It will take some time for taxpayers to digest the ramifications of the most comprehensive new US tax law in years.
<This article was first published by the Franklin Templeton Academy>
However, many of the provisions apply for tax year 2025, providing timely opportunities for planning right now. In particular, the timing of realizing income for provisions that are subject to certain phase-outs.
Let’s explore two examples in the new law for consideration:
The (temporary) $40,000 cap for the state and local tax (SALT) deduction will mean tax savings for certain residents in higher-taxed areas. At a marginal tax bracket of 35%, the increase in the cap translates into roughly $10,000 in tax savings.1
However, once a taxpayer’s modified adjusted gross income (MAGI) exceeds $500,000, the increase in the cap begins to phase out. At $600,000 of MAGI, it is fully phased out, and a maximum $10,000 cap on deducting SALT applies.
For these higher-income taxpayers, are there planning considerations to avoid this phase-out, reducing the tax benefit? The answer to this question may be especially relevant for married couples filing a joint tax return since they are subject to the same cap and income phase-outs as taxpayers filing a single return.
For example, a taxpayer with income right at the phase-out limit ($500,000) for the expanded SALT deduction, is considering a $100,000 Roth IRA conversion. The additional income generated from the Roth IRA conversion will result in the loss of a $30,000 tax deduction (although the taxpayer could opt to claim the standard deduction).
Depending on the specific circumstances, this effectively increases the overall “cost” of that Roth IRA conversion where it would not make sense to proceed. Taxpayers need to carefully consider the impact of these types of income timing ramifications and consult with a qualified tax advisor. Lastly, some taxpayers may pursue owning property in a separate, taxable trust (i.e. non-grantor trust). For example, those with a second home owning that property within a non-grantor trust may allow another $40,000 SALT deduction. This type of strategy involves important considerations, so a thorough analysis working with a qualified tax and legal professional is essential.
Similar to the expanded SALT deduction, the new senior deduction also phases out at certain income levels. For single filers, once MAGI exceeds $75,000 and $150,000 for married couples filing a joint tax return.
Another important point is that the new deduction can be utilized whether or not the taxpayer itemizes deductions or claims the standard deduction on their tax return. For a married couple claiming the standard deduction, where both are at least age 65, here’s what their total deductions would look like for 2025:
Assuming a marginal tax bracket of 22% where the income phase-outs apply, this new “senior” deduction represents a tax savings of $1,320 for a single filer or $2,640 for married couples where both are at least age 65.
However, there may be other benefits as well. Consider seniors subject to the 12% marginal income tax bracket, where long-term capital gains and qualified dividends are generally subject to a zero percent tax rate. With the slight increase in the standard deduction for 2025 and the new senior deduction, some taxpayers may be able to take advantage of this and harvest capital gains without owing income taxes. Of course, a large capital gain may effectively “push” a taxpayer’s income into a higher bracket subjecting those gains to taxation.
How does the zero percent capital gain rate apply?
A married couple where both are over the age of 65 may be subject to the zero percent tax rate until their gross income exceeds $143,400 (a standard and senior deduction of $46,700 plus $96,700, the threshold for where the zero percent tax rate applies on long-term capital gains and qualified dividends). This is another example of how the timing of income, depending on personal circumstances, may help to manage a tax bill. Given the numerous underlying factors and other considerations, consulting a qualified tax professional is crucial.
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