The temporary nature of these benefits makes immediate action critical. California residents aged 65+ have a limited window (2026-2028) to maximize tax savings before provisions expire.
California-Specific Impact of Federal Tax Changes
How California’s tax system interacts with federal changes:
What California DOES tax:
Federal taxable income (after deductions)
Traditional IRA/401(k) withdrawals
Pension income
Interest and dividends
Capital gains
What California DOES NOT tax:
Social Security benefits (California exemption)
Certain retirement income for seniors
The bonus deduction impact:
If the $6,000/$12,000 senior bonus deduction reduces your federal AGI, it ALSO reduces your California taxable income—creating compound tax savings.
Example: Sacramento couple, both 67:
Federal income after bonus deduction: $12,000 lower
Federal tax savings: $2,640 (22% bracket)
California tax savings: $1,080 (9% bracket)
Total annual savings: $3,720
Three-year benefit (2026-2028): $11,160
Estate Planning Implications of Temporary Tax Relief
These tax changes create estate planning opportunities California seniors shouldn’t miss:
1. Accelerate Roth Conversions During Low-Tax Window
The strategy:
Use the bonus deduction to reduce taxable income, then convert traditional IRA funds to Roth IRA while in lower tax brackets.
Why this works:
Bonus deduction creates $6,000-12,000 “room” in lower brackets
Roth conversions generate taxable income
The two offset each other, minimizing conversion tax
Roth grows tax-free forever
Heirs inherit tax-free Roth IRA
California example:
Margaret, 66, single filer in Sacramento:
Income: $70,000 annually
With bonus deduction: $64,000
Converts $6,000 IRA to Roth annually
Stays in same tax bracket due to offset
Over 3 years: $18,000 moved to tax-free Roth
At 8% growth over 20 years: $83,800 tax-free vs. $67,040 after-tax in traditional IRA
Savings for heirs: $16,760 in taxes
2. Strategic Income Management for Covered California Subsidies
For early retirees (62-65) not yet on Medicare:
California’s Covered California (ACA marketplace) provides health insurance subsidies based on Modified Adjusted Gross Income (MAGI).
The bonus deduction opportunity:
Lowers MAGI by $6,000-12,000
May qualify you for higher subsidies
Could save $500-1,500/month on premiums
Creates 3-year window of reduced healthcare costs
Example:
Tom and Susan, ages 63 and 64, San Diego:
Income without bonus: $82,000
Income with bonus: $70,000
Premium without subsidy: $2,400/month
Premium with subsidy: $900/month
Monthly savings: $1,500
Annual savings: $18,000
Two-year savings (until Medicare): $36,000
3. Gift Tax-Free Transfers Using Tax Savings
Use tax savings to fund wealth transfers:
Annual gift tax exclusion: $18,000 per person (2024 amount)
Strategy:
Federal + California tax savings: $3,000-4,000 annually
Use savings to gift to children/grandchildren
Removes assets from estate (reduces future estate tax risk)
Children benefit immediately
You see your legacy in action
California example:
Retired couple with three children:
Tax savings per year: $3,720
Gift $18,000 to each child ($36,000 per couple)
Tax savings pay for 10% of gifting strategy
Over 3 years: $108,000 transferred out of estate
Reduces estate size, potential tax, and probate costs
4. Charitable Giving Strategy
Combine bonus deduction with charitable giving:
For ages 70½+: Qualified Charitable Distributions (QCDs)
Donate up to $105,000 annually from IRA to charity
Counts toward required minimum distribution (RMD)
Not included in taxable income
Reduces California taxes
Stacking strategy (2026-2028):
Take bonus deduction ($6,000-12,000)
Make QCD from IRA ($10,000-20,000)
Lower taxable income by $16,000-32,000
Maximize tax benefit while supporting causes
Example:
William, 72, Los Angeles:
RMD required: $25,000
Takes $15,000 as QCD to charity
Takes $10,000 as income (with $6,000 bonus deduction = $4,000 taxable)
Supports church while minimizing taxes
Plans legacy charitable trust in estate plan
5. Update Estate Plans to Reflect Tax Landscape
Estate planning adjustments for 2026-2028:
Revise trust distribution provisions:
Account for temporary tax benefits
Adjust withdrawal strategies
Coordinate with trustee instructions
