Higher tax brackets will result in higher income taxes for taxpayers, but there may be additional ramifications for retirees. Your RMDs (mandatory minimum distributions that were withdrawn annually from traditional IRAs), 401 (k), s and 403 (b), after age 72, were previously taxed at a higher rate, and your Social Security benefits could also be taxed at a higher rate. In addition, they may have to pay higher monthly surcharges, called IRMAA (income-related monthly adjustment amounts), for Medicare Part B and D premiums. The following is an overview of the Tax Cuts and Jobs Act (TCJA) and some changes you can expect to affect your taxes in the short term.
Under the new tax code, owners of transferred businesses can deduct 20% of their business income, which will reduce their tax liability. If you combine the strategies of paying taxes on IRA withdrawals with making donations, you could reduce both income taxes and wealth taxes. Individually, understanding how the Act affects taxes in your tax bracket and the individual circumstances that directly affect you can help ensure that you're taking advantage of all the deductions you deserve and ultimately paying the lowest tax bill available to you. Wealth tax uses a bracket system with increasing marginal rates, as does individual income tax.
And depending on these changes, you may want to work with a financial advisor to help you formulate a tax strategy for your finances. While these cuts will also affect the amount of corporate taxes that will be applied to the deficit, they don't expire after 2026 the way individual cuts do. Or, you can opt for a Roth conversion because you believe that paying taxes at current rates will be lower than future tax rates. Darrow Kirkpatrick of Can I Retire Yet concluded that it may be important to accurately predict taxes as part of your detailed retirement plan.
According to the Center for Tax Policy, the TCJA reduced individual income taxes for 65 percent of households overall and increased taxes for approximately 6 percent of households. These withdrawals are exempt from federal taxes and penalties, but may be considered unqualified distributions under state tax laws. However, switching to the higher tax rates of 2026 after the expiration of the TCJA resulted in a much lower number of recommended conversions. These items are no longer tax-deductible unless they are related to a loss in a federally declared disaster area; think of victims of hurricanes, floods, and wildfires.
You may want to plan ways to stay below certain income thresholds after 2025 to minimize taxes. The tax bill doesn't change the age threshold for the child tax credit, but it does change the situation of undocumented immigrant parents.