Tax Kraken™
This update expands on the Government Strategies realm of the Retire REGAL® framework, where tax rules, Social Security, and Medicare are coordinated rather than chased one year at a time. The law it covers is the largest change to those rules in the current cycle.
On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law as Public Law 119-21. It is the most consequential retirement-adjacent tax legislation of the current cycle and it has already reshaped several of the assumptions that drove Roth conversion planning leading into 2026.
What OBBBA Changed That Matters for Government Strategies
- TCJA individual tax rates made permanent. The top marginal rate stays at 37% (rather than reverting to 39.6% in 2026, as prior law had scheduled). Other TCJA brackets and the enlarged standard deduction were also made permanent. This removes the "convert before rates rise" urgency that had driven much of the 2023–2025 Roth conversation, but it does not change the structural case for Roth planning. The most efficient conversion window remains between retirement and the start of Social Security and RMDs, when taxable income is typically at its lowest.
- New temporary Senior Deduction for age 65+. OBBBA introduced an additional deduction of up to $6,000 per qualifying individual age 65 or older (tax years 2025 through 2028), available to filers whether they itemize or take the standard deduction. The deduction phases out above $75,000 (single) and $150,000 (married filing jointly) of modified adjusted gross income.
- SALT deduction cap raised. The state and local tax deduction cap was temporarily increased from $10,000 to $40,000 for 2025 and $40,400 for 2026 (indexed at 1% annually through 2029, then reverting to $10,000), for households with MAGI at or below $500,000 in 2025 / $505,000 in 2026 (the threshold is also indexed +1% annually). Above that threshold, the cap is reduced by 30% of MAGI in excess but never below $10,000.
- Estate and gift tax exemption made permanent at the higher level. For 2026 the federal estate, gift, and generation-skipping transfer (GST) exemption is $15.0 million per individual (up to $30 million per married couple with proper portability planning; note that GST exemption is not portable). Indexed annually for inflation beginning in 2027. The annual gift exclusion remains $19,000 per recipient for 2026. The permanence removes the planning urgency that surrounded the prior scheduled sunset and meaningfully changes the calculus for larger estates.
Why the Senior Deduction Matters for Roth Conversion Sizing
The Senior Deduction creates an additional planning variable retirees did not have before. A Roth conversion that pushes MAGI into or above the phase-out range ($75,000 single / $150,000 MFJ) can reduce or eliminate the deduction, raising the effective tax cost of the conversion. Conversely, a conversion sized deliberately under the phase-out may preserve the full deduction while still moving assets into the Roth layer.
The practical implication is that the Senior Deduction adds a new threshold to watch alongside the IRMAA brackets, the Social Security provisional income thresholds, and the ordinary-income bracket boundaries. For qualifying households, Roth conversions should now be modeled against four interacting thresholds rather than three.
The Senior Deduction is currently scheduled to expire after tax year 2028 unless extended or made permanent by subsequent legislation. Planning that relies on the deduction should anticipate that expiration. The interaction between a Roth conversion and the Senior Deduction is specific to individual circumstances and should be modeled with a qualified tax professional before any conversion is initiated. A Roth conversion may not be suitable for every situation.
Sources and Review Date
Reviewed October 28, 2026. References: Public Law 119-21 (H.R. 1, 119th Congress) · IRS: OBBBA deductions for working Americans and seniors · IRS: tax year 2026 inflation adjustments. Examples are illustrative unless identified otherwise; account, contract, and state rules can affect the result.
