On July 4, President Trump signed a new tax bill into law which made permanent the lower income tax rates and wider tax brackets of the 2017 Tax Cuts and Jobs Act (TCJA) implemented during his first term. While the new law may have only narrowly passed the Senate and the House, it will have a wide-ranging impact on almost every taxpayer and is much more than simply an extension of the current tax regime. There is a raft of new provisions, some effective immediately with others coming online in future years, that could decrease (or in some cases increase) your tax bill. Below we outline the most notable provisions and how they may impact you.
But first, a couple important definitions that are used throughout:
- Adjusted Gross Income (AGI): this is your total income minus certain deductions. These deductions, such as eligible contributions to retirement or Health Savings Accounts, are known as “above the line” deductions. Your AGI impacts your eligibility for certain other deductions, credits and phaseouts such as what percentage of Social Security benefits are taxable.
- Modified Adjusted Gross Income (MAGI): this is your AGI plus certain deductions that are added back. While MAGI isn’t actually reported on your tax return, it is used to determine your eligibility for certain benefits (i.e., whether you can fund a Roth IRA) and how much your Medicare premiums will be, among other items. In the new tax law, MAGI is your AGI plus certain excluded foreign income and income earned while residing in U.S. territories. In other words, for the vast majority of taxpayers, MAGI is AGI as far as the new tax law is concerned.
- “Below the line” deductions: while “above the line” deductions help to arrive at your AGI, “below the line” deductions are subtracted from your AGI and determine your taxable income. This is an important distinction because below the line deductions ultimately reduce your taxable income but don’t help with certain phaseouts or thresholds that are based on AGI (as noted above). Previously, most below the line deductions were available for taxpayers who itemize, but as you’ll see below, the new tax law introduces a number of new deductions.
Standard Deduction Permanently Increased
· One of the biggest changes in the previous tax law (TCJA) was the significant increase in the standard deduction. This, coupled with limits on the deductibility of state and local taxes (SALT), meant that the vast majority of taxpayers would use the standard deduction rather than itemize. This will likely remain the case going forward as the higher standard deduction (adjusted for inflation) has been made permanent.
Ø Key takeaway: “bunching” deductions, which entails alternating from year-to-year between using the standard deduction and itemizing, will continue to be beneficial for many taxpayers going forward. In years that you claim the standard deduction, you would minimize charitable donations, property tax and estimated tax payments while in alternating years, you would more aggressively fund these deductions to obtain a higher economic benefit via itemizing.
New “Enhanced Senior Deduction”
· For those age 65 or older, a new deduction of $6,000 per person is available from 2025 through 2028 (subject to income phaseouts of $75,000 to $175,000 for single filers and $150,000 to $250,000 for joint filers).
· This temporary deduction is on top of the “additional” standard deduction for those who are age 65 or older or blind ($2,000 for single filers and $3,200 for joint filers).
· Therefore, between the “normal” standard deduction, the “additional” standard deduction for 65+/blind and the new “enhanced” deduction, single seniors are eligible for up to $23,750 in deductions for 2025, joint filers with one spouse age 65+ are eligible for up to $39,100 in deductions and joint filers where both spouses are 65+ can receive up to $46,700 in deductions without itemizing.
· It’s important to note this new enhanced deduction is not directly tied to Social Security benefits and, therefore, doesn’t eliminate taxes on Social Security (a long-touted goal from Trump’s campaign). Anyone 65 or older, whether they’re receiving Social Security benefits or not is eligible for the deduction. Critically, the enhanced deduction is “below the line” which means that, while it reduces taxable income, it doesn’t reduce AGI which is what is used to determine what portion of Social Security benefits are taxable in the first place.
Changes to Itemized Deductions
· The state and local tax (SALT) deduction has been temporarily increased from $10,000 to $40,000 for all filing statuses (except married filing separately) beginning this year. From 2026 to 2029, the deduction limit will increase by 1% per year and then will revert back to $10,000 from 2030.
· Higher income households may not experience the full benefit of the increased SALT deduction, as the $40,000 limit is phased down to $10,000 with MAGI between $500,000 and $600,000. This means that taxpayers in this “tax torpedo” phasedown range could experience very high marginal tax rates for recognizing additional income.
o Example: let’s assume a single filer with $510,000 of MAGI is in the 35% marginal tax bracket. Because they’re near the bottom of the SALT phaseout range, every additional dollar of income they receive would reduce their SALT deduction by 30% (the specified drawdown rate in the law), or in other words, would add $1.30 to their income. So their effective marginal tax rate while in the phaseout range would actually be actually over 45% (1.3 x 35% = 45.5%). This taxpayer would likely want to try to avoid incurring additional income or find ways to take additional “above the line” deductions to reduce their MAGI. Another strategy could be to “bunch” deductions in one year to try to reduce their income under the phaseout range and then use the standard deduction in alternating years.
· Charitable contributions will be subject to a 0.5%-of-AGI floor beginning in 2026. In other words, for taxpayers who itemize their deductions, they will lose the economic benefit of the amount of charitable contributions equal to 0.5% of their AGI. For a taxpayer with $125,000 of AGI and $5,000 of charitable contributions, the first $625 will be excluded and the deductible amount will be only $4,375 ($125,000 x 0.5% = $625).
Ø Key takeaways:
§ High income taxpayers who plan to make large charitable donations (and will itemize deductions) may want to consider accelerating donations this year before the 0.5%-of-AGI floor takes effect next year.
§ Qualified Charitable Distributions (QCD) may be worth considering. QCDs allow those over age 70 ½ to avoid income tax by making qualified IRA distributions directly to a charity.
· Higher income households (only those in the top 37% bracket) may also experience a reduction in their total allowable itemized deductions beginning in 2026. The new limitation reduces deductions by 2/37 which essentially reduces the value of itemized deductions from 37% to 35%.
Ø Key takeaway: if you’re in the highest tax bracket, consider accelerating deductions (perhaps prefunding several years’ worth of charitable donations via a donor-advised fund) this year before the itemized deduction limitation (and the 0.5%-of-AGI floor noted above) take effect in 2026.
New Below the Line Deductions
· A revamped charitable contribution deduction will be available for taxpayers who don’t itemize deductions. Beginning in 2026, single filers can deduct up to $1,000 and joint filers can deduct up to $2,000 of charitable contributions. Since this deduction is available to those who use the standard deduction, the 0.5%-of-AGI floor does not apply and there are no income restrictions. However, only contributions made in cash are eligible (no other types of property including household goods or securities can be used). Contributions of cash to a donor-advised fund are also not eligible.
Ø Key takeaway: if you don’t itemize deductions and otherwise don’t have plans for charitable donations this year, consider waiting until next year to make your donations so you get this new “below the line” deduction.
· The deductibility of interest on loans used to purchase new vehicles will be available between 2025 and 2028 (the vehicle must be assembled in the U.S. to qualify). Up to $10,000 in interest is deductible per year but single filers will be phased out of the deduction with MAGI between $100,000 and $149,000 ($200,000 to $249,000 for joint filers). Given these income restrictions, there are likely very few situations where taxpayers will be able to take advantage of the full deduction. With an interest rate of 5%, you would have to finance a $200,000 vehicle to deduct the full $10,000 of interest, and that won’t be feasible for many people with income below $150,000/$250,000.
Ø Key takeaway: if you weren’t planning on replacing your vehicle already, this new deduction is not reason enough to visit your local dealership.
Other Notable Items
· The estate tax exemption is increased to $15 million per person ($30 million per couple) beginning in 2026. Historically, this exemption has been one of Congress’s favorite toys to play with, so estate planning should continue to build in contingencies in the event a future Congress reduces the exemption again.
· The definition of “qualified higher education expenses” has been expanded meaning new expenses will be eligible for tax-free distributions from 529 plans (with total annual distributions up to $20,000 allowed, up from $10,000, starting next year). This includes K-12 expenses such as online education materials, costs for tutoring provided outside the home, fees for standardized tests, AP exams and college admission exams and educational therapy costs for students with disabilities. This new rule applies to any distributions taken after the bill’s enactment, meaning any of the above-mentioned expenses incurred this year may be reimbursed from a 529 plan as long as the distribution is also taken this year. With that said, Wisconsin does not automatically conform to all federal tax laws, so before these new provisions become effective in Wisconsin, the legislature will need a specific action to adopt or reject the new laws. In recent years, federal changes to 529 plans have been adopted by Wisconsin, but it’s important to know that it is not automatic, so the above changes are not yet part of Wisconsin tax law.
· Starting July 2026, parents can make contributions of up to $5,000 per year to a new tax-deferred “Trump Account” on behalf of a beneficiary who hasn’t yet reached age 18 (contribution eligibility ends the year before the child turns 18). Unlike IRA contributions, there is no earned income requirement for beneficiaries while contributions made directly by a parent are not tax-deductible. If an individual is eligible to contribute to an IRA and meets other requirements for a Trump Account, contributions to one do not reduce the amount that can be contributed to the other. Details for how beneficiaries can use the accounts after they turn 18 (i.e., can the assets be rolled into a standard IRA or converted to a Roth IRA?) are scarce at this time and will need to be clarified by the IRS.
· The Child Tax Credit has been permanently increased to $2,200 per qualifying child and will be indexed to inflation beginning next year.
· The Clean Vehicle Credit, which offered up to $7,500 for a new electric vehicle, is terminated after September 30, 2025.
· The Residential Clean Energy Credit and Energy Efficient Home Improvement Credit will be terminated after December 31, 2025 (property must be placed into service prior to this date to be eligible for the credit).
· Beginning in 2027, a new tax credit of up to $1,700 will be available for contributions to charitable organizations that fund K-12 scholarships within the taxpayer’s state. Tax credits, which directly offset a tax liability, are more valuable than tax deductions, so this could be a good future opportunity for those who are charitably inclined.
A final note for Wisconsin seniors: Governor Evers signed a new budget into law on July 3rd which allows single taxpayers age 67 or older to subtract up to $24,000 in retirement income (up to $48,000 for joint taxpayers if both are at least 67 before the end of the tax year) from their Wisconsin taxable income. Previously, those over age 65 could exclude up to $5,000 in retirement income ($10,000 for joint), but the deduction was subject to income restrictions (unlike the new policy). Since Wisconsin doesn’t tax Social Security benefits, other retirement income such as pensions or withdrawals from IRAs and 401(k)s will be eligible for the deduction.
The above list of provisions, while extensive (kudos if you made it this far), is far from comprehensive, and the sheer breadth and scope of the new law means that further planning strategies may not become apparent until there’s been more time to fully grasp the law’s impact (many provisions will also need further clarification from the IRS). And as a result of the changes, strategies that may have worked in the past may no longer be advisable. The bottom line is that the expansion of the internal revenue code will make tax planning even more essential in the years to come, particularly until 2028 when many new temporary deductions (and corresponding income phaseouts) end.
The above statistics and/or commentary have been obtained from sources we believe are reliable, but we cannot guarantee their accuracy or completeness. Past performance is no guarantee of future results.This is not a complete analysis of every material fact regarding any company, industry, or economic condition. Due to shifting market conditions, all expressions of opinion are subject to change without notice.
The information contained in this document does not constitute the rendering of legal, accounting, or other professional advice or opinions on specific facts or matters. Before implementing any ideas suggested here, consult with your tax advisor regarding your specific tax situation.
The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding investments, sectors or markets in general.
Talk to your financial advisor before acting on information in this document.