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CONTRIBUTORS

Bill Cass, CFP®, CPWA®

Director of Wealth Planning,
Franklin Templeton

The income tax code is riddled with many tax benefits that are dependent on income. Consider retirees who, depending on income, may owe taxes on Social Security benefits or be subject to higher Medicare premiums. The OBBBA adds additional complexity by introducing new tax deductions which phase-out at higher income levels. Being mindful of, and planning for key income thresholds may lead to more tax-efficient outcomes.

As income increases, the ability to tax advantage of many tax benefits lessens.

There are many planning considerations for clients. For example, does a Roth IRA conversion make sense? What are the potential drawbacks from a planning perspective if additional taxable income is generated?

Here are some important income thresholds to plan for:

Source: IRS 2026 figures. Provisional income includes modified adjusted gross income plus tax-exempt interest income plus half of Social Security benefits. Income dollar figures represent the beginning of income phase-out thresholds for each tax provision. The definition of modified adjusted gross income may differ depending on the specific tax provision.

Importance of planning

Managing these income thresholds effectively may lead to better after-tax results. For example, consider a taxpayer residing in a higher-income tax state who is planning on taking advantage of the maximum SALT deduction under the new tax law ($40,000). This is a significant increase in the $10,000 deduction cap that has been in place since 2018. However, once modified adjusted gross income exceeds $505,000 (single filers or married couples) the amount of the deduction is reduced. When modified adjusted gross income exceeds $606,333, the deduction cap reverts to $10,000. For someone approaching the income phase-out threshold ($505,000) adding additional income from a Roth conversion for example, may not be an advantageous strategy. Taxpayers should consult with a qualified tax professional on how to manage these income thresholds based on their specific circumstances.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.

Franklin Templeton, its affiliated companies, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

WF: 9666108

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

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