As the Tax Cuts and Jobs Act is set to expire in 2026, big changes to taxes are coming, which could greatly impact your finances, especially for retirees and those planning ahead.
This “tax cliff” means updates that will likely affect deductions, credits, and tax rates, so preparing now is essential to avoid surprises. Here’s what you need to know to protect your finances as these shifts approach.
Key Takeaways
Prepare now to avoid surprises as big changes to taxes are coming in 2026, affecting deductions, credits, and tax rates.
- Reduced standard deductions and a return to itemized deductions may impact retirees with higher incomes or those relying on these deductions.
- Marginal tax rate adjustments and the return of personal exemptions could offer relief for some retirees, but increase taxes for others.
- Certain credits and deductions will change, including the Earned Income Tax Credit, Alternative Minimum Tax considerations, and Capital Gains Tax Rates, which may impact retirees’ financial flexibility.
What the expiration of the TCJA means for you
The TCJA, rolled out in 2018, offered significant tax cuts for both individuals and businesses, but these were temporary. If the law isn’t renewed, many of these cuts will end by 2026. This means that the reductions people have enjoyed could disappear, impacting areas like standard deductions and tax rates, which might make managing your finances a little trickier, especially if you’re on a fixed income.
Reduced Standard Deductions and a Return to Itemized Deductions: One big change is the reduction of the standard deduction. For single filers, this deduction might drop from around $15,000 in 2025 to just over $8,300. For married couples filing jointly, it could go down from $30,000 to about $16,600. If you rely on these higher standard deductions, you might need to start itemizing again if your deductions can exceed the lower standard amount.
If you do choose to itemize, some deductions cut under the TCJA will come back, including deductions for medical expenses, mortgage interest, state and local taxes, charitable contributions, and certain unreimbursed employee expenses. If you’re dealing with high medical expenses or make regular charitable donations, itemizing could help reduce your tax liability.
Marginal Tax Rate Adjustments and the Return of Personal Exemptions: You might also notice changes in the tax rates, particularly if you have higher retirement income from investments, Social Security, or retirement accounts. The top tax rate, currently at 37%, may go back up to 39.6% for the highest earners, impacting retirees with higher incomes. On the positive side, the return of personal exemptions could offer some relief, especially if you’re supporting family members financially.
For those with moderate incomes, new IRS brackets and inflation adjustments might shift you into different tax brackets, impacting your tax rate. Reviewing your income sources and adjusting how you draw funds from retirement accounts could help you keep your taxes low.
Credits and deductions that could benefit retirees
As tax laws adjust, certain credits and deductions will also change, giving you options to manage your tax burden. Staying informed about these updates can help you tweak your retirement plans to align with the new tax landscape.
Standard Deduction and Extra Benefits for Seniors: In 2025, seniors over 65 can claim additional standard deductions: $2,000 for single filers and $1,600 for those filing jointly. While the standard deduction for singles is set at $15,000, you may want to consider itemizing if your deductions exceed this amount, especially since some itemized deductions that were eliminated could return once the TCJA sunsets.
Alternative Minimum Tax Considerations: The Alternative Minimum Tax could mean extra taxes for high-income retirees. Created to prevent high earners from avoiding taxes altogether, the AMT applies separate calculations on income. For 2025, exemptions are $88,100 for single filers and $137,000 for joint filers, with rates of 26 percent and 28 percent applied on income exceeding certain amounts. If your income is above these thresholds, consulting a tax advisor can help you plan and avoid unexpected AMT liabilities.
Earned Income Tax Credit Updates: The EITC provides relief for retirees with part-time income or additional earnings. In 2025, single or joint filers without dependents may qualify for up to $649 in credits, and if you have dependents, credits can reach up to $8,046, depending on income and family size. Even small credits can add up and make a difference, giving you extra financial flexibility in retirement.
Capital Gains Tax Rates for Long-Term Planning: Capital gains taxes on long-term investments are another area to consider. In 2025, capital gains rates are set at 0% for single filer incomes up to $48,350 and joint filer incomes up to $96,700. Rates rise to 15% and 20% for higher incomes. Retirees with large investment portfolios should consider timing asset sales to minimize taxes and preserve the value of their investments. This approach can help ensure you maximize the returns on your assets.
Strategic steps for retirees to prepare
Understanding the 2025 tax changes and acting now can help you protect your savings and manage taxes wisely. Here are some steps to take.
Optimize Distributions from Retirement Accounts: As tax rates may increase, planning your withdrawals from tax-deferred accounts like IRAs and 401(k)s can help lower your tax bills. Roth conversions are also worth considering if you’re in a lower tax bracket now but expect to be in a higher one after 2025. By converting traditional IRA funds to Roth IRAs, you can take advantage of current tax rates and enjoy tax-free withdrawals later.
Qualified Business Income Deduction: The Qualified Business Income deduction allows certain business income deductions but phases out at $197,300 for single filers and $394,600 for joint filers. If you’re a business owner, considering restructuring income or maximizing deductions may help reduce tax liability. An advisor can guide you on making your business income more tax-efficient through thoughtful expense planning or shifting to more tax-advantaged structures.
Estate Planning and Gifting Strategies: The gift and estate tax exemption may decrease soon, so this is a good time to review your estate plans. The current exemption allows you to pass on about $12.92 million tax-free, but it could revert to around $5 million. Making larger gifts to family or charities now can help reduce your taxable estate and lessen taxes for your heirs.
Annual Gift Exclusion: Increase Starting in 2025, you can gift up to $19,000 to anyone without paying taxes, providing a way to manage your estate and support loved ones tax-free. If your spouse is not a U.S. citizen, this amount increases to $190,000. These exemptions give you options to help family members while lowering potential estate taxes.
Work with Advisors to Build a Tax-Efficient Portfolio: Keeping your portfolio tax-efficient is essential as tax rates change. Reviewing investments to focus on tax-friendly options, like municipal bonds or tax-exempt funds, can reduce taxes and help your portfolio last longer. A retirement planning advisor can help you structure your withdrawals from various accounts in the most tax-effective way, allowing you to preserve savings while meeting your financial needs.
Making the most of 2025 tax planning
With the TCJA expiring, retirees will see substantial changes to deductions, credits, and tax rates. Staying proactive and informed about these adjustments will allow you to make strategic decisions that protect your financial well-being. By optimizing your retirement account distributions, reviewing estate and gifting options, and consulting with advisors, you can navigate the impending tax cliff with confidence and maintain your financial security for the years ahead.
