules and solo 401(k) contributions to special exceptions for those living in federally declared disaster zones.

Missing one of these deadlines could result in losing valuable deductions or credits, and in some cases, incurring IRS penalties.

Below, we outline six key tax deadlines on October 15 that every filer should be aware of, along with who qualifies for extra time. Let’s dive in.

1. October tax extension deadline

Last year's federal tax returns were originally due on April 15, 2025. But if you were granted a tax extension by the IRS, you need to file by Oct. 15, 2025.

Failure to file could result in a penalty of 5% of taxes due for every month (or partial month) that your return is late.

And yes, the IRS can charge interest on penalties, making that amount even higher.

However, the failure-to-file penalty is separate from late payment penalties. This means that your payment for 2024 federal tax returns was due on April 15, 2025, regardless of whether you were granted a federal tax extension for a later date.

So, if you haven’t paid your taxes yet, you should do so as soon as possible. The IRS offers several options for paying taxes, even if you can’t pay the full amount.

Can you avoid a late filing penalty? The IRS won’t impose a failure-to-file penalty if you had no tax liability last year or are due a tax refund. Also, if you lived or had records in a federally declared disaster area, you may have more time to file taxes in your state.

2. IRS tax deadline for disaster areas

Some taxpayers have until Oct. 15 to file federal tax returns even if they didn’t request a filing extension.

This measure, primarily for Los Angeles County residents in California, pushes back various tax deadlines due to wildfires that rapidly escalated into one of the most devastating disasters. At least 180,000 residents were evacuated, and 30 lives were lost.

Taxpayers impacted by the federally declared disaster in California are automatically granted an Oct. 15 federal tax filing extension. The IRS also granted taxpayers eligible for the relief more time to make certain contributions and tax payments.

2025 estimated tax payments originally due on January 15, April 15, June 16, and Sept. 15, 2025.
Quarterly payroll and excise tax returns originally due on Jan. 31, April 30, and July 31, 2025.

The state Franchise Tax Board has also issued a notice that individuals and businesses impacted by the fires have until October 15, 2025, to file and pay state income taxes. For more information, check out the state announcement for disaster relief.

Taxpayers in other states affected by disasters may have until Nov. 3, 2025, or later to meet the federal tax filing deadline. This can happen if you were impacted by a federally declared disaster in Arkansas, Kentucky, Mississippi, Missouri, Oklahoma, Tennessee, Texas, Virginia, or West Virginia.

But not all taxpayers may qualify for the automatic tax deadline extensions. You can check the IRS’s disaster relief page for more information.

Note: Affected taxpayers may be able to take a special disaster distribution from their retirement plan or IRA without incurring the 10% early distribution tax. But be sure to check your plan’s specific rules and guidance.

3. State tax deadlines

Most state tax extension deadlines are also due Oct. 15. Some states, such as Alabama and Kansas, grant automatic tax extensions if you request a federal filing extension.

However, not all states do, and the tax extension deadlines for some states can fall after Oct. 15. For example, the extended tax deadline for Louisiana state personal income tax returns isn’t until Nov. 15.

Here are a couple of other exceptions to the October 15 tax deadline:

The extended tax deadline in New Hampshire is Nov. 15. (Note: Starting in tax year 2025, the state income tax has been eliminated.)
The extended tax deadline in Virginia is Nov. 1.

Exceptions may apply for deadlines that fall after Oct. 15. For example, some states won’t grant a filing extension if you owe tax. So, it’s important to check with your state’s Department of Revenue before waiting to file your state tax return.

4. SEP IRA contribution deadline: Sole proprietors and C-corps

If you filed for a federal tax extension, Oct. 15 is the deadline to contribute to your employees’ 2024 SEP IRA accounts if you are a sole proprietorship or C-corporation. The contribution deadline for this type of IRA aligns with your federal income tax return deadline, which includes any granted extensions.

Making contributions to this type of IRA could lower your tax liability since you can claim them as a tax deduction on your return; however, it’s important to keep in mind that the IRS only allows you to deduct up to 25% of employee compensation (or the amount of your contributions, whichever is lower).

Note: The extended deadline to contribute to a SEP IRA for your employees was September 15, 2025, if you are an S-corporation or partnership entity.

5. Solo 401(k) contribution deadline

Self-employed taxpayers who requested a federal tax filing extension have until Oct. 15 to contribute to solo 401(k) accounts. Be sure you don’t exceed these contribution limits; however, if you choose to make additional contributions:

$69,000 or 25% of your net adjusted self-employment income, whichever is less.
If making catch-up contributions and are 50 or older, $76,500 or 25% of your net adjusted self-employment income, whichever is less.

6. Correct excess IRA contributions

If you accidentally made excess IRA contributions (“ineligible contributions”) last year and were granted a federal tax extension, act quickly!

Since the IRS will tax you 6% on the excess in your account, you’ll want to have withdrawn the excess funds before the Oct. 15 deadline.

Here are the contribution limits for traditional IRAs and Roth IRAs:

For taxpayers under 50 years old, $7,000 or your taxable compensation for 2024, whichever is less.
For taxpayers 50 years old or older, $8,000 or your taxable compensation for 2024, whichever is less.

October 15 tax deadline time

You have until October 15 to meet the above deadlines unless you were affected by a federal disaster area. In disaster-affected areas, taxpayers typically have later dates to file their federal returns (see individual IRS notices for more information).

Taxes for all other taxpayers who filed an extension or are otherwise subject to the Oct. 15 deadline are due by midnight. This means you’ll want your return filed by 11:59 that night.

However, any documents you send via regular mail must be postmarked by Oct. 15.

Whether you mail your documents or submit them electronically, it’s not possible to predict exactly how long it will take to complete all your forms, so it’s best to start ahead of time.

What is Net Investment Income Tax (NIIT) and Who Pays It?

Kate Schubel — Tue, 01 Oct 2024 14:32:30 +0000

If you don’t know what Net Investment Income Tax (NIIT) is, you’re not alone. This relatively new tax began a little over a decade ago but the number of taxpayers subject to the tax has increased.

For instance, data show that 3.1 million taxpayers were subject to NIIT in its first year. Just eight years later, that number more than doubled.

So what is NIIT and who must pay it?

Read on to avoid surprises on your next tax bill and to find out how you might lower your net investment income.

What is net investment income tax (NIIT)?

The net investment income tax is a 3.8% tax you must pay if your modified adjusted gross income (MAGI) exceeds a certain threshold. (More on that later).

Taxpayers meeting that income threshold pay the tax on the lesser of:

Net investment income, OR
The amount exceeding MAGI

The income thresholds are not indexed for inflation, meaning if inflation were to rise, you would pay a higher tax percentage on the same investment value.

What triggers NIIT?

Below are the MAGI thresholds that make you subject to NIIT:

Married filing separately — income over $125k
Single or Head of Household filers — income over $200k
Married filing jointly — income over $250k

If you have investment income and your MAGI is less than the above amounts, you will not need to pay NIIT.

What counts as net investment income?

Different types of income may be subject to the 3.8% tax, though not all. Below is a list of common examples of investment income that fall under NIIT:

Interest and dividends
Capital gains
Royalty and rental income
Business trading income or other such passive income

Additionally, non-qualified annuities may be subject to NIIT. It’s important to consult with a tax professional to determine if an investment you hold is subject to a specific tax.

What is tax-exempt from NIIT?

Several types of income are not subject to NIIT. For example, qualified annuities could be part of a retirement plan, so they may be subject to different tax rules. (For example: 401(k)s, 403(b)s, 457(b)s, and IRAs).

Other types of income generally exempt from NIIT include:

Wages and unemployment compensation
Social Security Benefits
Alimony
Tax-exempt interest (like municipal bond interest)
Self-employment income

How to avoid the net investment income tax (NIIT)

Here are a few types of expenses that can help lower your net investment income. Keep in mind that these don't necessarily help you avoid the tax entirely. Rather, the expenses can help reduce your NII, potentially lowering NIIT liability.

Investment interest expenses
Investment advisory fees (or brokerage fees)
Rental and royalty expenses related to your rental and royalty income
Tax preparation fees
Fiduciary expenses (for estates and trusts)
Local income and state taxes

Next, we’ll use an example to demonstrate how investment income may be subject to the net investment income tax.

Net investment income tax example

Note: Keep in mind this is a simple example. Real-world scenarios can typically be more complex.

Example. A single filer has $175k in wages and $80k in dividends (with no expenses). This means their net investment income is $80k. Their MAGI (wages plus dividends) is $255k.

In this case, MAGI exceeds the threshold level for a single filer under NIIT ($200k). This means that the single filer will be subject to the tax.

NIIT will take the lesser of:

The amount the taxpayer exceeds the threshold ($255k minus $200k = $55k), OR
Their investment income ($80k)

Since $55k is less than $80k, NIIT will use $55k.

Thus, the taxpayer’s NIIT will be 3.8% multiplied by $55k, resulting in a tax of $2,090.

Does NIIT apply to home sales?

Generally, NIIT does not apply to items normally excluded from your regular taxable income, which includes the sale of a main residence.

If you plan to sell your principal home, the first $250k (single filer) or $500k (married filing joint) is generally exempt from capital gains tax. Hence, it is generally exempt from NIIT. But if the gain on the sale of your home is over the capital gains tax home exclusion limit, you may need to pay tax on the overage, hence, you could pay NIIT if your MAGI exceeds the threshold.

For more information see: Capital Gains Tax on Real Estate and Home Sales.

What is the 3.8% Medicare surtax?

If you are a taxpayer exempt from Medicare taxes, you may still owe NIIT if you meet the investment and MAGI criteria. While you may be subject to the .9% Medicare tax and the 3.8% investment tax, you will not be subject to both on the same type of income.

Note: Though both are surtaxes, they are distinct taxes with different rules. Also, a fun fact: the 'Medicare tax' doesn't currently fund Medicare. It's a separate tax that goes to the general fund.

For more information, see Medicare Tax: Five Things Every Worker Needs to Know.

Net investment income tax 2025: More information

If you'd like to learn more, the IRS has published a list of NIIT FAQs.

Additionally, you can find a withholding estimator on the IRS website that can help you estimate your federal income tax withholding, including NIIT.

The TCJA: Key Facts on the 2017 'Trump Tax Cuts' and What's Extended for 2025

Kate Schubel — Fri, 20 Sep 2024 14:44:00 +0000

The Tax Cuts and Jobs Act (TCJA) became effective more than seven years ago as a major Trump administration tax code overhaul.

Before the recently so-called "One Big Beautiful Bill" (OBBB), the TCJA was the biggest change to tax law and policy in recent decades. (That's why the TCJA is also known as the "Trump tax cuts.")

Extending the expiring TCJA provisions in the OBBB affects millions of taxpayers across the U.S. since its provisions cover everything from changes to the standard deduction and the child tax credit to income tax rates and even the availability and amounts of other popular tax credits and deductions.

While many key TCJA provisions were extended in the OBBB, some were not. For instance, certain individual Alternative Minimum Tax (AMT) phaseout limits reverted to 2018 levels.

We’ll cover what the TCJA is, several provisions that remain, and how it all might impact your household.

TCJA Explained

What is the TCJA?

The TCJA was a sweeping tax overhaul that reduced tax rates, changed processes, and restructured individual and corporate tax frameworks.

As mentioned, the law, enacted in 2017, is also known as the "Trump tax cuts" because it was a signature piece of legislation in Trump's first term as president.

Several significant tax changes are in the TCJA, but a major one was a temporary reduction in individual federal income tax rates.

Tax Rates

TCJA income tax changes

Almost every U.S. taxpayer was affected in some way by the TCJA. Below are a few highlights from the tax rates and the bracket changes tied to them. We’ll use the data to illustrate examples of the 2017 law’s impact.

Source: Tax Policy Center. The tax bracket income thresholds here compare 2018 prior and post-TCJA amounts to show the immediate impact of the TCJA on tax brackets.

Federal income tax brackets are adjusted annually for inflation, so these comparisons don't reflect current federal income tax brackets for the 2025 tax year.

2017 (Before the TCJA)
Single Filer	Married, Filing Jointly	Rate
$38,700 to $93,700	$77,400 to $156,150	25%
$424,950 to $426,700	$424,950 to $480,050	35%
$426,700+	$480,050+	39.6%

2018 (With the TCJA)
Single Filer	Married, Filing Jointly	Rate
$38,700 to $82,500	$77,400 to $165,000	22%
$200,000 to $500,000	$400,000 to $600,000	35%
$500,000+	$600,000+	37%

As shown above, a single filer with income above $38,700 before the TCJA was enacted would have been subject to a 25% federal tax rate. The year following the TCJA's enactment, that same income level was instead subject to a 22% tax.

Another example from above is a married, filing jointly couple with income above $480,050 before the TCJA was enacted would have been subject to a 39.6% marginal federal tax rate. The year after the TCJA was signed into law, those earnings were instead subject to a 35% tax.

Note: Remember that the above examples merely illustrate the immediate impact of the change in tax rates from 2017 to 2018. Since federal tax brackets are adjusted yearly for inflation, the income tax brackets for 2025 are not reflected in that chart. For more information, see 2025 Federal Tax Brackets and Income Tax Rates.

Most tax rates were reduced under TCJA. However, the lowest tax rate of 10% was not. Taxpayers in the lowest bracket before and after the TCJA could have been subject to a 10% tax.

Households earning $450,000 or more received about 45% of benefits from the TCJA. As you can see from the above examples, under the TCJA, those with higher incomes generally saved more on taxes than taxpayers with lower incomes.

Note: In the newly enacted OBBB, the post-TCJA federal income tax bracket schedule and lower rates were made permanent.

Child Tax Credit

TCJA child credit changes

The TCJA also cut personal exemptions and expanded the federal child tax credit (CTC). That meant families could no longer take the personal and dependent exemption, which was $4,050 (indexed for inflation).

And under the newly signed OBBB law, the elimination of the personal and dependent exemption is permanent.

Before the TCJA, 292.7 million people claimed personal and dependent exemptions. Total taxpayer savings were in the billions, so individuals could potentially see a reduction in savings with permanent termination.

However, a higher CTC amount, which used to be $1,000, pre-TCJA, has become permanent under the OBBB.

The new CTC amount under the OBBB is $2,200 per child.
The tax law also indexes the credit amount for inflation yearly, starting in 2026.
The qualifying child’s age for this credit remains at 17 and under (pre-TCJA allowed a credit for children 16 and under).

As Kiplinger previously reported, data show that poverty levels can decrease when families benefit from an expanded CTC. But it hasn’t ended there.

The OBBB also maintains the increased income phase-out thresholds, the nonrefundable, non-child dependent credit, and leaves the refundable part of the child tax credit at $1,700.

For more information, check out Kiplinger's report, Three Major Changes Coming to Parents Under the Trump Megabill.

Note: The TCJA also changed the child tax credit requirements regarding Social Security numbers (SSN). Before, a qualifying child didn’t have to have an SSN. After, children without eligible SSNs couldn’t qualify for the full credit. Under the OBBB, a child's and his or her parents' SSNs are required to claim the credit.

Standard Deduction

TCJA doubled standard deduction

The TCJA almost doubled the baseline federal standard deduction.

When the TCJA was enacted, the standard deduction jumped from $6,500 to $12,000 (single filer). For married, filing jointly filers, the standard deduction increased from $13,000 to $24,000. The standard deduction is indexed annually for inflation.

Some bipartisan organizations suggest that the larger standard deduction offered by the TCJA leads to a progressive tax rate (a rate that increases as taxable income increases). This would mainly benefit middle-class and low-income households.

According to the Center for Economic and Policy Research (CEPR), studies have shown that more people with $200,000 or less in income took the standard deduction when the TCJA was first enacted. However, it should also be noted that data show most people took the standard deduction before the TCJA.

Under the recently signed OBBB, the raised standard deduction amounts are made permanent and further increased with an extra year of inflation adjustment.

For tax years 2025, the bill increases the standard deduction by the following amounts:

Single filers get an extra $750
Married, filing jointly couples receive an extra $1,500
Head-of-household filers get an additional $1,125

For information about the current standard deduction, see How Does the Standard Deduction Work?

SALT Cap

New SALT Cap Limit under TCJA and OBBB Changes

The TCJA also limited the amount of state and local tax (SALT) you could deduct. The SALT deduction includes property tax and other taxpayer liabilities already taken out for state and local services.

Pre-TCJA, the deduction was limitless; after the law was enacted, you could only deduct up to $10,000 of your state and local taxes. This mainly affected those with high-worth homes or state and local taxes in high-cost areas, such as New York, New Jersey, or California.

For example, homeowners could no longer itemize the full amount they pay in state, local, and property taxes if they pay more than $10,000. This meant those taxpayers saw fewer benefits.

However, the OBBB includes a provision temporarily raising the SALT cap to $40,000.

The cap will increase by 1% annually from 2026 through 2029.
Starting in 2030, the SALT cap will expire and revert to the $10,000 TCJA limit.
Those with modified adjusted gross income (MAGI) above $500,000 or more are subject to a phaseout ($250,000 if married filing separately).

There was much debate before the OBBB's temporary raise on the SALT cap was made final.

Rep. Nick Lalota (R-N.Y.), an outspoken critic of the SALT cap, told Politico that the tax bill was "dead effectively on the floor" under the original $10,000 the GOP proposed. Other Republicans representing high-tax districts have argued that a later proposed limit of $30,000 was still too low.

This might hint at future negotiations down the road when the $40,000 SALT cap expires in 2030.

For more information, see Kiplinger's report: SALT Deduction 2025: Three Things to Know Now.

Did itemized deductions go away under the TCJA?

The TCJA affected other miscellaneous itemized deductions in the following ways:

It limited deductible medical expenses and deductible home-equity loan interest. The medical expense limit was later made permanent. The OBBB also made the limit on home-equity loan interest permanent, unless the loan is for buying, building, or substantially improving the home securing the loan.
Increased the charitable contribution deduction rate from 50% to 60%. The OBBB made this provision permanent.
Repealed a “Pease” limitation, which reduced itemized deductions based on taxable income above certain thresholds. The OBBB repeals the Pease limitation and replaces it with a new limit on itemized deductions, which applies mostly to taxpayers in the highest income tax bracket.

The TCJA also eliminated the deduction for unreimbursed employee expenses and tax prep fees, for alimony, hobby expenses, and moving expenses (unless you're military), and the deduction for casualty and theft losses, except for certain losses in federally declared disaster areas.

Those "miscellaneous itemized deductions" were permanently removed under the "One Big Beautiful Bill." However, the increased standard deduction in the OBBB might result in a larger tax refund for some taxpayers next year.

For more information, check out Kiplinger's report, Five Ways Trump's 2025 Tax Bill Could Boost (or Shrink) Your Tax Refund.

Many TCJA or "Trump tax cuts" were extended under the new OBBB, or "One Big Beautiful Bill" tax law. (Image credit: Getty Images)

Alternative Minimum Tax

How the TCJA affected AMT (Alternative Minimum Tax)

The Alternative Minimum Tax (AMT) places a floor on the amount that higher-income taxpayers must pay, regardless of credits or deductions taken on their taxes.

The AMT’s income level and phase-out were raised under TCJA. This meant fewer higher-income people qualified for AMT (which for 2025 applies to taxpayers earning above $239,100). If a taxpayer did qualify, they generally paid less in taxes.

For example, the Tax Policy Center estimated that the number of taxpayers who would have paid AMT the year TCJA was enacted fell by about 5 million. This was big news for people who were subject to what some call a "parallel tax system," which provided the government with about $34 billion in revenue the year before TCJA.

Under the OBBB, certain AMT increased thresholds were made permanent.

For instance, the current exemption amounts have been extended, meaning AMT won't kick in until you meet the post-TCJA limits of $88,100 (single filers) or $137,000 (married, filing jointly, couples).

However, the higher phaseout limits have reverted to pre-TCJA levels. This effectively lowers the phaseouts to $1,000,000 for married filing joint filers and $500,000 for single filers. The rate at which the exemption is phased out has also been increased from 25% to 50% as income increases.

Estate Tax

Estate tax exemption extension

Another benefit for wealthier taxpayers under the TCJA is the doubling of the federal estate tax exemption.

In 2017, instead of paying taxes on estates above $5.6 million, higher-income individuals were not taxed until $11.2 million. The threshold is inflation-adjusted annually, with the current exemption level at $13.99 million.

The recently signed OBBB makes the higher exemption for the estate tax permanent. Not only that, but the law also indexes the estate exemption for inflation and raises the 2026 amounts to $15 million for single filers and $30 million for married couples.

For more information, see Kiplinger's report Big GOP Tax Bill Could Change Your Estate Planning for 2025.

Corporate Tax

Trump corporate tax rate

The TCJA changed taxes for businesses, too. For example, the TCJA cut the corporate income tax (CIT) from 35% to 21%. This was a permanent change.

Though the effect of lower corporate tax rates is debated in economic circles, the Tax Foundation reports that the burden of the CIT falls on consumers. Consequently, a lower CIT might entice companies to raise wages and lower prices for buyers.

Other TCJA changes made for businesses included:

Created a 20% deduction on qualified business income for some business owners (pass-through entities). The OBBB made this deduction permanent.
Limited deduction for meals and entertainment expenses (the latter are generally not deductible). The TCJA made this change permanent.
Largely eliminated tax deductibility of net operating losses (NOL) for businesses. (The TCJA limited the NOL deduction to 80% of taxable income and eliminated most carrybacks.) This provision is permanent.
Limited business interest expenses. (The OBBB makes a more restrictive calculation of adjusted taxable income (ATI) permanent.)
Allowed 100% expensing on some business property for specific tax years. (This provision was set to phase out gradually after 2022.) The OBBB allows taxpayers to immediately expense 100% of qualified short-lived property that was placed in service on or after January 20, 2025.

That last point, on expensing business property, concerns depreciation. Normally, business assets are depreciated over their useful life (typically five, 10, or 15 years). Before the TCJA, tax law generally allowed some equipment to be partially expensed, but it was only 40% of qualifying assets.

The OBBB extends the TCJA provision allowing businesses to fully and immediately expense their qualifying short-lived assets placed in service after January 19 and before January 1, 2030. (Other types of property may be subject to a different duration of tax benefits.)

Accelerated depreciation creates a greater tax difference between reportable income (what the stockholders see) and taxable income (what the IRS sees). But this difference is temporary. In later years, when the asset has been fully expensed for tax purposes, but not for reportable income purposes, the business will pay more tax on that asset.

That is why accelerated depreciation might be called a "deferred tax liability." Businesses pay less in taxes now for greater tax liability in the future.

Effectively, immediate expensing allows companies to invest more in the short term. This could create more jobs, boost productivity, and raise wages.

TCJA vs. OBBB

Bottom line: Trump tax bill extends TCJA provisions

Many TCJA cuts became permanent. However, doing so came with a price tag.

The OBBB is estimated to cost about $4.5 trillion over ten years, according to Tax Notes. This significant federal deficit impact could impact your wallet through higher borrowing costs and potential future tax increases, or in other ways.

You might want to get a head start on your 2026 tax planning. Consult with a tax planner to look at your financial situation to see whether any recent tax changes apply to you.

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