Permanent Tax Brackets? How to Plan for Your HNW Retirement
Episode 3
PERMANENT tax brackets?
Published on August 6th, 2025
In Episode 3 of Retirement Tax Matters, we dive into one of the most significant parts of the new "One Big Beautiful Bill Act" (OBBBA): the permanent extension of the lower tax brackets originally established by the Tax Cut and Jobs Act of 2017. We’ll provide a clear refresher on how today's tax rates (12%, 22%, 24%) are historically low compared to prior years and break down a common misunderstanding of how marginal tax brackets work. Most importantly, we discuss what this newfound "runway" means for HNW retirees and how a long-term, strategic approach to Roth conversions can now be even more powerful for managing your lifetime tax bill and creating a simpler legacy for your beneficiaries.
Key Tax Planning Questions
Click Below To See The Answer
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The recent passage of the One Big Beautiful Bill Act (OBBBA) permanently extended the historically low tax brackets established by the 2017 Tax Cuts and Jobs Act (TCJA).
For 2025, the seven federal income tax rates remain the same:
10% for incomes of $11,925 or less ($23,850 or less for married couples filing jointly).
12% for incomes over $11,925 ($23,850 for married couples filing jointly).
22% for incomes over $48,475 ($96,950 for married couples filing jointly).
24% for incomes over $103,350 ($206,700 for married couples filing jointly).
32% for incomes over $197,300 ($394,600 for married couples filing jointly).
35% for incomes over $250,525 ($501,050 for married couples filing jointly).
37% for incomes over $626,350 ($751,600 for married couples filing jointly).
Tax brackets are still indexed for inflation each year. However, there will be a small, one-time "bonus" inflation adjustment for the 10% and 12% brackets in 2026.
This permanent extension gives retirees a longer runway to make strategic decisions about their income, such as when to accelerate it through Roth conversions or defer it to future years.
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Your marginal tax rate is the rate you pay on your next dollar of income—it's simply your tax bracket. This rate is crucial for making forward-looking decisions, like a Roth conversion, because it determines the tax impact of that additional income.
Your effective tax rate is the average rate you pay across all your taxable income. We define it as your total tax divided by your taxable income (your adjusted gross income minus deductions). This rate gives a truer sense of your overall tax burden for the year.
For example, a couple that is Married Filing Jointly with $350,000 of taxable income is in the 24% marginal bracket. Any additional dollars they earn would be taxed at that rate.
However, because their first dollars were taxed at lower rates (10%, 12%, and 22%), their effective tax rate is a much lower 19.9%.
While your marginal rate is key for planning, your effective rate shows what percentage of your income you actually paid in tax.
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Technically, the answer is yes. The OBBBA made the lower tax brackets initially introduced by the Tax Cut Jobs Act (TCJA) in 2017 permanent.
However, there is a long extensive history of Congress changing tax brackets over time. Here’s a link to see that in action (source: Tax Foundation).
So while the current “permanent” tax brackets extended by OBBBA are great for planning purposes, it doesn’t mean it’s locked in forever. In fact, be prepared for them to change in the future!
Full Episode Transcript
Adam: Good morning and welcome to Retirement Tax Matters. We've got some fun stuff on the agenda for you today. How you feeling, Garrett?
Garrett: Feeling pretty good today. Summer's in full swing, so ready to go.
Adam: It is hot outside. Leather seats are great this time of year, but they are miserable.
Garrett: Yeah, I grew up with cloth seats in our vehicles and it wasn't until later in life we had a car with leather seats. But you're right. In fact, the other day I was in the parking lot, I put down my window to get the dead hot air out, and I put my arm out and the side of my car—the metal—it burned my forearm. You think I'd learn that being a Tennessean in the middle of summer, but here I am still learning.
Adam: All four seasons and we're in the middle of summer. Well, cool. I think we're going to pick up kind of where we've left off talking about the One Big Beautiful Bill Act, OBBBA. The marketing team I don't think nailed that one, but it's out there. That's what we're going with. We touched on last week some of the senior deductions and different things that revolve around that. And this week, I know it's been a topic that's been on a lot of people's planning minds for a couple of years now with the sun setting of the tax rates and wondering, will those be extended? Will they be changed? Will they go up? Will they go down? Well, we've kind of found our answer, right?
Garrett: Yeah. I think this is probably the biggest part of the Big Beautiful Bill was the extension of these existing tax brackets. Every time we get a new tax law, at least me as a financial planner, you're looking for the fun, exciting ones. This is probably the biggest impactful thing for our clients, but it doesn't feel that fun just because it's an extension of what we've already had. It's not like taxes are going lower or tax brackets are going even lower, but instead, it is an extension of the existing tax rates. I thought what we could talk about this morning was just to provide a refresher of some of the feelings that we had back in 2017 when this tax law was passed that lowered tax brackets and, now that we know that we have the permanent extension of these, what does that mean and how does it impact retirees?
So, I've got a couple of things printed off here this morning, and I guess in the future if we get really good at this, we'll link these things below the episode. We'll figure that out. But for right now, I'm going to look at this sheet of paper.
In 2016, President Trump was elected. And it wasn't until the following year, one of their big tax legislations that was passed was called the Tax Cut and Jobs Act of 2017. We called it the TCJA for short. Under the prior administration, the Obama administration, the tax rates were higher. So I wanted to just revisit what those tax brackets used to be.
Currently, the tax brackets go 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Based on your income, your marginal dollar will get charged at those brackets. But before 2017, our current 10% tax level was the same. The lowest income up to a certain level, that first bracket is going to be the same at 10%. But the next one, we're now getting familiar with the 12% tax bracket, but it used to be 15%. So it was 3% higher. The 22% bracket that we find ourselves in now used to be the 25% tax bracket, another 3% higher. We then added in a 24% tax bracket that we currently have, but that used to be 28%, so that was 4% higher. Our current 32% used to be 33%. Our current 35% was still there. Our current highest tax bracket is 37%, but it used to be 39.6%. At almost every level, our current tax brackets are lower than they used to be prior to the Tax Cut and Jobs Act of 2017.
We could go a lot of different directions here, but I just want to start off with one basic misunderstanding that I run into a lot with clients. Let's just take that 22% tax bracket for somebody that's married. That tax bracket goes from $96,950 up to $206,700 in 2025. If your income falls inside of that range, you're going to be in that marginal income tax bracket of 22%. Now, the misunderstanding is sometimes people think when they cross that lower threshold of $96,950 for married filing jointly, then all of their income gets taxed at 22%. That is not how the tax system works.
If somebody had a $106,000 household income and they were married, the first $23,850 would be taxed at 10%. The amount between $23,850 and $96,950 would get charged at 12%, and only the amount above $96,950 would get charged at the 22% rate. So, you may be in the 22% tax bracket, but you're still benefiting from those lower tax thresholds below you. It's only the last little bit that gets charged at 22%.
What we saw with the passing of the Big Beautiful Bill was a permanent extension of these lower tax brackets that we've seen since 2017.
Adam: And we've talked about what permanent means—until another Congress changes it, right?
Garrett: Yeah, because we see it all the time. So, not permanent written in stone, but something would have to come in and change it for it to be different in the future. There's no sunset on this one. I've been doing this for going on my 12th year now, and I've learned that nothing is set in stone and Congress can change whatever they want to as long as they have the public backing to do it.
There's this whole other rabbit trail that maybe we could go down one day, talking about how our current tax rate environment is pretty low historically. In fact, you and I were at a workshop last night and one of the slides I have shows the top marginal rate through the decades, and back during the 1940s and 1950s when we were going through wartime, the top tax bracket was at 91%. So, compared to our current 37%, 91% is hugely different. My chart basically goes through the decades and shows that the top bracket is a moving target. I like to tell people that's a little bit misleading just because of the way that tax brackets were calculated; there wasn't a huge amount of people paying that 91%, but the point of that slide is that tax brackets are dynamic.
Where we should go with this is tax brackets are low. The prior Tax Cut and Jobs Act was not permanent. So what we're seeing is the fruition of what happened in 2017—they did not get the approval to make those things permanent, so they had them sunsetting at the end of this year. As history would unfold, President Trump would not win the previous election, but then he came back and won this one. And so now he's still in office as they are seeing the expiration of the Tax Cut and Jobs Act, and his administration has made a big push to make these permanent.
Adam: Yeah. And I think two things in light of that. We had a good question last night: when did these go into effect? The One Big Beautiful Bill Act is in effect. It was signed and it will affect everything moving forward now.
Garrett: Yeah. July 4th was when the bill was signed. There were different pieces of that legislation that are going into effect at different times, but as of today, the Big Beautiful Bill is law and we are living underneath it. What's interesting about this conversation today is that nothing has changed to my understanding for the 2025 tax brackets. The tax bracket I was sharing with clients in January of this year is exactly the same through the end of the year. However, next year, they did throw in this little bell and whistle where they're going to actually increase the space between the 10 and 12% brackets and give people a little extra bonus. It's not huge, but it will save retirees in the 10 and 12% brackets some taxes. So 2025 is going to be the same tax brackets that we were expecting. 2026 we'll see our first inflation adjustment, but also this bonus adjustment at the 10 and 12% levels.
So I think maybe this morning let's end it with our audience—people that are getting close to retirement, they're in retirement—what does a permanent extension of the lower tax brackets mean for them? I think one of the themes of this bill is that tax planning has gotten more complicated. We'll figure that out as we go. But what I really like for retirees right now is that we have a known runway. Now, are we talking 20 years there's not going to be a change? Maybe not. We'll see. But it is permanent, and I think we've got quite a few years ahead of us that we can take advantage of these lower tax brackets. And I think Roth conversions are going to be one of the biggest things that retirees can use in their tool belt to leverage paying less taxes over their lifetime.
As I look at these tax brackets, I was just thinking this morning that for those people in the 22% and 24% tax brackets—so anywhere between $96,000 up to the top of the 24% at $394,000 if you're married filing jointly, which is where a lot of our clients are—incomes will often fall in that mix. If you're someone in the 22% tax bracket, 24% is not that big a difference. We're talking a 2% difference. And as we discuss Roth conversions and the long-term benefit of that and simplicity for beneficiaries, I'm just becoming more convinced that even going into that 24% tax bracket is worth a discussion. You can take control of your growing traditional IRA that has growing tax amounts that are owed.
Because we have a longer runway now with the permanent extension of these lower brackets, we can be more selective on how much we do. Instead of having three or four years until the tax brackets might go up, we could plan over a decade to do smaller amounts to either get to the top of the 22% or the top of the 24%. And I just think that's kind of the heart of where the Roth conversion planning would go. But even if you're outside of those ranges, while taxes are historically low, let's take advantage of that if we can.
Adam: And I'm glad you hit on that. That's one of my thoughts was the conversation the last couple of years has been, "Hey, we need to cram these in before this thing sunsets." But now it's like, "Hey, we've got a runway." And I think for us it's fun because we can put together a more well-thought-out plan where it says, "Hey, over the next 10 years, here's how we can utilize this to serve you well in this lifetime and also serve your beneficiaries well." We've talked about the simplicity of beneficiaries receiving Roth money instead of traditional money. So I think that's the exciting part for us is that we get more freedom on the playground to play than saying, "Hey, recess is almost over."
Garrett: And I've also found that urgency and huge Roth conversions are harder to commit to. When we talk about, "Hey, we don't have to trigger an IRMAA charge this year. We can keep you below a certain level, keep you in the current tax bracket," people are generally like, "Yeah, that seems to make sense." So, I think that's the environment we're in. I think tax planning is getting harder, but it's an exciting time for retirees to take control of their finances. So, what do you think?
Adam: Absolutely. I think that's great. Well, I appreciate your insight, Garrett. Thank you all for joining us on Retirement Tax Matters. Hope you have a great rest of your day.