WHAT IS A ROTH IRA CONVERSION?
If you currently own a traditional IRA, you can convert all or a portion of those qualified funds to a Roth IRA instead. This also applies to pre-tax funds in a qualified plan such as a 401(k). When you convert from a traditional IRA or qualified plan, you owe income taxes on the amount converted in the year of the conversion. At the time of the conversion, it is generally preferable to pay these taxes with funds outside of the IRA or qualified plan.
H.R. 1, known as the One Big Beautiful Bill Act (OBBBA), was signed into law by the president on July 4th, 2025.
Financial Planning 1. Long term care – Increases the amount of pre-tax dollars that may be contributed to a dependent care assistance program (IRC Sec. 129) from $5,000 to $7,500, effective in 2026. 2. 529 plans – Expands permissible tax-exempt distributions from Sec. 529 education savings plans to educational expenses in connection with enrollment or attendance at an elementary or secondary school (k-12). Increases the amount that may be withdrawn from a 529 plan for k-12 expenses from $10,000 to $20,000. Also broadens qualified expenses for post-secondary education. 3. Able Accounts (Achieving a Better Life Experience) – Extends and makes permanent a number of expiring provisions including higher contribution levels for individuals with disabilities who are employed. 4. IRAs for Minors (“Trump Accounts”) – New account for the exclusive benefit of an individual under age 18. For tax purposes the accounts are treated similar to an IRA under IRC Sec. 408(a). Must be invested in a mutual fund or exchange traded fund that tracks the return of a qualified index. Maximum annual contribution of $5,000. Includes a $1,000 government “seed” contribution. Children born between January 1st, 2025, and January 1st, 2029, are automatically enrolled. 5. 5) A new above-the-line $6,000 deduction available to taxpayers age 65 and older. Deduction phases out for individuals with AGI above $75,000 and married couples with AGI above $150,000 and is only available for tax years 2025 through 2028. While not directly linked to social security the intent with this new deduction was to alleviate the tax burden on seniors.
Income Tax Planning: 1. The Act extends the income tax rates contained in the 2017 Tax Act. The highest income tax rate remains 37%. The tax rates have been extended indefinitely. 2. The standard deduction for single filers increases to $15,750 in 2025, $31,500 for joint filers, an increase of $750 and $1,500 respectively. The standard deduction will be adjusted for inflation annually starting in 2026. 3. State and local tax deduction (SALT) – The SALT deduction is increased from $10,000 to $40,000 for 5 years (reverts to $10,000 in 2030), with a 1% inflation adjustment after 2025. The deduction starts to phase out for taxpayers with adjusted gross income above $500,000. Effective in 2025. Planning Note: The SALT deduction is available to non-grantor trusts. This will create an opportunity for those with substantial state and local taxes (think real estate property taxes), and a desire to transfer wealth, to minimize taxes by utilizing multiple non-grantor trusts (best practice is for each trust to have a different beneficiary). 4. Itemized deductions are capped at 35%. A taxpayer in the 37% tax bracket is limited to a deduction of 35%. For example, if a taxpayer made a $10,000 charitable donation, their tax savings would be limited to $3,500 (instead of $3,700). The cap does not apply to deductions for IRC Sec. 199A qualified business income deduction (see more on 199A below). 5. Alternative Minimum Tax (AMT) – Permanently extends the increased exemption amounts provided for in the 2017 Tax Act. Changes the exemption phaseout thresholds back to $500,000 ($1 million for joint return) and phases the exemption out quicker. 6. Child tax credit increased from $2,000 to $2,200 starting in 2026. Phases out after AGI reaches $400k. 7. Allows taxpayers an above-the-line deduction up to $10,000 for auto loan interest on the purchase of new cars made in the U.S. Phased out for taxpayers with AGI of $100,000 ($200,000 joint filers). Available for tax years 2025 to 2028. 8. Zero tax bracket for overtime – Allows taxpayers an above-the-line deduction for overtime compensation received, capped at $12,500 for single filers ($25,000 joint filers). Phases out with AGI over $150,000 ($300,000 joint filers). Available for tax years 2025 to 2028. 9. Taxation on tips – Allows taxpayers an above-the-line deduction for tips received in an occupation which customarily and regularly received tips. Deduction is capped at $25,000 and phases out with AGI over $150,000 ($300,000 joint filers). Available for tax years 2025 to 2028.
Bottom line
Tax planning is not a one-and-done exercise. To help reduce taxes, it makes sense to be planning throughout the year. Need help? A tax advisor and financial professional can help you build a tax-smart investing plan that works for you.
