Archives for November 2025

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Senior Deduction, NOT Standard Deduction

After last week’s article covering the 2026 tax brackets, standard deduction, retirement account limits, and HSA limits, a bunch of emails came in asking about the “new senior standard deduction.”

There’s no such thing.

There is a new “senior deduction” for people age 65+ for years 2025-2028. But that deduction is entirely unrelated to the standard deduction. They’re separate sections in the Internal Revenue Code (senior deduction is § 151(d)(5)(C), while the standard deduction is § 63(c)); they have separate math, separate rules, etc.

This is important for the sake of understanding what you’re reading. It means that:

  • If an article is discussing the senior deduction, it is by definition not referring to the standard deduction.
  • If an article is discussing the standard deduction, it is by definition not referring to the senior deduction.
  • And if an article is discussing the “senior standard deduction,” the author by definition does not know what they’re talking about.*

And in terms of how your taxes work, the distinction is critical for multiple reasons.

Firstly, the standard deduction itself has a “it’s slightly larger if you’re 65 or over (or blind)” component. It has functioned that way for many years. It still functions that way for 2025. And it will still function that way for 2026 and beyond. That’s not changing at all. And the standard deduction amount is only based on your filing status, age, and blind/not-blind status. It does not phase out based on your income. In contrast, the new senior deduction has nothing whatsoever to do with your vision, and it does phase out based on your income.

The second reason the distinction is important is that, because the new senior deduction is not part of the standard deduction, you can claim it in years in which you itemize (i.e., you can use it even if you aren’t using the standard deduction at all that year).

As far as inflation adjustments, unlike the standard deduction, the senior deduction amount ($6,000 per qualifying person) as well as the income phaseout ranges ($75,000 – $175,000 if single and $150,000 – $250,000 if married filing jointly) are not inflation-indexed. In other words, the dollar amounts will be the same for 2026-2028 as they are for 2025.

*In fairness to the writers, many of the articles about the new deduction were written before the actual text of the law was made public. In other words, they were written at a time when none of us knew what we were talking about, so everything was just based on hearsay. (If you want to get an idea of how reliable such things are, think back to the children’s game of telephone. Now imagine you’re playing that — but with tax law.) Now that we have the actual law to reference, we know that the standard deduction and temporary senior deduction are simply separate things.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"
November 24, 2025

2026 Tax Brackets, Standard Deduction, and Other Changes

The IRS recently published the last of the annual inflation updates for 2026. If you have questions about a particular amount that I do not mention here, you can likely find it in the official IRS announcements:

Single 2026 Tax Brackets

Taxable Income
Tax Bracket:
$0-$12,40010%
$12,400-$50,40012%
$50,400-$105,70022%
$105,700-$201,77524%
$201,775-$256,22532%
$256,225-$640,60035%
$640,600+37%

 

Married Filing Jointly 2026 Tax Brackets

Taxable Income
Tax Bracket:
$0-$24,80010%
$24,800-$100,80012%
$100,800-$211,40022%
$211,400-$403,55024%
$403,550-$512,45032%
$512,450-$768,70035%
$768,700+37%

 

Head of Household 2026 Tax Brackets

Taxable Income
Tax Bracket:
$0-$17,70010%
$17,700-$67,45012%
$67,450-$105,70022%
$105,700-$201,75024%
$201,750-$256,20032%
$256,200-$640,60035%
$640,600+37%

 

Married Filing Separately 2026 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$12,40010%
$12,400-$50,40012%
$50,400-$105,70022%
$105,700-$201,77524%
$201,775-$256,22532%
$256,225-$384,35035%
$384,350+37%

 

Standard Deduction Amounts

The 2026 standard deduction amounts are as follows:

  • Single or married filing separately: $16,100
  • Married filing jointly: $32,200
  • Head of household: $24,150

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,650 for each married taxpayer or $2,050 for unmarried taxpayers.

IRA Contribution Limits

The contribution limit for Roth IRA and traditional IRA accounts increases to $7,500.

The catch-up contribution limit for people age 50+ increases to $1,100.

401(k), 403(b), 457(b) Contribution Limits

The salary deferral limit for 401(k) and other similar plans is increased to $24,500.

The catch-up contribution limit for 401(k) and other similar plans for people age 50+ increases to $8,000. For people who turn 60, 61, 62, or 63 in 2026, the catch-up contribution limit remains at $11,250.

The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a solo 401(k)) is increased to $72,000.

401(k), 403(b), 457(b) Roth Catch-Up Contribution Requirement

Effective January 1, 2026, the new requirement for high wage earners regarding Roth catch-up contributions to employer plans goes into effect. Specifically, for anybody making a catch-up contribution to a 401(k), 403(b), or governmental 457(b) plan, if your wages from the employer in question in the prior year (so, 2025 in this case) exceeded $150,000, then your catch-up contributions to that employer-sponsored plan in 2026 have to be Roth rather than tax-deferred.

Health Savings Account Contribution Limits

For 2026, the maximum HSA contribution for somebody with self-only coverage under a high deductible health plan is $4,400. The limit for somebody with family coverage under such a plan is $8,750.

The HSA catch-up contribution limit for people age 55 and over is not inflation adjusted, so it remains at $1,000.

Qualified Charitable Distributions

For 2026, the limit for qualified charitable distributions (QCDs) for people age 70.5 and up is increased to $111,000 (per spouse, if married).

Capital Gains and Qualified Dividends

For 2026, long-term capital gains and qualified dividends face the following tax rates:

  • 0% tax rate if they fall below $49,450 of taxable income if filing as single or married filing separately, $98,900 if married filing jointly, or $66,200 if head of household.
  • 15% tax rate if they fall above the 0% threshold but below $545,500 if single, $613,700 if married filing jointly, $579,600 if head of household, or $306,850 if married filing separately.
  • 20% tax rate if they fall above the 15% threshold.

Alternative Minimum Tax (AMT)

The AMT exemption amount is increased to:

  • $90,100 for single people and people filing as head of household,
  • $140,200 for married people filing jointly, and
  • $70,100 for married people filing separately.

Annual Gift Tax Exclusion

For 2026 the annual exclusion for gifts remains at $19,000.

Estate Tax

The estate tax exclusion is increased to $15 million per decedent.

Pass-Through Business Income

With respect to the 20% deduction for qualified pass-through income, for 2026, the threshold amount at which the “specified service trade or business” phaseout and the wage (or wage+property) limitations begin to kick in will be $403,500 for married taxpayers filing jointly and $201,750 for single taxpayers and people filing as head of household, and $201,775 for married people filing separately.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"
November 17, 2025

Investing Blog Roundup: Vanguard Expands “Vanguard Investor Choice” Program

When you own shares of a business, as a partial owner, you have the right to vote on how the business will respond to various important issues facing the company. You are a part of the business’s governance. You have influence.

When you own mutual funds though, your stock ownership is indirect. You own shares of a mutual fund, which owns shares of various companies. And when that’s the case, it’s the fund management (rather than you, the fund shareholder) that gets to vote the various shares that the fund holds. As fund shareholders, we have largely abdicated our our corporate governance rights and responsibilities.

This issue isn’t new. (Here’s a 2002 letter from Jack Bogle to the SEC, voicing his concerns on the topic, for example.) But as indirect ownership of stocks (via mutual funds) has been growing steadily for several decades, the issue becomes increasingly important each year.

Fortunately, some fund companies have been responding by creating systems that allow their shareholders to indicate, at a broad level, how they would like their portion of shares to be voted.

Vanguard has been gradually rolling out their program (“Vanguard Investor Choice”) since 2023. And they just announced that they’re adding more funds to the program (including all share classes of the Vanguard 500 Index Fund/ETF), which will collectively triple the assets eligible to participate in the program.

Other Recommended Reading

Thanks for reading!

November 10, 2025

Traditional IRA Growth Is Tax-Free (And When to Take RMDs)

In response to my recent article about RMD timing, a handful of people wrote in with comments/questions similar to this one:

“Maybe I am missing something, but to the extent that there is significant equity in the retirement account, then isn’t it better to take the RMD earlier in the year so that growth is ultimately taxed at capital gains rates rather than as ordinary income from future RMDs? Thanks for any clarification.”

A key point to understand about traditional IRAs is that the growth is tax-free. This is fundamental to understanding all of the “Roth or tax-deferred” decisions as well as Roth conversion decisions.

A traditional IRA can be thought of as a Roth IRA (i.e., an account with tax-free growth) in which the government owns a share. (The other two differences are that Roth IRAs don’t have RMDs during the original owner’s lifetime, and with Roth IRAs you can withdraw contributions at any time tax-free and penalty-free. Those differences are often important. But in terms of the math of how the accounts grow, there is no difference.)

The Classic Example (Contributions)

The classic example illustrating this point is in the context of whether to contribute to a Roth or tax-deferred account. And the point of the illustration is that the two options work out the same, if the tax rate at the time of contribution is the same as the tax rate at the time of distribution.

Let’s imagine:

  • Reiley has a current marginal tax rate of 20%, and we can somehow predict that her future marginal tax rate will be 20% as well. (Of course this level of certainty is entirely unrealistic, but the point here is just to demonstrate the math.)
  • Reiley can currently afford to make a $2,000 contribution to a Roth IRA, or she could make a $2,500 contribution to a traditional IRA (because the deductible contribution would net her $500 in tax savings this year, so her net out-of-pocket would be $2,000).
  • In either case, the contribution will eventually grow to eight-times its initial value, and then be distributed.

If Reiley contributes $2,000 to a Roth IRA, it will turn into $16,000. And that $16,000 distribution will be tax-free.

If Reiley contributes $2,500 to a traditional IRA, it will turn into $20,000. That $20,000 distribution will be taxable at at 20% rate ($4,000 of tax), leaving Reiley with $16,000.

Point being, if the tax rate is the same at the time of contribution and the time of distribution, the after-tax amount available for spending will be the same. In other words:

  1. We have no preference between paying tax at the start (in the case of Roth) or at the end (in the case of tax-deferred) if the tax rate is the same.
  2. And #1 is true because both the Roth IRA and the traditional IRA grow tax-free.

RMDs (And When to Take Them)

Now let’s move on to the topic at hand (RMDs), so we can see how the same concept (tax-free growth in a traditional IRA) is applicable.

Let’s imagine:

  • Your RMD for this year is $30,000.
  • The dollars in question will earn a 10% return this year.
  • The tax rate you pay on the distribution will be 22%.

If you take the RMD on January 1, it will be $30,000 before the distribution. And after accounting for the 22% tax, it will be $23,400 that actually gets invested in the taxable account. That $23,400 grows by 10% over the course of the year, to $25,740.

Conversely, if you take the RMD on December 31 (not a good idea in real life to take it on literally the last day of the year, but let’s ignore that for a moment), the $30,000 from the start of the year will have grown to $33,000 by that point. If you take out the whole $33,000, pay tax at 22%, what’s left is $25,740.

Not coincidentally, those two amounts are exactly the same. $25,740 in either case. It’s the same exact amount that’s left after taxes, whether you take the distribution at the start or end of the year, because we don’t care whether we pay the tax at the start or end of the year, due to the commutative property of multiplication.

But we’ve left out something important!

In the “RMD at the start of the year” case, when the $23,400 that’s now in your taxable brokerage account grows to $25,740, some portion of that is usually going to be taxable, either as interest, dividends, or capital gains. (Even if the dollars are kept entirely in stocks, and you’re in the income range where qualified dividends and long-term capital gains are taxed at a 0% rate, most stock funds still pay some amount of unqualified dividends.) And thus the “RMD at the start of the year” strategy falls behind by however much tax gets paid on the return earned in the taxable account over the course of the year. (Again, returns in an IRA are tax-free, whereas returns earned in a taxable account generally are not.)

In addition, to illustrate the “it’s the same dollar amount” concept in the example above, I was assuming that, if the RMD for the year was $30,000 and the dollars in question grow to $33,000 over the course of the year, you take out the whole $33,000 if you’re following an “RMD at year-end” strategy. But you don’t actually have to do that. The RMD is still just $30,000.

Overall point being, as a general principle, because growth in IRAs isn’t taxed whereas growth in taxable accounts usually is taxed to some extent, we want to keep our money in IRAs for as long as possible.

November 3, 2025

How to Calculate the Deduction for Pass-Through Business Income

This article discusses the deduction for “qualified business income,” a.k.a. pass-through business income (i.e., income from sole proprietorships, partnerships, S-corporations, or LLCs taxed as any of the above).

What follows is my best attempt to explain the deduction clearly. Unfortunately, it is complicated. So if this deduction is relevant to your personal tax planning, I’d encourage you to meet with a tax professional and read the applicable Code section for yourself.

One point before we get started: I’m simplifying here by assuming that you have no qualified cooperative dividends, qualified REIT dividends, or qualified publicly traded partnership income. Each of those types of income gets special treatment under this new Code section.

Basic Calculation

If your taxable income* is under a certain threshold amount, the deduction is 20% of the pass-through income from your business(es), but it cannot be greater than 20% of your taxable income excluding net capital gains.

The threshold amounts for 2026 are $201,750 if you are single or head of household, $201,775 if you are married filing separately, or $403,500 if you are married filing jointly.

When your taxable income exceeds the threshold, two potential complications kick in:

  • A wage (or wage + property) limit, and/or
  • A phaseout for “specified service businesses.” 

Wage (or Wage + Property) Limit

If your taxable income exceeds a certain phaseout range (i.e., the threshold amount from above, plus $150,000 if married filling jointly or $75,000 if single/head of household/married filing separately), then your deduction for each business will also be limited to the greater of:

  • 50% of the W-2 wages paid by the business**, or
  • 25% of the W-2 wages paid by the business**, plus 2.5 percent of the unadjusted basis immediately after acquisition of all “qualified property” (basically, depreciable tangible property that is used by the business or held by the business and available for use).

If your taxable income is in the phaseout range, the calculation basically says, “If you were past the phaseout range, how much would the wage (or wage + property) limit reduce the amount of your deduction? Now, instead of reducing your deduction by that whole amount, we’ll multiply that reduction by a percentage that is the percentage of the way you are through the phaseout range.”

Example: You are single and in 2026 you have $150,000 of pass-through income from a sole proprietorship. Your taxable income is $239,250 (i.e., halfway through the phaseout range). The business has no qualified property. The business has two part-time employees to whom it paid a total of $40,000 of W-2 wages over the course of the year.

Without regard to the limitations, your pass-through business income deduction would be $30,000 (i.e., 20% of $150,000). But your taxable income is past the threshold amount of $201,750. If you were past the phaseout range, your deduction would be limited to $20,000 (i.e., 50% of the wages paid by the business). That’s a $10,000 reduction relative to what it would be without the limitation.

But you aren’t past the phaseout range. You are halfway through it. So your deduction ($30,000) is reduced by half of that $10,000 — for a total deduction of $25,000.

Specified Service Business Phaseout

If your business is a “specified service business,” there’s another limitation that can come into play. A specified service business is:

  • Any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its owners or employees; or
  • Any trade or business which involves the performance of investing and investment management, trading, or dealing in securities, partnership interests, or commodities.

If your business is a specified service business, then we again calculate how far your taxable income is through the same phaseout range (i.e., the same threshold, plus either $150,000 or $75,000).

If you are past the phaseout range, you get no deduction for pass-through business income.

If you are in the phaseout range, then we calculate the deduction as normal, except we only consider a pro-rata share of all of the amounts from the business (income, gain, deduction, loss, W-2 wages from the business). So, for example, if your income is 70% of the way through the phaseout range, everything is 70% phased out, so only 30% of your income from the business would be counted for calculating the deduction.

A key point here is that this affects the amount of wages counted for applying the wage and wage+property limits! And this is where the complexity starts to get ugly.

Example: You are single and in 2026 you have $150,000 of pass-through income from a sole proprietorship. Your taxable income is $220,500 (i.e., 25% of the way through the phaseout range). The business has no qualified property. The business has two part-time employees to whom it paid a total of $40,000 of W-2 wages over the course of the year. The business is a specified service business.

Because you are 25% of the way through the phaseout range, all of the amounts from the business are 25% phased out, meaning we use 75% of each of them. So instead of calculating 20% of the income from the business, we calculate 20% of 75% of the income from the business (i.e., 20% of 75% of $150,000). That gives us a deduction of $22,500 before applying the wage-related limit.

As in the prior example, to apply the wage-related limit, we calculate what the reduction to the deduction would be if you were all the way through the phaseout range, then we apply only a portion of that reduction, based on how far you are through the phaseout range.

Again, the wage limit is 50% of the wages from the business, but because of the specified service business phaseout we are now calculating 50% of 75% of the wages from the business (i.e., 50% of 75% of $40,000). That gives us a limit of $15,000. That’s what the limitation would be if you were past the phaseout range. Relative to the $22,500 deduction you’d have without the wage limit, that’s a $7,500 reduction.

But you aren’t past the phaseout range. You’re 25% of the way through it. So we calculate 25% of the $7,500 reduction, which gives us a reduction of $1,875. So we take your initial $22,500 deduction and reduce it by $1,875 for a total allowed deduction of $20,625.

Other Assorted Points of Note

The deduction for pass-through business income is not an “above the line” deduction (i.e., it does not reduce AGI). But it is also not an itemized deduction; that is, you can claim it as well as the standard deduction.

As far as tax planning thoughts, I’ll offer three brief points:

  • For business owners below the phaseout range, this deduction is usually a point in favor of keeping sole proprietor taxation (or partnership taxation) rather than electing S-corp taxation, as the wages that the S-corp would have to pay to owner-employees would not be pass-through business income.
  • Business owners below the phaseout range will have two different marginal tax rates for different types of income. (Normal taxable income will have a normal marginal tax rate, and pass-through business income will have a lower marginal tax rate because it results in a larger deduction.)
  • For business owners in the phaseout range, those two marginal tax rates will be higher, because each additional dollar of income (whether from the business or not) will cause partial phaseout of the deduction.

*For brevity’s sake, I’m referring to “taxable income” throughout this article. In reality, we are concerned with taxable income without regard to the deduction for pass-through business income.

**For multiple-owner pass-through businesses (i.e., partnerships, S-corps, or LLCs taxed as either of the two), “W-2 wages” only includes that one owner’s allocated share of total wages paid. For example, if the business paid $60,000 of wages and there are two partners each with 50% ownership, $30,000 would be the amount of wages each partner would use when calculating the deduction.

For More Information, See My Related Book:

Independent Contractor, Sole Proprietor, and LLC Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • Estimated tax payments: When and how to pay them, as well as an easy way to calculate each payment,
  • Self-employment tax: What it is, why it exists, and how to calculate it,
  • Business retirement plans: What the different types are, and which one is best for you,
  • Click here to see the full list.
A testimonial from a reader on Amazon:
"Quick and easy read. No fluff, just straight to the point and gives you more helpful information that you might imagine. If you are looking to get the bottom line information you need to start your business right then this book is a must have."
November 1, 2025
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