How New Tax Rules Could Impact Your Financial Plan

There are several important tax rule changes that can potentially create new opportunities for planning. These changes affect retirement savings, tax deductions, and more. Understanding what's different is important for making smart money decisions this year.

For many people, especially those over 50 with higher incomes, these changes mean you should review your plan early in the year. Instead of seeing tax changes as problems, you can use them as chances to improve your long-term financial strategy.

New rules for retirement catch-up contributions

One big change for 2026 affects how people save extra money for retirement. For years, workers aged 50 and older could save more than the normal limit through "catch-up contributions." This helps people who started saving late or need to save more.

Starting in 2026, high earners face a new rule. If you earn $150,000 or more per year, you must now make all catch-up contributions as Roth contributions. This means you pay taxes on this money now, but it grows tax-free and you won't pay taxes when you take it out in retirement. The catch-up amount has increased by $500 to $8,000 for those 50 and older. Those aged 60-63 can save even more: $11,250.

Why does this matter? In the past, high earners could save this extra money before paying taxes on it, which lowered their tax bill today. Now, they must pay taxes on it first. For example, a 55-year-old earning $150,000 who saves $8,000 in catch-up contributions will pay taxes on that $8,000 this year instead of reducing their taxable income by that amount.

Higher limits for state and local tax deductions

Another major change affects how much you can deduct for state and local taxes. The SALT deduction (which stands for state and local tax deduction) lets you reduce your federal taxable income by the amount you pay in state and local taxes. This prevents you from being taxed twice on the same income.

Since 2017, this deduction was capped at $10,000. Now, it has been raised to $40,400 for 2026. This helps many Americans, especially those living in high-tax states like California, New York, and New Jersey.

This change makes "itemizing" your deductions more worthwhile for many households. When you file taxes, you can choose between taking the standard deduction (a fixed amount everyone can claim) or itemizing (adding up specific expenses like mortgage interest, charitable donations, and state and local taxes). For 2026, the standard deduction is $16,100 for single people and $32,200 for married couples.

Here's an example: A married couple in California pays $35,000 in state and local taxes, gives $8,000 to charity, and pays $12,000 in mortgage interest. Under the old $10,000 cap, they could only deduct $30,000 total, which is less than the $32,200 standard deduction. Under the new rules, they can deduct $55,000, which saves them more money on their taxes.

Planning ahead with these changes

These tax changes don't exist in isolation—they affect your whole financial picture. This is especially true for retirees who receive Social Security benefits.

For example, any changes that increase your income could make more of your Social Security benefits taxable. There's also a new "senior bonus" deduction of $6,000 for single filers or $12,000 for married couples aged 65 and older for tax years 2025-2028. However, this phases out at higher income levels.

The expanded SALT deduction creates planning opportunities. If you're close to the itemizing threshold, you might consider timing certain expenses, like charitable donations or property tax payments, to maximize your benefit. Remember that the increased SALT cap is temporary and drops back to $10,000 in 2030.

The bottom line? Tax rules for 2026 are complex and affect households differently. Taking a big-picture view and planning accordingly can help improve your financial outcomes.

References

1. https://taxpolicycenter.org/briefing-book/what-are-itemized-deductions-and-who-claims-them

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Examples are for illustrative purposes only. All investing involves risk of loss including the possible loss of all amounts invested.