The “One Big, Beautiful Bill Act” [OBBBA] is 330 pages of dense text and legal jargon – signed into law on July 4th – that makes sweeping changes to tax law and the national budget. The full effects of this massive piece of legislation may not be felt for several years, but there is no denying that it has already lived up to its title of “big.”
We combed through the expansive provisions and noted several that might affect investors. These key changes are summarized below to give you a head start in understanding this new legislation and how it could impact your financial plan.
2017 Tax Cuts Made Permanent
The 2017 Tax Cuts and Jobs Act [TCJA] made notable changes to tax brackets, but they were set to expire at the end of this year. The OBBBA made these changes permanent, and the tax brackets remain 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Refer to our updated Key Financial Data document for details of the income ranges associated with each bracket.
Another change that was first implemented in the TCJA was a boost to the standard deduction, which led to a dramatic decline in the number of taxpayers who itemize deductions. The OBBBA made the higher standard deduction permanent, and it is now $15,750 for single filers, $23,625 for heads of household, and $31,500 for couples filing jointly. The deduction will further increase each year as it is adjusted for inflation.
A final provision that was made permanent is the increased estate and gift tax exclusion, which applies to the inheritance of assets from large estates. The TCJA doubled the amount of assets that are excluded from this tax in 2017, and the OBBBA further increased the threshold to $15 million for single individuals and $30 million for married couples in 2026.
Higher Standard Deduction for Seniors
One of the administration’s stated campaign goals was to eliminate tax on Social Security payments. There was no direct change to Social Security taxation, but the OBBBA does allow some people over 65 to deduct an additional $6,000 from their taxable income as an increased standard deduction.
Seniors already receive a larger standard deduction than younger adults, and the new increase is applied on top of this existing benefit. This deduction is available for both itemizers and those who claim only the standard deduction. However, the new deduction phases out when income is above $75,000 for single filers and $150,000 for couples.
Exemptions for Tipped Workers and Overtime Eligible Employees
Another campaign goal of the administration was to exclude tips and overtime work from taxation. Some progress was made toward this goal in the OBBBA.
Employees in industries that typically receive tips – like food service and beauty – will be eligible to deduct up to $25,000 per year in tip income. The applicable tips could be received in cash, by card, or through tip-sharing.
Additionally, people who work overtime are eligible to deduct $12,500 – or $25,000 for joint filers – per year. However, this deduction only applies to the overtime portion of an eligible person’s paycheck. For example, if a person makes 1.5 times their salary for overtime hours, they are eligible to deduct the additional 0.5 payment.
There are a few caveats to the new deductions. First, both the tip and overtime deductions are phased out for employees who earn more than $150,000 per year or $300,000 for joint filers. Second, the deduction only applies to federal income tax. Eligible employees could still owe payroll taxes on tips and overtime earnings. Finally, these deductions are temporary and expire after 2028.
SALT Deduction Quadrupled
The state and local tax deduction – better known as SALT – allows taxpayers to deduct amounts paid to their state and local governments from their federal taxes. This deduction is particularly important for taxpayers who live in states with high taxes, and it was championed by representatives from those areas during negotiations for the reconciliation bill.
The OBBBA temporarily raises the cap on the amount that can be deducted from $10,000 under the previous law to $40,000. The cap will be further increased by 1% each year through 2029 after which time it will revert to the previous level. However, high earners may not be able to take full advantage of the deduction because it is phased out for taxpayers with income over $500,000.
Changes To Tax Advantaged Savings Accounts
One of the most interesting changes in the OBBBA is the creation of a new type of savings account for children. The pilot program will provide a $1,000 starting balance for children born between January 1, 2025, and December 1, 2028, which will be paid directly from the Treasury. Parents, friends, and family are also eligible to contribute up to a total of $5,000 per child each year, and that limit will be indexed for inflation beginning in 2027. However, contributions are not tax deductible.
The accounts will be owned by the child, with a custodian – such as a parent – managing the account until the child reaches age 18. This person will choose investments for the account, and allowable options include index mutual funds and ETFs with expense ratios under 0.1%.
Withdrawals are not permitted before the beneficiary – the child – reaches age 18. Between the ages of 18 and 25, the beneficiary can withdraw up to 50% of the funds to pay for “qualified expenses” – higher education, training, small business loans, or a first-time home purchase. Between the ages of 25 and 30, the beneficiary can withdraw all the funds for qualified expenses. After age 30, the beneficiary can withdraw all of the funds for any reason.
Distributions for qualifying purposes are treated as long-term capital gains, which are generally taxed at a lower rate than income. If the distribution is not for a qualifying purpose, the beneficiary may owe regular income tax and a 10% penalty.
Along with the new savings plan for children, the OBBBA also expands the utility of 529 plans. Families could previously withdraw up to $10,000 per year for K-12 schooling, and the new law expands that limit to $20,000. It also allows 529 funds to be used for certain professional certifications, licenses, and continuing education fees.
The OBBBA also included clarifications about who is eligible to contribute to a Health Savings Account. These accounts are one of the only types of triple tax advantaged accounts and are designed to allow people with high-deductible health plans to set aside money to cover their medical expenses. Under the new law, people with bronze or catastrophic plans are now eligible to contribute. In addition, those who use direct primary care services and people who have plans that fully cover telehealth services are not considered to have “other coverage” and are therefore eligible to contribute.
The OBBBA was a vast piece of legislation and included other provisions that aren’t mentioned in this article – like important changes for businesses. If have questions about the impact to your personal finances or business, work with an experienced financial advisor to learn how the new laws might affect you.
Stay Up to Date on Tax and Investing Changes with Meld Financial
At Meld Financial, we strive to bring you the latest information that could impact your financial success. We publish articles nearly every week to keep you informed of the latest developments and simplify complex topics so you can feel confident in your financial future.
Our team also comes together to help you secure your finances with a comprehensive wealth management program that we call Financial Fingerprint®. This nimble plan brings together the most important aspects of your financial life into one easy-to-understand program that evolves with your life.
To learn more about Financial Fingerprint® or discuss how the new bill could impact your finances, contact a member of our team today.