Treasury Bills vs. High Yield Savings Accounts: The Tax Angle Most People Miss

Purse Strings Approved Professional Blog Series

Treasury Bills vs. High Yield Savings Accounts: The Tax Angle Most People Miss

Robert Cucchiaro, CFP® President at Summit Wealth & Retirement Partners

If you’re parking cash for an emergency fund, a home down payment, or any other near-term goal, you’ve probably heard the pitch for High Yield Savings Accounts (HYSAs). The rates have been attractive in recent years, and the ease of use is hard to argue with.

But, a lesser-known alternative called Treasury Bills are worth understanding. The difference between the two comes down almost entirely to taxes.

What Is a Treasury Bill?

A Treasury Bill (T-Bill) is a short-term debt instrument issued and backed by the U.S. federal government. They come in terms of 4, 8, 13, 17, 26, and 52 weeks, making them a flexible option for cash you don’t need immediately, but want working (aka growing) for you.

T-Bills don’t pay traditional interest. Instead, they’re sold at a discount to their face value, and mature at full (par) value. The difference between what you paid and what you receive at maturity is your return.

Here’s the formula to calculate the purchase price:

  • Price = Face Value × (1 − (Discount Rate × Days to Maturity) / 360)
  • For example, a $10,000 four-week T-Bill with a discount rate of 3.59% would be priced at: $10,000 × (1 − (0.0359 × 28) / 360) = $9,972.08

You pay $9,972.08 today and collect $10,000 in four weeks — a gain of $27.92. That’s your “interest.”

Treasury bills versus high-yield savings account tax comparison

The State & Federal Tax Pictures

Federal Level

At the federal level, T-Bill income is treated as ordinary income and reported on Form 1099-INT. You’ll owe federal income tax on those earnings at your marginal rate, the same as you do on interest earned in a savings account.

T-Bills start to pull ahead at the state and local level.

State Level Tax Advantage

Under federal law, interest income earned from U.S. Treasury securities (including T-Bills, notes, bonds, TIPS, and Floating Rate Notes) is exempt from all state and local income taxes. This is an explicit federal protection that has been in place for decades.

A High Yield Savings Account offers no such protection. Interest earned in a HYSA is fully taxable at both the federal and state level.

This distinction is most valuable in high-tax states where the T-Bill exemption can meaningfully shift your after-tax math. People in high tax states (like California at over 13% or New York over 10%) benefit most, but it still matters in every state that collects income tax, including Idaho.

What This Means for Idaho Residents

Idaho has a flat state income tax rate of 5.3% on taxable income and does not permit local income taxes, so there’s no city or county layer to worry about.

Critically, Idaho follows the federal treatment of U.S. government obligations: interest income from T-Bills (and other U.S. obligations) is explicitly exempt from Idaho state income tax.

This puts Idaho residents in the same favorable position as savers anywhere else in the country, since the 5.3% state bite doesn’t apply to T-Bill income.

That being said, Idaho’s flat rate is lower than high-tax coastal states, so the raw dollar advantage of T-Bills is somewhat narrower here than it would be in California or New York. But it’s still real money, especially as your cash balance grows.

Running the Numbers: HYSA vs. T-Bill in Idaho

Let’s look at a realistic Idaho scenario.

Assume:

  • Federal marginal tax rate: 22%
  • Idaho state tax rate: 5.3%
  • HYSA yield: 4.0%
  • T-Bill yield: 3.75% (slightly lower, as is often the case)
  • HYSA after-tax yield: 4.0% × (1 − 0.22 − 0.053) = 4.0% × 0.727 = 2.91%
  • T-Bill after-tax yield (state-exempt): 3.75% × (1 − 0.22) = 3.75% × 0.78 = 2.93%

In this example, the T-Bill edges out the HYSA on an after-tax basis despite having a lower headline rate.

That difference may seem insignificant until I walk you through a real-life example we just encountered.

The $5 Million Money Market Mistake

Annual Idaho tax cost on a $5 million money-market balance

We recently met with a prospective client, an Idaho resident with over $5M sitting in a standard money market fund. On the surface, it looked like a reasonable place to park liquid cash thanks to its competitive yield, low risk, and easy access.

What he didn’t realize was that the fund was fully taxable at the Idaho state level.

This is more common than you’d think, and it stems from a widely misunderstood distinction in how money market funds work.

Not All “Government” Money Market Funds Are State-Tax-Exempt

Many money market funds, even some with “treasury” or “government” in their name, hold a significant portion of their assets in repurchase agreements (repos).

A repo is essentially a short-term collateralized loan between financial institutions, often backed by government securities but not a direct government obligation itself.

That distinction matters enormously at tax time because repos are fully taxable at both the federal and state level, while direct Treasury holdings are state-exempt.

Industry data suggests that on average, large government money market funds hold roughly half their assets in repos and half in Treasuries, meaning a substantial portion of what looks like “government” yield is actually fully state-taxable income.

Some popular funds marketed as treasury-focused are nearly 100% repos. You would never know this from the fund’s name or marketing materials alone.

What He Was Losing Every Year

Let’s run the numbers for this client.

Assume the $5M was earning a 4.5% yield in a fully state-taxable money market fund, and his Idaho state tax rate was 5.3%:

  • Annual interest earned: $5,000,000 × 4.5% = $225,000
  • Idaho state tax owed on that interest: $225,000 × 5.3% = $11,925 per year

That’s nearly $12,000 annually paid to the Idaho State Tax Commission on income that could have been entirely exempt if it was held in a different vehicle.

Over five years, assuming similar rates, that’s roughly $60,000 in avoidable state taxes. That number doesn’t include the compounding effect of those dollars staying invested rather than going to the state.

What He Should Have Done Instead

The fixes are straightforward and don’t require taking on any additional risk or sacrificing meaningful yield:

1. Option 1: Direct T-Bills

Purchase Treasury Bills directly through TreasuryDirect.gov or a brokerage account. At a comparable 4.5% yield, the full $225,000 in annual interest would be exempt from Idaho state income tax.

Federal taxes still apply, but the $11,925 state liability disappears entirely.

2. Option 2: A Treasury-Only Money Market Fund

For investors who want the convenience of a money market fund with daily liquidity, certain funds invest exclusively (or near-exclusively) in direct Treasury obligations rather than repos.

Examples include Vanguard’s Treasury Money Market Fund (VUSXX), which has historically maintained 100% of its income as state-tax-exempt, and Schwab’s equivalent Treasury-focused fund.

These offer nearly identical liquidity to a standard money market fund while keeping your state tax exemption.

For either to work, you need to verify the fund’s composition before investing.

Even if you do this, the 1099 produced by your brokerage company won’t alert your tax preparer that this is the case, so they might end up reporting taxable interest at the state level inadvertently.

This is where having your CFP (Certified Financial Planner) and your CPA (Certified Public Accountant) work side-by-side can benefit you. In this case, to the tune of almost $12,000 per year!

The Broader Lesson

This client had a sophisticated financial situation, worked with professionals in other areas, and still had millions of dollars in the wrong wrapper for years.

And yet, he still made this invisible mistake.

High income, high net worth families need a team of Advisors that specializes in these kinds of situations.

For many families, Summit Wealth & Retirement has been that team for 40 years.

Disclaimer

This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy.

Robert Cucchiaro, CFP®

Robert Cucchiaro, CFP®

President at Summit Wealth & Retirement Partners

Robert Cucchiaro, CFP® is a Purse Strings Approved Professional and President of Summit Wealth & Retirement Partners in Eagle, Idaho. He helps women and families create clear, practical financial plans with a focus on retirement planning, wealth protection, tax strategies, and long-term financial confidence. With a fiduciary, education-first approach, Robert is committed to making financial planning feel more understandable, approachable, and empowering.

Estate Planning for Blended Families: Women Whose Adult Step-Kids are (roughly) their Same Age

Purse Strings Approved Professional Blog Series

Estate Planning for Blended Families: Women Whose Adult Step-Kids are (roughly) their Same Age

Robert Cucchiaro, CFP® President at Summit Wealth & Retirement Partners

This article will be helpful if you are a married woman whose family controls at least $10M of assets. It will be particularly helpful if you are a married woman whose husband has kids from a previous marriage, and those kids are roughly the same age as you.

I recently sat down with a widow who spent the last 3 years, and over $1M in legal fees, disputing her late husband’s estate with his kids from a prior marriage. While that may seem like an extreme situation, it’s not the first time I’ve come across it and I guarantee it won’t be the last.

Why does this happen?

It’s pretty simple; most estate plans, even for high net worth families, are constructed in the following manner:

  • Part 1: What happens when both spouses are alive?
  • Part 2: What happens when one spouse dies and one is still alive?
  • Part 3: What happens when both spouses die?

The first part is easy, and the third is somewhat easy (lifetime trusts vs. outright distribution, etc.).

It’s the middle one that is tricky, especially when your second spouse is roughly the same age as your kids from your first marriage.

Why is that?

Let’s assume Dad dies first and leaves his assets in 3 buckets, a common scenario for families with $10M+ in assets. Those buckets would be:

  • Bucket 1: Survivor’s Trust – Mom has full control
  • Bucket 2: Family or Bypass Trust – Mom has limited control and may have some access to income, designed to protect the kids
  • Bucket 3: Marital or QTIP* Trust – Mom has mandatory access to all income

Even though buckets #2 and #3 are designed to protect the kids and ensure something of their inheritance will be left for them (no matter how long stepmom lives or how much she spends), they are still waiting for her to die to inherit any $!

*A QTIP trust, aka Qualified Terminal Interest Trust is an irrevocable trust which pays the trust’s income to the surviving spouse while retaining the principal for the benefit of other named by the deceased spouse.

And if the kids are in their 50s and the stepmom is also in her 50s, you can see how this structure is ripe for contention.

Frankly, even if stepmom is 70 and the kids are in their 40s, I’ve still seen issues because the kids have a vested interest in watching and scrutinizing how their stepmom is living her life, and spending her/their money.

Why this structure is so common

You may be wondering why this structure (A, B, C trusts) is so common, and it’s because it’s used to reduce any estate taxes owed at 1st death.

There is something called the “unlimited marital deduction” which says you can leave an unlimited amount of money to your spouse when you die, without the imposition of an estate tax. And the A, B, C trust structure ensures that to be the case.

This structure is a great combination for maximizing the step up in basis on some assets at both 1st and 2nd deaths, deferring/minimizing the estate taxes, and controlling and preserving the assets for the next generation.

But, what it doesn’t necessarily do is preserve harmony for the surviving family members that presumably want to have a relationship long after Dad is gone.

And I believe that one of the goals for an estate plan should be to create an environment that is conducive to family harmony after a patriarch and/or matriarch pass away.

A better approach

That’s why a better approach is to proactively address this dynamic in advance.

Most people think of life insurance as something you need to protect your income when you are young and the kids are little and the mortgage is large, but the situation we are describing here is also well suited for life insurance.

Depending on the size of the estate, this could also be done using liquid securities after they receive a full step up in basis at Dad’s death (held in a stand-alone separate property trust account that passes directly to his kids or remains in trust for their benefit at his death).

Either way, the proactive plan is designed to preserve harmony after Dad dies, and prevent his heirs from spending hundreds of thousands of dollars (or more) on legal fees and years of angst because no one anticipated this in advance.

My number #1 goal as an Advisor is to give my clients peace of mind.

This type of planning is designed to do exactly that.

Final note

Finally, our specialty is helping successful families navigate wealth and all the complexity that comes with it. We want to continue to write about the topics that are most important and interesting to readers like you – so if you have questions or blog article ideas, please reach out to us and let me know: rob@swrpteam.com

Disclaimer

This material is purely intended to be general and educational in nature and should not be construed as specifically tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as of the date of publication and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.

Robert Cucchiaro, CFP®

Robert Cucchiaro, CFP®

President at Summit Wealth & Retirement Partners

Robert Cucchiaro, CFP® is a Purse Strings Approved Professional and President of Summit Wealth & Retirement Partners in Eagle, Idaho. He helps women and families create clear, practical financial plans with a focus on retirement planning, wealth protection, tax strategies, and long-term financial confidence. With a fiduciary, education-first approach, Robert is committed to making financial planning feel more understandable, approachable, and empowering.

What if a bypass trust is never funded? And 4 Other Things You Should Know About Your New Bypass Trust

Purse Strings Approved Professional Blog Series

What if a bypass trust is never funded? And 4 Other Things You Should Know About Your New Bypass Trust

Robert Cucchiaro, CFP® President Summit Wealth & Retirement Partners

I’ve spent the past 20+ years working with financially successful families, and one of the things that almost all of them have in common is an irrevocable trust. To be clear: for the sole purpose of avoiding probate, 100% of the families I’ve worked with have had a revocable living trust (RLT). But, an irrevocable trust is quite different.

Most people have heard of a simple RLT, but according to former accountant and tax legend Bob Keebler, there are 29 other types of trusts! And, since oftentimes the same trust will have multiple names (i.e. a Bypass trust is also known as a Family trust), I am sure you can find articles that count more than 30 kinds.

For today, I want to talk about Bypass trusts (aka Family trusts) and the 5 most common questions we get about them.

For a married couple with children, most RLTs have 3 parts:

  1. What happens when both spouses are alive (usually nothing from a trust perspective)
  2. What happens when one spouse dies (the purpose of today’s article)
  3. What happens when both spouses die

After RLTs are created, signed, and funded, it’s normal for many years go by before they are looked at again. More often than not, the next time they’re reviewed is when a spouse dies (typically the husband dies first) and the wife is sitting down with her Attorney or Advisor to find out what happens next.

At that point, the spouse is surprised (and sometimes upset) to learn that their RLT says:

“At first death, place ½ of the estate in a survivor’s trust and the other ½ in a Bypass (or Family) trust.”

So, what does that mean?

The Attorney or Advisor then explains that:

  • A new trust is going to be created.
  • That new trust will be irrevocable.
  • Assets equal to 50% of the value of the estate will need to be retitled into this new irrevocable trust.
  • This new trust will have a separate tax return.
  • Distributions from the trust (i.e. accessing the money that was “yours” before your spouse died) will be subject to the terms of the trust, and may be restricted.

Before you call your Attorney and demand that they revise your RLT (if both spouses are still alive, this can be done very easily), there are benefits to this kind of trust design. For today’s purpose I will not explain all pros and cons of a bypass trust, but I will write a follow up blog post on that subject. Email me: rob@swrpteam.com and I will send it to you.

What I will provide today are answers to the 5 most common questions I get when a spouse first learns that they will now have a Bypass trust in their life

1) Do I really have to fund my bypass trust at 1st death?

Technically yes. However, I once had an attorney say that if:

  1. it was a first marriage;
  2. all kids were from that marriage;
  3. everyone alive agreed to sign a waiver,

that the surviving spouse could decide NOT to fund the bypass trust.

I am sure that many of the estate planning attorneys reading this are not going to like that answer, and I’m not saying it was the right thing for the attorney to do. But, they did it, and the mom’s still alive, the kids are all still doing well, and 100% of the estate remains in the survivor’s trust.

Given that, let’s look at an example of how a bypass trust gets funded when the first spouse dies. In our example, assume that dad died first and the assets in the estate were as follows:

  • His IRA was worth $1.5M and his wife was named as primary beneficiary
  • The house was paid off and was worth $2M, and was held in their RLT as community property
  • The Schwab / Fidelity brokerage account was worth $2M, and was held in their RLT as community property

The IRA passes directly to the wife, and there are no estate planning decisions to be made (unless she disclaims the asset, a different subject for a different day 😊).

The attorney says the wife has to fund the bypass trust with 50% of the remaining 2 assets, which leaves 3 options:

  1. Put 50% of the house in the bypass trust and 50% in the survivor’s trust, and do the same for the brokerage account.
  2. Put 100% of the house or the brokerage account in the survivor’s trust and 100% in the bypass trust.
  3. Put a promissory note in the bypass trust for $2M (at the applicable interest rate) that says it will be repaid in full when the surviving spouse dies.

Over my 20+ years of working with families in this situation, I have seen all three of these occur.

I’ve also seen many attorneys tell the surviving spouse:

“This decision has legal ramifications, tax ramifications, and investment ramifications, so find an Advisor that can help you think through this and let me know what you decide to do.”

2) What do you mean our Revocable Living Trust says to create 2 (or even 3) trusts when my spouse dies?

RLTs were initially written in a manner that created 2 (or even 3) trusts as first death for estate tax reasons. However, the estate tax rules have changed so much that even for very successful families, this is often no longer needed. But, if you haven’t updated your trust in a while, you may find that this is how yours is still written.

To describe the 3 trusts I am referring to, we will use the terms A, B, and C trust to describe what typically happens at first death:

  • A trust = the survivor’s trust
  • B trust = the bypass/family trust
  • C trust = the marital (sometimes referred to as a QTIP) trust

Each of these trusts has different rules for income distributions from the trust, separate tax returns, and different levels of authority granted to the beneficiaries. One of the decisions you will need to make is which assets go in which trusts. And, you will need to live with this decision potentially for many years, so make sure you have a Wealth Advisor that has experience in this area.

Again, this may sound overly complicated and potentially unnecessary, but there are tax and non-tax reasons for this structure. While I will write about this in more detail in the next blog post (email me rob@swrpteam.com to access it), for now let’s say that these trusts cannot and should not be dismissed as in some cases, the pros outweigh the cons.

    3) What is Portability?

    At the risk of upsetting estate planning attorneys, I am going to grossly oversimplify a fairly complicated subject. When someone dies, the IRS has rules that state how much money that person can leave behind before their estate is subject to taxation. The current amount for 2026 is $15M, and the tax rate on any amount above that is 40%. The $15M is known as a “lifetime exemption amount.”

    Portability is a concept that allows a surviving spouse, who presumably inherits money from her late husband (without any estate tax, even if over $15M thanks to the “unlimited marital deduction”), to add his unused lifetime exemption amount (let’s say it’s the full $15M) to her lifetime exemption amount.

    This allows a married couple to benefit from the full $30M deduction ($15M per person) even if their deaths are many years apart.

    One of the decisions you will have to make is whether to file a portability election. And because this impact could save or cost your family thousands of dollars, make sure you have a Wealth Advisor that has experience in this area.

    4) Why is there a separate tax return?

    An irrevocable trust will have its own tax ID number, which in turn will mean a separate tax return (Form 1041 as opposed to Form 1040, which you use when filing your personal tax return). To further complicate things, an irrevocable trust will be subject to more punitive tax rates than an individual. So, income tax planning becomes more important and more fruitful once someone dies and the surviving spouse now has 2 tax returns to contend with.

    You also have issues like the step-up in basis, which occurs at death, and can result in assets being sold without capital gains taxes or rentals being re-depreciated all over again even if they had already been depreciated down to $0.

    Once again, while the complexity of it all can seem overwhelming, there are potential benefits to understand.

    One of the things that makes irrevocable trust tax returns unique is that you have 65 days after the year ends to make several decisions that impact the prior year’s tax returns. The full name for this provision is called IRC 663(b), and it’s a rule that “allows trustees of complex trusts and estates to treat distributions made within the first 65 days of a new tax year as if they were made on December 31 of the previous year. This enables trusts to avoid high tax rates by shifting income to beneficiaries.”

    Decisions made here could save or cost your family thousands of dollars, so make sure you have a Wealth Advisor that has experience in this area.

    5) Can’t I just amend all of this?

    If you and your spouse are both still alive and in a position to make decisions (i.e. no one is experiencing diminished mental capacity), then yes, you can amend your RLT now and leave everything in 1 trust as first death. And, this may be the right thing for you to do.

    We’ve had many clients make this exact amendment to their revocable living trust because they are in a position where the benefits of the myriad trusts that will come up after the first spouse dies are not worth it given their goals.

    Before you come to this same conclusion, I would highly recommend sitting down with a Wealth Advisor who understands investments, tax planning, and estate planning, because you need to factor in all three when making these decisions.

    If you or someone you love is seeking this kind of advice around wealth and complexity, please send me an email at rob@swrpteam.com

    Disclaimer

    This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.

    Robert Cucchiaro, CFP®

    Robert Cucchiaro, CFP®

    President at Summit Wealth & Retirement Partners

    Robert Cucchiaro, CFP® is a Purse Strings Approved Professional and President of Summit Wealth & Retirement Partners in Eagle, Idaho. He helps women and families create clear, practical financial plans with a focus on retirement planning, wealth protection, tax strategies, and long-term financial confidence. With a fiduciary, education-first approach, Robert is committed to making financial planning feel more understandable, approachable, and empowering.

    How to invest my inheritance or unexpected windfall?

    Purse Strings Approved Professional Blog Series

    How Does the One Big Beautiful Bill Affect Me? 3 Tax Changes High-Income Families Need to Know About

    Robert Cucchiaro, CFP® President Summit Wealth & Retirement Partners

    If you follow the news, you’ve probably heard about the “One Big Beautiful Bill” (OBBB) that became law in July 2025.

    The OBBB made significant changes, affecting both minor and major parts of the tax code. For example, everything from bike commuting benefits to tax brackets and tax rates was impacted.

    There are too many changes to give anyone a simple summary like, “You’ll benefit from this,” or “You won’t benefit.” But we can look at smaller parts of the OBBB to better understand who will be affected and how.

    In this article, we will discuss changes to itemized deductions that will affect the financial plans of high-income families.

    Itemizing vs. the Standard Deduction

    A windfall is any large, unexpected amount of money you receive outside of regular income, like:

    When you file your federal tax return, you choose between two deduction options that help reduce your taxable income. Your options are to:

    • Take the standard deduction, which is a flat amount based on your filing status
    • Itemize your deductions, which means listing specific deductible expenses on Schedule A

    ewer Americans are itemizing today because the Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction and capped the deduction for state and local taxes (SALT) at $10,000, making itemizing less worthwhile for most people.

    For tax year 2025, single filers have a standard deduction of $15,750, and those married filing jointly have a standard deduction of $31,500.

    However, for high-income families in high-tax states like California, itemizing instead of taking the standard deduction can still be essential for reducing a significant tax bill.

    And the OBBB made three major changes that impact those who itemize.

    Change #1: The SALT Cap Upgrade

    You can deduct some of what you pay in state and local taxes (SALT), which helps reduce your taxable income.

    For years, though, there was a $10,000 cap on SALT deductions. This has been a source of frustration for those living in high-tax states because a family in the Bay Area paying $50,000 in state income and property taxes could only deduct $10,000 of it on their federal return.

    However, the OBBB raised the SALT cap to $40,000 for tax years 2025 through 2029. Married couples filing separately get a $20,000 cap each.

    Unfortunately, this benefit phases out for higher earners. For single filers and those married filing jointly, the SALT deduction starts to phase out once your modified adjusted gross income (MAGI) exceeds $500,000 and disappears entirely at $600,000. That means if your income is above $600,000, your SALT cap is still $10,000.

    The cap and the phase-out threshold both increase by 1% each year through 2029.

    What this means for your financial plan:
     If your household income sits between roughly $300,000 and $500,000, this could meaningfully reduce your federal tax bill, and your tax strategy should be updated to reflect it. If your income exceeds $600,000, the impact is limited, but it is still worth reviewing whether your withholding, estimated tax payments, and deduction timing are optimized based on the phase-out math.

      Change #2: Charitable Deductions Get a Floor

      This one catches many people off guard because it affects both itemizers and non-itemizers.

      For those who itemize:
       Starting with your 2026 tax return, filed in 2027, you can no longer deduct every dollar of charitable giving. Instead, your charitable deduction is only available for the amount that exceeds 0.5% of your adjusted gross income (AGI). This is similar to the existing rule for medical expenses, where you can only deduct costs above 7.5% of your AGI.

      For high-income itemizers, the 0.5% floor will not eliminate the deduction entirely, but it will reduce it. A family with $500,000 in AGI, for example, would automatically lose the first $2,500 of their charitable deduction. Unused amounts can be carried forward for up to five years, so the dollars are not lost, but the timing and structure of your giving strategy may need to change.

       For those who do not itemize:

      Starting in 2026, even if you take the standard deduction, you can still deduct up to $1,000 in charitable cash gifts, or $2,000 for joint filers.

      What this means for your financial plan:
       Donor-advised funds, bunching charitable contributions into higher-income years, and qualified charitable distributions (QCDs) from IRAs all become more important. If you give consistently, discuss with your advisor how the 0.5% floor, carryforward rules, and deductions will affect your financial plan.

      Change #3: High-Income Filers Get Total Deductions Capped

      Starting in 2027, for tax year 2026, total itemized deductions will be reduced for taxpayers in the highest income bracket. This change is the most significant for high earners.

      If you are in the 37% federal tax bracket, your itemized deductions will be reduced by whichever is smaller:

      • 2/37ths of your total itemized deductions
      • The income subject to the 37% rate

      Some say this has the same effect as capping the tax benefit of itemized deductions at roughly 35%, even if your marginal rate is higher.

      You can still itemize, but the higher your income, the less each dollar of deductions helps you.

      What this means for your financial plan:
       This rule interacts with everything, including mortgage interest, SALT deductions, charitable giving, and investment interest expenses. For taxpayers in the 37% bracket, the assumption that “more deductions = lower taxes” no longer holds in the same way.

      Why These Changes Matter Together

      Each of these three changes is significant on its own, and together they change how itemized deductions work for high-income families.

      Consider a family that owns a home in a high-cost area, has substantial investment accounts, gives generously to charity, and earns well into the six or seven figures. That family is simultaneously affected by all three changes:

      • Their SALT deduction now has a phase-out
      • Their charitable strategy needs to account for a new floor
      • Their total deduction value may be cut by the 37% bracket limitation

      Each of those will impact decisions about investment timing, retirement contributions, estate planning, and cash flow.

      What You Should Do Now

      If you are a high-income earner who itemizes, ask yourself:

      • Has my withholding or estimated tax been updated to reflect the new SALT cap and its potential phase-out at my income level?
      • Does my charitable giving strategy account for the 0.5% AGI floor?
      • If I am in the 37% bracket, how does the deduction limitation affect the value of my itemized deductions?
      • Are there planning moves, such as accelerating deductions, structuring charitable vehicles, or adjusting investment activity, that make sense for me?

      The best financial plans treat taxes not as an annual chore, but as part of a broader strategy that supports your investment management, cash flow, and long-term goals.

      As always, we recommend working with a professional who understands both tax strategies and wealth management.

      Q&As in This Blog

      • How does the One Big Beautiful Bill impact me?
      • How does the One Big Beautiful Bill impact high-income earners?
      • What does it mean to itemize on your tax return?
      • What does it mean to take the standard deduction on your tax return?
      • Do more people itemize or take the standard deduction on their tax return?
      • What is the standard deduction for 2025?
      • What are SALT deductions?
      • What are SALT deductions capped at?
      • How did the One Big Beautiful Bill affect SALT deductions?
      • Can anyone take the full $40,000 SALT deduction?
      • What are the phase-out rules for SALT deductions?
      • How did the One Big Beautiful Bill affect charitable deductions?
      • Can I still get a charitable deduction if I do not itemize?
      • If I am in the 37% tax bracket, how are my itemized deductions impacted?
      • Does more deductions always mean lower taxes?

      Disclaimer

      This material is purely intended to be general and educational in nature and should not be construed as specifically tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as of the date of publication and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.

      Robert Cucchiaro, CFP®

      Robert Cucchiaro, CFP®

      President at Summit Wealth & Retirement Partners

      Robert Cucchiaro, CFP® is a Purse Strings Approved Professional and President of Summit Wealth & Retirement Partners in Eagle, Idaho. He helps women and families create clear, practical financial plans with a focus on retirement planning, wealth protection, tax strategies, and long-term financial confidence. With a fiduciary, education-first approach, Robert is committed to making financial planning feel more understandable, approachable, and empowering.

      How to invest my inheritance or unexpected windfall?

      Purse Strings Approved Professional Blog Series

      How To Invest My Inheritance or Unexpected Windfall?

      Robert Cucchiaro, CFP® President Summit Wealth & Retirement Partners

      Receiving a windfall or inheritance can be life changing.

      Whether it’s $1M from the sale of a family property, $2M from a life insurance payout, or $10M from a parent’s estate, coming into sudden wealth creates opportunities and challenges.

      That’s why not acting rashly and handling the money strategically (especially in a tax-conscious way) is important.

      What is a Windfall or Inheritance?

      A windfall is any large, unexpected amount of money you receive outside of regular income, like:

      • Inheritances: Assets received from a deceased family member’s estate (cash, investment accounts, real estate, business interests, etc.)
      • Life insurance proceeds: Death benefit payouts from policies where you’re a beneficiary
      • Legal settlements: Compensation from lawsuits, divorce settlements, or insurance claims
      • Business exits: Proceeds from selling a business or exercising stock options

       

      Should I Invest My Windfall?

      Many people want to invest their windfalls, but using it in other places can be beneficial.

      When to Consider Alternatives to Investing a Windfall:

      • High-Interest Debt: If you have high interest credit card debt or personal loans, paying these off can provide a better guaranteed “return” than normal market investments.
      • Emergency Fund Gaps: As a general rule, you should have 3-6 months of liquid cash. If you don’t have this, allocating part of your windfall to an emergency fund might be useful.
      • Near-Term Major Expenses: Maybe you’re planning for a wedding, to buy a home, or some other big purchase in the next few years. Even though in recent years we’ve had a bull market, investments always have an inherent risk due to market volatility and potential losses. Rather than investing in an aggressive portfolio, consider keeping some of the funds in a high-yield savings account or short-term Treasury securities.

      Strategic Investment Approaches

      Investment outcomes are never guaranteed so instead of promising returns, we’ll give two examples of different approaches based on different goals and life circumstances.

      Example 1: Retirement Focused

      Jennifer (age 42) inherits $6M from her mom. She’s employed and has a stable income, no debt, a 6-month emergency fund, and owns her home. Her main goal is to retire at 60.

      Investment Approach: Jennifer decides to add $100k to her emergency fund (increasing it for added security) and invest the other $5.9M with a long-term, tax-efficient strategy.

      Asset Allocation:

      • $3M to taxable brokerage account: Invested in a diversified portfolio of low-cost index funds (60% stocks, 40% bonds). She chooses tax-efficient index funds that minimize taxable distributions and plans to harvest tax losses annually to offset other gains.
      • $1.45M to maximize tax-advantaged accounts over multiple years: Due to annual limits, she can’t contribute the full amount immediately to an IRA or 401(k). So, Jennifer creates a plan to maximize contributions for the next several years. She increases her 401(k) contribution to the maximum ($24,500 for 2026), contributes the maximum to a Roth IRA ($7,500 for 2026), and uses the other amount to supplement her income and maintain her current lifestyle despite the reduced take-home pay.
      • $1.45M to municipal bonds: Jennifer lives in California with high state income taxes. She invests in a California municipal bond, where the interest she’ll earn is exempt from federal and state income tax. This provides tax-free income and reduces portfolio volatility.
      • $100,000 retained in high-yield savings: This is the $100k Jennifer padded her emergency fund with. This will help her handle unexpected expenses without disrupting her investment plan.

      Tax Advantages: By spreading her windfall across different types of accounts, Jennifer creates “tax diversification.” Her 401(k) contributions reduce her current taxable income by up to $24,500 annually. The Roth IRA grows completely tax-free for retirement. Municipal bonds provide tax-free income. And her taxable account uses tax-loss harvesting and holds assets for at least a year until she gets favorable long-term capital gains rates (typically 15% or 20%, lower than ordinary income rates). With 18 years until she turns 60, even with modest market returns, this could help her achieve her goal of early retirement.

      Example 2: Multi-Generational Planning

      Marcus and Denise (both 55) receive a $12M windfall from selling Marcus’s family business. They’re financially secure with existing retirement accounts, but want to make sure they maintain their family’s wealth for their four adult children while managing their estate tax exposure.

      Investment Approach: Rather than investing everything in their own names, Marcus and Denise use their windfall to benefit multiple generations.

      Wealth Transfer Strategy: $720,000 to 529 accounts: They establish a 529 plan for each of their twelve grandchildren, contributing $60k to each. By making five years’ worth of contributions at once (using the gift tax annual exclusion acceleration rule), they remove $720k from their taxable estate. The 529s grow tax-free and distributions for qualified education expenses are completely tax-free.

      $3.28M through intra-family loans: They provide loans to two of their kids at the AFR (approximately 4.5% for long-term loans in early 2026) to help them buy homes. The children benefit from below-market rates while Marcus and Denise earn interest income.

      $6M to diversified taxable investment account: Invested in a globally diversified portfolio with an emphasis on growth stocks that pay minimal dividends. By focusing on appreciation rather than income, they defer taxes until they choose to realize gains. They plan to hold these investments long-term, potentially until death, when the step-up in basis would eliminate capital gains taxes entirely for their heirs.

      $2M to donor-advised fund (DAF): Marcus and Denise establish a DAF, taking an immediate charitable deduction on their taxes for their contribution. The assets grow tax-free within the DAF. This helps them achieve their charitable goals while also reducing their taxable estate.

      Tax Advantages: Their strategy has multiple tax efficient layers. The 529 contributions remove assets from their estate and provide tax-free growth for education. The intra-family loans transfer wealth through the interest rate differential without gift tax consequences. The growth-focused taxable account defers taxes and sets up a step-up basis for heirs. The DAF provides an immediate tax deduction while removing assets from the estate.

      Also, by distributing their windfall rather than adding $12M to their already-substantial estate, Marcus and Denise reduce their potential future estate tax liability. Estate taxes can be 40% for the amounts exceeding the exemption (up to $15M individually or $30M joint).

      Additional Considerations for Windfall Investing

       Timing the Market vs. Lump Sum Investing: There’s always anxiety about investing a large sum “at the wrong time.” While dollar-cost averaging might reduce this anxiety, historical data says that lump-sum investing typically produces better returns since markets trend upward over time.

      Rebalancing Your Overall Financial Picture: A windfall might seem like a separate group of assets especially if it was unexpected, but it should be seen as a part of your complete financial picture. If you already have $500k in stocks through your 401(k), adding another $500k to stocks might create too much risk.

       

      While there’s no “right” answer for what to do with your windfall or inheritance, a good starting point is to address any immediate financial needs then consider your long-term goals. After, you can decide on a tax-advantaged strategy.

      Windfalls involve many areas of wealth management, including tax planning, estate planning, and investment management.

      As always, we recommend working with a professional who understands both tax strategies and wealth management.

      Robert Cucchiaro, CFP®

      Robert Cucchiaro, CFP®

      President at Summit Wealth & Retirement Partners

      Robert Cucchiaro, CFP® is a Purse Strings Approved Professional and President of Summit Wealth & Retirement Partners in Eagle, Idaho. He helps women and families create clear, practical financial plans with a focus on retirement planning, wealth protection, tax strategies, and long-term financial confidence. With a fiduciary, education-first approach, Robert is committed to making financial planning feel more understandable, approachable, and empowering.