Market Update – Third Quarter, 2025

THE NEW TAX BILL passed earlier this month, and it contains several new provisions. We are not tax advisors but as financial advisors we’ve received many questions. Below we cover a few of the areas that have come up in our conversations. We’ll wrap-up with an invite to head over to the Latest News section on our website where we share a few words about current U.S. stock market valuation.

Senior Deduction
Starting in 2025 and through 2028, taxpayers 65+ years of age will receive an additional income tax deduction of $6,000. For married filing jointly the deduction is $12,000. The Senior Deduction is in addition to the increased standard deduction, and it even applies to those who itemize. Regarding the pre-existing deduction for 65+ year olds ($2,000 for singles and $3,200 for married filing jointly) it still applies to those using the standard deduction.

To qualify for the full deduction, taxpayers must be 65 years old and have a modified adjusted gross income (MAGI) of less than $75,000 for single filers and $150,000 for married filers. Above the income thresholds the deduction begins to phase out by 6%, or six cents, for every dollar over the limits until being eliminated at income levels of $175,000 for singles and $250,000 for married filing joint.

Here’s an example. Let’s say your MAGI is $110,000 as a single filer. Since your income is $35,000 over the income threshold, your deduction will be reduced by 6% of the amount you are over. In this case, you could take a $3,900 deduction.

Senior Deduction – Our Take
This provision was targeted to help offset social security taxes for those 65+, but it did not change or eliminate taxes on social security, nor could it under the budget reconciliation process used to pass the tax bill. What the Senior Deduction will do is lower taxable income across-the-board for those who qualify which will reduce taxes paid, whether that’s federal, state or social security.

SALT Deductions
State and local tax deductions got an upgrade in the new tax bill. For taxpayers who itemize, state and local taxes paid can reduce their federal tax liability. The cap was previously $10,000. The cap is now $40,000 and begins to phase out at income thresholds of $250,00 for single filers and $500,000 for joint filers.

Under the old $10,000 SALT cap, states quickly developed workarounds that benefited individuals and the respective state at the expense of the federal government. Essentially, states allowed taxpayers to pay state taxes as charitable contributions which were not subject to the $10,000 cap. Here is how that worked:

The above workaround didn’t go over so well with the Treasury Department, and they put a stop to it. However, an exception was made for pass-through businesses such as S-corps, LLCs and partnerships among others.  Here is the structure of the pass-through workaround:

SALT Deductions – Our Take
In similar fashion to the Senior Deduction, we favor increased tax savings on the belief the savings can transfer to the household and business level and increase investment and discretionary spending – all good things for the economy. Given the complexity of the tax code, careful planning and strategies such as the pass-through entity tax will continue to be important for taxpayers.

Trump Accounts
Expected to be available next year, Trump accounts are designed for children under the age of 18. Parents can open an account (younger children likely auto-enrolled) as a tax-advantaged way to help their child save for their future. There are several complexities to the accounts which are similar in design to IRA’s.

After-tax contributions can come from parents, relatives and friends up to $5,000 per year until the child reaches 18 years old. The parent’s employer can make tax-free contributions up to $2,500 which counts towards the $5,000 max. Contribution limits will be adjusted for inflation starting in 2028.

For children born in 2025 – 2028, the U.S. Treasury will make a deposit of $1,000. Contributions can also come from state and local governments and charities under various stipulations.

The account is required to be invested in a low-cost U.S. equity index mutual fund or exchange-traded fund (ETF).

As a general rule, the account can’t be touched before the beneficiary turns 18 years old. After that, it essentially turns into and follows the rules of an IRA for withdrawals, penalties, contributions, investments, conversions and required minimum distributions. This is where things can get complicated.

Income tax applies to all withdrawals that were tax-free contributions such as those from the government (including state and local), employers, charities and the earnings in the account. After-tax contributions from parents, relatives and friends are not subject to income tax.

Let’s simplify using the example from Ashlea Ebeling from the Wall Street Journal, “Say you contributed $10,000 of after-tax money to the account on top of the $1,000 seed money, and there is $4,000 of investment earnings. Any distribution you take will be one-third taxable because the $1,000 seed money counts as earnings, and IRA distributions that include after-tax money are partially taxable. If you take out $6,000 in this case, $2,000 would be taxed, no matter what you use it for and at what age.”

In addition to taxes, account holders must navigate any penalties. Withdrawals in the year the beneficiary turns 18 but before they reach 59 ½ years of age will incur a 10% early withdrawal penalty unless it qualifies for an IRS exception. Some of those exceptions include education expenses and up to $10,000 as a first-time home buyer.

Trump Accounts – Our Take
We’re all for the idea of encouraging young people to save and invest. The earlier one can benefit from the time-value of money and the power of compounding, the better. We just don’t see the Trump accounts really standing out above the other options that exist for parents (and eventually the children themselves) to save and plan for the future.

The tax code already provides other vehicles such as 529 plans that carry higher contribution limits and substantial tax benefits. Standard custodial brokerage accounts also provide an advantage given capital gains taxes apply to earnings instead of the ordinary income tax on Trump account earnings. Establishing a custodial Roth IRA (once the child has earned income) offers a long runway of tax-deferred growth and tax-free withdrawals at 59 ½. Prior to that contributions can be taken out tax and penalty-free.

All said, there is no reason for parents not to open the account and take the free $1,000 if they have a child in 2025 through 2028. Parents may also want a Trump account to receive contributions should their employer, state and local government or charities ever participate. But in terms of using the Trump account as a primary strategy to save and invest in their child’s future – there are likely better options.

In Closing
To our clients, thank you for the opportunity to serve your investment needs and please do not hesitate to contact us if you experience any material changes in your personal situation or would like to discuss any specific matters.

To our other readers, if you would like a complimentary review of your investment accounts or any other financial planning matters, please do not hesitate to contact us. As fiduciaries, we will happily provide you with an unbiased opinion based on your specific situation.

Lastly, head over to the Latest News section on our website to read our update on market valuation and don’t forget to follow us on social.

This newsletter is for informational purposes only and not intended nor should it be interpreted as tax advice. AIMA, Inc. is an SEC registered investment advisor – not a tax advisor.