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.

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

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 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.

Related

• New Tax Rules: Income the IRS Won't Touch
• Standard Deduction 2026 Amounts Are Here
• Income Tax Brackets for 2025: What to Know
• 2026 Family Tax Credits: Three IRS Changes You Need to Know Now

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 questions on what Congress will do next with taxes. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Federal government shutdown

Question: What are the chances that the federal government will shut down after September 30?

Joy Taylor: Although there is a chance the federal government will close on October 1, the odds are better that Democrats and Republicans in Congress will reach a short-term extension agreement to fund the government for maybe 30 days. We expect that this government funding fight will continue throughout the fall.

Many hurdles need to be cleared for Congress to reach a government funding deal by the end of September, including the following. First, Republicans and Democrats are very much divided. Second, there is intraparty bickering among Republicans. Third, the push by the White House to claw back money previously approved by Congress is also causing friction. In July, Republicans agreed to rescind $9 billion in previously approved spending for the Corporation for Public Broadcasting and foreign aid. President Trump wants Congress to approve a second bill rescinding even more funding, although we don't yet know the details. Democrats are fuming over these rescission bills and are questioning whether they should cooperate with their Republican colleagues on government funding if Congress is later going to renege and rescind the money.

2. IRS and a government shutdown

Question: If the federal government does shut down after September 30, how will this impact the IRS?

Joy Taylor: Luckily, if there is a government shutdown, it will not occur during the filing season. So filers generally won't have to worry about late refunds or delayed return processing.

However, the IRS has a lot on its plate to implement all of the tax changes in the so-called One Big Beautiful Bill law (OBBB), which was enacted on July 4. The agency has to revise forms, instructions and publications, and do it soon, since many of the OBBB's changes take effect for 2025 tax returns that will be filed early next year. Several of the new tax changes have complicated rules and guardrails that will require IRS guidance to interpret. Also, the IRS's IT people have to reprogram computer systems to account for all the changes.

Implementing the OBBB changes will be a hurculean task for an agency that by Sept. 30, 2025, is expected to lose 25% of its total workforce. However, although it's a massive undertaking and there will definitely be hiccups, we believe that the agency will step up. Passing the OBBB was a White House priority, and President Trump's administration will pressure the Treasury Dept. and the IRS for as seamless an implementation process as possible. This is so, even in the midst of a possible government shutdown. If the government does shutter, we think the IRS will keep many employees working to implement the OBBB changes.

3. Obamacare subsidies

Question: Will Congress extend the expansions to the health premium tax credits (PTC) that are set to expire after this year?

Joy Taylor: We think so, but it's still too soon to tell. The PTC is an Obamacare tax subsidy for eligible individuals who buy health insurance through the marketplace. Most people who qualify opt for the PTC to be paid in advance, directly to the health insurance company, to lower their monthly premium payments.

During the height of the COVID-19 pandemic, federal lawmakers enhanced the PTC, allowing more people to qualify and increasing the credit amount. But these expansions are temporary, ending after 2025. Letting these expansions lapse will impact people seeking health insurance for 2026 and later years and could cause millions to lose insurance.

Extending the expiring expansions to the PTC is a priority of democratic lawmakers in Congress. Don't be surprised if Democrats use this as a negotiating tool in the government funding discussions. There is a willingness among some Republicans in Congress to make a deal with Democrats on this issue.

4. Another budget reconciliation bill

Question: I keep reading that House Speaker Mike Johnson (R-LA) wants to do another budget reconciliation bill this year. Do you think this will happen, and if so, what will it cover?

Joy Taylor: Republicans in Congress passed the OBBB through the complicated budget reconciliation process. This allowed them to bypass the 60-vote filibuster rule in the Senate and instead pass the law on a strict majority vote. Republican leaders and tax writers are now saying that they would like to pull off another reconciliation bill this fall. Items that could be included in any such bill are further cuts to Medicaid and other provisions that were in the House's version of the OBBB but were slashed by the Senate parliamentarian because they violated procedural rules.

We think the odds of another reconciliation bill this year are quite low. Many in Congress don't see this as a priority, nor do they have the stomach to go through this process again. Remember, the OBBB passed in the Senate only because of the tie-breaking vote by Vice President Vance. Also, there's a lot on Congress's plate, first and foremost, avoiding a government shutdown. And, as we said above, we expect that process to last through the end of the year.

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 OBBB 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.

More Reader Questions Answered

• All Ask the Editor Q&As
• Ask the Editor: Questions on the New Tax Law
• Ask the Editor: Questions on the $6,000 Senior Deduction
• Ask the Editor: Questions on home sales and taxes
• Ask the Editor: Questions on Inherited IRAs
• More Shutdown Struggles Ahead for Divided Congress

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 questions on the OBBB and tax rates. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Income tax rates

Question: Did the “One Big Beautiful Bill” act (OBBB) extend the lower federal income tax rates for individuals that were going to expire after 2025?

Joy Taylor: Yes. Federal income tax rates for C corporations, individuals, trusts and estates will stay the same. C corporations are taxed at a 21% rate. The individual income tax brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%. The federal income tax rates for trusts and estates are 10%, 24%, 35% and 37%. These are all permanent.

2. Income tax withholding tables

Question: Will the IRS adjust the 2025 federal income tax withholding tables to reflect the changes in the OBBB?

Joy Taylor: No. The IRS announced that it will not update the 2025 federal income tax withholding tables to account for the new tax breaks in the OBBB, such as the higher standard deduction, the write-offs for tips and overtime pay, and the $6,000 senior deduction for filers 65 and older. Although these new tax breaks begin in 2025, filers won’t reap the benefits of them until next year when they file their 2025 tax returns.

3. Estate tax

Question: Did the OBBB lower or eliminate the top 40% federal estate tax rate?

Joy Taylor: No. The top federal estate tax rate stays at 40%. But the higher lifetime estate and gift tax exemption is now permanent, and is even bigger, beginning in 2026. The federal lifetime exemption for 2025 deaths is $13,990,000. Starting with 2026 deaths, the exemption rises to $15 million (and is indexed for inflation for each year thereafter). So fewer estates will have to file a federal estate tax return.

4. Net investment income tax

Question: Did the OBBB repeal the 3.8% surtax on net investment income of individuals with higher incomes?

Joy Taylor: No. The 3.8% net investment income (NII) tax was not changed in the OBBB. The tax applies to single filers with modified adjusted gross incomes (AGI) over $200,000, joint filers with modified AGI over $250,000, and married people filing separately with modified AGI above $125,000. For this purpose, modified AGI is defined as AGI plus tax-free foreign-earned income. The NII tax, which is added to the regular income tax, is due on the lesser of NII or the excess of modified AGI over the $200,000/$250,000/$125,000 thresholds. Investment income of trusts and estates can also be hit with the 3.8% NII tax if their 2025 AGI exceeds $15,650 and they have undistributed net investment income.

NII includes what is commonly thought of as investment income: Dividends, capital gains, taxable interest, annuities, royalties and passive rental income. Trade or business income derived through a passive activity is also NII, provided that the business income isn’t otherwise subject to self-employment tax.

For more details on the 3.8% NII tax, see our article “More People Are Paying This Tax On Investment Income Each Year.”

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" act 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.

More Reader Questions Answered

• All Ask the Editor Q&As
• Ask the Editor: Questions on the New Tax Law
• Ask the Editor: Questions on the $6,000 Senior Deduction
• Ask the Editor: Questions on home sales and taxes
• Ask the Editor: Questions on Inherited IRAs

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 questions on hobby losses, I bonds and Medicare premiums. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Hobby Loss or Business Loss

Question: I own a dog-breeding business, and for the past few years, I have reported losses from the business on Schedule C of my Form 1040. What are the odds that the IRS will audit my return?

Joy Taylor: The odds of an IRS audit are quite low for most people. In recent years, the IRS has audited significantly less than 1% of all individual tax returns, and we expect that number will remain low for the foreseeable future. However, there are some audit red flags that could increase the chance of drawing unwanted attention from the IRS. One of those is deducting a hobby loss. Filers who report multiple years of big losses on Schedule C of Form 1040, run an activity that sounds like a hobby, and have lots of income from other sources that the losses offset are prime IRS audit targets.

To deduct a Schedule C loss, you must show that the activity is a business. It needs to be conducted with continuity and regularity in a businesslike manner, and you must have a reasonable, good-faith objective of making a profit from it. The IRS’s regulations provide a safe harbor. If your activity generates profit in three out of five consecutive years (or two out of seven years for horse breeding), the law presumes you’re in business to make a profit unless the IRS establishes otherwise. The hobby-business analysis is trickier if you can’t meet the safe harbor. That’s because the determination of whether an activity is properly categorized as a hobby or a business is then based on each taxpayer’s facts and circumstances. The IRS and the courts generally look at the following nine factors (note that no one factor is determinative, but some are routinely given more weight):

• Expertise of the taxpayer and advisers
• Manner in which one carries on the activity
• Time and effort devoted to the venture
• Expectation that assets used in the activity may appreciate
• History of income and losses (the more years of large, consecutive losses, the harder it is to demonstrate a profit motive unless the activity is still in its start-up stage)
• Amount of occasional profits
• Success in carrying on other activities
• Elements of personal pleasure or recreation that one gets from the activity
• Whether the taxpayer has substantial income from other sources, such as wages, other business income, retirement income or investment income

For more information, here is an online story that I wrote on the hobby loss rules

2. I Bonds and College Education

Question: I have owned Series I bonds for many years. I heard that if I cash in the bonds and use the bond proceeds for higher education for my children, then I won’t have to pay tax on the interest when I cash my I bonds in. Is that true?

Joy Taylor: I bond buyers have a choice when they acquire the bonds. They can pay federal income tax each year on the interest earned or defer the tax bill to the end. Most people choose the latter, which is what I assume you did. Thus, you would generally report interest income on your Form 1040 for the year the bonds mature or when they are cashed in, whichever comes first.

One way to avoid paying federal income tax on accrued I bond interest is to cash in the bonds on or before the maturity date and use the proceeds to help pay for college or other higher education expenses for you, your spouse or your dependent. Note that there are lots of hurdles to jump over to be able to take advantage of this tax perk. Here are some of them:

• You must have purchased the bonds after 1989 when you were at least 24 years old.
• The bonds must be in your name only.
• The bonds must be redeemed to pay for undergraduate, graduate or vocational school tuition and fees for you, your spouse, or your dependent (grandparents cannot use this tax break to help pay for their grandchild’s college tuition unless the grandparents can, on their Form 1040, claim the grandkid as a dependent).
• Room and board costs aren’t eligible for the exclusion.
• The exclusion is subject to strict income limits. For 2025, it begins to phase out at modified adjusted gross income (MAGI) of more than $149,250 for joint filers and completely phases out at MAGI of $179,250. For all other filers, the phase-out range for 2025 is $99,500 - $114,500. These figures are adjusted for inflation each year, so they would be higher for 2026 and so forth. MAGI for this purpose starts with the AGI on line 11 of your Form 1040 (figured without taking into account any I-bond interest exclusion). Then you add back any tax breaks from working abroad, the exclusion for employer-provided adoption assistance and any deductions for student loan interest.

If the proceeds from all I bonds cashed in during the year exceed the qualified education expenses that you pay for the year, the amount of I bond interest you can exclude is reduced proportionally. You would use IRS Form 8815 to compute your MAGI and the amount of any I-bond interest exclusion that you would be entitled to.

3. Medicare Premiums and IRMAA

Question: How do I calculate MAGI to determine whether I owe an income-related monthly adjustment amount (IRMAA) on top of my basic monthly Medicare Part B and D premiums? Is the untaxed portion of Social Security benefits added back in for this purpose?

Joy Taylor: True to the complexity of the federal tax code, the definition of MAGI often differs, depending on what it is used for. MAGI for purposes of determining IRMAA for Medicare purposes is your adjusted gross income shown on line 11 of your Form 1040 plus any tax-exempt interest income. As a result, the untaxed portion of your Social Security benefits is not included in MAGI.

If you'd like to learn more, here is a link to an explainer I wrote on modified adjusted gross income (MAGI).

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to inherited IRAs, Roth IRA conversions, responding to an IRS tax notice and more. We’ll answer some of these in a future Ask the Editor round-up. 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.

More Reader Questions Answered

• Ask the Editor: Questions on Trump's Big Beautiful Bill
• Ask the Editor: Questions on capital gains
• Ask the Editor: Questions on tax deductions and losses
• Ask the Editor: Questions on 529 plans
• Ask the Editor: Questions on amended returns

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 questions related to the House-passed “One Big Beautiful Bill.” (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Legislative forecast

Question: Now that the House passed the One Big Beautiful Bill, when will the Senate pass it?

Joy Taylor: In the wee hours of May 22, the House passed its One Big Beautiful Bill on a 215-214 vote. The proposal would extend many of the expiring tax provisions in the 2017 Tax Cuts and Jobs Act and enhance them in several instances, provide brand new tax breaks, repeal clean-energy credits for individuals and businesses, and make Medicaid cuts to offset some of the bill’s cost.

It’s now time for the Senate’s turn. And the process to passage in the upper chamber won’t be easy. Republicans senators are already saying they will make changes to the package. For example, some don’t like the extent of the Medicaid cost reductions, others want certain business tax changes to be made permanent, some oppose big cuts to clean-energy credits, and the list goes on. There is also the impact on the federal deficit. The bill is estimated to hike the deficit by $2.8 trillion over 10 years. After the Senate makes its changes, the House would then have to approve them.

Republicans are pushing to get a finished bill to President Trump by July 4, but this compressed time frame seems unlikely. A more likely scenario is for a final Senate vote by late July.

2. Impact on Muni bonds

Question: Does the House-passed tax bill make interest on state and local bonds (Munis) taxable?

Joy Taylor: No. The tax break is safe for now. Interest earned on Munis is tax-free for federal income tax purposes. Some Republicans floated the idea of repealing the interest exemption as an option for raising revenues to help offset the cost of other proposed tax relief in the bill. But a lobbying push by affected groups and industries helped to save the break. Also, states and local governments rely on Munis to fund all sorts of infrastructure projects.

3. Impact on Social Security benefits

Question: I receive Social Security benefits, and I have to pay federal income tax on a portion of the benefits. Does the House-passed bill make Social Security benefits tax-free?

Joy Taylor: Many Social Security recipients pay federal income tax on up to 85% of their benefits, depending on their provisional income. President Trump vowed to end the tax. But the process that Republican lawmakers are using to pass their bill by circumventing the 60-vote filibuster rule in the Senate won’t allow this income tax change to Social Security benefits. So the answer to your specific question is that your Social Security benefits will be taxed as usual for federal income tax purposes.

However, congressional Republicans found an alternative means of providing tax relief for seniors. The House-passed bill would give a $4,000 bonus deduction to filers who are age 65 and up. Individuals 65 and older who take the standard deduction would add the extra $4,000 to their standard deduction amounts. Married couples with both spouses who are 65 or older would be able to deduct $8,000. Filers who are 65 or older and itemize on Schedule A would also get the deduction. The proposal would first take effect on 2025 returns filed next year and end after 2028.

But not every senior would qualify for this bonus deduction. There is an income limit. The deduction would begin to phase out for taxpayers with modified adjusted gross incomes over $150,000 on joint returns and $75,000 on single and head-of-household returns.

4. Who can claim the $4,000 bonus deduction?

Question: My wife are I are both retired federal employees. We receive a Civil Service Retirement System (CSRS) pension, but we do not receive Social Security benefits. Will we be able to claim the proposed $4,000 bonus deduction that is included in the House-passed bill even though we do not receive Social Security benefits?

Joy Taylor: Yes, if the One Big Beautiful Bill is eventually enacted, and you are age 65 or older, you would be able to claim the bonus $4,000 deduction (per spouse), subject to the income phaseouts discussed above. You do not have to receive Social Security benefits to take the deduction.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to tax basis in a home, IRA contributions and distributions, and more. We’ll answer some of these in a future Ask the Editor round-up. 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.

More Reader Questions Answered

• Ask the Editor: Questions on capital gains
• Ask the Editor: Questions on tax deductions and losses
• Ask the Editor: Questions on 529 plans
• Ask the Editor: Questions on amended returns
• Ask the Editor: Questions on IRAs, RMDs and PTPs

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 questions on gifts, the estate tax and stepped-up basis upon death. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. The annual exclusion amount for gifts

Question: What is the annual exclusion amount for gifts made in 2025?

Joy Taylor: The annual gift tax exclusion is $19,000 per donee this year. This means in 2025, you can give up to $19,000 per person without paying federal gift tax, tapping your lifetime estate and gift tax exemption, or filing a federal gift tax return. Here’s an example. Say you have two sons and three grandchildren, and you want to gift the maximum amount to each of your relatives, including your son’s spouses, without having to file a gift tax return in 2025. The most you can give is $19,000 to each relative. That’s $133,000 in excludable gifts.

2. Gifts over the annual exclusion amount

Question: I am planning to gift my son $100,000 this year. Do I have to pay federal gift tax on this?

Joy Taylor: It is unlikely that you will have to pay any federal gift tax on this gift to your son. Although the $100,000 gift would exceed the $19,000-per-donee annual gift tax exclusion amount, you will not owe any federal gift tax, provided that your total lifetime gifts don’t exceed the lifetime estate and gift tax exemption, which for 2025 deaths is $13,990,000. You will have to file a federal gift tax return on Form 709 to report the gift to the IRS because the gift is over the $19,000 annual exclusion amount.

3. Stepped-up basis

Question: My spouse and I jointly own our home, which has substantially appreciated. How do the stepped-up basis rules work if one of us dies?

Joy Taylor: Under the tax law, a decedent’s unrealized gains aren’t hit with federal income tax at death, and heirs step up their basis in the assets they receive, equal to fair market value on death. With regards to your house, if you don’t live in a community property state, half of the home will get a step-up in basis upon the death of the first-to-die spouse. For example, let’s say you and your spouse bought a home for $100,000 many years ago, and it is worth $750,000 on the date the first of you dies. The surviving spouse’s basis in the home would be $425,000 (his or her half of the original $100,000 basis plus half of the deceased spouse’s $750,000 date-of-death value). The rules are more generous if the house is held as community property. The entire basis is stepped up to fair market value when the first spouse dies.

4. Estate taxes and the house bill

Question: Does the one big, beautiful House bill extend the larger lifetime estate tax exemption?

Joy Taylor: Currently, the federal lifetime estate and gift tax exemption for 2025 deaths is $13,990,000, and the highest estate tax rate is 40%. After 2025, the $13,900,000 figure is slated to drop to about $7 million or so unless Congress passes legislation to extend the higher amount. That is because the higher lifetime estate tax exemption is one of the provisions in the 2017 Tax Cuts and Jobs Act that was made temporary.

The one big, beautiful bill passed by the House would not only make the larger lifetime estate and gift tax exemption permanent but would also increase it. If the bill is enacted, the lifetime estate and gift tax exemption amount for decedents dying in 2026 would be $15 million. And this figure would increase for inflation each year.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to inherited IRAs, hobby losses, IRS payment letters and more. We’ll answer some of these in a future Ask the Editor round-up. 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.

More Reader Questions Answered

• Ask the Editor: Questions on capital gains
• Ask the Editor: Questions on tax deductions and losses
• Ask the Editor: Questions on 529 plans
• Ask the Editor: Questions on amended returns
• Ask the Editor: Questions on IRAs, RMDs and PTPs

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 questions on capital gains. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Capital gains tax rates

Reader Question: What are the federal capital gains tax rates for 2025? And what are the income cut-off points for the various rates?

Joy Taylor:
Long-term capital gains, which are profits from the sale or exchange of capital assets held for more than a year, get favorable federal tax rates. They are taxed at 0%, 15% or 20%. Prior to 2018, the determination of which rate you'd qualify for was based on your tax bracket. Through the end of 2025, the rate is based on set income thresholds, which are adjusted annually for inflation. Note that these same favorable rates also apply to qualified dividends.
For 2025, the income thresholds are:

• The 0% rate applies at taxable incomes up to $48,350 for single filers, $64,750 for head-of-household filers and $96,700 for joint filers.
• The 20% rate starts at $533,401 for single filers, $556,701 for head-of-household filers and $600,051 for joint filers.
• The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

Though most long-term capital gains are taxed at the 0%, 15% or 20% rates discussed above, there are a couple of exceptions. Long-term capital gains from the sale of art, antiques, coins, historical documents and other collectibles have a 28% top rate. Depreciation recapture from real estate sales is taxed at as much as 25%. Short-term capital gains, which are profits from the sale or exchange of capital assets held for 12 months or less, are taxed at ordinary income rates.

2. The 0% tax rate

Reader Question: Can you explain how to qualify for the 0% federal tax rate on long-term capital gains and qualified dividends?

Joy Taylor:
For 2025, if taxable income other than long-term gains and dividends doesn't exceed $48,350 on single-filed returns, $64,750 on head-of-household returns or $96,700 on jointly filed returns, then qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal income tax rate until they push you over the threshold amounts.

These figures are a bit lower for 2024 tax returns, since they are adjusted annually for inflation: $47,025 for single filers, $63,000 for head-of-households, and $94,050 for joint filers. Note that although these 0%-rate gains might not be taxed at the federal level, they do increase adjusted gross income. Also, some states tax capital gains as ordinary income.

Here are three scenarios to illustrate the 0%-rate rule. In all three scenarios, you have a married couple with $18,000 of qualified dividends and long-term capital gains in 2025, which are included in taxable income.
In the first scenario, the couple has $77,000 of taxable income.
The full $18,000 of gains and dividends is taxed at the 0% rate.
In the second scenario, the couple has taxable income of $104,000.
$10,700 of the gains and dividends ($96,700 - ($104,000 - $18,000)) gets the favorable 0% tax rate, and $7,300 is taxed at the 15% rate.
In the third scenario, the couple has $120,000 of taxable income.
The 0% rate doesn't apply, and the full $18,000 of gains and dividends is taxed at 15%.

3. Capital gains indexing

Reader Question: Is there any effort in Congress to provide some sort of inflation indexing for capital gains?

Joy Taylor
As you might be aware, the White House and congressional Republicans are negotiating a tax package that would extend the expiring provisions in the 2017 Tax Cuts and Jobs Act and make some other tax changes.

There has been no talk about changing the taxation of capital gains, with one exception. Free-market groups and some Republican lawmakers would like to see capital gains indexed to inflation each year. Essentially, if this concept were enacted, taxpayers could increase their tax basis in capital assets by the rate of inflation between the purchase date and the time of sale. For example, say you bought stock in early 2010 for $10,000 and sold it in January 2024 for $35,000. Absent indexing, you would have a $25,000 long-term capital gain. With indexing, using the Chained CPI inflation measure, your basis in the stock would jump to $13,740, making your gain $21,260, thus lowering the amount of capital gain tax you would pay.

Senator Ted Cruz (R-TX), a long-time proponent of capital gains indexing, has introduced a bill that would allow inflation indexing for purposes of calculating a capital gain or loss. His proposal would use the gross domestic product deflator as the index for measuring inflation.

It's hard to know right now whether capital gains indexing would make it into the tax package. There are lots of complexities associated with it, including choosing the appropriate index; tax basis doesn’t remain static over time; and indexing would add to the federal debt. And we don't know where President Trump stands on the idea. During his first term as president, he was all over the board. He touted the idea several times, but then also nixed it.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to gifts, tax credits for installing solar panels in a home and more. We’ll answer some of these in a future Ask the Editor round-up. 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.

More Reader Questions Answered

• Ask the Editor, May 23, 2025: Gifts, Estate Tax
• Ask the Editor, May 4, 2025: Tax deductions and losses
• Ask the Editor, April 25, 2025: 529 plans.
• Ask the Editor, April 18, 2025: Amended returns.
• Ask the Editor, April 11, 2025: IRAs, RMDs and PTPs.
• Ask the Editor, April 4, 2025: The new tax bill, estate tax, and muni bonds.

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.

Related Content:

• Key State Tax Changes for 2025
• Are No Income Tax States Better to Live In?
• Iowa Tax Guide

Tax refunds are coming in smaller this year, and the drop may be due to certain family tax credits haven’t been delivered yet.

The IRS reported that the average refund amount via direct deposit was $2,252 based on 33 million tax returns processed through February 14. That’s down 31% from $3,265 during the same period last year when the agency processed over 34 million returns.

It’s still early in the tax season, meaning refund amounts still have time to even out or climb higher as more tax returns come in.

Additionally, under current law, the IRS cannot issue refunds for tax returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) before mid-February. Those numbers aren’t reflected in the latest statistics.

Here’s what you can expect regarding your refund amount in the coming weeks.

Tax refunds average amount

Though IRS tax refunds came in $1,000 smaller this week, here are some key reasons why refunds may increase for some taxpayers.

Tax experts this year hinted that refunds could come in slightly larger due to inflation-related changes to the standard deduction and tax brackets for 2024. There’s also an extra standard deduction benefit for people over 65.

These changes impact your taxable income and generally translate to a bigger refund. That’s if your filing status and tax credits are the same as last year.

Here are three reasons why your refund may be better this year.

1. Larger standard deduction

Most taxpayers benefit from the standard deduction, and there’s good news this year. The 2024 standard deduction amounts for returns you’re filing now, in early 2025, are slightly larger.

That means you’ll get a broader chance to lower your tax liability and potentially get a larger tax refund. For single taxpayers and married individuals filing separately, the standard deduction rises to $14,600 for 2024, an increase of $730 from the previous year.

For couples who file jointly, the standard deduction is $29,200. As for heads of households, their deduction is $21,900 for the 2024 tax year.

If you are at least 65 or blind, you can claim an additional standard deduction benefit worth $1,950 for 2024. The extra deduction amount is doubled if you and your spouse meet that criteria.

Planning ahead? The IRS announced the 2025 standard deduction, and it’s the largest it has ever been.

2. Tax brackets adjusted for inflation

The IRS adjusts tax brackets each year to reflect upticks in the cost of living, to prevent what is sometimes referred to as “bracket creep.”

However, if a taxpayer's income increases more than the inflation rate, they could move into a higher bracket. In some cases, that can impact the amount of tax credits and deductions they are eligible to claim.

For instance, popular credits like the child tax credit phase out the higher your income level is.

The federal income tax rates haven’t changed for the 2024 tax year: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

For more information see our guide: 2024 and 2025 Federal Tax Brackets and Income Tax Rates

3. Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is an often-overlooked refundable tax break available for workers with low and moderate incomes, with or without children.

As Kiplinger reported, the amount you get depends on your income, filing status, and the number of qualifying children in your household. Most importantly, due to 2024 inflation adjustments, the EITC credit amounts and income thresholds are slightly larger than a year ago.

• No qualifying children: $632
• 1 qualifying child: $4,213
• 2 qualifying children: $6,960
• 3 or more qualifying children: $7,830

Some good news: the EITC income and credit thresholds increased for 2025. That could lead to a bigger refund next year as well.

Check your refund status for updates

Tax season is underway, and the IRS has already received over 33 million tax returns through February 14. The tax agency expects more than 140 million individual tax returns to be filed by the April 15 deadline.

If you’ve electronically filed your tax return, the ‘Where’s My Refund’ tool can show you the status of your tax refund as early as 24 hours after the IRS receives your return. Those who file a paper return can check their refund status four weeks after mailing a return.

As mentioned, there’s one exception. The IRS isn’t legally allowed to issue EITC or Additional Child Tax Credit (ACTC) refunds before mid-February, which may keep some refunds on hold for early filers.

If you electronically filed your tax return and expect an EITC or ACTC refund, you can check your refund status by Feb. 22. The first refunds should be delivered by March 3, according to the IRS.

Remember, your tax refund amount may be slightly bigger this year if your income levels and tax brackets haven’t changed significantly. So stay tuned for more updates as the tax season continues.

For more information and live updates, follow our tax team on Filing Taxes 2025: Live Updates, Tax Tips, and Strategies from Kiplinger.

Related Content:

• Tax Season 2025 Is Here: Key IRS Changes to Know Before You File
• Where’s My Refund? How to Track Your Tax Refund Status
• IRS Direct File Will Be Permanent, Competing With TurboTax, H&R Block

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.

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.

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 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.

Related

• IRS Updates Capital Gains Tax Thresholds for 2025
• Types of Income the IRS Doesn’t Tax
• How Much is the New 2025 Child Tax Credit?
• HSA Limit Announced for 2025

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.

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.

Related: Child Tax Credit Increase Under Trump.

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.

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.

Read More

• Three Popular Tax Breaks Are Gone for Good in 2026
• Trump's ‘One Big, Beautiful Bill’ With Trillions in Tax Cuts
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Time is running out if you haven't already filed your 2021 federal tax return. For most people, the tax return filing deadline is April 18 this year (residents of Maine and Massachusetts get one extra day). So, for all you tax procrastinators out there, it's time to get moving. One of the first things you should do is collect and organize your tax records. If you're going to file your own 1040, you should also check out tax software options. If you need more time to file your return, request a tax filing extension (although you'll still have to pay any tax you expect to owe). And, no matter when you fill out your 2021 tax return, you first want to familiarize yourself with the tax law changes that may impact it.

Many (but not all) of the new items on the 2021 1040 form come from the American Rescue Plan Act, which was enacted last March. This Covid-relief bill made changes to the child tax credit, child and dependent care credit, earned income tax credit, and more. Other changes stem from the expiration of earlier Covid-related provisions that expired at the end of 2020. There are a few modifications to some of the main 1040 schedules, too. And, of course, there are the normal inflation-based adjustments that occur every year.

There are many reasons why you should know and understanding these changes up front. First and foremost, it very well may result in a larger tax refund or a smaller tax bill. You're also likely to get through your return faster if you're already aware of any new twists and turns. If someone else prepares your 1040, it will be easier to catch any errors when you review the return. But since "Tax Day" is right around the corner, you don't have much time left to get up-to-speed on what's new and changed for your 2021 tax return. So take a look at our list below and study up now so you know what to look for before tackling your 1040.

"Tax Day" is the day that federal personal income tax returns are due. It was delayed the past two years because of COVID-19. In 2020, Tax Day was pushed back to July 15, and last year it was moved to May 17. This year, however, the tax return filing deadline is moved back to its normal spot on the calendar…well, sort of.

Federal income tax returns are normally due on April 15. But this year most 2021 tax returns aren't due until April 18. That's because of a holiday in the District of Columbia. If you live in Maine or Massachusetts, your federal return isn't due until April 19, thanks to a local holiday in those states. Victims of certain recent natural disaster can wait even longer to file their return.

There are some subtle, but important, changes to the 1040 form itself for 2021 tax returns. Generally, they're needed to account for changes to the tax laws that are discussed below. For instance, the line on page 1 of the 1040 used for reporting the $300 deduction for charitable cash contributions was moved down on the form so that the deduction no longer impacts your federal adjusted gross income (AGI). This is important because your federal AGI is used to calculate several other tax breaks and obligations. It's also used by many states as the starting point for determining your state income tax liability.

Lines 19 and 28 on page 2 of the 1040 form were also adjusted to account for the fact that the child tax credit is fully refundable for the 2021 tax year. Line 27 was also modified and expanded (including a new check box) to satisfy changes to the earned income tax credit. (See more about changes to the child tax credit and earned income credit below.)

The idea of having a postcard-size tax form has been totally abandoned, too. We see this in the expansion of Schedules 1, 2, and 3 that go with the 1040 form. For 2020 returns, each of these schedules fit on one page. Now, for 2021 tax returns, they're each two pages long. The extra length is due to various additions to income, "above-the-line" deductions, extra taxes, and less common credits now getting their own line on these forms instead of being lump together as an "other" item to include.

Approximately 90% of all taxpayers claim the standard deduction instead of itemized deductions. Fortunately, the standard deduction amounts you'll use on your 2021 tax return are larger than last year, thanks to the annual adjustment for inflation. For the 1040 form you'll complete this year, married couples filing a joint return can claim a $25,100 standard deduction. That's a $300 increase over the 2020 tax year amount. For each spouse 65 years of age or older, you can tack on an additional $1,350 ($1,300 for 2020).

Single filers can claim a $12,550 standard deduction on their 2021 tax return ($12,400 for 2020). That jumps to $14,250 if you're at least 65 years old ($14,050 for 2020).

For head-of-household filers, the standard deduction for 2021 tax returns is $18,800 ($18,650 for 2020), plus an additional $1,700 if they're at least 65 years old.

Regardless of their filing status, blind people can add an additional $1,350 to their 2021 standard deduction ($1,700 if they're unmarried and not a surviving spouse).

The tax rates you'll see on your 2021 tax return are the same as they were last year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, the income ranges that apply to each tax rate bracket have changed. Use the tables below to find the appropriate tax bracket for your 2021 return. It's based on your filing status and taxable income (Line 15 of your 1040 form).

Remember, though, that the tax rate associated with the bracket you fall into doesn't apply to all your income. It only applies to the amount of your taxable income that's within the bracket's range. So, for example, if you're single with $50,000 of taxable income in 2021, only the last $9,475 of your taxable income is taxed at the 22% rate ($50,000 - $40,525 = $9,475). The rest is taxed at either the 10% or 12% rate.

2021 Tax Brackets for Single Filers and Married Couples Filing Jointly

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2021 Tax Brackets for Married Couples Filing Separately and Head-of-Household Filers

If you hold on to a capital asset (e.g., stocks, bonds, real estate, art, etc.) for at least one year, any gains from the sale of the asset are taxed at a lower capital gains rate – either 0%, 15%, or 20%. The same rates apply to qualified dividends. Which rate applies to you depends on your taxable income.

For your 2021 federal income tax return, the 0% rate applies if you're single with taxable income up to $40,400 ($40,000 for 2020), a head-of-household filer with taxable income up to $54,100 ($53,600 for 2020), or a married couple filing a joint return with up to $80,800 of taxable income ($80,000 for 2020).

The 20% rate kicks in at $445,851 of taxable income for single filers ($441,451 for 2020), $473,751 for head-of-household filers ($469,051 for 2020), and $501,601 for joint filers ($496,601 for 2020).

If your taxable income falls between the 0% and 20% thresholds for your filing status, then the 15% rate applies.

As mentioned above, the $300 deduction for cash contributions to charity no longer affects your federal AGI. There's also another important change to this deduction for 2021 tax year returns – married couples can now deduct up to $600. For 2020 returns, married couples who filed jointly could only deduct $300. However, one deduction is allowed per person now, which means each spouse can deduct up to $300 on a joint 2021 return.

Note that this deduction is only available if you claim the standard deduction. It also expired at the end of 2021, so you won't be able to claim it on your 2022 return.

Several significant upgrades to the 2021 earned income tax credit (EITC) were made by the American Rescue Plan Act. The biggest changes will allow more childless workers to claim the EITC on their 2021 tax return. For one thing, the minimum age for claiming the credit without a qualifying child is lowered from 25 to 19 (except for certain full-time students). Workers over the age of 65 can claim the credit on their 2021 return, too. The maximum credit available for workers without a qualifying child also jumps from $543 to $1,502. Expanded eligibility rules for former foster youth and homeless youth were put in place for the 2021 tax year as well.

While the modified rules listed above for childless workers only apply for the 2021 tax year, the American Rescue Plan Act made a few other changes to the EITC that are permanent. For example, the $3,650 limit on a worker's investment income is bumped up to $10,000, and the cap will be adjusted for inflation each year going forward. In addition, certain married couples who are separated can now claim the credit on separate tax returns. And certain workers who can't satisfy the EITC identification requirements for their children can now qualify for the credit as a childless worker.

Finally, as with the 2020 EITC, you can use your 2019 earned income to calculate your 2021 EITC if it's more than your 2021 earned income. Since this can increase or decrease your EITC, calculate the credit using both your 2019 and 2021 earned income to see which method will save you the most money.

To calculate your EITC, complete the worksheets associated with Lines 27a, 27b, and 27c of Form 1040 in the instructions for Form 1040. If you have a qualifying child, also complete Schedule EIC and attach it to your 1040 form.

As with the earned income tax credit, the American Rescue Plan Act made major improvements to the child tax credit for the 2021 tax year. For instance, the credit amount for 2021 tax returns was increased from $2,000-per-child to $3,000-per-child six to 17 years of age and to $3,600-per-child five years old and younger. However, the extra $1,000 or $1,600 is phased out for single filers with a federal AGI above $75,000, head-of-household filers with a federal AGI above $112,500, and joint filers with a federal AGI above $150,000. The credit is further reduced under pre-existing rules for single and head-of-household filers with a federal AGI above $200,000 and married couples filing jointly with a federal AGI above $400,000.

Any child tax credit claimed on your 2021 return is also fully refundable for most parents, even if you don't have any earned income (normally, the credit is only partially refundable – up to $1,400-per-child – and you must have at least $2,500 of earned income). Children who are 17 years old also qualify for the 2021 credit (child normally must be 16 or younger to qualify). Finally, unless you opted-out of the payments, families received 50% of their estimated 2021 child tax credit amount in advance through monthly payments sent between July 15 and December 15 last year.

To calculate the child tax credit allowed on your 2021 tax return, you must subtract the monthly payments you received last year from the total credit that you're otherwise entitled to claim for the 2021 tax year. (The IRS will send you a Letter 6419 showing the amount paid to you in monthly payments.) If the total child tax credit amount is more than your combined monthly payments, you can claim the excess amount as a credit on your return. However, if the total credit amount is less than your payments, you might have to pay back the extra child credit payments.

Use Schedule 8812 to reconcile the advance payments you received last year with the actual child tax credit you're entitled to claim on your 1040 form, and to see if you need to pay back any payments (they will be paid back in the form of an additional tax calculated Part III of the schedule).

For more information about claiming the 2021 credit, see Child Tax Credit FAQs for Your 2021 Tax Return.

Parents benefiting from the child tax credit enhancements may be able to cut their 2021 tax bill even further because of big changes to the child and dependent care credit made by the American Rescue Plan Act. For example, the maximum credit is increased from 35% to 50% of eligible expenses for the 2021 tax year. Plus, the credit percentage won't be reduced for families making less than $125,000 a year (instead of $15,000 per year), and all taxpayers earning less than $438,000 can claim at least a partial credit on their 2021 return.

The 2021 credit applies to more child or dependent care expenses, too. The credit percentage is applied to as much as $8,000 of eligible expenses for one child/disabled person and up to $16,000 of expenses for two or more (the amounts are usually $3,000 and $6,000, respectively). That means the total credit amount can be as high as $4,000 if you have just one child/disabled person and $8,000 if you have more ($1,050 and $2,100, respectively, for 2020).

The child and dependent care credit for the 2021 tax year is also fully refundable for most people (it's usually a nonrefundable credit). Form 2441 is used to calculate the credit.

See Your Child Care Tax Credit May Be Bigger on Your 2021 Tax Return for details.

The American Rescue Plan Act improved the premium tax credit for 2021 and 2022 to lower premiums for people who buy health insurance through an Obamacare exchange (e.g., HealthCare.gov) on their own. The credit amount was increased for eligible taxpayers by reducing the percentage of annual income that households are required to contribute toward their health insurance premium. The law also allowed the credit to be claimed by people with an income above 400% of the federal poverty line.

For certain people who purchase health insurance through an exchange, an estimated premium tax credit amount is paid in advance to the insurance company. If advance payments are made on your behalf, you must reconcile the credit and the advance payments when you file your tax return. If the advance payments are greater than the actual allowable credit, the difference (subject to certain repayment caps) usually must be paid back. However, the American Rescue Plan Act eliminated the repayment requirement – but only for the 2020 tax year. As a result, excess advance payments made in 2021 will have to be repaid when you file your 2021 tax return.

Use Form 8962 to calculate your premium tax credit and reconcile it with any advance payments. Also make sure you submit Form 8962 with the rest of your 2021 tax return.

The nonrefundable credit for expenses related to the adoption of a child is a little larger for the 2021 tax year. For 1040 forms filed this year, the credit can be worth up to $14,440 ($14,300 for 2020). Plus, the full credit is available for a special-needs adoption, even if it costs less.

The credit begins to phase out if your modified AGI is over $216,660 and it's eliminated altogether if your modified AGI reaches $256,660 ($214,520 and $254,520, respectively, for 2020). To claim the credit, complete Form 8839 and report the credit amount on Line 6c of Schedule 3. Also submit Form 8839 with the rest of your 2021 tax return.

The income tax exclusion for company-paid adoption aid was also increased from $14,300 to $14,440 for the 2021 tax year.

The alternative minimum tax (AMT) was originally designed to hit only wealthier Americans. However, the AMT exemption amount wasn't always adjusted annual for inflation – but it is now. For the 2021 tax year, the AMT exemption jumped from $113,400 to $114,600 for married couples filing a joint return and from $72,900 to $73,600 for single and head-of-household filers.

The phase-out ranges for the AMT exemption are adjusted for inflation each year, too. For 2021 tax returns, the exemption is gradually reduced and can ultimately be eliminated if alternative minimum taxable income (AMTI) on a joint return is between $1,047,200 and $1,505,600 ($1,036,800 and $1,490,400 for 2020). For single and head-of-household filers, the 2021 phase-out range is $523,600 to $818,000 of AMTI ($518,400 to $810,000 for 2020). The 2021 range for married people filing a separate return is $523,600 to $752,800 ($518,400 to $745,200 for 2020).

In addition, the 28% AMT tax rate doesn't kick on 2021 tax returns until you hit $199,900 of AMTI. That's an increase over the 2020 threshold, which was AMTI of $197,900 or more.

Use Form 6251 to calculate your AMT and file the form with your 2021 Form 1040.

Say goodbye to the tuition and fees deduction, which was worth up to $4,000 per year. It was repealed starting with the 2021 tax year.

On the bright side, the phase-out thresholds for the lifetime learning credit were increased. They're now the same as the phase-out amounts for the American Opportunity credit. So, beginning with 2021 tax returns, the lifetime learning credit is gradually reduced to zero for joint filers with a modified AGI from $160,000 to $180,000 ($118,000 to $138,000 for 2020) and single filers with a modified AGI between $80,000 to $90,000 ($59,000 and $69,000 for 2020). If you're claiming either the lifetime learning credit or the American Opportunity credit, you must first complete Form 8863 and then attach it to your 1040 form.

The phase-out ranges are also higher in 2021 for the exclusion of interest on Series EE and I savings bonds redeemed to help pay for tuition and fees for college, graduate school, or vocational school. For 2021 tax returns, the exclusion starts to phase out for joint filers with a modified AGI exceeding $124,800 and for other people with a modified AGI of $83,200 or more ($123,550 and $82,350, respectively, for 2020). The exclusion is totally phased-out for joint filers with a modified AGI of $154,800 or more and for other taxpayers with a modified AGI of at least $98,200 ($153,550 and $97,350, respectively, for 2020). You must compete Form 8815 to claim the exclusion and then report the exclusion amount on Line 3 of Schedule B.

The recovery rebate credit is back, but with one important change. As you may recall, this credit made its first appearance on the 2020 Form 1040 and was available for people who didn't receive a first or second stimulus check, or who didn't receive the full stimulus check amount they were entitled to.

For 2021 tax returns, the credit is for people who didn't receive a third stimulus check (or didn't receive the full amount). Those payments were for up to $1,400, plus an additional $1,400 for each dependent in your family. Similar to the monthly child tax credit payments the IRS sent last year, your third stimulus check was an advance payment of the recovery rebate credit. As a result, when you file your 2021 return, you must reduce the recovery rebate credit you're entitled to claim by the amount of your third stimulus check. (The IRS will send you a Letter 6475 showing the amount of your third stimulus check.) For most people, your third stimulus check payment will equal the 2021 recovery rebate credit allowed. If that's the case for you, the credit will be reduced to zero. But if your third stimulus check was less than the credit, your recovery rebate credit will equal the difference. And what if your third stimulus check was more than your 2021 recovery rebate credit? You get to keep the difference!

Use our Third Stimulus Check Calculator to see you how large your third stimulus check should have been.

Two tax breaks that encourage saving for retirement were tweaked for the 2021 tax year. In both cases, the changes are the result of annual adjustments for inflation.

The first retirement-related change for 2021 tax returns is to the deduction for contributions to a traditional IRA. If either you or your spouse was covered by an employer retirement plan, your IRA deduction may be reduced (potentially to zero), depending on your filing status and income. The income levels that trigger a reduction for 2021 returns have been adjusted. For married couples filing a joint return, the deduction is gradually phased out if you're modified AGI is between $105,000 and $125,000 (between $104,000 and $124,000 for 2020 returns). For single and head-of-household filers, the phase-out range is from $66,000 to $76,000 ($65,000 to $75,000 for 2020).

If only one spouse is covered by a retirement plan at work, the deduction is reduced if the couple's modified AGI exceeds $198,000, and it's totally eliminated if their modified AGI hits $208,000 ($196,000 and $206,000, respectively, for 2020). (NOTE: If you made any nondeductible contributions to a traditional IRA for 2021, report them on Form 8606.)

The second change is to the "Saver's Credit," which encourages lower- and middle-income people to save for retirement. The credit is allowed for either 10%, 20%, or 50% of the first $2,000 ($4,000 for joint filers) you contribute to retirement accounts, depending on your filing status and income. The lower your income, the higher the percentage you can use to calculate the credit. For 2021 tax returns, single filers, married people filing a separate return, and qualified widow(er)s can claim a 50% credit if their AGI is $19,750 or less ($19,500 for 2020). They can claim a 20% credit if their AGI is from $19,751 to $21,500 ($19,501 to $21,250 for 2020), and the 10% credit is available if their AGI is from $21,501 to $33,000 ($21,251 to $32,500).

For married couples filing a joint return, the 50% credit is available if their AGI doesn't exceed $39,500 ($39,000 for 2020), the 20% credit is available if their AGI is from $39,501 to $43,000 ($39,001 to $42,500 for 2020), and the 10% credit is available if their AGI is from $43,001 to $66,000 ($42,501 to $65,000 for 2020).

The 50% credit can be claimed by head-of-household filers with an AGI of $29,625 or less ($29,250 for 2020), while they can claim the 20% credit with an AGI from $29,626 to $32,250 ($29,251 to $31,875 for 2020) and the 10% credit with an AGI from $32,251 to $49,500 ($31,876 to $48,750 for 2020).

To claim the credit, complete Form 8880 and send it to the IRS with your 1040 form.

For 2021 tax returns, standard mileage rate for business driving is 56¢ a mile – that's less than the 57.5¢ per mile for 2020. The rate for medical travel and military moves also dropped for the 2021 tax year from 17¢ to 16¢ a mile.

The mileage rate for charitable driving doesn't change from year-to-year. So, it stayed put at 14¢ a mile for 2021 returns.

Self-employed taxpayers can claim some tax breaks that other people can't. And some of those tax breaks are tweaked for 2021 tax returns. For instance, the sick or family leave credits self-employed people could claim on their 2020 tax return if they missed work for Covid-related reasons was extended for 2021 – but not for the full year. For 2021 returns, the credits are only available for qualified absences through September 30, 2021. In addition, the family leave credit can only be claimed for 50 days missed from January 1 to March 31, 2021, but it can be claimed for up to 60 days missed from April 1 to September 30, 2021. Self-employed people should use Form 7202 to calculate the sick and family leave credits they're entitled to claim on their 2021 1040 form.

The income threshold for limits on the 20% deduction for qualified business income were also adjusted for the 2021 tax year. The taxable income threshold is $329,800 for married couples filing a joint return, $164,925 for married people filing a separate return, and $164,900 for all others ($326,600 for joint filers and $163,300 for all others for 2020 returns). Use Form 8995 or Form 8995-A to figure your qualified business income deduction.

Self-employed people who are wining and dining clients can take advantage of another perk for both the 2021 and 2022 tax years. The deduction for business meals at a restaurant is increased from 50% to 100%. This deduction is claimed on Line 24b of Schedule C.

If a self-employed person had a Paycheck Protection Program (PPP) loan forgiven in 2021, the canceled debt is not taxable income and doesn't have to be reported on Form 1040. However, if you have tax-exempt income resulting from the discharge of a PPP loan last year, you must attach a statement to your 2021 tax return that includes certain information related to your PPP loan (see the instructions to Form 1040 for details). You should also write "RP2021-48" at the top of the statement.

Unfortunately, there are also a couple of negative changes that may increase the 2021 tax bill for some self-employed taxpayers. First, none of the self-employment taxes owed for the 2021 tax year can be deferred as they could on 2020 returns. In fact, half of any 2020 tax deferred had to be paid by the end of 2021, while the rest is due by the end of 2022. Second, the cap on deductible business losses is back after being suspended for the 2018 to 2020 tax years. For 2021 tax returns, the inflation-adjusted limit is $262,000 ($524,000 for married couples filing a joint return). Form 461 is used to calculate a self-employed taxpayer's limitation on business losses.

The $10,200 exemption for unemployment compensation in effect for the 2020 tax year is no more. Under the American Rescue Plan Act, which authorized the exemption for families with a federal AGI less than $150,000, the tax break was for one year only.

As a result, any unemployment compensation you received last year will be fully taxed on your 2021 tax return. Report the benefits on Line 7 of Schedule 1.

If you're paying for long-term care insurance, you might be able to deduct a portion of your premiums – and the deduction maximums, which are based on age, are higher for the 2021 tax year. Taxpayers age 71 or older can deduct up to $5,640 per person on their 2021 tax return ($5,430 for 2020). If you're 61 to 70 years old, you can deduct as much as $4,520 of your premiums ($4,350 for 2020). Anyone 51 to 60 years old can write-off up to $1,690 ($1,630 for 2020). For people 41 to 50 years of age, the max is $850 ($810 for 2020). And, finally, the maximum deduction is $450 if you're 40 or younger ($430 for 2020).

Long-term care insurance premiums are only deductible as medical expenses for most people, which means they must itemize deductions on Schedule A to claim the tax break. However, self-employed people can deduct their premiums on Line 17 of Schedule 1 without having to itemize.

Before the 2021 tax year, canceled or forgiven student loan debt was considered taxable income. However, from 2021 to 2025, most canceled student loan debt that was incurred for a post-secondary education is tax-free. Therefore, you shouldn't report qualified student loan debt that was canceled last year on Line 8c of Schedule 1.

The IRS has also told lenders and student loan servicer providers not to file Form 1099-C or submit payee statements for qualified student loan debt that's discharged, canceled, or otherwise forgiven through 2025. So, if you do receive a 1099-C form reporting discharged student loan debt that you believe is not taxable, contact the lender or loan service provider that issued the form and ask them to send a corrected form.

Americans working abroad may be able to exclude all or a portion of their foreign-earned income from taxable income on their U.S. tax return. For 2021 returns, the maximum exclusion amount is $1,100 higher than it was for the 2020 tax year – it jumped from $107,600 to $108,700.

In addition to the foreign earned income exclusion, taxpayers living abroad may also be able to claim an exclusion or deduction for their foreign housing. For the 2021 tax year, the maximum foreign housing exclusion is generally $15,218 ($15,064 for 2020), although it can be higher in certain high-cost areas.

Use Form 2555 to figure both your foreign earned income exclusion and foreign housing exclusion/deduction.

Don't skip calculating your Required Minimum Distributions (RMDs) as retirement nears or once you're already retired. You'll avoid hefty tax penalties and keep more of your hard-earned savings intact.

Beyond avoiding fines, calculating RMDs can help you strategize gifting or spending to reduce estate taxes (especially valuable if you're approaching the $15 million federal estate tax exemption in 2026), and can also guide your investment strategy.

Bottom line: Run the numbers early and often. It's a simple step that protects your wealth and opens doors to smarter tax and legacy planning.

What are RMDs?

So, what are RMDs? RMDs are the minimum annual withdrawals you must make each year from most tax-deferred retirement plans (excluding Roth accounts). Because your retirement accounts grow tax-free over time, the government taxes withdrawals through Required Minimum Distributions (RMDs), treated as regular income.

You may be required to take RMDs from your 401(k), 403(b), or other employer-sponsored retirement plans, but here we're focusing on how to calculate RMDs from a traditional Individual Retirement Account (IRA).

Not sure how to calculate your RMD? We’ll walk you through the steps and point you to other practical resources to use. For more detailed information, seek guidance from a qualified financial adviser or tax professional.

When do RMDs start?

Starting RMD withdrawals at the right age is critical. Note that the rules have changed recently.

• In 2020, the SECURE Act increased the age for Required Minimum Distributions (RMDs) from retirement accounts from 70-½ to 72.
• The SECURE 2.0 Act raised the RMD age to 73 for individuals who turn 72 on or after January 1, 2023.
• You must take your first RMD by April 1 of the year following the year you turn 73.
• Starting in 2033, the RMD age will increase to 75 for individuals who turn 74 after December 31, 2032.

Let's say you are a single man who turned 73 in 2024. The balance in your IRA was $254,316 on December 31, 2023, and you estimate it will grow by 5% annually. In 2024 (at age 73), your required minimum distribution was $9,433.96.

As the chart shows, your annual RMD will increase over the next three years, but your account balance will not dip below its original value, assuming it continues to earn the estimated 5% interest.

How to calculate your RMDs

Follow these steps to work out your RMDs for a traditional IRA:
DIY method: Start by determining how much you had in your IRA account as of December 31 of the previous year. Next, you can find your life expectancy factor, or the number of additional years you expect to live, according to actuarial calculations. Divide the account balance by the life expectancy factor to get your RMD.
Simple RMD calculator: Get a quick estimate using our calculator below. Input your retirement account balance, your age and the tool will calculate your RMD.

Note: You must calculate your RMDs for each traditional IRA separately, based on its year-end balance and your life expectancy.

RMD dates to remember

Once you turn 73, it's important to be proactive about following the rules for required minimum distributions for IRAs, or you may face penalties. Also, you can withdraw or use your traditional IRA assets at any time, but a 10% additional tax may apply if you withdraw or use IRA assets before you reach age 59½.

Officially, RMDs are due by December 31 each year, but the IRS gives you flexibility for your first one. You can delay your first RMD (required at age 73 in 2026) until April 1 of the following year. Your first RMD covers 2026 and can be postponed to April 1, 2027.

If you delay your first RMD withdrawal, you must take your second by December 31 of that same year. Taking two RMDs in one year creates two taxable events, which could increase your taxable income and potentially push you into a higher tax bracket.

RMD penalties

The IRS imposes penalties for taking RMDs that are too small. If you withdraw less than required, the IRS charges a 25% penalty (or 10% if corrected within two years) on the difference between what you withdrew and what you should have taken.

You can always take larger distributions, but the RMD sets the minimum withdrawal needed to meet IRS requirements. Withdrawals above the minimum in one year cannot be used to satisfy RMDs in future years.

Which accounts require RMDs?

These retirement accounts will require you to withdraw RMDs (as long as they are not Roth accounts).

• Traditional IRAs
• Traditional 401(k)s
• Nonprofit 403(b) plans
• Government 457 plans
• Simplified Employee Pension (SEP) IRAs
• Savings Incentive Match Plan for Employees (SIMPLE) IRAs
• Profit-sharing plans
• Other defined contribution plans

You must calculate your RMDs for each traditional IRA separately, based on its year-end balance and your life expectancy. However, you can withdraw the total required minimum distribution amount from any combination of your IRA accounts (one or more). This simplifies bookkeeping and allows you to strategically draw down an IRA, such as one with poor performance or underperforming investments.

What are the RMD rules for an inherited IRA?

The IRS states that beneficiaries of inherited IRAs follow specific RMD rules, which vary based on when the original account owner passed away, the beneficiary’s relationship to the account holder, and whether the death occurred before or after January 1, 2020.

Generally, the rules are:
Spousal Options: If you inherit a Traditional, SIMPLE IRA, Rollover, or SEP-IRA from your spouse, you have multiple options, depending on whether your spouse died before or after their RMD start date (age 73 in 2026). A common choice is to transfer the funds to your own IRA, but you can also take a lump-sum distribution or maintain the inherited IRA with specific RMD rules.

Non-Spousal Options: If you inherit an IRA from someone other than your spouse, withdrawal rules depend on your status as a designated beneficiary, eligible designated beneficiary (minor child, disabled individual), or non-individual, such as a trust or estate. For deaths after December 31, 2019, most non-spousal beneficiaries must withdraw all funds within 10 years, with specific RMD requirements for eligible designated beneficiaries.

Read Retirement Topics — Beneficiary on the IRS website to fully understand the rules and how they apply to your personal situation.

Consider RMDs in the context of your broader retirement goals

To better save for retirement, consider all of your options, such as contributing to a 401(k) or IRA, or 403(b). Different accounts may have different fees that can eat into returns, in addition to different tax implications. And you should consider whether you will be required to take minimum distributions once you hit age 73.

Roth IRAs don’t require RMDs, but traditional IRAs and other retirement accounts do.

More resources

Other calculators: Fidelity's RMD tool is one we recommend, as it accounts for your spouse's age and projects your RMDs for future years.

The IRS: Or, go to the source: Visit the IRS website to find additional information on RMDs, such as what they are, the types of retirement plans that require RMDs, the timeline for taking minimum distributions and how the amount is calculated.

We strongly recommend that you seek the advice of a financial services professional with whom you have a fiduciary relationship before making any investment or significant financial decision.

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President Biden's latest economic "Build Back Better" package – the $1.8 trillion American Families Plan – isn't kind to America's upper crust. It would provide a host of perks and freebies for low- and middle-income Americans, such as guaranteed family and medical leave, free preschool and community college, limits on child-care costs, extended tax breaks, and more. But to pay for all these goodies, the Biden plan also includes a long list of tax increases for the wealthiest Americans (and, perhaps, some people who aren't rich).

Whether any of the president's proposed tax increases ever make it into the tax code remains to be seen. Republicans in Congress will push back hard on the tax increases. And a handful of moderate Democrats will probably join them, too. So, don't be surprised if a fair number of the plan's revenue raisers are dropped or amended during the congressional sausage-making process…or even if some new tax boosts are added.

While we don't know yet which – if any – of the proposed tax increases will survive and be enacted into law, wise taxpayers will start studying the plan now so that they're prepared for the final results (any changes probably won't take effect until next year). To get you going in that direction, here's a list of the 7 ways the American Families Plan could raise taxes on the rich. But even if you're not particularly wealthy, make sure you read closely to see if you might be caught up in any of the proposed tax hikes, since a few of them could snare some not-so-rich people in addition to the one-percenters.

The 2017 tax reform law signed by former President Trump lowered the highest federal personal income tax rate from 39.6% to 37%. According to the White House, this rate reduction gave a married couple with $2 million of taxable income a tax cut of more than $36,400. President Biden wants to reverse the rate change and bring the top rate back up to 39.6%.

For 2021, the following taxpayers will fall within the current 37% tax bracket:

• Single filers with taxable income over $523,600;
• Married couples filing a joint return with taxable income over $628,300;
• Married couples filing separate returns with taxable income over $314,150; and
• Head-of-household filers with taxable income over $523,600.

(For the complete 2021 tax brackets, see What Are the Income Tax Brackets for 2021 vs. 2020?)

President Biden has said many times that he won't raise taxes on anyone making less than $400,000 per year. But there have always been questions and a lack of clarity as to what this exactly means. For instance, does it apply to each individual or to each tax family? We still haven't received a crystal-clear answer to that question. As a result, we're not entirely sure if the president wants to adjust the starting point for the top-rate bracket to account for his $400,000 threshold. According to a report from Axios, an unnamed White House official said the 39.6% rate would only apply to single filers with taxable income over $452,700 and joint filers with taxable income exceeding $509,300. That would satisfy the president's promise for single people, but it's a bit trickier for married couples filing a joint return.

If the 39.6% rate kicks in on a joint return when taxable income surpasses $509,300, a married couple could end up being taxed at that rate even if both spouses earn well under $400,000 per year. For example, if Spouse A makes $270,000 and Spouse B makes $260,000, their combined income ($530,000) is over the $509,300 threshold. Using the 2021 tax brackets, they wouldn't even make it into the 37% bracket (they'd be in the 35% bracket). So, each spouse would face a tax increase under the Biden plan, even though neither one of them earn over $400,000 per year.

To be fair, this type of "marriage penalty" exists for the current 37% tax bracket, since the minimum taxable income for joint filers is less than twice the minimum amount for single filers. However, the current brackets weren't set up with a pledge not to raise taxes on anyone making less than $400,000 per year in the background. Perhaps the Biden administration will recognize this and eventually adjust the brackets to fix the marriage penalty issue.

The American Families Plan also calls for an increase in the capital gains tax rate for people earning $1 million or more.

Currently, gains from the sale of stocks, mutual funds, and other capital assets that are held for at least one year (i.e., long-term capital gains) are taxed at either a 0%, 15%, or 20% rate. The highest rate (20%) is paid by wealthier taxpayers – i.e., single filers with taxable income over $445,850, head-of-household filers with taxable income over $473,750, and married couples filing a joint return with taxable income over $501,600. Gains from the sale of capital assets held for less than one year (i.e., short-term capital gains) are taxed at the ordinary income tax rates.

Under the Biden plan, anyone making more than $1 million per year would have to pay a 39.6% tax on long-term capital gains – which is almost double the current top rate. As noted above, that's also the proposed top tax rate for ordinary income (e.g., wages). So, in effect, millionaires would completely lose the tax benefits of holding capital assets for more than one year. Plus, there's the existing 3.8% surtax on net investment income, which would bump the overall tax rate up to 43.4% for people with income exceeding $1 million.

[Note: A summary of the American Families Plan states that application of the 3.8% surtax is "inconsistent across taxpayers due to holes in the law." It then states that the president's plan would apply the surtax "consistently to those making over $400,000, ensuring that all high-income Americans pay the same Medicare taxes." No further details are provided, but this could mean expanding the surtax to cover certain income from the active participation in S corporations and limited partnerships.]

There's another capital gains-related tax increase in the American Families Plan – eliminating the step up in basis allowed for inherited property. Under current law, if you inherit stock, real estate, or some other capital asset, your basis in the property is increased ("stepped up") to its fair market value on the date that the person who previously owned it died. This increase in basis also means you can immediately sell the inherited property and avoid paying capital gains tax, because there's technically no gain to tax. Why? Because gain is generally equal to the amount you receive from the sale minus your basis in the property. Assuming you sell the property for fair market value, the sales price will equal your basis…which results in zero gain (e.g., $1,000 – $1,000 = $0).

President Biden wants to change this result. Although details are scarce at this point, the president's plan would nullify the effects of stepped-up basis for gains of $1 million or more ($2 million or more for a married couple) – perhaps by taxing the property as if it were sold upon death. There would be exceptions to the new rules for property donated to charity and family-owned businesses and farms that the heirs continue to operate. Other yet-to-be-determined exceptions could also be added, such as for property inherited by a spouse or transferred through a trust.

This is one of the tax changes that could impact Americans making less than $400,000 per year – perhaps only indirectly. Anyone, regardless of their own income level, can inherit property. If the heir's basis is not adjusted upward any longer, that in essence is a tax increase on him or her. If the capital gains tax is levied before the property is transfer, that could mean there's less to inherit – which could be considered an indirect tax on the person receiving the property. It can be a bit tricky, but there's certainly the potential for someone inheriting property who makes less than $400,000 per year getting the short end of the stick because of this Biden proposal.

In certain case, an investment fund manager can treat earned income as long-term capital gain. Known as the "carried interest" loophole, this lets the fund manager take advantage of the long-term capital gains tax rates, which are usually lower than the ordinary income tax rates he or she would otherwise have to pay on the income.

The American Families Plan calls for the elimination of the carried interest rules. The Biden administration sees this change as "an important structural change that is necessary to ensure that we have a tax code that treats all workers fairly."

For a fund manager, this change would result in a potential tax increase on the affected income of up to 19.6%. For example, assuming the income is high enough, he or she could go from a rate of 23.8% (20% capital gain rate + 3.8% surtax on net investment income) to 43.4% (39.6% ordinary tax rate + 3.8% surtax on NII).

One would think that most, if not all, fund managers earn at least $400,000 per year. But if there are any of them out there making less than that amount, then this change could raise taxes on someone making less than Biden's $400,000 per year threshold. Yeah, it's not likely…but it's theoretical possible.

If you sell real property used for business or held as an investment and then turn around and buy other business or investment property that is the same type, you're generally not required to recognize gain or loss for tax purposes under the "like-kind" exchange rules. Properties are of "like-kind" if they're of the same nature or character. For example, an apartment building would generally be like-kind to another apartment building. This is true even if they differ in grade or quality.

The Biden plan would end this special real estate tax break for gains greater than $500,000. Since there are no income thresholds for the taxpayer, this change could potentially prevent someone making less than $400,000 per year from making a tax-free exchange (the $500,000 gain could be offset by other tax deductions, exemptions, or credits). Again, in most cases, wealthier people would be impacted by this change, but it's possible that someone making less than $400,000 could also end up with a higher tax bill if this proposal became law.

Under the 2017 tax reform law, individuals operating a trade or business can't deduct losses exceeding $250,000 ($500,000 for joint filers) on Schedule C. The excess losses may, however, be carried forward to later tax years. This rule is currently set to expire in 2027 (it was also generally suspended by the CARES Act for the 2018 to 2020 tax years).

President Biden's American Families Plan calls for this business loss limitation rule to be made permanent. According to the plan summary, 80% of the affected business loss deductions would go to people making over $1 million. But, once again, someone making less than $400,000 could also incur a large business loss that wouldn't be deductible after 2026 if the Biden proposal is adopted.

Biden wants to increase tax enforcement activities aimed at high-income Americans – and give the IRS an extra $80 billion over a 10-year period to do it. While this really isn't a tax increase, it certainly could result in wealthier Americans pay more in taxes. The idea is to "increase investment in the IRS, while ensuring that the additional resources go toward enforcement against those with the highest incomes, rather than Americans with actual income less than $400,000." The IRS would also focus resources on large corporations, other businesses, and estates. The audit rate for Americans making less than $400,000 per year wouldn't increase under the president's plan.

The American Families Plan summary also states that financial institutions would be required to "report information on account flows so that earnings from investments and business activity are subject to reporting more like wages already are." The income of wealthier Americans disproportionately comes from investments and small businesses, which are harder for the IRS to verify than other sources of income like wages. As a result, the Treasury Department estimates that up to 55% of taxes owed on some of these less visible income streams goes unpaid. And more of that unpaid tax is owed by people with higher incomes. The proposal would funnel additional information to the IRS about the hard-to-verify income without burdening taxpayers.

All-in-all, the White House claims that the increased tax enforcement efforts would raise $700 billion in revenue over a 10-year period.

With good reason, some Americans are worried that their tax bill is going to shoot up in the near future. During last year's campaign, President Biden wasn't shy about telling the American public that he will raise taxes on the wealthy. And it looks like he's about to release a new "social infrastructure" plan that's expected to do just that. But what, exactly, does he mean by "wealthy"? The president has repeatedly said he won't raise taxes on anyone making less than $400,000 per year. That appears to be a nice, clean, easy to understand dividing line between those who'll pay more taxes and those who won't. Unfortunately, though, it's not that simple.

First, it's not clear if the $400,000 threshold will be applied per individual or per family. If it applies to a family's overall income, a lot more Americans are going to see their tax bill go up. Also, regardless of whether the threshold applies to an individual or a family, some Biden campaign proposals could increase taxes on Americans who don't come close to earning $400,000 in a year. While the threshold would generally apply to income taxes and certain payroll taxes, the president has called for changes that would raise other taxes, too. People making less than $400,000 per year could get caught up in those other tax increases.

We also don't know when any proposed tax increases would go into effect. The economy hasn't fully recovered yet, and raising taxes on Americans before that happens (or close to it) could be risky. It will also be harder politically to boost taxes on individuals than it might be to increase taxes on corporations. As a result, we don't think higher taxes will apply for the 2021 tax year. Instead, look for them to apply in 2022 or perhaps even later.

Having said all that, let's take a look at some of the people who should be the most concerned about tax increases sometime during the Biden administration. Just remember that this isn't necessarily an all-inclusive list – other people could also face higher taxes over the next few years. We'll have a better idea of exactly who might see higher taxes soon once the president releases his "American Families Plan," but his campaign proposals provide a good starting point for making predictions now.

As we already mentioned, President Biden says he won't raise taxes on anyone earning less than $400,000 per year. But, it seems, it's open season for anyone making more than that amount. In fact, Biden has offered several tax proposals that would lighten the wallets of people earning $400,000 or more (again, we don't know for sure if that means any individual or any family earning over $400,000).

First, the president wants to raise the top individual income tax rate from 37% to 39.6%. In other words, he wants to undo what former President Trump's Tax Cuts and Jobs Act did back in 2017 (the TCJA temporarily lowered the top rate from 39.6% to 37% until 2026). For 2021, the following taxpayers will pay tax at the highest tax rate:

• Single filers with taxable income over $523,600;
• Joint filers with taxable income over $628,300;
• Married couples filing separate returns with taxable income over $314,150; and
• Head-of-household filers with taxable income over $523,600.

(For the complete 2021 tax brackets, see What Are the Income Tax Brackets for 2021 vs. 2020?)

It isn't clear if Biden will also try to adjust the top-rate brackets so that they start at $400,000. If he does, that would result in a tax increase for single, joint, and head-of-household filers making between $400,000 and the current threshold amount. Currently, they're not paying income tax at the top rate. If the threshold is moved up to $400,000 for married couples filing separate returns, that would result in a tax increase for people earning between $314,150 and $400,000, because they would be pushed into the highest bracket even though they aren't there now.

The president has also talked about making wages above $400,000 subject to the 12.4% Social Security payroll tax (half paid by the employee; half paid by the employer). For 2021, wages above $142,800 aren't subject to the tax (the amount is adjusted annually for inflation). However, instead of just imposing the tax on all wages, Biden may only want to add wages above $400,000 to the levy. That would create a "hole" in the tax – wages between $142,800 and $400,000 would not be taxed. The bottom threshold amount ($142,800 for 2021) would gradually increase through inflation adjustments, so the hole would eventually be filled, but that would take a long time to happen.

Small business owners earning $400,000 or more might also see a tax hike during the Biden administration by losing a valuable deduction. The TCJA added a 20% deduction for "qualified business income" from pass-through entities (e.g., partnerships, S corporations, and limited liability companies). The president has previously said he supports phasing out the QBI deduction for small business owners making more than $400,000 for the year.

TAX TIP: If you're worried about higher taxes in 2022, consider moving some taxable income into 2021 if you expect to earn more than $400,000 next year. For instance, think about shifting money from a traditional IRA a Roth IRA in 2021. You'll pay tax on the rollover amount now, but it'll be taxed at 2021 rates instead of at whatever rate is imposed when you withdraw the funds in retirement. If you own a pass-through entity, see if you can shift QBI into 2021 to get the full 20% deduction. Also, see if your boss is willing to move some of your salary or bonus money into 2021 to drop your wages below the possible $400,000 Social Security tax threshold for 2022 – both you and your company could save money.

Wealthy investors would be affected by any plan to do away with favorable tax rates on capital gains. Currently, gains from the sale of stocks, mutual funds, and other capital assets that you hold for at least one year are taxed at either a 0%, 15%, or 20% rate. Wealthier taxpayers – single filers with taxable income over $445,850, head-of-household filers with taxable income over $473,750, and joint filers with taxable income over $501,600 – end up paying the 20% rate.

However, don't be surprised if President Biden's American Families Plan requires anyone making more than $1 million per year to pay tax on long-term capital gains at the top income tax rate for ordinary income. That's currently 37%, but don't forget that the president also wants to kick that back up to 39.6%. So, millionaires could potentially see a 19.6% tax increase on capital gains.

And let's not forget about the 3.8% surtax on net investment income (e.g., taxable interest, dividends, gains, passive rents, annuities, and royalties), which hits single taxpayers with a modified adjusted gross income over $200,000 and joint filers with a modified AGI over $250,000. Biden hasn't suggested doing away with or otherwise modifying this extra tax, which means investors earning $1 million or more could actually see their tax rate on capital gains soar to 43.4%.

A Biden plan to reform the Opportunity Zone program could cost wealthy investors, too. Under the program, you can defer capital gains from the sale of business or personal property by investing the proceeds in qualified opportunity funds (QOF), which in turn invest in economically distressed communities. However, QOFs typically require investors to have a high net worth, a minimum annual income, and at least a six-figure investment. As a result, these investment vehicles, and the tax breaks that go with them, are mainly for the wealthy. Among other things, Biden said during last year's campaign that he wants to make sure that Opportunity Zone tax benefits are only available if there are also clear economic, social, and environmental benefits for people living in the distressed communities.

TAX TIP: It might be time for millionaires to sell some of the stock or other capital assets they've been holding for a year or more, especially if they were going to sell soon anyway. If you're worried about higher capital gains tax rates next year, realize gains in 2021 and take advantage of the favorable tax rates while you still can. Tax-loss harvesting (i.e., selling assets at a loss to offset capital gains) might also help reduce your tax burden.

One of President Biden's campaign proposals that never received a lot of attention is capping the value of itemized deductions at 28%. Generally, the plan is to reduce the total amount of itemized deductions for anyone paying a marginal tax rate above 28% – that is, taxpayers in the current 32%, 35% and 37% tax brackets, or the proposed 39.6% bracket. For example, instead of itemized deductions for the wealthiest taxpayers being worth 39.6% (assuming that's the rate they'll pay under Biden's plan), that value would be capped at 28% and their itemized deductions would be reduced accordingly (similar to the itemized deduction limit that existed before the TCJA). In other words, instead of a wealthy person getting a 39.6% tax reduction for every dollar spent on, say, charitable gifts, he or she would only get a 28% tax reduction for every dollar donated to charity.

Note that the current 32% tax bracket applies to single taxpayers with taxable income as low as $164,926 and to joint filers with $329,851 of taxable income. As a result, limiting the value of itemized deductions to 28% could mean higher taxes for people earning less than $400,000. However, we could use some more clarity on this point. Unlike other income tax proposals offered during last year's campaign, Biden never specifically said this itemized deduction limit would only apply to people earning $400,000 or more (although the Washington Post reported last August that an unidentified Biden campaign adviser said the $400,000 threshold would apply to the cap). The cap might fall under the general "no tax on people earning less than $400,000" mantra, but we'd sure like to hear that from President Biden himself if this proposal makes it into his American Families Plan.

There's also another limit on itemized deductions that Biden talked about as a candidate. He wants to phase-out itemized deductions for people earning more than $400,000 for the year. Actually, this is simply a reversal of the TCJA's repeal of the so-called "Pease limitation" (named after Congressman Don Pease (D-Ohio), who drafted the tax code provision establishing the limit.)

TAX TIP: Increase charitable donations in 2021 if you expect to be trapped by these potential itemize deduction limitations next year or beyond. Think about opening a donor-advised fund if you want to get your tax deduction now, but spread out donations to your favorite charities in the future. Also, before the year runs out, try to prepay deductible expenses, such as mortgage payments and state taxes due in January.

President Biden has also set his sights on lowering the federal estate tax exemption, which would subject more estates to the tax. In 2017, any estate worth less than $5.49 million was exempt from tax. Thanks to the TCJA, the exemption amount for 2021 is now up to $11.7 million (although the higher amount is scheduled to expire in 2026). Biden has said he wants to bring the exemption back down – by a lot.

We think the president will try to set the exemption amount to the pre-TCJA levels (i.e., around $5.5 million when adjusted for inflation). However, don't be surprised if he follow's Sen. Bernie Sanders' lead and asks for a reduction to $3.5 million (that's what it was in 2009). Nevertheless, assuming the exemption amount is only brought down to the pre-TCJA amount, that still means estates worth about $5.5 million to almost $12 million would suddenly be hit with the federal estate tax. For those estates, it's a tax increase – going from 0% in taxes to a 40% estate tax.

While this seems like a tax increase that only impacts the superrich, people of modest means can also be affected by the change. The estate tax is paid by the estate, not by your heirs. But that means that one or more of the beneficiaries are inheriting less than they otherwise would if no tax (or less tax) had to be paid. So, in effect, this tax increase is really an indirect tax on the people who inherit your property. And those people certainly could earn less than $400,000 annually.

TAX TIP: Giving away cash or property while you're alive can help you reduce or even avoid estate taxes when you die. The general rule is that any gift is subject to the federal gift tax. However, there's an important exception to this rule — you can give up to $15,000 per person during the year without having to pay any tax. If you're married, your spouse can also give $15,000 to the same people, jacking the annual tax-free gift up to $30,000 per person. And you can do that year-after-year without paying any gift tax unless the total of all your non-exempt gifts exceeds the lifetime limit, which is the same as the estate tax exemption amount. Plus, as long as your gifts stay below the annual limits, whatever you give away won't be counted for estate tax purposes when you die. So, for example, if the current value of your estate is above the federal estate tax exemption amount ($11.7 million for 2021), giving away assets now could drop the value below the exclusion amount, which would mean no federal estate tax when you pass away.

There's another way your heirs could be screwed by one of President Biden's expected tax proposals. He wants to eliminate the step-up in basis for inherited capital assets, which means more taxes on wealth passed to heirs.

Here's how the step-up in basis lowers taxes: Johnny's grandmother bought some stock years ago for $10,000. When she dies, Johnny inherited the stock – which is now worth $100,000. Johnny immediately sells the stock for $100,000. When you sell stock (or other capital assets), you pay tax on the gain – which is the amount you got when you sold the stock minus the "basis" (generally, the amount paid for the stock). In this case, Johnny's gain would be $90,000 ($100,000 - $10,000). However, when you inherit a capital asset, the basis is increased ("stepped up") to the fair market value of the asset on the date that the person who owned it died. So, in this case, Johnny's basis in the stock automatically jumps up from $10,000 to $100,000, which means he has zero gain because the selling price and the basis are identical ($100,000 - $100,000 = $0). No gain = no tax for Johnny.

If the step-up in basis is eliminated, Johnny is going to be paying tax on $90,000 of capital gain. Assuming Johnny isn't a millionaire (see above), at least he would still be able to take advantage of the favorable tax rates for capital gains since the gain from the sale of inherited assets is treated as long-term gain. But still, going from no tax to potentially paying a 15% or 20% tax is a tax increase for him. And, since Johnny's salary doesn't impact whether the stock basis is stepped-up or not, we can put this tax increase on the list of proposals that could hit people earning less than $400,000 per year.

TAX TIP: For certain people, a life insurance retirement plan (LIRP) might be something worth looking into if the step-up in basis for inherited assets goes away (or even if it doesn't). As the name suggests, a LIRP is a cash value life insurance policy that can provide some of the same tax advantages as a Roth IRA, such as tax-deferred growth and tax-free income during your golden years. Since it's a life insurance policy, a LIRP provides death benefits for your beneficiaries, too – and life insurance proceeds received by a beneficiary following the death of an insured person are generally tax-free. So, if you can't pass tax-free capital assets to your children or grandchildren, listing them as a beneficiary on a LIRP might be a good alternative method of providing for them after you're gone.

Is it true that retirement changes everything?

No, not literally. But it does significantly change many aspects of your finances, and the more you understand your new situation, the more money you will have available to spend or save.

How you set up retirement income to be taxed is complex — and a big part of retirement success.

I am surprised myself, in fact, by how much there is to learn. I’ve been studying annuities and retirement plans for 40 years and recently discovered calculations nestled within IRS schedules that might change your own plans for retirement. An important discovery was how taxes on one source of income, like dividends, are driven by how much a retiree has in another source, like taxable interest.

Know your retirement tax rate

Before we get into the nitty-gritty of how this retirement tax strategy works and whether it’s right for you, you need to know the answer to this question: What is your true tax burden? By that, we don’t mean what tax bracket you are in. We mean what is the percentage of your income that you actually pay in taxes, or what we call your “retirement tax rate”?

To figure it out, take the amount you paid in federal taxes and divide it by your retirement income — which for most retirees is the sum of income from Social Security, interest and dividends from investments, annuity payments and withdrawals from your IRA.

Retirement Tax Rate - Sample Calculation

Financial Assets $2 million, Retirees Male 70, Female 70

The traditional thinking is that retirees should keep their taxes as low as possible and invest much of their savings in programs like tax-free municipal bonds. If you are wealthy and your tax bracket is, say, 24% or higher, advisers often suggest that strategy.

But what if your retirement tax rate (RTR) is, say, 10% or lower? Then you should consider a different approach — one that includes income annuities.

When your income was based on wages or other forms of pay, the big tax-planning decision was how much to set aside in your 401(k) or IRA. When you’re retired, each source of retirement income has its own unique tax-planning decision. And, importantly, decisions you make about each income source will impact your RTR.

How income annuities can lower your retirement tax rate

The IRS makes you pay taxes only once on money you earn. And when you buy an income annuity from personal (after-tax) savings, you are using money on which you have already paid taxes. As the income annuity begins to pay out, the IRS considers a portion of each monthly payment to be from your original investment. Since you already paid taxes on the original investment, you receive that portion tax-free. (The interest that you earn is taxed, albeit spread over time.)

Because the taxable income from annuity payments currently is substantially lower than taxable interest, your taxes also may be reduced on other sources of income, such as 1) the amount of qualified dividends and realized capital gains that are taxed, and 2) the percentage of Social Security that is included in your taxable income. (For more, see How Your Social Security Benefits Are Taxed.) The end result could be more spending money in your pocket, instead of Uncle Sam’s.

To see what that could look like in dollars and cents, let’s consider hypothetical couples with three levels of financial assets who are considering two strategies that could affect their income and tax bills. Under the first strategy, they include annuity payments; in the second, they replace annuity payments with interest on corporate bonds.

Advantages of Including Annuity Payments in Retirement Income Plans

Results for First Year Only of Substituting Annuity Payments for Interest on Corporate Bonds

Assumptions: The couples have 30% of savings in a traditional IRA invested in a balanced portfolio and are taking RMDs. The “with annuity payments” strategy generates annuity payments of 6.27% a year. Other personal assets are invested in tax-free bonds (2.5% yield), taxable bonds (4% yield), and dividend-paying stocks (3.75% yield). Each couple is receiving $40,000 in Social Security benefits and is taking a standard deduction.

Note that the tax rate advantage for income annuities will eventually disappear because your previously taxed investment will be paid out over a decade or more. What happens then? You will be much closer to the time when you will likely have higher tax deductions for medical and long-term care costs. And, of course, the annuity payments are generating lifetime income at a higher rate than the alternatives.

To get the maximum tax benefit, how much of my portfolio should be in income annuities?

Although income annuities offer many income and tax benefits, as a rule of thumb no more than one-third of your savings portfolio should be invested in these annuities. Keep in mind, however, that with the security from guaranteed lifetime annuity payments, you can take more risk in your investment portfolio.

In the example above, the income annuity is replacing the 30% portion of the portfolio invested in fixed income securities, generating 4% interest after fees. For the case with $2 million in financial assets, that substitution is producing, under our calculations, an increase in spendable after-tax income of over $16,000.

Of course, don’t look at the various elements of your tax bill in isolation. Increasing the allocation to immediate income annuities beyond 30% may be possible, although you may want to consider deferred income annuities like a QLAC for other tax-minimization strategies.

How does your retirement tax rate impact your financial decisions?

Set out below are some questions to consider as you gather information on how to design your retirement income plan.

Before you start, you should know your RTR, and then see if changes to your retirement income plan either increase or decrease your RTR. You need to know where you are starting before you can create a plan to improve.

Should I switch from tax-exempt to taxable bonds? You know you will be paying taxes on the higher income, but will it be better to have the extra income, even if it is taxed?

Should I switch to a high-dividend portfolio? Qualified dividends on stocks can be an important part of your income allocation plan for retirement. Stock dividends are assessed lower taxes than regular income, and the amount of taxes depends on your taxable income from other sources.

Should I exchange a deferred annuity for an income annuity? When you withdraw money from deferred annuities, the income could be fully taxed for a period of years – until all the earnings and interest have been withdrawn and you have finally started tapping into your principal. However, if you move the accumulated value of these deferred annuities into an immediate income annuity that pays regular, guaranteed income, the IRS will exclude a portion of the payment from tax. (For more, see How Annuities Are Taxed.)

Should I convert all or part of my traditional IRA to a Roth IRA? A 401(k) or traditional IRA is a good way to build up retirement savings and lower taxes while you are working. During retirement, you may want to pay taxes and convert to a Roth IRA so that distributions become tax-free. A lower RTR may reduce the cost of conversion.

Can I create the same tax benefits of annuity payments with a do-it-yourself withdrawal plan? Those retirees who don’t think income annuities are fair — or who have a shortened life expectancy — may want to create their own withdrawal plan that combines both interest and dividends and withdrawals of capital. But analyze whether it makes tax sense.

The way you structure your income and taxes can affect other areas, too. For instance, your “modified adjusted gross income,” as reported to the IRS, affects your monthly Medicare premium. How would you like to pay $100 to $200 a month less for Medicare for you and your spouse? With the right income plan, that could be a possibility.

At Go2Income, you can calculate how much you can generate in annuity payments, where to find the best prices, and also how much of your annuity payments are taxed. To create your own retirement income plan, go to the income allocation page at www.Go2income.com. Once you get your income allocation report, request an appointment so we can discuss these tax strategies. We are not intending the above as tax advice and suggest you discuss all ideas with your accountant or tax adviser.

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.

In case you haven’t heard — taxes are on sale! To take advantage of that, it means that 2018 could be the year for you to consider converting a traditional IRA into a Roth.

But first, some background. Thanks to the 2017 Tax Cuts and Jobs Act, nearly all Americans will benefit from reduced tax rates and an expansion of the amount of income subject to those newly reduced rates, due to broader tax brackets.

Most workers will start seeing bigger paychecks, because a smaller portion is being withheld by Uncle Sam. Many retirees will also benefit from reduced withholdings on retirement account distributions, lower estimated tax payments or potentially a bigger refund when they file their 2018 tax returns.

Throughout this article, I’ll explain how you can take advantage of these tax rate and bracket changes to minimize your federal tax liability.

Not All Rate Reductions and Bracket Expansions Are Created Equal

As the tables above illustrate, the benefit of new tax rates and brackets is dependent on your filing status and total income. For example, married couples in the old 15% bracket benefit from a reduced tax rate down to 12%, but the tax bracket only expanded $1,500 to cover income up to $77,400.

On the other hand, married taxpayers who were in the 25% tax bracket are presented with bigger potential benefits. The 25% tax rate was reduced to 22%, and the bracket expanded almost $12,000 to cover income up to $165,000. The larger opportunity, however, was the change to the new 24% tax bracket, which applies to income up to $315,000. Compared to 2017, a married couple previously comfortable paying tax at 25% could now potentially realize over $160,000 in additional in income that is taxed at the new lower 24% tax rate.

For single taxpayers, similar rate reductions and bracket expansions improved the old 15% and 25% brackets. Compared to 2017, a single individual previously comfortable paying tax at 25% could now potentially realize an additional $65,600 can be realized at the new 24% rate.

It’s these new tax bracket sweet spots that provide powerful opportunities for meaningful tax planning.

Don’t Bust the Wrong Bracket

The goal of good tax planning is to pay as little tax as possible over your lifetime by maximizing income when tax rates are low and minimizing income when tax rates are high. If your current marginal tax rate (the rate that applies to the next additional dollar of income) is more than your expected future rate, filling your brackets is a bust since you would pay more today than you otherwise would in future.

If your current marginal tax rate is less than your expected future marginal rate, however, then realizing additional income now by filling up your brackets may be beneficial. Future tax rates often increase for taxpayers for a number of reasons, including:

• Required minimum distributions (RMDs) from retirement accounts (IRAs, 401(k)s, etc.).
• When a spouse passes and single tax rates apply to the surviving spouse.
• If the client passes and the accounts are inherited by working children who are often subject to higher tax rates.

In my practice in the past, I've found that it has often been beneficial for many taxpayers to pay tax at the old 15% rate, and for others up to the old 25% tax rate. Realizing income in excess of the old 25% rate was often confusing to evaluate, because the Alternative Minimum Tax (AMT) often applied, and the real marginal rate was anywhere from 26%-35%.

Under the new tax laws, the decision to realize additional income is simpler and more advantageous, especially since the AMT no longer applies in most circumstances. That, coupled with lower rates and expanded brackets, can make tax planning more lucrative.

For many households, filling up the new 12% bracket will continue to be a "no-brainer," although the calculation can be complicated when determining the taxability of any Social Security and qualifying for the 0% preferred tax rate on qualified dividends and long-term capital gains. Filling up the new 24% bracket, however, may provide a substantial opportunity, especially for those who were previously comfortable paying 25%.

Roth Conversions Could Help You to Win Your Bracket

For many workers and retirees, the easiest way to realize additional income to fill up your tax bracket is to use what is likely one of your largest assets: your tax-deferred traditional IRA account. Distributions from this account type create taxable income, but there’s a smarter solution that just taking the distributions. Instead, you can convert all or a portion of the account into a Roth IRA. Doing so will create additional income and a tax bill, but the investments in the Roth IRA will now benefit from tax-free growth and no tax when properly distributed. Roth conversions are generally beneficial when the resulting tax can be paid from assets other than a tax-deferred retirement account.

Let's take a look at an example with Dave and June, both 65. In 2017 they were in the 25% tax bracket and anticipated that their RMD, once they reached age 70.5, would put them in the 33% tax bracket. In this case, they decided and were comfortable filling up the 25% tax bracket, which, in their case, required a $33,000 Roth IRA conversion.

Under the new tax laws in 2018, however, their situation has changed significantly. In this case, they are already in the new 24% bracket and anticipate that RMDs would almost put them in the 32% tax bracket and certainly the 35% when the first spouse passes. To avoid hitting those higher rates, they decide to fill up the 24% tax bracket, which means they could realize taxable income up to $315,000. As such, they anticipate completing a $195,000 Roth IRA conversion: $162,000 more than what was advantageous in 2017.

Final Thoughts

Sales are exciting because they offer “a deal” and don’t last forever. And that’s certainly the case with the recent tax law changes. Under the current law, this sale will end on Dec. 31, 2025, at which point tax rates will automatically increase back to the 2017 rates unless a future Congress extends the current structure. Consequently, there’s never been a better time to max your brackets and minimize the negative impact that taxes can play in the pursuit of your broader financial goals.

This information is not intended to be a substitute for specific individualized tax advice. I suggest that you discuss tax strategies with a qualified tax adviser to see if these strategies makes sense for your unique situation and consider the following questions:

• How am I strategically taking advantage of the new lower tax rates and expanded brackets?
• What is my ideal percentage of retirement savings that should be saved in a tax-free Roth account?

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.