Harry Sit's Blog

The best investment strategy is to take risks that the market decides to reward. Somebody, somewhere, is always saying something about how much the market will reward which risks. Knowing who to listen to and when makes a big difference.

Gold

A reader asked me back in February whether I wasn’t against investing in gold. I said I didn’t have gold in my portfolio, but I wasn’t against it. My problem with gold is that it tends to get people’s attention only after a sharp price run-up. Then it goes quiet for a long time before the idea of investing in gold comes up again.

Harry Browne introduced the Permanent Portfolio in 1981. It invests 25% in U.S. stocks, 25% in long-term Treasuries, 25% in short-term Treasuries, and 25% in gold. The stand-out feature of Harry Browne’s Permanent Portfolio is its 25% allocation to gold. The rationale is that gold provides a hedge against inflation and currency crises, scenarios in which both stocks and bonds can suffer simultaneously.

Gold was $400 to $500 per ounce in 1981. It stayed below that range for the next 24 years until 2005. I don’t know how many people had the patience to stay with such a big drag for so long.

Price of Gold 1970 – 2005, Macrotrends.net

The Permanent Portfolio popped up on the radar again after the 2008 financial crisis. A book, The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy, was published in 2012 to reintroduce the strategy. The price of gold was about $1,700 per ounce at that time. It rose to $2,050 per ounce by the end of 2023. That was an average annual return of 1.7%, which was lower than inflation for 11 years, before a switch was turned on in 2024.

Price of Gold 2006 – 2023, Macrotrends.net

When the reader asked me about gold in February 2025, it was after the price of gold had increased nearly 40% in one year. Gold handily beat the S&P 500, which performed quite well during the same period, if only not compared to gold.

Gold vs S&P 500 Jan 2024 – Feb 2025, Portfolio Visualizer

Adding gold after the price had gone up 40% in one year is chasing performance, right? Doing so when gold was hot in 1981 and 2012 did poorly. What about this time?

Gold vs S&P 500, 03/2025 – 09/2025

Although I thought it was late, it wasn’t too late. Gold continued to do well. The price went up another 35% in seven months. Investing in the SPDR Gold ETF (GLD) since March 2025 would’ve beaten the S&P 500 by a wide margin, even after the stock market shrugged off the tariff jitters and reached record highs with rich valuations fueled by tech and AI.

People chase performance because sometimes the market decides to reward performance chasing. Knowing when to chase and when not to chase makes all the difference.

Tesla

A friend asked me about the Tesla stock in mid-March this year. There was a big backlash against Elon Musk at that time for his role with DOGE. The price of the Tesla stock had dropped nearly 50% in four months. My friend thought it was a good buying opportunity.

Tesla Stock Price, 12/2024 – 03/2025

I of course said I didn’t know where the stock was going. It could drop more, or it could rebound. Tesla’s price-to-earnings ratio was still astronomically high after the stock had dropped nearly in half.

Tesla vs S&P 500, 3/14/25 – 9/30/25

My friend was right. Tesla’s stock price is up 78% since March, which beats the S&P 500 by 4x.

Is buying a stock with a high P/E ratio only because its price is 50% off a recent peak pure speculation or taking a calculated risk? Either way, the market decided to reward it. A high P/E ratio can go higher still in six months.

Apple

This happens in a longer timeframe, too. I listened to a podcast by Boldin (formerly NewRetirement) some time ago. The guest, David, was laid off by his former employer in 2013, which allowed him to roll over his 401k to an IRA. Once the money was in an IRA, he had more investment options than only the ones offered in the 401k plan’s menu.

Apple was coming out with iPhone 4 at the time, and David was a big Apple fan. He saw that all the Apple stores were always busy. So he put 100% of his IRA into Apple stock and stayed in it through several splits. That one decision helped him retire 7 years later at age 53.

Apple Stock vs Vanguard Target Retirement 2030 Fund, 2013 – 2020

You can say David got lucky, and he wouldn’t have been on the podcast if it didn’t work out, but you can’t argue with success. It’s better to be lucky than good. Investing everything in one stock looked “wrong,” but David’s conviction helped him retire sooner.

Bitcoin

When did you first hear about Bitcoin? I remember that some co-workers were getting into it in late 2017 when the price of Bitcoin was going from $10,000 to $20,000.

I found a video clip on YouTube of Jack Bogle talking about Bitcoin. It included a chart showing a date of September 28, 2018. I assume the presentation was given around that time.

Jack Bogle on Bitcoin, 2018

Mr. Bogle said people should avoid Bitcoin like the plague, and he would tell them what Bitcoin is worth when it gets to $1. What happened since then?

BitCoin vs S&P 500, 09/2018 – 09/2025

If someone bought Bitcoin after hearing the presentation by Jack Bogle in 2018, it would’ve grown 1,700%, versus 150% in the S&P 500. My co-workers would beat the stock market several times over even if they bought at the previous peak in December 2017. They only had to hang on for the ride, or as someone said on Reddit:

A few years of volatility versus 20 extra years of steady work, with no way to catch up.

Round_Ad_40 in r/Bogleheads

That’s the power of taking risks that the market decides to reward.

VTSAX and Chill

Investing in index funds also benefits from the same phenomenon. Investing 100% in the U.S. stock market (“VTSAX and chill”) is a popular, simple path to wealth in recent years. It beat investing in a target date fund or a globally diversified fund (such as VT) because stocks have outperformed bonds, and U.S. stocks have outperformed international stocks.

The Market Has the Final Say

Investing in gold, Apple, Tesla, Bitcoin, and, to a lesser extent, 100% in U.S. stocks looked “wrong” at the time, but the market disagreed. The thing is, it’s hard to tell ahead of time which risks the market will decide to reward.

A successful strategy looks irrational at the time, but not all irrational strategies will be successful. Somebody, somewhere, is always saying something. All the talks about investing are basically trying to answer this one question:

How much will the market reward this risk?

Some answers will be proven right. Some answers will be proven wrong. If you get into the habit of wanting to hit the right answers, you will invariably also hit some wrong answers. You can only hope that the right answers will outweigh the wrong ones, which is far from a given. Despite such a strong tailwind for Bitcoin and tech stocks, someone still lost $500k chasing crypto and speculative stocks over the last 5 years.

The point of investing in a globally diversified portfolio of both stocks and bonds is to avoid relying on hitting the right answers and to avoid the wrong answers that come along. Getting rewarded by the market for the risks you take can be life-changing, but a diversified portfolio is more reliable, and there’s safety in the mainstream.

[Headline Image Credit: Mohamed Hassan from Pixabay.]

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Taking Risks That the Market Decides to Reward appeared first on The Finance Buff.

When you buy real estate or apply for a loan or a visa, you may be asked to present proof of sufficient funds. You can submit an account statement, but a statement contains much more information than they need to know. You only need to show that you have more than a certain amount. You don’t want to give them your account number, exact balance, or transaction details.

The party you’re disclosing the information to may not have good security. Who knows what will happen to your document after you submit it? The less information you disclose, the better. For instance, the account number of a brokerage account is a key piece of information for an asset transfer (see Protect Your Brokerage Accounts From ACATS Transfer Fraud).

Some financial institutions make it easy to create a proof of funds or balance confirmation. They only include minimal information without oversharing. Because I ditched banks and only use a Fidelity account for day-to-day cash flow, here’s how I generated a proof of funds or balance confirmation for a Fidelity account.

Log in to Fidelity’s website. Select an account on the left. Click on the Balances tab, and then the three dots on the right.

Click on “Create balance letter” in the pop-up.

If you enabled Fidelity’s Money Transfer Lockdown for your accounts, you’ll see an error saying “There are no eligible accounts to generate a letter.” Turn off the Money Transfer Lockdown and try again. Select one or more accounts you need for the balance confirmation.

You have the option to show the total balance or a specific balance. The custom amount is a better option for privacy. When you give the minimum amount you need, the letter will say this:

Please accept this letter as confirmation that as of market close on [date], you held a balance in excess of $[amount] in cash and securities in your portfolio at Fidelity Brokerage Services.

The proof of funds letter bears the Fidelity letterhead, includes your name and address, and is signed by a Fidelity officer. It doesn’t have your account number, the exact balance, holdings, or any transaction details.

Remember to re-enable Money Transfer Lockdown if you turned it off to generate the letter.

Vanguard or Schwab may also have a similar process to do this. I don’t know how because I don’t have accounts there. Call customer service if you don’t see it on their website.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Proof of Funds or Balance Confirmation for Fidelity Accounts appeared first on The Finance Buff.

We covered the new tax deductions in the 2025 Trump tax law in previous posts: seniors, car loan interest, tips, overtime, charity donations, and the SALT cap increase. The law also created a new type of tax-advantaged account called the Trump Account.

Trump Account, of course, is named after President Trump, in the same way Roth accounts are named after Senator William Roth. It was originally called MAGA Account when it was introduced in the House bill before the name changed to Trump Account.

Table of ContentsWhat Is a Trump Account?Age RequirementContributionsInvestmentsDistributionsTrump Account vs Custodial Roth IRATrump Account vs 529 PlanTrump Account vs Custodial Account (UTMA/UGMA)Converting to RothLegislative RiskPriorityWhat Is a Trump Account?

A Trump account, in essence, is a non-deductible Traditional IRA for kids without earned income.

Kids with taxable compensation (“earned income”) from a job or self-employment can already contribute to a Traditional or Roth IRA. They need an adult to serve as the custodian until they’re 18 or 21. This type of account is called a custodial IRA (most parents choose the Roth version). Mainstream brokers such as Fidelity, Schwab, and Vanguard all offer custodial Roth IRAs.

A Trump account is similar to a custodial Roth IRA for a child, except that:

It’s a non-deductible Traditional IRA, not a Roth IRA. Contributions are not tax-deductible. Earnings are taxed as ordinary income upon withdrawal.The child doesn’t need taxable compensation (“earned income”) from a job or self-employment.Age Requirement

A Trump account can receive contributions for a child under 18 by the end of the calendar year. You can’t contribute for older children. The child must be a U.S. citizen. There’s no minimum age.

There’s no income limit or phaseout for the parents. There’s no limit on the number of kids as long as each kid meets the age requirement.

Contributions

No one can contribute to a Trump account just yet. The law says contributions can’t be accepted until July 4, 2026, which is 12 months after the date of its enactment. This gives government agencies and their contractors time to set up the program. The July 4, 2026 date is a “no earlier than” date. The actual launch date may be later if the IT projects require more time.

When the program launches, parents and family members can open an account for kids who won’t be 18 yet by the end of the year.

The initial account must be opened through the federal government. It can be rolled over to a private financial institution afterward. The government will contribute a one-time $1,000 to kids born in the years 2025 through 2028 (inclusive).

The maximum contribution an eligible child can receive in a calendar year is $5,000. If parents and grandparents contribute to accounts for the same child, the total combined contributions still can’t exceed $5,000 in that year. The $1,000 from the government for a newborn doesn’t count toward the $5,000. The $5,000 annual limit is indexed to inflation, starting in 2028.

An employer is allowed to contribute up to $2,500 a year to an employee’s or an employee’s dependent’s Trump Account if the employer establishes a program for their employees. The employer contribution won’t be taxed to the employee at the time of the contribution, but the money will be taxable upon withdrawal, similar to a 401k match from an employer. The employer contribution counts toward the $5,000 overall contribution limit, similar to how it works in an employer contribution to an HSA.

It might be wishful thinking that an employer will establish such a program. It’s unclear whether a one-person business can set up a program for the owner’s children.

Federal and state governments and charities can also contribute to Trump accounts for a broad class of children in an area. Their contributions don’t count toward the $5,000 annual limit. Treasury Secretary Scott Bessent said Trump Accounts could lay the groundwork for privatizing Social Security (and maybe other state child welfare programs?).

Investments

Investments in a Trump account are limited to index funds and ETFs that track a U.S. equity index, such as the S&P 500, and charge an expense ratio of no more than 0.1% a year. The law specifically says the index must be “comprised of equity investments in primarily United States companies” — no bonds, no international stocks, no target date funds.

As in other IRAs, earnings aren’t taxed while the money stays in the Trump Account.

Distributions

No distributions are allowed until January 1 of the calendar year in which the child reaches age 18. The money is locked up except for rollovers and withdrawal of excess contributions over the annual contribution limit. You can’t take any money out before the year the kid turns 18, even if you’re willing to pay a penalty.

The law doesn’t explicitly say what happens when the child is no longer eligible to receive contributions, but the general rule says a Trump Account shall be treated as a Traditional IRA. I take it to mean that it just turns into a regular Traditional IRA in the child’s name on January 1 of the calendar year in which the child turns 18. In that case, all existing rules on a regular Traditional IRA will apply at that point (requiring earned income to contribute, annual contribution limits, tax and penalty on early withdrawals, converting to Roth, etc.).

Because the contributions from parents and family members aren’t tax-deductible, they’re not taxed again on withdrawal. Only the earnings and contributions from the federal government, employers, states, and charities are taxed. This means you must track the cumulative contributions over the years, similar to how non-deductible contributions to a Traditional IRA are tracked on a Form 8606.

Should you open a Trump account for your kid when it becomes available? It’s a no-brainer to collect the one-time $1,000 from the government if you have a newborn in 2025 through 2028. Beyond that, it depends on how much money you have and what the money is for.

Trump Account vs Custodial Roth IRA

If the child has earned income from a job or self-employment, a custodial Roth IRA is better than a Trump Account. Earnings in a custodial Roth IRA are tax-free from the get-go.

You can do both a custodial Roth IRA and a Trump Account if you have more money to contribute. A contribution to the child’s Trump Account doesn’t eat into the contribution limit for a custodial Roth IRA based on the child’s earned income, and vice versa.

Trump Account vs 529 Plan

Many parents save for their kids’ college education in a 529 plan. Distributions from a 529 account are tax-free if they’re used for qualified education expenses.

A 529 plan is better if the money is for college. It’s tax-free, whereas earnings built up in a Trump Account will be taxed as ordinary income upon withdrawal. Many states also offer tax incentives for contributing to a 529 plan.

Trump Account vs Custodial Account (UTMA/UGMA)

If you want to give money to your child for something other than college expenses, you can already set up a custodial account, also known as a UTMA/UGMA account. Mainstream brokers all offer custodial accounts. Buying is similar to using a custodial account.

A custodial account is taxable, but a child receives favorable tax treatment on a set amount of investment income each year. The first $1,350 in investment income in 2025 is tax-free. The next $1,350 is taxed at the child’s tax rate. Investment income received by a dependent above $2,700 in 2025 is taxed at the parent’s rate.

A custodial account is more flexible. There’s no limit to how much you can put into a custodial account. You can invest in more diversified investments, not just U.S. stocks. You can withdraw from a custodial account at any time when the money is used for the benefit of the child. If you invest tax efficiently, there won’t be much tax to pay each year, and the child pays the lower tax rate on long-term capital gains (possibly at 0%) when they eventually sell.

A custodial account is still the way to go if you want flexibility.

Converting to Roth

Besides the one-time $1,000 for a newborn in 2025 through 2028, the lure of a Trump Account is in converting the money to a Roth IRA when the child is no longer a dependent. The earnings built up over the years will be taxed as ordinary income in the year of the conversion, but maybe the child is still in a low tax bracket at that time. The Roth IRA will provide a good base for the child’s retirement.

Legislative Risk

However, if the child is already 15 or 16, contributing $5,000 a year for only a few years won’t gain much in tax benefits over a regular custodial account, even when the money is converted into a Roth IRA at age 18. If the child is still young, it’s far from certain whether the law will stay in its current form until the child is 18.

Many things can happen in 18 years while the money is locked up. It’s an understatement to say that the Trump branding is more controversial than Roth’s. A good percentage of people in the country may not want it associated with their kids. If the political regime changes, the Trump Account might be repealed. You may end up with an orphan account that has nowhere to go, or you may get a forced distribution. Your child may never see the opportunity to convert it to a Roth IRA.

We’ve seen several initiatives that didn’t go as well as the government had hoped.

The Obama administration introduced a “myRA” account in 2014 for people without a workplace retirement plan. Only 0.05% of all people who could’ve signed up did so. The program was shut down after two years.

Coverdell Education Savings Account (“Coverdell ESA”) launched as a savings vehicle for children’s education. It fell to the wayside after 529 plans became available, to the point that Fidelity and Vanguard stopped accepting new contributions to Coverdell ESAs many years ago. Vanguard recently asked all existing Coverdell account holders to close their accounts.

The SECURE 2.0 Act created a “Saver’s Match” program to match the retirement contributions from low- to moderate-income Americans. It was supposed to begin in 2027, but now the entire program has been killed. Not a single person received any Saver’s Match.

Priority

I would place the Trump Account below the existing tried-and-true account types in terms of attractiveness:

Custodial Roth IRA if the child has earned income;529 plan for education;Custodial (UTMA/UGMA) account for flexibility.

If you have more money than you know what to do with for a child after all the accounts above are fully funded, maybe take a chance on a Trump Account when it becomes available and plan to have the child convert it to a Roth IRA after turning 18. Just be fully aware that the account may end before there’s any opportunity to convert it to a Roth IRA.

***

You’ll find more deep dives on recent changes from the 2025 Trump tax law in the full OBBBA series.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post Trump Account: IRA for Kids With No Earned Income appeared first on The Finance Buff.

My other post listed 2026 401k and IRA contribution and income limits. I also calculated the inflation-adjusted tax brackets and some of the most commonly used numbers in tax planning for 2026 using the published inflation numbers and the same formula prescribed in the tax law.

Table of Contents2025 2026 Standard Deduction2025 2026 Tax Brackets2025 2026 Capital Gains TaxNet Investment Income Tax2025 2026 Estate and Trust Tax Brackets2025 2026 Qualified Charitable Distributions (QCD) Limit2025 2026 2027 Medicare IRMAA2025 2026 Gift Tax Exclusion2025 2026 Savings Bonds Tax-Free Redemption for College Expenses2025 2026 Standard Deduction

You don’t pay federal income tax on every dollar of your income. You deduct an amount from your income before you calculate taxes. Over 80% of all taxpayers take the standard deduction. The other 10-20% itemize deductions when their total deductions exceed the standard deduction. In other words, you’re deducting a larger amount than your allowed deductions when you take the standard deduction. Don’t feel bad about taking the standard deduction!

The basic standard deduction in 2025 and 2026 is:

20252026 (Projected)Single or Married Filing Separately$15,750$16,100Head of Household$23,625$24,150Married Filing Jointly$31,500$32,200Basic Standard Deduction

People who are age 65 and over have a higher standard deduction than the basic standard deduction.

20252026 (Projected)Single, age 65 and over$17,750$18,150Head of Household, age 65 and over$25,625$26,200Married Filing Jointly, one person age 65 and over$33,100$33,850Married Filing Jointly, both age 65 and over$34,700$35,500Standard Deduction for age 65 and over

The 2025 Trump tax law raised the standard deduction for 2025. The increases are reflected in the tables above. It also introduced a new senior deduction for people age 65 and over. The senior deduction is in addition to the standard deduction. It isn’t part of the standard deduction. See Social Security Is Still Taxed Under the New 2025 Trump Tax Law for more on the senior deduction.

People who are blind have a higher standard deduction.

20252026 (Projected)Single or Head of Household, blind+$2,000$2,050Married Filing Jointly, one person is blind+$1,600$1,650Married Filing Jointly, both are blind+$3,200$3,300Additional Standard Deduction for Blindness

Source: IRS Rev. Proc. 2024-40, One Big Beautiful Bill Act, author’s calculations.

2025 2026 Tax Brackets

The tax brackets are based on taxable income, which is AGI minus various deductions. The tax brackets in 2025 are:

SingleHead of HouseholdMarried Filing Jointly10%$0 – $11,925$0 – $17,000$0 – $23,85012%$11,925 – $48,475$17,000 – $64,850$23,850 – $96,95022%$48,475 – $103,350$64,850 – $103,350$96,950 – $206,70024%$103,350 – $197,300$103,350 – $197,300$206,700 – $394,60032%$197,300 – $250,525$197,300 – $250,500$394,600 – $501,05035%$250,525 – $626,350$250,500 – $626,350$501,050 – $751,60037%Over $626,350Over $626,350Over $751,6002025 Tax Brackets

Source: IRS Rev. Proc. 2024-40.

The 2025 Trump tax law raised the top of the 10% and 12% brackets in 2026 by a little less than 2% above the normal inflation adjustments. The projected 2026 tax brackets are:

SingleHead of HouseholdMarried Filing Jointly10%$0 – $12,400$0 – $17,700$0 – $24,80012%$12,400 – $50,375$17,700 – $67,450$24,800 – $100,75022%$50,375 – $105,675$67,450 – $105,650$100,750 – $211,35024%$105,675 – $201,775$105,650 – $201,750$211,350 – $403,55032%$201,775 – $256,225$201,750 – $256,200$403,550 – $512,45035%$256,225 – $640,575$256,200 – $640,550$512,450 – $768,65037%Over $640,575Over $640,550Over $768,650Projected 2026 Tax Brackets

Source: Author’s calculations.

A common misconception is that when you get into a higher tax bracket, all your income is taxed at the higher rate and you’re better off not having the extra income. That’s not true. Tax brackets work incrementally. If you’re $1,000 into the next tax bracket, only $1,000 is taxed at the higher rate. It doesn’t affect the income in the previous brackets.

For example, someone single with a $70,000 AGI in 2025 will pay:

First 15,750 (the standard deduction)0%Next $11,92510%Next $36,550 ($48,475 – $11,925)12%Final $5,77522%Progressive Tax Rates

This person is in the 22% tax bracket, but only a tiny fraction of the $70,000 AGI is taxed at 22%. Most of the income is taxed at 0%, 10%, and 12%. The blended tax rate is only 9.8%. If this person doesn’t earn the final $5,775, they are in the 12% bracket instead of the 22% bracket, but the blended tax rate only decreases slightly from 9.8% to 8.7%. Making the extra income doesn’t cost this person more in taxes than the additional income.

Don’t be afraid of going into the next tax bracket.

2025 2026 Capital Gains Tax

When your other taxable income (after deductions) plus your qualified dividends and long-term capital gains are below a cutoff, you will pay 0% federal income tax on your qualified dividends and long-term capital gains under this cutoff.

This is illustrated by the chart below. Taxable income is the part above the black line, after subtracting deductions. A portion of the qualified dividends and long-term capital gains is taxed at 0% when the other taxable income plus these qualified dividends and long-term capital gains are under the red line.

The red line is close to the top of the 12% tax bracket but they don’t line up exactly.

20252026 (Projected)Single or Married Filing Separately$48,350$49,450Head of Household$64,750$66,200Married Filing Jointly$96,700$98,900Maximum Zero Rate Amount for Qualified Dividends and Long-term Capital Gains

For example, suppose a married couple filing jointly has $70,000 in other taxable income (after deductions) plus $30,000 in qualified dividends and long-term capital gains in 2025. The maximum zero rate amount cutoff is $96,700. $26,700 of the qualified dividends and long-term capital gains ($96,700 – $70,000) is taxed at 0%. The remaining $30,000 – $26,700 = $3,300 is taxed at 15%.

A similar threshold exists on the upper end for qualified dividends and long-term capital gains. When your other taxable income (after deductions) plus your qualified dividends and long-term capital gains are above a cutoff, you will pay 20% federal income tax instead of 15% on your qualified dividends and long-term capital gains above this cutoff.

20252026 (Projected)Single$533,400$545,500Head of Household$566,700$579,550Married Filing Jointly$600,050$613,650Married Filing Separately$300,000$306,800Maximum 15% Rate Amount for Qualified Dividends and Long-term Capital Gains

Source: IRS Rev. Proc. 2024-40, author’s calculations.

Net Investment Income Tax

Net Investment Income Tax (NIIT) is a 3.8% tax on the portion of interest, dividends, and capital gains that makes your modified adjusted gross income exceed these thresholds:

MAGI ThresholdSingle$200,000Head of Household$200,000Married Filing Jointly$250,000Married Filing Separately$125,000Net Investment Income Tax MAGI Threshold

These thresholds are fixed by law. They are not adjusted for inflation. You pay a 3.8% tax on the amount your MAGI exceeds these thresholds or your total interest, dividends, and capital gains, whichever is less.

Suppose you’re married filing jointly and you have a $300,000 MAGI, which includes $10,000 in interest, dividends, and capital gains. Although your MAGI exceeds the $250,000 threshold by $50,000, you will pay 3.8% in NIIT on only $10,000 because you have only $10,000 in net investment income.

Suppose you’re married filing jointly and you have $260,000 MAGI, which includes $150,000 in interest, dividends, and capital gains. Although you have $150,000 in net investment income, you will pay 3.8% in NIIT only on $10,000 because your MAGI exceeds the $250,000 threshold by only $10,000.

2025 2026 Estate and Trust Tax Brackets

Estates and trusts have different tax brackets than individuals. These apply to non-grantor trusts and estates that retain income as opposed to distributing the income to beneficiaries. Grantor trusts (including the most common revocable living trusts) don’t pay taxes separately. The income of a grantor trust is taxed to the grantor at the grantor’s tax brackets.

Here are the tax brackets for estates and trusts in 2025 and 2026:

20252026 (Projected)10%$0 – $3,150$0 – $3,30024%$3,150 – $11,450$3,300 – $11,70035%$11,450 – $15,650$11,700 – $16,00037%over $15,650over $16,000Estate and Trust Tax Brackets

Source: IRS Rev. Proc. 2024-40, author’s calculations.

2025 2026 Qualified Charitable Distributions (QCD) Limit

People older than 70-1/2 can make Qualified Charitable Distributions (QCD) from their Traditional IRA directly to qualifying charitable organizations. QCDs count toward the Required Minimum Distribution (RMD).

The total QCDs can’t exceed $108,000 in 2025. The limit will go up to $111,000 in 2026.

The QCD limit is per person. If you’re married and both you and your spouse are over 70-1/2, you can make QCDs up to the limit separately from your respective IRAs.

Source: IRS Rev. Proc. 2024-40, author’s calculations.

2025 2026 2027 Medicare IRMAA

People on Medicare Part B and Part D pay a higher Medicare premium when their Modified Adjusted Gross Income from two years ago crosses certain thresholds. I track these in Medicare IRMAA Premium MAGI Brackets.

2025 2026 Gift Tax Exclusion

Each person can give another person up to a set amount in a calendar year without having to file a gift tax form. Not that filing a gift tax form is onerous, but many people avoid it if they can. This gift tax exclusion amount will stay the same at $19,000 in 2025 and 2026.

20252026 (Projected)Gift Tax Exclusion$19,000$19,000Gift Tax Exclusion

Source: IRS Rev. Proc. 2024-40, author’s calculations.

The gift tax exclusion is counted by each giver to each recipient. As a giver, you can give up to $19,000 each in 2025 to an unlimited number of people without having to file a gift tax form. If you give $19,000 to each of your 10 grandkids in 2025, you still won’t be required to file a gift tax form. Any recipient can also receive a gift from an unlimited number of people. If a grandchild receives $19,000 from each of his or her four grandparents in 2025, no taxes or tax forms will be required.

2025 2026 Savings Bonds Tax-Free Redemption for College Expenses

If you cash out U.S. Savings Bonds (Series I or Series EE) for college expenses or transfer to a 529 plan, your modified adjusted gross income must be under certain limits to get a tax exemption on the interest. See Cash Out I Bonds Tax Free For College Expenses Or 529 Plan.

Here are the income limits in 2025 and 2026. The limits are in a phase-out range. You get a full exemption if your income is below the lower number in the range. You get no exemption if your income is above the higher number in the range. You get a partial exemption if your income falls within the range.

20252026 (Projected)Single, Head of Household$99,500 – $114,500$101,750 – $116,750Married Filing Jointly$149,250 – $179,250$152,650 – $182,650Income Limit for Tax-Free Savings Bond Redemption for Higher Education

Source: IRS Rev. Proc. 2024-40, author’s calculations.

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Retirement account contribution limits are adjusted for inflation each year. Most contribution limits and income limits are projected to go up in 2026.

Before the IRS publishes the official adjustments for the next year in late October or early November, I calculate them based on the published inflation numbers by the same method the IRS uses, as stipulated by law. I’ve maintained a track record of 100% accuracy ever since I started doing these calculations.

Table of Contents2025 2026 401k/403b/457/TSP Elective Deferral Limit2025 2026 Annual Additions Limit2025 2026 SEP-IRA Contribution Limit2025 2026 Annual Compensation Limit2025 2026 Highly Compensated Employee Threshold2025 2026 SIMPLE 401k and SIMPLE IRA Contribution Limit2025 2026 Traditional and Roth IRA Contribution Limit2025 2026 Deductible IRA Income Limit2025 2026 Roth IRA Income Limit2025 2026 Healthcare FSA Contribution Limit2025 2026 HSA Contribution Limit2025 2026 Saver’s Credit Income LimitAll Together2025 2026 Tax Brackets and Standard Deduction2025 2026 401k/403b/457/TSP Elective Deferral Limit

The 401k/403b/457/TSP contribution limit is $23,500 in 2025. It will go up by $1,000 to $24,500 in 2026.

If you are age 50 or over by December 31, the catch-up contribution limit is $7,500 in 2025. It will go up by $500 to $8,000 in 2026.

If your age is 60 through 63 by December 31, you have a higher catch-up limit of $11,250 in 2025. It will go up by $250 to $11,500 in 2026.

If your prior year’s wages from the employer were over $145,000, your 2025 catch-up contribution must go to a Roth subaccount in the plan. The threshold will go up by $5,000 to $150,000 in 2026. The IRS has postponed enforcing this rule for 2025, but it will start enforcing it in 2026.

Employer match or profit-sharing contributions aren’t included in these limits. If you work for multiple employers in the same year or if your employer offers multiple plans, you have one single employee contribution limit for 401k, 403b, and the federal government’s Thrift Savings Plan (TSP) across all plans.

The 457 plan limit is separate from the 401k/403b/TSP limit. You can contribute the maximum to both a 401k/403b/TSP plan and a 457 plan.

2025 2026 Annual Additions Limit

The limit on total contributions from both the employer and the employee to all defined contribution plans by the same employer is $70,000 in 2025. It will increase to $72,000 in 2026.

The age-50-or-over catch-up contribution is separate from this limit. If you work for multiple employers in the same year, you have a separate annual additions limit for each unrelated employer.

2025 2026 SEP-IRA Contribution Limit

If you have self-employment income, you can contribute a percentage of your self-employment income to a SEP-IRA. The SEP-IRA contribution limit is always the same as the annual additions limit for a 401k plan. It’s $70,000 in 2025, and it will increase to $72,000 in 2026.

Because the SEP-IRA doesn’t allow employee contributions, unless your self-employment income is well above $200,000, you have a higher contribution limit if you use a solo 401k. See Solo 401k When You Have Self-Employment Income.

2025 2026 Annual Compensation Limit

The maximum annual compensation that can be considered for making contributions to a retirement plan is always 5x the annual additions limit. Therefore the annual compensation limit is $350,000 in 2025. It will increase to $360,000 in 2026.

2025 2026 Highly Compensated Employee Threshold

If your employer limits your contribution because you’re a Highly Compensated Employee (HCE), the minimum compensation to be counted as an HCE is $160,000 in 2025. It will stay the same at $160,000 in 2026.

2025 2026 SIMPLE 401k and SIMPLE IRA Contribution Limit

Some smaller employers offer a SIMPLE 401k or a SIMPLE IRA plan instead of a regular 401k plan. SIMPLE 401k and SIMPLE IRA plans have a lower contribution limit than standard 401k plans. The contribution limit for SIMPLE 401k and SIMPLE IRA plans is $16,500 in 2025. It will go up to $17,000 in 2026.

Employers with fewer than 25 employees and larger employers that contribute more to the plan have a higher contribution limit. The regular contribution limit to their SIMPLE plans is $17,600 in 2025. It will go up to $18,500 in 2026.

If you are 50 or over by December 31, the catch-up contribution limit in a SIMPLE 401k or SIMPLE IRA plan is $3,500 in 2025 ($3,850 at smaller employers) for ages 50-59 and 64 and over, and $5,250 for ages 60 through 63. It will be $4,000 in 2026 for ages 50-59 and 64 and over, and $5,000 for ages 60 through 63. The IRS may keep the catch-up limit for ages 60 through 63 at $5,250 in 2026.

Employer contributions to a SIMPLE 401k or SIMPLE IRA plan aren’t included in these limits.

2025 2026 Traditional and Roth IRA Contribution Limit

You need taxable compensation (“earned income”) to contribute to a Traditional or Roth IRA but there’s no age limit. The Traditional IRA or Roth IRA contribution limit is $7,000 in 2025. It will increase by $500 to $7,500 in 2026.

If you are age 50 or over by December 31, the catch-up limit is $1,000 in 2025. It will increase by $100 to $1,100 in 2026.

The IRA contribution limit is shared between the Traditional IRA and the Roth IRA. If you contribute the maximum to a Roth IRA, you can’t contribute the same maximum again to a Traditional IRA, and vice versa.

The IRA contribution limit and the 401k/403b/TSP or SIMPLE contribution limit are separate. You can contribute the respective maximum to both a 401k/403b/TSP/SIMPLE plan and a Traditional IRA or Roth IRA.

2025 2026 Deductible IRA Income Limit

The income limit for taking a full deduction for your contribution to a Traditional IRA while participating in a workplace retirement plan in 2025 is $79,000 for single filers and $126,000 for a married couple filing jointly. The deduction completely phases out when your income goes above $89,000 for singles and $146,000 for married filing jointly.

The full-deduction income limits will go up in 2026 to $81,000 for single filers and to $129,000 for a married couple filing jointly. The deduction will completely phase out when your income goes above $91,000 for singles and $149,000 for married filing jointly.

When you’re not covered in a workplace retirement plan but your spouse is, the income limit for taking a full deduction for your contribution to a Traditional IRA is $236,000 in 2025. The deduction completely phases out when your joint income goes above $246,000.

The full-deduction income limit will go up to $242,000 in 2026. The deduction completely phases out when your joint income goes above $252,000.

There’s no income limit if neither you nor your spouse is covered by a workplace retirement plan.

When you exceed the income limit for taking a deduction for contributing to a Traditional IRA, consider contributing to a Roth IRA instead.

2025 2026 Roth IRA Income Limit

The income limit for contributing the maximum to a Roth IRA depends on your filing status. The income limit in 2025 is $150,000 for singles and $236,000 for married filing jointly. These limits will go up to $153,000 for singles and $242,000 for married filing jointly in 2026.

You can’t contribute anything directly to a Roth IRA when your income goes above $165,000 in 2025 for singles and $246,000 for married filing jointly. These income limits will go up to $168,000 for singles and $252,000 for married filing jointly in 2026.

Your contribution eligibility is prorated in the income phase-out range. When you exceed the income limit for contributing to a Roth IRA, consider doing the backdoor Roth. See Backdoor Roth: A Complete How-To.

2025 2026 Healthcare FSA Contribution Limit

The Healthcare FSA contribution limit is $3,300 per person in 2025. It will go up to $3,400 in 2026.

Some employers allow carrying over some unused amount to the following year. The maximum amount that can be carried over to the following year is set to 20% of the contribution limit in the current tax year. As a result, the carryover limit is $660 per person in 2025. It will go up to $680 in 2026.

2025 2026 HSA Contribution Limit

You need to have a High Deductible Health Plan with no other coverage to contribute to a Health Savings Account (HSA). Not all high-deductible health insurance is HSA-eligible, but the 2025 Trump tax law made all Bronze plans from an ACA marketplace HSA-eligible starting in 2026.

Medicare or your spouse having a general-purpose healthcare FSA counts as having other coverage, which makes you ineligible to contribute to an HSA.

You don’t need taxable compensation (“earned income”) to contribute to an HSA.

The HSA contribution limit in 2025 is $4,300 for single coverage and $8,550 for family coverage. These limits will go up in 2026 to $4,400 for single coverage and $8,750 for family coverage. The new limits were announced previously in the spring. See HSA Contribution Limits.

Those who are 55 or older by December 31 can contribute an additional $1,000. If you are married and both of you are 55 or older by December 31, each of you can contribute the additional $1,000, but the contributions must go into separate HSAs in each person’s name.

2025 2026 Saver’s Credit Income Limit

You may be eligible to receive a Retirement Savings Contributions Credit (“Saver’s Credit”) of up to $2,000 per person when you contribute to a retirement account or an ABLE account.

The income limits for receiving the credit in 2025 for married filing jointly are $47,500 (50% credit), $51,000 (20% credit), and $79,000 (10% credit). These limits will go up in 2026 to $48,500 (50% credit), $52,500 (20% credit), and $80,500 (10% credit).

The limits for singles are half of the limits for married filing jointly. The 2025 limits are $23,750 (50% credit), $25,500 (20% credit), and $39,500 (10% credit). The 2026 limits will be $24,250 (50% credit), $26,250 (20% credit), and $40,250 (10% credit).

The 2025 Trump tax law reduced the scope of the Saver’s Credit. It will apply only when you contribute to an ABLE account starting in 2027. Contributions to retirement accounts will no longer qualify after 2026.

All Together20252026 (Projected)Increase401k, 403b, or 457 plan employee contributions limit$23,500$24,500$1,000401k, 403b, or 457 plan ages 50-59 and 64+ catch-up contributions limit$7,500$8,000$500401k, 403b, or 457 plan ages 60-63 catch-up contributions limit$11,250$11,500$250SIMPLE plan contributions limit$16,500$17,000$500SIMPLE plan contributions limit at eligible employers$17,600$18,500$900SIMPLE plan ages 50-59 and 64+ catch-up contributions limit$3,500$4,000$500SIMPLE plan ages 50-59 and 64+ catch-up contributions limit at eligible employers$3,850$4,000$150SIMPLE plan ages 60-63 catch-up contributions limit$5,250$5,000 or $5,250-$250 or NoneMaximum annual additions to all defined contribution plans by the same employer$70,000$72,000$2,000SEP-IRA contribution limit$70,000$72,000$2,000Highly Compensated Employee definition$160,000$160,000NoneAnnual Compensation Limit$350,000$360,000$10,000Traditional and Roth IRA contribution limit$7,000$7,500$500Traditional and Roth IRA age 50+ catch-up contribution limit$1,000$1,100$100Deductible IRA income limit, single, active participant in a workplace retirement plan$79,000 – $89,000$81,000 – $91,000$2,000Deductible IRA income limit, married, active participant in a workplace retirement plan$126,000 – $146,000$129,000 – $149,000$3,000Deductible IRA income limit, married, spouse is an active participant in a workplace retirement plan$236,000 – $246,000$242,000 – $252,000$6,000Roth IRA income limit, single$150,000 – $165,000$153,000 – $168,000$3,000Roth IRA income limit, married filing jointly$236,000 – $246,000$242,000 – $252,000$6,000Healthcare FSA Contribution Limit$3,300$3,400$100HSA Contribution Limit, single coverage$4,300$4,400$100HSA Contribution Limit, family coverage$8,550$8,750$200HSA, age 55 catch-up$1,000$1,000NoneSaver’s Credit income limit, married filing jointly$47,500 (50%)
$51,000 (20%)
$79,000 (10%)$48,500 (50%)
$52,500 (20%)
$80,500 (10%)$1,000 (50%)
$1,500 (20%)
$1,500 (10%)Saver’s Credit income limit, single$23,750 (50%)
$25,500 (20%)
$39,500 (10%)$24,250 (50%)
$26,250 (20%)
$40,250 (10%)$500 (50%)
$750 (20%)
$750 (10%)

Source: IRS Notice 2024-80, author’s calculations.

2025 2026 Tax Brackets and Standard Deduction

I also calculated the 2026 income tax brackets, standard deduction, capital gains tax brackets, and the gift tax exclusion limit. Please read 2026 Tax Brackets, Standard Deduction, Capital Gains, etc.

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Retirees on Social Security receive an increase of their Social Security benefits each year known as the Cost of Living Adjustment or COLA. The COLA was 2.5% in 2025. Retirees on Social Security will once again receive a COLA in 2026. The increase will be similar to the one in 2025.

Table of ContentsAutomatic Link to InflationCPI-WQ3 Average2026 Social Security COLAMedicare PremiumsRoot for a Lower COLAAutomatic Link to Inflation

Some retirees think the COLA is given at the discretion of the President or Congress, and they want their elected officials to take care of seniors by declaring a higher COLA. They blame the President or Congress when they think the increase is too small.

It was done that way before 1975, but the COLA has been automatically linked to inflation for nearly 50 years. How much the COLA will be is determined strictly by the inflation numbers. The COLA is high when inflation is high. It’s low when inflation is low. There’s no COLA when inflation is zero or negative, which happened in 2010, 2011, and 2016.

CPI-W

Specifically, the Social Security COLA is determined by the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-W is a separate index from the Consumer Price Index for All Urban Consumers (CPI-U), which is more often referenced by the media when they talk about inflation.

CPI-W tracks inflation experienced by workers. CPI-U tracks inflation experienced by consumers. There are some minor differences in how much weight different goods and services have in each index but CPI-W and CPI-U look practically identical when you put them in a chart.

CPI-W and CPI-U 1993-2023

The red line is CPI-W and the blue line is CPI-U. They differed by only smidges in 30 years.

There’s also a research CPI index called the Consumer Price Index for Americans 62 years of age and older, or R-CPI-E. This index is weighted more by the spending patterns of older Americans. Some researchers argue that the Social Security COLA should use R-CPI-E, which has increased more than CPI-W in the last 30 years.

CPI-W and R-CPI-E 1993-2023

The green line is R-CPI-E. The red line is CPI-W. R-CPI-E outpaced CPI-W in 30 years between 1993 and 2023, but not by much. Had the Social Security COLA used R-CPI-E instead of CPI-W, Social Security benefits would’ve been higher by 0.1% per year, or a little over 3% after 30 years. That’s still not much difference.

Regardless of which exact CPI index is used to calculate the Social Security COLA, it’s subject to the same overall price environment. Congress chose CPI-W 50 years ago. That’s the one we’re going with.

Q3 Average

More specifically, the Social Security COLA for next year is calculated by the increase in the average of CPI-W from the third quarter of last year to the third quarter of this year. You get the CPI-W numbers in July, August, and September of last year. Add them up and divide by three. You do the same for July, August, and September this year. Compare the two numbers and round the change to the nearest 0.1%. That’ll be the Social Security COLA for next year.

2026 Social Security COLA

The average of CPI-W from the third quarter in 2025 won’t be known until Oct. 15, 2025, when the government releases inflation numbers for September. We can estimate using the CPI-W for July and fill in blanks for August and September.

If the CPI-W in August and September stays the same as the CPI-W in July, the 2026 Social Security COLA will be 2.5%. If the CPI-W in August and September goes up at a 3% annual pace (about 0.25% per month), the 2026 Social Security COLA will be 2.7%.

Because we likely will have some inflation, I estimate the 2026 Social Security COLA will be 2.7%. It’s slightly higher than the 2.5% increase for 2025.

Medicare Premiums

If you’re on Medicare, the Social Security Administration automatically deducts the Medicare premium from your Social Security benefits. The Social Security COLA is given on the “gross” Social Security benefits before deducting the Medicare premium and any tax withholding.

Medicare will announce the standard Part B premium for 2026 in October. The increase in healthcare costs is part of the cost of living that the Social Security COLA is intended to cover. You’re still getting the full COLA even though a part of the COLA will be used toward the increase in Medicare premiums.

Retirees with a higher income pay more than the standard Medicare premiums. This is called Income-Related Monthly Adjustment Amount (IRMAA). I cover IRMAA in 2025 2026 2027 Medicare IRMAA Premium MAGI Brackets.

Root for a Lower COLA

People intuitively want a higher COLA, but a higher COLA can only be caused by higher inflation. Higher inflation is bad for retirees.

Whether inflation is high or low, your Social Security benefits will have the same purchasing power. You should think more about the purchasing power of your savings and investments outside Social Security. When inflation is high, even though your Social Security benefits get a bump, your other money loses more value to inflation. Your savings and investments outside Social Security will last longer when inflation is low.

You want a lower Social Security COLA, which means lower inflation and lower expenses.

Some people say that the government deliberately under-reports inflation. Even if that’s the case, you still want a lower COLA.

Suppose the true inflation for seniors is 3% higher than the inflation numbers reported by the government. If you get a 3% COLA when the true inflation is 6% and you get a 7% COLA when the true inflation is 10%, you are much better off with a lower 3% COLA together with 6% inflation than getting a 7% COLA together with 10% inflation. Your Social Security benefits lag inflation by the same amount either way, but you’d rather your other money outside Social Security loses to 6% inflation than to 10% inflation.

Root for lower inflation and lower Social Security COLA when you are retired.

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SALT stands for State And Local Taxes. It’s basically state and local income taxes and property tax. The 2017 Trump tax law capped the tax deduction for SALT at $10,000. If you paid more than $10,000 in state and local taxes, the amount above the $10,000 cap wasn’t deductible.

The SALT cap primarily affected high earners in high-tax states. Legislators from those states had been demanding that the SALT cap be raised or repealed. The 2025 Trump tax law — One Big Beautiful Bill Act — finally raised the SALT cap for the next few years.

Table of ContentsTemporary SALT Cap IncreaseStay In Standard DeductionBunchingSwitch to ItemizingContinue ItemizingIncome-Based PhaseoutMarriage PenaltyHigher Marginal Tax RateCalculatorTemporary SALT Cap Increase

The SALT cap goes from $10,000 to $40,000 in 2025 (one-half for married filing separately). The cap will further increase by 1% a year until 2029. Then it returns to $10,000 in 2030.

YearSALT Cap2025$40,0002026$40,4002027$40,8042028$41,2122029$41,6242030$10,000

I pay more than $10,000 in state income tax and property tax. With the SALT cap increase, my SALT deduction will be uncapped because it’s less than $40,000. Does this mean my total deductions will increase now?

Stay In Standard Deduction

Nearly 90% of taxpayers take the standard deduction. That percentage will drop slightly after the SALT cap increase, but it’s expected that over 80% of taxpayers will still take the standard deduction.

I’m in this camp. I took the standard deduction when the SALT cap was $10,000. I will continue to take the standard deduction even though I pay more than the old cap in state and local taxes. This is because when I add my other itemizable deductions (mortgage interest, charity donations, …) to the total state and local taxes I pay, it’s still lower than the standard deduction.

You will get no increase in your deductions from the SALT cap increase if you took the standard deduction under the old cap, and you’ll still take the standard deduction under the new cap (except for the rise in the standard deduction itself, unrelated to the SALT cap).

Bunching

Bunching means shifting the timing of payments to put two years’ worth of state income tax or property tax into one calendar year. You can do it with charity donations, too.

The tax deduction on the federal tax return goes by the actual date of the SALT payments, not which tax year those payments are for. If you can shift a December payment to January or a January payment to December, you may have enough SALT payments in one calendar year to push you over the hurdle of the standard deduction. Then you will alternate between itemizing in one year and taking the standard deduction next year, as opposed to taking the standard deduction in both years.

Switch to Itemizing

You will get a partial increase if you took the standard deduction before, and you will switch to itemizing after the SALT cap increase.

You get a partial increase because you must pass the hurdle of the standard deduction first. Taking the standard deduction gives you an allowance of free deductions. It’s free because everyone gets the standard deduction; you don’t have to do anything to get it. Switching from the standard deduction to itemized deductions means now you must pay for the allowance that used to be free with a part of your itemized deductions. Your deductions will increase only by what remains after you pay for the free allowance.

For example, suppose you have $5,000 in non-SALT itemizable deductions. You have $15,000 in total itemizable deductions under the old SALT cap, and the standard deduction is $31,500 for married filing jointly. You grab the $16,500 free allowance when you take the standard deduction. Suppose now your total itemized deductions under the new SALT cap are $45,000. Your SALT cap increases by $45,000 – $15,000 = $30,000, but your total deductions only increase by $45,000 – $31,500 = $13,500. You must use $16,500 from your $30,000 increase to pay for the allowance that used to be free.

Continue Itemizing

You will get the full increase if you were already itemizing deductions, and you’ll continue to do so. An increase in the SALT cap increases your SALT deduction to the amount you paid in state and local taxes, up to the new cap. This increase adds to your itemized deductions dollar for dollar.

Income-Based Phaseout

However, the new cap isn’t $40,000 for some high earners, because it has an income-based phaseout. The SALT cap drops by 30% of the Modified Adjusted Gross Income (MAGI) above $500,000. When the MAGI reaches $600,000, the SALT cap is back to the old $10,000.

The MAGI for the phaseout is the AGI for most people. It doesn’t add back untaxed Social Security or tax-free muni bond interest. The “modified” part is only for foreign earned income exclusion and residents in Puerto Rico, Guam, American Samoa, and the Northern Mariana Islands.

The table below shows how the SALT cap is phased out with income. Interpolate for an income between two rows in this table.

2025 MAGISALT Cap$500,000 or less$40,000$510,000$37,000$520,000$34,000$530,000$31,000$540,000$28,000$550,000$25,000$560,000$22,000$570,000$19,000$580,000$16,000$590,000$13,000$600,000 or more$10,0002025 SALT Cap Phaseout for Single and Married Filing Jointly

The starting point for the phaseout also increases by 1% a year through 2029. There’s no phaseout in 2030 when the SALT cap goes back to $10,000.

YearPhaseout Starts At2025$500,0002026$505,0002027$510,0502028$515,1512029$520,3022030No phaseoutMarriage Penalty

The $500,000 income threshold for the phaseout is the same for both single and married filing jointly. It carries a huge marriage penalty. Two single persons, each earning $400,000, can deduct up to $80,000 between the two of them. A married couple earning $800,000 is phased out to a $10,000 cap. Married filing separately doesn’t help because both the phaseout threshold and the cap are cut in half.

Higher Marginal Tax Rate

The SALT cap phaseout also increases the marginal tax rate in the phaseout income range. The tax bracket in that income range is normally 32% or 35%. Because a $10,000 increase in the phaseout income range also reduces the SALT cap by $3,000, the marginal tax rate becomes 32% * 1.3 = 41.6% or 35% * 1.3 = 45.5% when the SALT paid is limited by the cap.

High-earners in the phaseout income range should do all-out pre-tax contributions to lower their AGI.

Calculator

I created a calculator to show whether you’ll see no increase, a partial increase, or a full increase from the new SALT cap. The calculator takes into account both the standard deduction and the SALT cap phaseout at higher incomes. It calculates the federal income tax before and after the SALT cap increase to show the tax savings.

Tax Filing Status: Single
Head of Household
Married Filing JointlyI’m 65 by 12/31Spouse (if filing jointly) is 65 by 12/31Adjusted Gross Income (AGI), everything included:Qualified dividends and long-term capital gains included in the AGIUncapped SALT paidOther itemizable deductions (mortgage interest, charity donations, …)

A higher SALT cap increases your standard or itemized deductions by $, from $ to $.

Your federal income tax is approximately $ before the SALT cap increase. It’s approximately $ after.

You save $, which is % of your AGI.

The calculated tax does not include the Net Investment Income Tax (NIIT).

***

Most people will see no benefit from the SALT cap increase because they will continue to take the standard deduction. Some will see a partial increase in their deductions when they start itemizing. Only people who were already itemizing deductions before will see the full increase, unless they get phased out.

You’ll find more deep dives on recent changes from the 2025 Trump tax law in the full OBBBA series.

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The post Calculator: Effect of Higher SALT Cap in 2025 Trump Tax Law appeared first on The Finance Buff.

SALT stands for State And Local Taxes. It’s basically state and local income taxes and property tax. The 2017 Trump tax law capped the tax deduction for SALT at $10,000. If you paid more than $10,000 in state and local taxes, the amount above the $10,000 cap wasn’t deductible.

Table of ContentsTemporary SALT Cap IncreaseStay In Standard DeductionSwitch to ItemizingContinue ItemizingIncome-Based PhaseoutCalculatorTemporary SALT Cap Increase

The 2025 Trump tax law — One Big Beautiful Bill Act — increased the SALT cap from $10,000 to $40,000 in 2025 (one-half for married filing separately). The cap further increases by 1% a year until 2029. Then it goes back to $10,000 in 2030.

YearSALT Cap2025$40,0002026$40,4002027$40,8042028$41,2122029$41,6242030$10,000

I pay more than $10,000 in state income tax and property tax. With the SALT cap increase, my SALT deduction will be uncapped because it’s less than $40,000. Does this mean my total deductions will increase now?

Stay In Standard Deduction

Nearly 90% of taxpayers take the standard deduction. That percentage will drop a little bit after the SALT cap increase, but it’s expected that over 80% of taxpayers will still take the standard deduction.

I’m in this camp. I took the standard deduction when the SALT cap was $10,000. I will continue to take the standard deduction even though I pay more than the old cap in state and local taxes. This is because when I add my other itemizable deductions (mortgage interest, charity donations, …) to the total state and local taxes I pay, it’s still lower than the standard deduction.

You will get no increase in your deductions from the SALT cap increase if you took the standard deduction under the old cap, and you’ll still take the standard deduction under the new cap (except for the increase in the standard deduction itself, unrelated to the SALT cap).

Switch to Itemizing

You will get a partial increase if you took the standard deduction before, and you will switch to itemizing after the SALT cap increase.

You get a partial increase because you must pass the hurdle of the standard deduction first. Taking the standard deduction gives you an allowance of free deductions. It’s free because everyone gets the standard deduction. You don’t have to do anything to get it. Switching from the standard deduction to itemized deductions means now you must pay for the allowance that used to be free with a part of your itemized deductions. Your deductions will increase only by what remains after you pay for the free allowance.

For example, suppose you have $5,000 in non-SALT itemizable deductions. You have $15,000 in total itemizable deductions under the old SALT cap, and the standard deduction is $31,500 for married filing jointly. You grab the $16,500 free allowance and take the standard deduction. Suppose now your total itemized deductions under the new SALT cap are $45,000. Your SALT cap increases by $45,000 – $15,000 = $30,000, but your total deductions only increase by $45,000 – $31,500 = $13,500. You must use $16,500 from your $30,000 increase to pay for the allowance that used to be free.

Continue Itemizing

You will get the full increase if you were already itemizing deductions, and you’ll continue to do so. An increase in the SALT cap increases your SALT deduction to the amount you paid in state and local taxes, up to the new cap. This increase adds to your itemized deductions dollar for dollar.

Income-Based Phaseout

However, the new cap isn’t $40,000 for high earners, because it has an income-based phaseout. The SALT cap drops by 30% of the Modified Adjusted Gross Income (MAGI) above $500,000. When the MAGI reaches $600,000, the SALT cap is back to the old $10,000.

The MAGI is the AGI for most people. It doesn’t add back untaxed Social Security or tax-free muni bond interest. The “modified” part is only for foreign earned income exclusion and residents in Puerto Rico, Guam, American Samoa, and the Northern Mariana Islands.

The $500,000 income threshold for the phaseout is the same for both single and married filing jointly. It carries a huge marriage penalty. Two single persons, each earning $400,000, can deduct up to $80,000 in state and local taxes paid. A married couple earning $800,000 is phased out to a $10,000 cap. Married filing separately doesn’t help because both the phaseout threshold and the cap are cut in half.

MAGISALT Cap$500,000 or less$40,000$510,000$37,000$520,000$34,000$530,000$31,000$540,000$28,000$550,000$25,000$560,000$22,000$570,000$19,000$580,000$16,000$590,000$13,000$600,000 or more$10,0002025 SALT Cap Phaseout for Single and Married Filing Jointly

The starting point for the phaseout also increases by 1% a year through 2029.

YearPhaseout Starts At2025$500,0002026$505,0002027$510,0502028$515,1512029$520,3022030No phaseoutCalculator

I created a calculator to show whether you’ll see no increase, a partial increase, or a full increase from the new SALT cap. The calculator takes into account both the standard deduction and the SALT cap phaseout at higher incomes. It calculates the federal income tax before and after the SALT cap increase to show the tax savings.

[Email readers: The calculator doesn’t work in emails. Please go to the website to use the calculator.]

Tax Filing Status: Single
Head of Household
Married Filing JointlyI’m 65 by 12/31Spouse (if filing jointly) is 65 by 12/31Adjusted Gross Income (AGI), everything included:Qualified dividends and long-term capital gains included in the AGIUncapped SALT paidOther itemizable deductions (mortgage interest, charity donations, …)

A higher SALT cap increases your standard or itemized deductions by $, from $ to $.

Your federal income tax is approximately $ before the SALT cap increase. It’s approximately $ after.

You save $, which is % of your AGI.

The calculated tax does not include the Net Investment Income Tax (NIIT).

***

Most people will see no benefit from the SALT cap increase because they will continue to take the standard deduction. Some will see a partial increase in their deductions when they start itemizing. Only people who were already itemizing deductions before will see the full increase, unless they get phased out.

You’ll find more deep dives on recent changes from the 2025 Trump tax law in the full OBBBA series.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post SALT Cap Calculator: How Much Does It Lower Your Taxes? appeared first on The Finance Buff.

The new 2025 Trump tax law includes provisions for “No Tax on Tips” and “No Tax on Overtime.” I covered “No Tax on Tips” in a different post. Let’s look into “No Tax on Overtime” now. If you earn both tips and overtime pay, you can benefit from both!

Table of ContentsNon-Exempt W-2 EmployeesNot What You ThinkTemporary WindowTax WithholdingTax DeductionDollar CapIncome PhaseoutBoth Overtime and TipsCalculatorNon-Exempt W-2 Employees

In general, only W-2 employees are entitled to overtime pay. Independent contractors paid by a 1099 don’t qualify for overtime. Nor do self-employed business owners.

Among W-2 employees, for the most part, only hourly (“non-exempt”) employees are entitled to overtime pay. Most salaried (“exempt”) employees don’t receive overtime pay, regardless of the number of hours they work in a week.

Some salaried employees aren’t paid high enough to qualify as exempt employees. They’re still classified as non-exempt and entitled to overtime pay.

Exempt and non-exempt refer to the requirements mandated by the Fair Labor Standards Act of 1938. Being exempt means that the employer isn’t required to follow those requirements in its employment relationship with you. Your employer will tell you whether you’re exempt or non-exempt if you’re not sure.

If you’re currently a salaried exempt employee, it’s unlikely that your employer is willing to re-classify you as non-exempt and give you the advantage of “No Tax on Overtime.” Having you as a non-exempt employee would subject the employer to many requirements from the Fair Labor Standards Act. An employer wants to find every reason to make an employee exempt from those requirements.

Not What You Think

The Fair Labor Standards Act requires that overtime must be paid at least 1-1/2 times the regular hourly wage (“time-and-a-half”). Some state laws and union contracts require double time in some scenarios. Some employers voluntarily pay double time for holidays.

Suppose your regular hourly rate is $30/hour and you’re paid $45/hour for overtime. You receive $450 in gross overtime pay when you work 10 overtime hours in a week. You would think that “No Tax on Overtime” means you don’t pay tax on that $450, but that’s not how it works.

“No Tax on Overtime” covers only the pay premium over and above your regular hourly rate. The “No Tax” part applies to $150 out of the $450 gross overtime pay for 10 hours. You still pay taxes as usual on $300 earned at your regular $30/hour rate for those hours.

As a result, if your overtime hours are paid time-and-a-half, you’ll have no tax on only 1/3 of your gross overtime pay. If you’re paid double time, you’ll have no tax on 1/2 of the gross overtime pay.

Temporary Window

As is the case with several other provisions in the 2025 Trump tax law affecting individual taxpayers, “No Tax on Overtime” is only effective between 2025 and 2028 (inclusive). It expires at the end of 2028.

Tax Withholding

“No Tax” refers only to the federal income tax. It doesn’t change the Social Security and Medicare taxes withheld from your paychecks. It doesn’t reduce your state taxes.

The IRS will make changes to payroll tax withholding to treat overtime pay differently, but the changes won’t start until 2026. You won’t see any change in your paychecks in 2025 unless you change your tax withholding with your employer.

Tax Deduction

The IRS will add a box to the W-2 form for employers to break out the overtime premium. Until then, your employer can report the overtime pay to you outside the W-2. You will have a new tax deduction for your overtime pay premium. You’ll use it to reconcile with your tax withholding. You’ll get a higher tax refund if the tax withholding was too high.

This deduction is available whether you take the standard deduction or itemize your deductions. However, it doesn’t lower your AGI. 100% of your overtime pay will still be included in your AGI. It doesn’t make it easier for you to qualify for other tax benefits, such as the Child Tax Credit.

Dollar Cap

You may not be allowed to deduct all your overtime pay premiums. There’s a $12,500 cap ($25,000 for married filing jointly). You don’t get this tax deduction if you’re married filing separately.

Because most people are paid time-and-a-half for overtime, a $12,500 cap for the premium portion of the overtime pay translates into $25,000 at the regular hourly rate for the overtime hours. If your regular hourly rate is $25/hour, it means you can work 1,000 overtime hours in a year before you hit the cap. That’s like working 60 hours per week every week of the year.

If you’re married filing jointly, and only one of you has overtime pay, your cap is twice as high as that for a single person.

Income Phaseout

The dollar cap drops slowly as your income increases above $150,000 ($300,000 for married filing jointly). It decreases by $100 for every $1,000 of income above the threshold. The cap drops to zero when your income reaches $275,000 ($550,000 for married filing jointly).

Most people won’t be affected by the income phaseout because both the dollar cap and the phaseout threshold are set sufficiently high.

Both Overtime and Tips

“No Tax on Overtime” and “No Tax on Tips” are independent of each other. You qualify for both if you receive both overtime pay and tips. If you’re 65 or older, you also qualify for the Senior Deduction. If you take the standard deduction and you donate cash to charities, you’ll qualify for the charity donation deduction starting in 2026.

Calculator

I made a calculator to help you estimate your federal income tax before and after “No Tax on Overtime” and “No Tax on Tips.” Use the calculator to see how much you’ll benefit. Leave the tips field at 0 if you don’t receive tips. [Email readers: The calculator doesn’t work in emails. Please go to the website to try the calculator.]

If you’re married filing jointly, please include income from both of you.

Tax Filing Status: Single
Head of Household
Married Filing JointlyYou:
– Regular Hourly Rate
– Annual Overtime Hours age 65 by 12/31

Spouse:
– Regular Hourly Rate
– Annual Overtime Hours age 65 by 12/31

Your Adjusted Gross Income (AGI), eveything included:Tips included in your AGI:

Your federal income tax before “No Tax on Overtime” and “No Tax on Tips” is approximately $ minus any applicable tax credits. It’s approximately $ after.

You save $, which is % of your total overtime pay plus tips.

The calculator estimates taxes using basic assumptions. It assumes your overtime hours are paid time-and-a-half. Your taxes may be different if you have a more complex scenario.

***

You’ll find more deep dives on recent changes from the 2025 Trump tax law in the full OBBBA series.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post No Tax on Overtime in 2025 Trump Tax Law. What’s the Catch? appeared first on The Finance Buff.

The 2025 Trump tax law — One Big Beautiful Bill Act (OBBBA) — contains a provision for “No tax on tips.” It says if you earn tips, you won’t pay tax on those tips.

As you can expect, not everyone is eligible, and not all tips will have no tax. “No tax” covers only one type of tax, not all taxes. What’s the catch? Let’s take a deep dive.

Table of ContentsOccupationVoluntary Tips OnlyProperly ReportedTemporary WindowTax WithholdingTax DeductionDollar CapIncome PhaseoutCalculatorOccupation

First of all, you must be in “an occupation which customarily and regularly received tips on or before December 31, 2024.” Don’t think you can run to your boss or your clients and have a part of your pay classified as tips if you’re not in those occupations.

Certain lines of business are automatically excluded. These include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services. You don’t qualify whether you work as an owner or an employee and receive tips in these businesses.

“Performing arts” stands out in this list. Does that mean a band or a singer won’t qualify if they receive tips?

Voluntary Tips Only

A tip qualifies only if it “is paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor.” I guess this means that a mandatory 20% service fee for a group of six or more won’t count.

The tips can be either cash or card charges. Shared tips count too.

Properly Reported

If you’re in the right occupation, it doesn’t matter whether you’re a W-2 employee or you’re paid by a 1099. Restaurant and hotel employees paid by a W-2 qualify. Uber and DoorDash drivers paid by a 1099 qualify as well.

The tips must be reported to you and the IRS on the W-2 or 1099. Or you can file Form 4137 with your tax return to report tips in addition to the amount on those W-2 or 1099 forms.

Currently, the W-2 form only has a box for allocated tips. Unallocated tips are mixed with regular pay in other boxes on the W-2. 1099-NEC and 1099-K forms don’t have a separate field for tips right now. The IRS will have to amend those forms with additional boxes to break out tips. Until then, your employer or payor can report the tips to you separately outside the W-2 or 1099.

Temporary Window

“No tax on tips” is only effective between 2025 and 2028 (inclusive). It expires at the end of 2028.

Tax Withholding

This provision only affects your federal income tax. It doesn’t change the Social Security and Medicare taxes withheld from your paychecks, or if you’re paid by a 1099, the self-employment tax you must pay in addition to the regular income tax. It doesn’t reduce your state taxes.

The IRS will make changes to payroll tax withholding to treat tips differently, but the changes won’t start until 2026. You won’t see any change in your paychecks in 2025 unless you change your tax withholding with your employer.

Tax Deduction

You will have a new tax deduction for your income from tips. You’ll use it to reconcile with changes to your tax withholding. You’ll get a higher tax refund if the tax withholding was too high.

This deduction is available whether you take the standard deduction or itemize your deductions. However, it doesn’t lower your AGI. Your income from tips is still included in your AGI. It doesn’t make it easier for you to qualify for other tax benefits, such as the Child Tax Credit.

Dollar Cap

You may not be able to deduct all your tips. There’s a $25,000 cap. This cap is the same whether your tax filing status is single, head of household, or married filing jointly.

I guess Congress thinks that a married couple has at most one person earning tips. Therefore, the dollar cap is the same for a single person and a married couple. If you’re married, and both of you earn tips, the dollar cap for your combined tips is the same as that for a single person.

Filing separate returns doesn’t help, because you aren’t allowed this tax deduction if you’re married filing separately.

If you earn tips in a self-employed business (for instance, a sole proprietor hairdresser) and you deduct business expenses, the dollar cap is also limited by the net profit after all business expenses. If you received $20,000 in tips but the business only made $15,000 in net profit, you can only deduct $15,000.

Income Phaseout

The $25,000 cap goes down slowly as your income increases above $150,000 ($300,000 for married filing jointly). It decreases by $100 for every $1,000 of income above the threshold. The cap drops to zero when your income gets to $400,000 ($550,000 for married filing jointly).

Most people receiving tips don’t have an income that high and won’t be affected by the income phaseout.

Calculator

I made a calculator to help you estimate your federal income tax before and after “no tax on tips.” Use the calculator to see how much you’ll benefit. [Email readers: The calculator doesn’t work in emails. Please go to the website to try the calculator.]

If you’re married filing jointly, please include income and tips from both of you.

Tax Filing Status: Single
Head of Household
Married Filing JointlyI’m 65 by 12/31Spouse (if filing jointly) is 65 by 12/31Your Adjusted Gross Income (AGI) including tips:Tips included in your AGI:

Your federal income tax before “no tax on tips” is approximately $. It’s approximately $ after.

You save $, which is % of your tips income.

The calculator estimates taxes using basic assumptions. Your taxes may be different if you have a more complex scenario.

***

You’ll find more deep dives on recent changes from the 2025 Trump tax law in the full OBBBA series.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post No Tax on Tips in 2025 Trump Tax Law. What’s the Catch? appeared first on The Finance Buff.