2025 featured resilient markets and significant tax law developments with the enactment of the One Big Beautiful Bill Act (OBBBA). This legislation provides meaningful opportunities for tax planning while introducing changes that warrant proactive review. We encourage you to consider the following as we head into the new year:
State and Local Tax (SALT) Deduction Increase: Beginning in 2025, the SALT deduction cap rises temporarily from $10,000 to $40,000. Combined with higher standard deductions, this may enable more clients in high-tax states to itemize and realize substantial federal tax savings. Review your 2025 estimated state and local taxes to maximize this benefit prior to filing in April of 2026.
Aligning Employer-Sponsored Allocations with the 2026 Market Outlook: We recommend reviewing your employer-sponsored plan investment elections to ensure alignment with your financial plan and an evolving market. Retirement plan sponsors/record keepers may be evaluating and modifying their investment offerings to participants this time of the year which may trigger new options available to you. We would be happy to assist you with this.
Optimizing Health Savings Account (HSA) Contributions: HSAs remain a powerful tool with triple tax advantages. If you’re not already investing contributions beyond cash holdings, consider doing so to build tax-free dollars for future healthcare needs. These funds could prove to be critical in retirement.
Capital Gains Tax Planning: Long-term capital gains rates remain unchanged. If you anticipate significant gains from the sale of a business or a concentrated stock position in the next few years, we can assist you in evaluating accelerated tax loss harvesting strategies to help offset this future event.
P/C Insurance Coverage Review: Property and casualty premiums continued to rise in 2025. We recommend contacting your P/C agent for an annual review of coverage limits and deductibles, and to compare carriers and bundling opportunities.
Reminder: The “High Earner” Rule – Mandatory Roth for Catch-Up Contributions:
Starting January 1, 2026, a provision from the SECURE 2.0 Act (Section 603) goes into effect for employees aged 50 or older.
- The Threshold: If your FICA wages (Box 3 of your W-2) from your specific employer in the previous year (2025) exceeded $145,000 (indexed to $150,000 for 2026), you are classified as a “high earner.”
- The Change: You are no longer allowed to make catch-up contributions on a pre-tax basis. Instead, any catch-up contribution you make must be designated as Roth (after-tax).
- Standard Limit (2026): The first $24,500 of your contributions can still be pre-tax (traditional) or Roth, regardless of your income.
- Catch-Up Limit (2026): The additional $8,000 catch-up (or $11,250 for ages 60–63) must be Roth if you exceed the wage threshold.
- Impact: You lose the immediate tax deduction on that catch-up amount (approx. $8k–$11k), increasing your current taxable income. However, those funds (and their growth) will be tax-free when withdrawn in retirement.
- Changes to Employer Matching (Optional) While the $145k rule is a mandate for catch-up contributions, there is a separate change regarding employer matching that is optional for your company:
- Roth Matching: Employers are now allowed (but not required) to let employees choose to receive their company match as Roth (after-tax) contributions.
- Tax Implication: If your plan offers this and you select it, you will owe income tax on the matching funds in the year you receive them, but they will grow tax-free. If your plan does not offer this, your match remains pre-tax by default.
As always, please feel free to contact us regarding any aspect, big or small, of your financial life. Thank you for being clients of Grandview Square Financial.