2026 Income Tax Review I — Filing Status, Taxable Income, Foreign Accounts & Retirement Rules
The 2026 filing season (for 2025 income) brings not only inflation-adjusted numbers but also refinements in what counts as income, who qualifies to file, and how retirement and foreign assets are reported.
This chapter explains the core concepts every tax practitioner and individual should review before filing: filing status qualification, taxable income composition, foreign account reporting, and retirement account limits.
Practical examples and 2025 law updates (OBBBA and SECURE 2.0) are woven throughout.
1️⃣ Filing Status — Who Qualifies and Why It Matters
Choosing the right filing status sets your standard deduction amount, tax rate brackets, and credit eligibility. For most taxpayers it is straightforward, but for recently widowed or single-parent taxpayers, one status can mean thousands in tax savings.
- Single — Default status if not married or legally separated by year-end.
- Married Filing Jointly (MFJ) — Both spouses report combined income and deductions.
- Married Filing Separately (MFS) — Used for liability separation or student-loan/credit phaseouts.
- Head of Household (HoH) — Requires a qualifying dependent and over 50% support of home costs.
- Qualifying Surviving Spouse (QSS) — Available for two years after a spouse’s death if a dependent child remains at home.
Grace’s husband passed away in 2023. She continues to support her 10-year-old child and pays the household expenses. For 2024 and 2025 she may file as a Qualifying Surviving Spouse, receiving the same standard deduction as MFJ.
Starting in 2026 she will switch to Head of Household status.
For detailed definitions and tests, refer to IRS Publication 501 – Filing Status and Dependents.
Correct status selection affects credits like the EITC and Child Tax Credit made permanent under the OBBBA.
2️⃣ Taxable Income — What Counts as Income in 2025
Under the Internal Revenue Code, gross income means “all income from whatever source derived.” That includes cash, property, services, digital assets, and employer benefits unless specifically excluded by law.
The 2025 One Big Beautiful Bill Act (OBBBA) introduced several notable changes.
2025 Highlights under OBBBA:
- Tip income and certain overtime pay are partially excluded (subject to MAGI limits).
- Car loan interest deduction (up to $10,000) is temporary through 2028.
- Standard deduction made permanent ($31,500 MFJ / $15,750 Single / $23,625 HoH).
Taxable income commonly includes wages (W-2), interest (1099-INT), dividends (1099-DIV), business income (Schedule C), rental income (Schedule E), and capital gains (Schedule D). Even non-cash benefits like cryptocurrency received for services must be valued at fair market value on receipt.
Jordan works for a software company (W-2) and also freelances as a UX designer earning $12,000 via online platforms.
Her W-2 wages are reported by her employer, but the freelance payments trigger Form 1099-K once they exceed $2,500 in 2025. Jordan must report self-employment income on Schedule C and may deduct related expenses such as software subscriptions and home office costs.
Common non-taxable items include child support, qualified life-insurance proceeds, and Roth IRA distributions (after the five-year rule). Always cross-check with Publication 525 – Taxable and Nontaxable Income.
3️⃣ Foreign Accounts and Trust Reporting (FATCA & FBAR)
U.S. citizens and residents must report worldwide income. Foreign financial accounts and trusts carry separate reporting obligations under two key regimes:
- FBAR (FinCEN Form 114): Required if the aggregate value of foreign accounts exceeds $10,000 at any time during the year.
- FATCA (Form 8938): Required when specified foreign assets exceed $50,000 (single) / $100,000 (MFJ) on the last day of the year or $75,000 / $150,000 at any point.
- Foreign Trusts (Forms 3520 & 3520-A): For ownership or transactions involving foreign trusts.
John, a U.S. green-card holder living in Korea, has a savings account with $15,000 and mutual funds worth $40,000. He must file both the FBAR and Form 8938. If he also established a Korean education trust for his child, Forms 3520 and 3520-A are additionally required.
Penalties for non-filing can reach $10,000 per form or 50% of account value for willful cases.
Learn more at the official IRS FATCA resource page.
Keeping accurate records of balances and ownership percentages simplifies both compliance and audit defense.
4️⃣ Retirement Accounts — 2025 Contribution and Distribution Rules
Retirement savings remain a cornerstone of tax planning. The SECURE 2.0 Act and the OBBBA extended benefits for older workers and simplified catch-up limits.
Understanding which plan type applies is essential for accurate deductions and avoidance of early-withdrawal penalties.
- Traditional IRA: 2025 limit $7,000 (+$1,000 catch-up age 50+). Tax-deductible contributions, taxable distributions.
- Roth IRA: Same limits, but contributions after tax; qualified withdrawals tax-free.
- 401(k)/403(b): Limit $23,000 (+$7,500 catch-up 50+). New age 60-63 catch-up $11,250 for qualified plans.
- SIMPLE IRA: Limit $16,000 (+$3,500 catch-up; or $5,250 if age 60-63 per SECURE 2.0).
Emily works for a medical clinic and earns $120,000. In 2025 she can contribute $23,000 to her 401(k) plus a special catch-up of $11,250, totaling $34,250. If her plan offers a Roth option, she may split the amount between pre-tax and Roth buckets based on cash-flow needs.
Required Minimum Distributions (RMDs) still begin at age 73. Roth 401(k) RMDs are eliminated after 2024. Check IRS RMD guidelines for calculation tables.
Encourage clients aged 60-63 to maximize the temporary catch-up window before retirement while monitoring MAGI-based phaseouts for deductibility.
5️⃣ Summary & EA Practice Notes
- Filing status determines eligibility for key credits and deduction thresholds — review annually after life changes.
- OBBBA introduces new partial exclusions (tips, overtime, vehicle loan interest); verify MAGI limits.
- Foreign asset reporting (FBAR/FATCA) remains a major audit focus — penalties are severe.
- SECURE 2.0 expanded retirement catch-ups for ages 60-63; RMD rules simplified for Roth accounts.
Up next: Income Tax Review II — Unemployment, Business Income & Home-Office Deductions.