Navigating the New Tax Law: Tips for Maximizing New Deductions
Membership required
Membership is now required to use this feature. To learn more:
View Membership BenefitsIt will take some time for taxpayers to digest the ramifications of the most comprehensive new US tax law in years. 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 increase in the cap on deducting state and local taxes (SALT) from $10,000 to $40,000 (for tax years 2025 through 2029)
- The new deduction for seniors (age 65+) of $6,000 (for tax years 2025 through 2028)
Increase in the SALT deduction
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.
New deduction for seniors
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.
Opportunity to realize capital gains without any taxes
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. Since there are many underlying factors and other considerations, consultation with a qualified tax professional is critical.
Endnote
1. Note: Beginning in 2026 the tax benefit of itemizing deductions is capped at the 35% marginal tax bracket. This means a slight reduction in the tax benefit for those in the 37% marginal tax bracket.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
Franklin Templeton, its affiliated companies, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Franklin Templeton has environmental, social and governance (ESG) capabilities; however, not all strategies or products for a strategy consider “ESG” as part of their investment process.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com. Investments are not FDIC insured; may lose value; and are not bank guaranteed.
You need Adobe Acrobat Reader to view and print PDF documents. Download a free version from Adobe's website.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
Membership required
Membership is now required to use this feature. To learn more:
View Membership BenefitsSponsored Content
Upcoming Virtual Events View All
