The signature Republican megalegislation has a very appropriate nomenclature, as it combines taxing and spending across a broad range of issues. While the ultimate cost of the bill and the political agenda items that the bill was developed to address may be up for discussion and debate, the impact for taxpayers across the financial journey is significant.
We get into the biggest changes, and how investors can take advantage of opportunities and revisit their own tax, income, and estate planning with a multi-year view. Several of the changes take effect in 2025, so tax planning for the 2026 tax season should start now.
Uncertainty Resolves: The Tax Cuts and Jobs Act Provisions Are Now Permanent
The 2017 Tax Cuts and Jobs Act (TCJA) provisions that were set to expire in 2025 have now been permanently extended. This allows for more effective tax planning with a longer-term view.
Estate planning strategies can now be built on the expectation of a higher gift tax exemption. The exemption of $13.99 million that was set to sunset in 2025 has been increased for 2026 to $15 million for single filers and $30 million for those who are married and filing jointly.
On the income side, several provisions that allowed for lower taxes have also been made permanent. The lower tax brackets of the TCJA will remain in place. The OBBA didn’t increase the $750,000 deductible limit on mortgage debt, but it did make it permanent.
Business owners will now permanently keep the qualified business income deduction (QBI) that was created by the TCJA. This deduction applies to businesses that report income at the individual level (so-called “pass-through businesses”. It allows sole proprietors, partnerships, S-corporations and some trusts and estates to deduct up to 20% of eligible revenue.
Parents with children under 17 can now take advantage of higher tax credit. The bump takes the credit for each eligible child in 2026 to $2200 from $2000. This credit is partially refundable, and for 2025 this refundable portion can reach up to $1700. The credit applies to families with income of $200,000 a year or less, or $400,000 for joint filers. It decreases by 5% for every $1,000 above those income limits.
For new parents in 2025, and those who have a child in any year between 2026 and 2028, the Federal Government is throwing you a baby shower in the form of a one-time $1,000 deposit into a savings account. These “Trump accounts” are tax-advantaged savings accounts that allow parents to contribute up to $5,000 per year. The account balance will be invested in a diversified fund tracking a U.S. stock index. Earnings grow tax-deferred, and qualified withdrawals are taxed as ordinary income.
Many Filers May Now Have More Options
The TCJA almost doubled the standard deduction. With annual increases since 2017, it is now set at $15,750 for an individual and $31,500 for those who are married and filing jointly.
The increased standard deduction being made permanent continues the simplification of the tax code. With the higher level and limits to itemized deductions, for many investors it has been easier to file using the standard deduction.
The OBBA loosened some limitations on itemizing deductions, potentially making it worthwhile to revisit this more complicated tax filing process. The Sales and Local Tax deduction (SALT) that was limited to $10,000 under the TCJA has been increased to $40,000 for 2025. There is a phase out for filers with modified adjusted gross income above $500,000, and for incomes of $600,000 and above, it reverts to $10,000.
The new limits are only in place through 2029; they revert back to $10,000 in 2030. For the next several years, if you pay high levels of state and local taxes, such as real estate taxes, and have high mortgage debt, it may pay off to go back to itemizing.
What’s New?
The OBBA introduced a host of new provisions with the goal of solving specific problems for certain groups of taxpayers.
One of the President’s campaign promises was to eliminate taxes on Social Security payments. Changing Social Security legislation wasn’t possible due to the type of bill this is, so the solution was to increase the senior “bonus deduction.” The existing deduction of $1600 for age 65 and over was increased to $7600, or $8,000 for unmarried people or those without surviving spouses. The increase goes into effect in 2025 and remains in effect until 2028. The credit phases out at income levels above $75,000 for single files and $150,000 for married filing jointly.
Auto loans are now a deductible for some households. Up to $10,000 of annual interest on new auto loans can be deducted, starting in 2025 and running to 2028. There is an income restriction where the value of the deduction decreases for individuals making over $100,000 and $200,000 for married filing jointly. Cars need to be assembled in the United States.
It’s Not All Positive
Student loans saw some changes that may make things more difficult for those that are taking out loans to attend university. The bill limits the amount of loan money available for education from the Federal Government. There is now a lifetime borrowing limit of $257,500 for all federal student loans, but there are also lower caps on graduate school borrowing ($100,000 lifetime) and borrowing for professional degrees ($200,000 lifetime/$50,000 per year). Unemployment deferment and economic hardship deferment for loan payments has been eliminated.
The Bottom Line
The goal of tax planning isn’t just to save money in any one year; it’s to lower the amount of taxes paid over a lifetime. Achieving this requires building a multi-year plan that takes into account the trajectory of your wealth and maximizes opportunities to reduce taxes. Lower tax brackets, tax credits, and the potential to maximize deductions are one piece of the tax puzzle. Lowering income by maximizing tax-advantaged savings, thinking strategically about charitable giving, and setting up an estate plan well in advance are all important parts of a good strategy.
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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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