In plain words
In July 2025, Congress passed a large federal tax law. The IRS now calls its family provisions the Working Families Tax Cuts. Many rules from 2017 were set to expire at the end of 2025. The new law made most of them permanent and added several new, temporary deductions.
What stayed and became permanent:
- Tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%. The bracket ranges still rise with inflation each year.
- A larger standard deduction. For 2026: $16,100 single, $24,150 head of household, $32,200 married filing jointly.
- The child tax credit, now $2,200 per qualifying child for 2026, indexed for inflation.
- The 20% qualified business income deduction for many business owners.
- A high estate and gift tax exemption: $15 million per person in 2026.
New deductions for 2025 through 2028 (federal):
| Deduction | Up to | Phases out above (modified AGI) |
|---|---|---|
| Extra deduction for people 65 and over | $6,000 per person ($12,000 couple) | $75,000 single, $150,000 joint |
| Qualified tips | $25,000 | $150,000 single, $300,000 joint |
| Qualified overtime premium pay | $12,500 ($25,000 joint) | $150,000 single, $300,000 joint |
| Interest on a loan for a new U.S.-assembled personal vehicle | $10,000 | $100,000 single, $200,000 joint |
These can be claimed whether or not you itemize.
State and local taxes (SALT). The cap on deducting state and local taxes rose from $10,000 to $40,000 for 2025, and is $40,400 for 2026. It shrinks for incomes above $505,000 in 2026, but not below $10,000. It’s set to return to $10,000 in 2030.
Charitable giving, starting in 2026. People who don’t itemize can deduct up to $1,000 ($2,000 joint) of cash gifts to qualifying charities. Gifts to donor-advised funds don’t count for this. People who do itemize can deduct only the part of their gifts above 0.5% of their adjusted gross income.
Trump accounts. A new kind of savings account for children. Children born from 2025 through 2028 who are U.S. citizens can get a one-time $1,000 federal deposit if a parent elects it. Contributions from families and employers began July 4, 2026, up to $5,000 a year in total.
How it helps real people
The law changes the math on several everyday decisions:
- Retirees with moderate incomes can get a much larger deduction, which can make Roth conversions or IRA withdrawals cheaper in the 65-and-over years, as long as income stays under the phase-out.
- Service and hourly workers who earn tips or overtime may keep more of that pay.
- Homeowners in high-tax states may find itemizing worthwhile again under the higher SALT cap.
- New parents have a new account for a child’s long-term savings.
A worked example
Illustrative. Luis and Marta are married, both 66, with $95,000 of income from pensions, IRA withdrawals and the taxable part of Social Security.
| Illustrative amount | |
|---|---|
| Income | $95,000 |
| Standard deduction (joint) | –$32,200 |
| Extra standard deduction for being 65+ (existing rule, about $1,650 each) | –$3,300 |
| New senior deduction ($6,000 each) | –$12,000 |
| Taxable income | about $47,500 |
Without the new deduction, they’d have about $12,000 more taxable income, costing roughly $1,440 at their 12% bracket. Their income is under the $150,000 phase-out, so they get the full amount. These figures are illustrative; the existing additional deduction for age also changes each year.
Who it’s for
- Retirees 65 and over, especially with moderate incomes.
- Workers who earn tips or overtime.
- Families in high-tax states, and parents of young children.
Who it’s not for
Higher-income households above the phase-outs gain little from the new deductions. For them, the permanent brackets and the estate exemption matter more.
Risks and trade-offs
- Temporary rules. The senior, tip, overtime and car-loan deductions end after 2028 unless Congress extends them. Don’t build a 20-year plan on them.
- Phase-outs raise marginal rates. Each extra dollar of income in a phase-out range shrinks a deduction too.
- Itemizers face new limits on charitable gifts, and very high earners face a cap on the value of itemized deductions.
- State rules differ. Many states don’t follow these federal deductions.
Common mistakes
- Assuming all tips or overtime are tax-free. Only qualified amounts, up to the limits, are deductible, and payroll taxes still apply.
- Missing the senior deduction because you don’t itemize. You don’t have to.
- Forgetting the 0.5% floor when planning big gifts as an itemizer. Bunching gifts into one year can help.
- Not electing the $1,000 Trump account deposit for an eligible child.
FAQs
Did tax brackets go up in 2026?
The rates didn’t change. The dollar ranges rose with inflation.
Is Social Security now tax-free?
No. The law didn’t change how Social Security is taxed. The new senior deduction can reduce the tax many retirees owe.
Can I take the senior deduction and the standard deduction?
Yes. It’s in addition to the standard deduction and the existing extra deduction for age.
Does the higher SALT cap help me?
Only if your itemized deductions, including state and local taxes, beat your standard deduction.
Will these rules change again?
Possibly. Several are temporary, and future laws can change any of them. Review each year.
Related strategies
- Tax brackets: marginal vs effective rate
- Charitable giving: DAFs, QCDs and appreciated stock
- Roth conversions: when paying tax early makes sense
- An annual financial review checklist
Your next step
Ask VeraLife (/#ask) which 2026 changes apply to your household.
Education, not advice. Examples are illustrative. VeraLife.ai is not a registered investment adviser, broker-dealer or insurance agency.