Net short-term capital gains are taxed at ordinary income rates…up to 37%. This applies to gains from the sale or exchange of capital assets held for a year or less. The 3.8% NII tax can also hit short-term capital gains of upper-income taxpayers. Take heed of stock mutual funds that frequently buy or sell holdings. They can potentially generate big short-term capital gain distributions, which are taxed at ordinary income rates instead of at long-term capital gains rates.
Before you invest in a mutual fund, check its turnover ratio. The higher the ratio, the higher the potential for tax-inefficient short-term capital gains distributions. One way around this hazard is to keep high-turnover mutual funds in an IRA or another tax-deferred account instead of in a taxable investment account.
The cap on deducting state and local taxes on Schedule A rises to $40,000 for 2025 through 2029. It goes back down to $10,000 beginning in 2030. There is also an income limit. For 2025, the SALT deduction begins to phase out…but not below $10,000…for filers with modified AGIs over $500,000…$250,000 for separate filers. The cap and income limit increase 1% each year through 2029.
The 2025 law temporarily offers four new above-the-line deductions, meaning they are available for taxpayers who claim the standard deduction and for those who itemize on Schedule A of the 1040. These four tax write-offs first take effect on 2025 tax returns filed next year, and they end after 2028.
First, there is a new senior deduction of $6,000 per filer age 65 or older. Married couples with both spouses 65 and older can deduct $12,000. Not every senior .will qualify. The deduction begins to phase out for taxpayers with modified AGI over $150,000 on joint returns and $75,000 on single and head-of-household returns.
Second, up to $25,000 of qualified tips is deductible. The write-off begins to phase out at modified AGIs over $300,000 on joint returns…$150,000 on others.
Third, up to $12,500 of overtime pay is deductible…$25,000 for joint filers. This write-off begins to phase out at modified AGIs over $300,000 on joint returns…$150,000 on others.
Fourth, individuals with auto loans can deduct up to $10,000 of interest that they pay on loans to buy a new car, minivan, SUV, pickup truck or motorcycle after 2024. Final assembly of the vehicle must take place in the U.S. And the write-off begins to phase out at modified AGI over $200,000 for joint filers…$100,000 for others.
Nonitemizers can deduct up to $1,000 of charitable cash contributions, starting with 2026 returns filed in 2027. The amount is $2,000 for joint filers. But itemizers who make charitable gifts don’t fare as well, beginning in 2026. Charitable donations claimed on Schedule A are subject to a haircut. They are deductible only to the extent they exceed 0.5% of adjusted gross income.
Bad news for gamblers: Starting in 2026, they can deduct only 90% of losses against their taxable winnings. Now, gamblers report winnings on Schedule 1 of the 1040 and deduct losses on Schedule A to the extent of their reported winnings.
529 college savings accounts are expanded in three important ways. First, you can withdraw up to $20,000 per year tax-free for K-12 schooling beginning in 2026, an increase of $10,000 from the current annual cap. As always, ,there is no limit on the amount of tax-free withdrawals used to pay for college.
Second, more K-12 expenses are covered. It used to be that distributions for K-12 education were tax-free only if used to cover tuition. Now covered are costs of tuition, materials for curricula and online studying, books, educational tutoring, fees for taking an advanced placement test or any exam related to college admission, and educational therapies provided by a licensed provider to students with disabilities. This easing begins with distributions from 529 accounts made after July 4, 2025.
Third, certain post-high-school credentialing program costs are 529-eligible.
The OBBB creates a new tax-advantaged savings account, beginning in 2026: The Trump account for young children. Up to $5,000 can be contributed to the account each year. The federal government would automatically put in $1,000 for each child born after 2024 and before 2029. Contributions aren’t deductible. Income tax on the earnings is deferred until the account owner takes distributions.
Two tax credits for energy-efficient home improvements end after 2025. The 30% residential clean-energy credit is for people who install solar panels and the like in their homes. The energy-efficient home improvement credit is for homeowners who install smaller energy-saving upgrades, such as heat pumps, exterior doors and windows, central air-conditioning systems and boilers. They are repealed for property placed in service after Dec. 31. Paying for the improvements before Jan. 1, 2026, is not enough to secure the credit. You will need to pay for them and get them completed before the end of this year.
A credit for employers who hire economically challenged workers ends Dec. 31. The work opportunity tax credit is for businesses that hire qualified veterans, ex-felons, residents of empowerment zones or rural renewal counties, and certain others who face employment barriers. The credit is capped at 40% of the first $6,000 in wages paid to each worker in the first year of employment, resulting in a $2,400 credit per qualifying worker. The credit for hiring veterans is even higher. Employers prescreen job applicants using Form 8850, which the applicant and employer fill out. The employer then submits the form to the state workforce agency within 28 days of the employee’s starting work, to certify that the hiring is credit-eligible.
Note the 2025 contribution limits to 401(k)s and other workplace plans. The maximum 401(k) contribution for most individuals is $23,500 in 2025.Individuals who are 50 and older can generally put in an additional $7,500.People 60 to 63 can stash up to $11,250 as their 401(k) catch-up contribution, meaning that if they contribute the maximum, they can put in $34,750 for 2025. The cap on most SIMPLE contributions this year is $16,500, plus $3,500 more
for people 50 and older. If age 60-63, the $3,500 figure is replaced with $5,250.
IRS is phasing out paper refund checks to individuals after Sept. 30 to comply with an executive order from the White House. Tax refunds for individuals will be paid by direct deposit or some other electronic method. Prepaid debit cards, digital wallets and the like will be available for people without access to bank accounts. Individuals can continue to pay their taxes with a paper check, for now. The Service says it will issue additional guidance before the 2026 filing season starts on tax payment alternatives to paper checks.