Hope all is well with you. Happy and Healthy Holiday to all. This is the final update of 2025; they will start up again on January 11th. No theme this week because, as I do every year, I will summarize the important changes you need to know for next year. I have put in bold the changes that impact the highest percentage of you.
Cost-of-Living Adjustment (COLA): A 2.8% COLA will be applied to all Social Security and Supplemental Security Income (SSI) benefits, resulting in an average increase of about $56 per month for those of you collecting Social Security.
Taxable Earnings Limit: The maximum amount of income subject to the Social Security payroll tax increases to $184,500 (up from $176,100 in 2025), meaning high earners will pay more in Social Security tax.
Retirement Earnings Test: For those working while collecting benefits before their Social Security full retirement age (FRA) and for Federal retirees collecting the Special Retirement Supplement, the amount you can earn before benefits are withheld increases to $24,480 (up from $23,400).
Medicare Part B Premiums: The standard monthly premium for Medicare Part B is projected to rise almost 10 percent from $185 to approximately $202.90.
Medicare Drug Costs: An annual out-of-pocket cap of $2,100 for covered prescription drugs goes into effect for Part D plans. Good news for those of you on Medicare with a New Year’s resolution to lose weight. Medicare will also begin covering certain GLP-1 weight-loss drugs like Ozempic and Wegovy.
Paper Checks Eliminated: The federal government has ended the issuance of paper checks. This has already gone into effect. It officially stopped issuing most paper checks for payments like Social Security, tax refunds, and veterans’ benefits as of September 30, 2025, transitioning to faster, more secure electronic methods like direct deposit, digital wallets, and debit/credit cards. If you were still receiving paper checks, they were not automatically switched to a different method. To switch to an electronic payment method can do so through the official GoDirect.gov website or by contacting the specific federal paying agency.
Standard Deduction: The standard deduction increases to $16,100 for single filers and $32,200 for married couples filing jointly.
New Senior Deduction: Eligible taxpayers age 65 or older can claim an extra federal income tax deduction of up to $6,000 for single filers or $12,000 for joint filers, subject to income phase-outs. The new temporary federal senior deduction (for tax years 2025-2028) begins to phase out when your Modified Adjusted Gross Income (MAGI) exceeds $75,000 for single filers and $150,000 for married couples filing jointly. This deduction is available even if you take the standard deduction or if you itemize deductions, and it is in addition to the existing age-based standard deduction. The deduction is phased out by 6 cents for every dollar your MAGI is over the starting threshold.
Big changes to TSP and 401k Contributions
Standard Contribution Limit: The annual elective deferral limit for employees will increase to $24,500, up from $23,500 in 2025. If you are getting paid 26 times a year, that is $942.31 per pay period.
Age 50+ Catch-Up Limit: The standard catch-up contribution for individuals age 50 and older will rise to $8,000, up from $7,500 in 2025. If you are getting paid 26 times a year, that is $307.69 per pay period.
Age 60-63 “Super” Catch-Up Limit: For employees aged 60 through 63, the higher “super catch-up” limit remains at $11,250. If you are getting paid 26 times a year, that is $432.69 per pay period.
Mandatory Roth Catch-Up for High Earners: A significant new rule under the SECURE 2.0 Act mandates that participants aged 50 or older who earned more than $150,000 in FICA wages in the prior year (2025) must make any catch-up contributions on a Roth (after-tax) basis. This means affected individuals will no longer be able to make pre-tax catch-up contributions to reduce their current taxable income. If your employer’s plan does not offer a Roth option, and you are considered a high earner, then you will be prohibited from making any catch-up contributions at all.
If you are self-employed. The maximum SEP contribution combined total of employee and employer contributions (excluding catch-up contributions) will increase to $72,000, up from $70,000 in 2025.
For Federal employees specifically, here is a summary of some important changes.
Pay raise: Most civilian employees on the General Schedule are set for a 1% pay bump beginning in January. The White House uploaded pay tables detailing the pay rates for various federal employee schedules. Unlike other recent years of pay raises, the president did not include an increase in locality pay for 2026. Here is a link to the new pay schedules: Pay Tables
Federal Law enforcement officers may receive bigger federal pay raises next year, although it’s not yet clear exactly which positions will see the larger pay bump. Trump’s executive order directed the Office of Personnel Management (OPM) to “assess whether to provide” up to a 3.8% raise for “certain federal civilian law enforcement personnel.”
TSP offering in-plan Roth conversion: A TSP Roth in-plan conversion lets federal employees move pre-tax Traditional TSP funds to a Roth TSP account, paying taxes now on the converted amount for tax-free growth and withdrawals later. The feature launches January 28, 2026. When the TSP rolls out new things, there are usually glitches, so I would not want to be the first one through the door on this. It also requires careful tax planning as it increases your taxable income for the year. This is a tool for those expecting higher taxes in retirement or wanting tax-free income streams. However, it’s crucial to use separate funds for taxes. That means you must have cash available in the bank to pay the taxes that will be owed.
For those of you making charitable gifts.
Major changes to charitable contribution tax laws under the One Big Beautiful Bill Act (OBBBA) will take effect in 2026.
The Universal Deduction: A new universal deduction for non-itemizers. For Taxpayers taking the standard deduction, you can only claim a new “above-the-line” deduction for direct cash contributions to qualified public charities. The deduction limit is up to $1,000 for single filers and $2,000 for married couples filing jointly. Only cash gifts made directly to a public charity qualify. Contributions to donor-advised funds (DAFs) or private foundations are not eligible for this universal deduction.
For Taxpayers Who Itemize Deductions
Itemizers will face new limitations on the amount and value of their charitable deductions in 2026. There is a new 0.5% AGI Floor. This means charitable contributions are only deductible to the extent that their total amount exceeds 0.5% of your Adjusted Gross Income (AGI). For example, if your AGI is $200,000, only donations above $1,000 will be deductible ($200,000 x 0.005). Consider a bunching strategy consolidating several years’ worth of donations into a single tax year to clear the 0.5% AGI floor more effectively, especially if you alternate between itemizing and taking the standard deduction.
Deduction Cap for Top Earners: For those in the highest federal tax bracket (37% marginal rate), the tax benefit of itemized deductions will be capped at a 35% rate. A $10,000 donation, for instance, would result in $3,500 in tax savings instead of $3,700.
Permanent 60% AGI Limit: The existing rule that allows donors to deduct cash gifts up to 60% of their AGI to public charities has been made permanent.
Qualified Charitable Distributions (QCDs): Donors age 70½ and older can make tax-free transfers directly from an IRA to a charity (up to $111,000 per person in 2026). QCDs bypass AGI limitations and are an effective way to meet required minimum distributions (RMDs).
Please use my calendar link below and schedule a phone or Zoom appointment. The calendar link allows you to schedule a call as early as January, as there are no more appointments available this year. If you have a time-sensitive issue, please reach out to me directly before 12/24, as I will be traveling the final week of the year. If it has been a while since your last review, please schedule. The calendar link has a 15-minute appointment option. If it is something you need done promptly, it is generally best to schedule a 15-minute appointment.
