How Recent Tax Law Changes Could Impact Retirees and Pre-Retirees

How Recent Tax Law Changes Could Impact Retirees and Pre-Retirees

Big changes are coming to the tax world at the end of 2025, and they might affect your retirement plans in major ways. If you’re already retired or planning to retire in the next few years, these changes could impact how much money you get to keep and how much goes to Uncle Sam.

The tax laws we’ve been using since 2017, called the Tax Cuts and Jobs Act (TCJA), are set to expire on December 31, 2025. Unless Congress passes new laws, we’ll go back to the old tax rules from before 2017. This means different tax rates, different deductions, and different rules for retirement accounts. It’s like the clock striking midnight and your tax carriage turning back into a pumpkin!

Key Takeaways:

• The Tax Cuts and Jobs Act will expire at the end of 2025, potentially increasing income taxes for many retirees
• Standard deductions will nearly be cut in half if no new legislation passes
• Tax brackets will shift, possibly pushing retirees into higher tax rates
• Retirement account rules are changing, with new contribution limits and required distribution rules
• Estate tax exemptions will drop significantly, affecting wealth transfer plans
• Strategic planning in 2024-2025 could help minimize tax impacts

What’s Changing for Income Taxes?

The biggest change many retirees will notice is in their regular income taxes. Right now, we have seven tax brackets with rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If the TCJA expires, these will return to the old rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

This matters because many brackets will cover different income amounts than before. For example, the 12% bracket will become 15%, and the 22% bracket will jump to 25%. That’s a big difference if your retirement income puts you in these ranges!

The standard deduction – the amount everyone can subtract from their income before calculating taxes – will also change. In 2025, married couples can deduct $30,000, and single filers can deduct $15,000. But if the law expires, these amounts will drop to around $16,525 for couples and $8,265 for singles in 2026 For married couples filing jointly, the standard deduction increases to $30,000, up $800 from tax year 2024. For heads of households, it is $22,500 for tax year 2025, up $600 from tax year 2024. For single taxpayers and married individuals filing separately for tax year 2025, the standard deduction increases to $15,000 for 2025, up $400 from 2024. With these changes, many middle-income retirees could see their tax rates increase by 3% or more. 

However, personal exemptions will return, which could help some families.

For retirees living on fixed incomes, these changes could mean paying more in taxes each year, leaving less money for living expenses and healthcare costs.

How Retirement Accounts Will Be Affected

Retirement accounts like 401(k)s and IRAs are getting some updates too. For 2025, contribution limits are increasing slightly from previous years, allowing you to save more for retirement if you’re still working.

One exciting change for near-retirees is the new “super catch-up” contribution. If you’re between 60 and 63 years old, you can put significantly more money into your workplace retirement plan. This is a great opportunity to boost your savings right before retirement.

Rules about taking money out of retirement accounts are also changing. If you turned 73 recently, you have until early 2025 to take your first required minimum distribution (RMD). Missing this deadline comes with a substantial penalty, so marking your calendar is important.

Starting in 2025, there’s also a change for people who inherit IRAs. If you’re not the spouse of the original account owner, you’ll have to empty the account within 10 years instead of stretching distributions over your lifetime. This compressed timeline could push you into higher tax brackets during those years.

Estate Planning Changes

The TCJA made big changes to estate taxes by raising the amount you can pass on without paying federal estate taxes. In 2025, this exemption is $13.99 million for individuals and $27.98 million for married couples For single filers, the maximum is $13.99 million for 2025 (up from $13.6 million in 2024). This change will be reversed after 2025.

But when the law expires, this exemption will drop by about half – to approximately $7 million (adjusted for inflation). If your estate is worth more than this amount, your heirs might face significant tax bills unless you plan ahead.

Many financial experts suggest considering gifts to family members or setting up trusts now, while the exemption is still high. This way, you can take advantage of the current rules before they change.

State Tax Considerations for Retirees

While we’re talking about federal taxes, don’t forget that state taxes are changing too. Many states are updating how they tax retirement income.

Some states are becoming more tax-friendly to retirees to attract and keep residents, while others are looking to increase taxes to cover budget shortfalls. Where you live during retirement can make a big difference in your overall tax bill.

Strategies to Consider Before 2026

With these changes coming, what can you do to prepare? Here are some smart moves to consider:

Rethink Your Income Timing

Since tax rates may go up in 2026, you might want to take more income in 2024 and 2025 while rates are lower. This could mean:

• Converting traditional IRAs to Roth IRAs
• Selling investments with large gains
• Taking bonuses or business income sooner rather than later

Maximize Retirement Contributions

Take full advantage of the higher contribution limits for retirement accounts in 2024 and 2025. If you’re between 60 and 63, don’t miss the chance to make those extra-large “super catch-up” contributions.

Reevaluate Your Deductions

With the standard deduction potentially dropping in 2026, you might need to start tracking itemized deductions again. This includes things like:

• Medical expenses
• Mortgage interest
• Charitable contributions
• State and local taxes (up to the limits)

Start keeping better records now so you’re ready if itemizing becomes the better option after 2025.

Review Estate Plans

If your estate might be worth more than $7 million (or $14 million for couples), talk to an estate planning professional about how to protect your assets from higher estate taxes.

Strategies might include making gifts to family members now, setting up trusts, or using life insurance to cover potential estate tax bills.

What Might Actually Happen?

While the TCJA is set to expire, there’s ongoing discussion about new tax legislation. With Republicans now controlling the White House and Congress following the 2024 elections, there’s likely to be movement on extending many of the current tax provisions.

Lawmakers are considering various approaches to addressing the expiring provisions, with most proposals aiming to preserve at least some elements of the current tax structure. However, growing concerns about the federal deficit may influence which provisions are extended and for how long.

The outcome of these legislative discussions will shape the tax landscape for retirees in 2026 and beyond, making it important to stay informed about developments and prepare for potential changes.

Work With Us

Planning for tax changes can be complicated, especially when the rules keep shifting. The expiration of the Tax Cuts and Jobs Act in 2025 will affect different retirees in different ways, depending on your income, location, and financial situation. By understanding these changes and planning ahead, you can make smart choices now that could save you thousands of dollars in taxes later.

At Avior, we help clients navigate complex tax changes and create retirement plans that adjust to new laws. Our team stays up-to-date on tax legislation and can help you develop strategies to minimize your tax burden while maximizing your retirement income. Contact us today to schedule a consultation and make sure your retirement plan is ready for whatever tax changes come in 2026 and beyond.

Sources

• https://www.brookings.edu/articles/which-provisions-of-the-tax-cuts-and-jobs-act-expire-in-2025/
• https://www.aarp.org/money/retirement/changes-2025/
• https://www.voya.com/blog/five-changes-coming-to-iras-and-401ks-2025
• https://www.healio.com/news/hematology-oncology/20240610/tax-law-changes-affect-your-retirement-planning-in-2024
• https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/
• https://www.pwc.com/us/en/services/tax/library/2025-tax-cuts-and-jobs-act.html