Following the passage of the One Big Beautiful Bill Act (OBBBA), several tax law changes are now in effect that could impact your financial picture. As a tax-intelligent financial planning firm, we are here to break down these updates and how they may affect you depending on your circumstances.
Whether you're retired, managing a business, earning executive-level pay, or inheriting assets, here’s what you need to know, along with strategies we can help you use to plan with purpose.
For Retirees
New Senior Deduction for Taxpayers Age 65+
- Explanation: This provides an extra $6,000 (single) or $12,000 (joint) deduction, phased out for high-income earners. Rumors suggested that Social Security wouldn’t be taxed due to this change. To clarify, Social Security income remains taxable; however, with these larger deductions, taxpayers with only Social Security income will pay little or nothing, thanks to the increased standard deduction and senior deduction. This phases out between $75,000 and $175,000 for singles and $150,000 and $250,000 for Joint Filers.
- Impact: Reduces taxable income for qualifying seniors.
- Strategy: Time your income and charitable gifts to maximize senior deduction and standard deduction combo.
Above-The-Line Charitable Deduction Returns (And Charitable Deduction Limited)
- Explanation: Added an above-the-line deduction of up to $1,000 ($2,000 joint).
- Impact: Fewer taxpayers will benefit from itemized charitable deductions.
- Strategy: Consider bundling your charitable giving through donor-advised funds (DAFs) or utilizing Qualified Charitable Distributions (QCDs) if you are over 70½.
For Beneficiaries and Estate Planning
Estate Tax Exemption Increased to $15 Million
- Explanation: The Federal estate tax exemption increased and was indexed for inflation.
- Impact: Fewer families will be subject to the federal estate tax.
- Strategy: Now is a good time to review and possibly simplify estate plans, while continuing to take advantage of the step-up in basis.
New 'Trump Accounts' Created for Minors
- Explanation: Allows $5,000/year contributions for children under 18, invested in U.S. index funds with tax-free growth until retirement.
- Impact: Creates a long-term wealth-building vehicle for kids.
- Strategy: Coordinate these accounts with gifting strategies and educate children on the benefits of long-term investing.
For Executives and High-Earners
Itemized Deductions Limited for Those in the 37% Bracket
- Explanation: Top earners will see reduced benefit from itemizing deductions. Their deductions will now lead to a 35% savings instead of 37%.
- Impact: Reduces tax savings for wealthy households.
- Strategy: Speed up deductions during lower-income years or switch to above-the-line planning strategies.
AMT Income Threshold Lowered and Phaseout Rate Increased
- Explanation: The Alternative Minimum Tax (AMT) primarily affects upper-middle-income households due to lower exemption phaseouts and higher claw-back rates.
- Impact: Some high-income filers may owe AMT unexpectedly, such as those exercising Company Stock Options.
- Strategy: Watch for ISO exercises, large deductions, and income spikes that could trigger AMT liability.
Qualified Opportunity Zones Extended
- Explanation: The program has been extended to 2030, with enhanced compliance rules.
- Impact: Continued deferral/exclusion of capital gains through QOZ investing.
- Strategy: Consider long-term QOZ investments and follow new reporting requirements.
Cap On SALT Deduction Raised (Then Phased Out)
- Explanation: The deduction for state/local taxes increases to $40,000, phasing out for high earners, with an income phaseout from $500,000 to $600,000 of MAGI.
- Impact: More benefit for middle-income households in high-tax states.
- Strategy: Use income deferral or acceleration to time SALT deductions for maximum value.
For Business Owners
20% QBI Deduction for Pass-Through Businesses Becomes Permanent
- Explanation: The Section 199A deduction for qualifying business income (QBI) remains permanent. The income phase-out for non-qualified businesses is $197,300 for single filers and $394,600 for joint filers. A new minimum deduction for micro-businesses has been introduced.
- Impact: Self-employed individuals and pass-through entities benefit from a continued 20% deduction.
- Strategy: Ensure your business income qualifies and is structured to optimize this deduction.
100% Bonus Depreciation Reinstated and Made Permanent
- Explanation: Restores full 100% bonus depreciation for qualified business property placed in service after January 19, 2025. Applies to most capital assets with a recovery period of 20 years or less.
- Impact: Allows immediate expensing of capital purchases, improving cash flow for capital-intensive businesses.
- Strategy: Accelerate equipment and property purchases into 2025. Use cost segregation studies to identify qualifying assets.
Pass Through Entity Tax (PTET) Workaround (Not Available in PA)
- Explanation: PTET allows partnerships and S corps to pay state tax at the entity level, bypassing the Federal State deduction limits.
- Impact: Owners receive a full federal deduction for state taxes—enhancing tax savings in high-tax states.
- Strategy: Elect PTET where allowed. Not available in Pennsylvania yet, so stay tuned for possible legislative updates.
Considerations for All Taxpayers
TCJA Tax Brackets and Standard Deduction Made Permanent
- Explanation: The current income tax brackets and doubled standard deduction, as set by the 2017 Tax Cuts and Jobs Act (TCJA), are now permanent ($15,750 for Single Filers, $31,500 for Joint Filers).
- Impact: Ongoing lower tax rates and bigger deductions offer more predictability in planning.
- Strategy: Taxpayers can keep using standard deduction strategies, like bunching charitable donations.
Enhanced Child Tax Credit Becomes Permanent
- Explanation: The credit increases to $2,200 per child and is indexed for inflation. The credit phases out at $200,000 for singles and $400,000 for Joint Filers.
- Impact: Supports families with children, particularly those from middle-income backgrounds.
- Strategy: Track MAGI to maintain eligibility within phaseout limits.
Auto Loan Interest Deduction Introduced
- Explanation: Up to $10,000 interest on new personal-use car loans is deductible.
- Impact: Helps middle-income taxpayers purchase new vehicles.
- Strategy: Consider financing vs. leasing to optimize this deduction.
Overtime and Tip Income Deduction Introduced
- Explanation: Allows deduction for tip income (up to $25,000) and overtime ($12,500/$25,000), with income phaseouts.
- Impact: Provides tax relief to service workers and hourly employees.
- Strategy: Make sure you maintain documentation for tips and overtime to substantiate deductions.
529 Plan Expenses Expanded Again
- Explanation: Qualified expenses now cover tutoring, test prep, and certifications.
- Impact: Enhances 529 plans to better suit modern educational requirements.
- Strategy: Utilize 529 funds for a wider range of educational expenses and think about making larger contributions early on.
HSA Eligibility Expanded
- Explanation: Bronze ACA plans and direct primary care memberships now qualify for HSA contributions.
- Impact: More taxpayers can use triple-tax-advantaged HSAs.
- Strategy: Evaluate your plan eligibility and contribute the maximum annually for long-term tax savings.
Clean Energy Credits Repealed
- Explanation: Most green energy tax credits, including those for EVs and solar, expire after 2025.
- Impact: Reduces the incentive for adopting clean energy.
- Strategy: Complete clean energy projects by year-end 2025 to lock in current credits.
Casualty And Wagering Losses Limited
- Explanation: Only 90% of gambling losses are deductible; casualty losses are limited to declared disasters.
- Impact: Limits tax recovery for gambling or natural disasters.
- Strategy: Track winnings/losses carefully and consider insurance coverage in disaster-prone areas.
Miscellaneous Deductions and Educator Expense Deduction Reinstated
- Explanation: Miscellaneous deductions are repealed, but a small deduction for educators who itemize is added.
- Impact: Most taxpayers still won’t benefit unless they itemize.
- Strategy: Teachers should track expenses; others should prioritize above-the-line deductions.
If you have questions about how these changes may affect your plan, don’t hesitate to reach out. Understanding the tax code is part of creating a smart financial strategy, and we’re here to help you make the most of it.