What taxpayers need to know about savings plans, tax changes in 2026

New tax deductions, such as those for tips and overtime, as well as for seniors, are some of the changes to be aware of when filing your 2025 tax return.

That’s because many of the tax deductions, and a smaller number of tax credits, are part of President Donald Trump’s so-called One Big Beautiful Bill Act.

But there are some provisions in the massive tax and spending bill that will either change or take effect this year — meaning taxpayers should prepare now ahead of filing their returns in 2027.

State and local taxes

The cap on deducting state and local taxes, or SALT, increased from $10,000 to $40,000 for the 2025 tax year. The deduction helps filers claim certain taxes they've already, paid like sales and property taxes.

First introduced in 2017, under Trump's first presidential term, the SALT deduction only applies if filers itemize — not those who take the standard deduction.

The SALT cap will increase annually by 1% until 2029, after which it'll revert back to its 2017 cap of $10,000, or $5,000 for married filing separately.

This year, the cap increases by $400 to $40,400, or $20,200 for married couples filing separately — amounts that would apply when filing by April 15, 2027.

The full deduction phases out for filers with modified adjusted gross income of more than $500,000, or $250,000 for those married filing jointly. Similar to the deduction, the phaseout levels increase by 1% annually through 2029.

Starting in 2026, the value of itemized deductions for those in the 37% tax bracket will be capped at 35%, or about 35 cents for every dollar they deduct, according to Fidelity.

Mark Gallegos, tax partner at accounting and consulting firm Porte Brown's Elgin office, said taxpayers should confirm they're not subject to the alternative minimum tax and that Illinois properly credits their prepayments before they accelerate such payments.

Tax-advantaged investment for kids

For American citizens who have a baby between Jan. 1, 2025, and Dec. 31, 2028, the federal government will contribute $1,000 into a 530A account, also known as a Trump Account, on the child’s behalf. The account is similar to an individual retirement account and is expected to be available starting in July.

Families, employers and others may contribute up to $5,000 annually in after-tax money to each child’s account until they turn 18. From ages 18 to 30, the child can withdraw the funds tax-free as long as they're used for higher education, job training, a first-time home purchase, starting a small business or certain workforce expenses. After age 30, the money is taxed as ordinary income.

Beverly Moran, tax law expert and professor emerita at Vanderbilt University, said low-income families will come up short.

“My message would be, ‘Don’t be fooled by the hype,’” Moran said. “[The account] has been billed as good for working Americans. Mostly, it’s not.”

That’s because most families don’t have an extra $5,000 to save for that long, she said.

Moran said it’s vital that low-income working families also see their new reality under the tax bill: tighter eligibility, smaller benefits and greater costs in time, expenses and recordkeeping.

Expenses for 529 plans

A 529 plan is a tax-advantaged savings plan that helps families plan for future educational expenses. Contributions grow tax-free, and withdrawals are also tax-free.

Before the passage of last year's sweeping budget bill, the plan allowed qualified educational expenses of up to $10,000 per year, per beneficiary for K-12 tuition, certain apprenticeship programs registered with the U.S. Department of Labor and student loan repayments.

In addition to tuition, qualified expenses included fees, books, school supplies, campus food and meal plans, technology used for schoolwork and certain room and board costs for students enrolled at least half time.

Under the new law, families have expanded flexibility. The most significant change is that families can now withdraw $20,000 versus $10,000, as of Jan. 1.

It also expanded the list of qualified expenses, which took effect July 2025. This includes online education materials; costs for tutoring provided outside the home; fees for standardized tests, Advanced Placement exams and college admissions; educational therapy for students with disabilities; and dual enrollment fees for postsecondary programs.

“[The] 529 plans have quietly become one of the most flexible planning tools for families, but the rules are technical, and missteps can trigger taxes or penalties,” Gallegos said.

Senior tax deduction

Taxpayers ages 65 and older can claim an additional $6,000 deduction on their tax returns. The federal write-off takes effect for returns filed in April and expires in tax year 2028.

Single filers with an income of $75,000 may claim the entire $6,000 additional deduction. Joint filers can deduct up to $12,000 so long as they both meet the age requirement and have a shared modified adjusted gross income of $150,000 or less.

The deduction phases out for filers with a modified adjusted gross income over $75,000, or $150,000 for joint filers. Taxpayers can't claim the deduction if their MAGI is $175,000 or more, and $250,000 or more for joint filers.

Goldburn Maynard Jr., law professor at the University of Connecticut, said it’s important to note that withdrawing a large amount from your retirement savings could reduce or eliminate your ability to qualify for the senior deduction. That’s because retirement monies count toward modified adjusted gross income.

Maynard’s scholarship on race-neutral tax policy argues that temporary, income-limited senior deductions perpetuate using small tax breaks and disguise an underlying structure that disadvantages lower-income seniors of color and those who rely on retirement withdrawals.

Mark Gallegos, certified public accountant and partner at Porte Brown, said now is the time to review ways you can qualify for the lower tax brackets and bigger deductions.

He said the earlier you pinpoint the rules, the more time you'll have to use free online tools and resources offered by the IRS and companies like Intuit and TurboTax.

No tax provisions

The much-talked about "no tax on tips" provision allows some taxpayers and self-employed individuals in qualified occupations — like servers, bartenders, salon workers, personal trainers and gig workers — to deduct their tips.

A big downside, Moran said, is that the new rules will require many more workers to keep their own detailed financial records, starting in the 2026 tax year. That’s because the new rules lowered the threshold for which businesses must issue forms for non-employee pay, called 1099s.

That puts the burden on the worker to keep up with pay stubs, receipts and tip totals.

“A lot of people don’t keep records, don’t want to keep records or are freaked out by records,” Moran said. “It’s not an easy thing to do.”

There's also a new auto loan interest tax deduction that applies to new cars with final assembly done in the U.S. The write-off runs through 2028, and car buyers can deduct up to $10,000 a year in interest paid.

“The new temporary deduction for qualified car loan interest only applies to the percentage of the interest associated with personal use,” Moran said.

Another deduction on overtime rules could benefit middle-income filers. For the tax years 2026 and later, employers will be required to separately report qualified overtime compensation.

The deduction is up to $12,500 for the year per return, or $25,000 for joint filers. But for occupations like police officers, firefighters and hospital and construction workers, who regularly work overtime, they should pay attention because the tax benefit phases out if a filer's modified adjusted gross income is more than $150,000, or $300,000 for joint filers.

“Now is the time to step back and ask: What does your income look like for the year? Your W-2, Social Security, other sources,” Gallegos said. “Do you qualify for these credits and deductions? A lot of people miss a lot of deductions. Get your arms around it early.”