One Big Beautiful Bill Takeaways

With new tax laws officially signed in, we can start unpacking the implications of the One Big Beautiful Bill Act (OBBB). Focusing on the personal financial implications, we have a few key takeaways below.

Executive Summary

• The Act extends previous tax cuts, keeping lower tax rates in place, unless changed by future legislation.
• Most people will see a lower tax bill. A higher standard deduction and a higher cap on the state and local tax (SALT) deduction will benefit many.
• There are income phase-outs limiting benefits for high-income earners.
• Rules are changing on several tax strategies (more detail below).
• Student loan repayment plans have been overhauled.
• There are changes specifically affecting business owners and those overseas.
• Tax cuts are expected to add to the deficit which will have other economic and market implications.

Higher Standard Deduction & Senior Bonus

• Standard Deduction Increase: Single tax filers: $750 increase; Married filing jointly: $1,500 increase. These increased amounts are set to expire after 2028. Note these increased amounts are separate from the already occuring annual increase. Combining the OBBB increase with the already occuring annual increase, standard deductions will have a total increase (from 2024 to 2025) of $1,150 and $2,300 for single and married filing joint filers respectively.
• Senior Standard Deduction: An additional $6,000 deduction for individuals 65 and over. This is phased out for individuals who have over $75,000 Modified Adjusted Gross Income (MAGI) or joint filers with over $150,000 MAGI. This additional deduction is also set to expire after 2028.
  • Note: If joint filers do not qualify, consider married filing separate if one spouse has lower income. There are nuances and other limitations with filing separate, but it’s something worth considering with a tax professional.

Other Increases & New Trump Account

• Higher FSA & HSA contribution limits.
• Estate tax exemption increase to $15MM per person ($30MM for a joint couple).
• The OBBB created a new tax-advantaged savings account for minors (“Trump account”).
  • Accounts will automatically be opened and funded by the Treasury, with a $1,000 seed contribution for children born between 2025 and 2028.
    • For parents of children born before 2025, you can open a Trump account at participating financial institutions.
  • Contributions are not tax-deductible but grow tax-deferred until withdrawn. Qualifying withdrawals are taxed as long-term capital gains.
  • Contributions must be made for another beneficiary (i.e. you can’t contribute to your own Trump account) and can only be made for individuals under 18.
  • Max contributions are $5,000 per child, per year.
  • Qualifying withdrawals are broader than those for 529 accounts.
    • Higher education and disability expenses are covered with no caps, along with capped amounts for first-time home purchases and small business start-up expenses.
  • Investments must be made in a fund that tracks a US stock index.

Retirement Accounts and Roth Conversions

• Backdoor Roth IRA contributions are no longer allowed after 2025.
  • Standard Roth IRA contributions and conversions remain unchanged. Roth 401(k) conversions also remain available.

Charitable Deductions

• Rules on charitable deductions are changing, but the changes don’t go into effect until 2026.
  • If you have charitable goals, a personal review is recommended to determine which tax year would provide you the largest deduction (2025 or 2026). This will not be the same for every taxpayer.

State and Local Tax (SALT) Deduction

• The SALT deduction cap is increasing from $10,000 to $40,000.
• This additional cap is set to expire after 2029.
• The additional deduction is phased out for taxpayers with income (MAGI) over $500,000.
• This increased deduction will shift some taxpayers from taking the standard deduction to the itemized deduction.

Auto Loan Interest Deduction

The Act introduces a deduction for personal auto loan interest. Details below:

• $10,000 deduction amount per tax return ($20,000 potentially for married filing separate with a vehicle for each spouse).
• Income phase outs start at $100,000 of MAGI ($200,000 for married filers).
• Expires after 2028.
• You do not need to itemize to claim this deduction.
• The vehicle must be new, purchased after January 1, 2025 and assembled in the US.
• Leased vehicles and refinanced loans are not eligible.
• Must be for personal use, not business.

529 Plan Changes

• Broadens qualified expenses (effective immediately) to include:
  • K-12 educational related expenses.
  • Recognized credential programs.
  • Homeschooling.
• The qualified K-12 withdrawal limit doubled from $10,000 to $20,000 per student per year, starting in 2026.
• 529 funds can be rolled into ABLE accounts for disability-related expenses permanently.

Student Loan Changes

• For new borrowers, there will only be two federal payment plans going forward.
  • Standard 30-year repayment plan.
  • RAP Plan (Repayment Assistance Plan): An income-based repayment plan with forgiveness after 30 years.
• Existing borrowers must transition to the new system by July 1, 2028.
• Public service loan forgiveness still remains for new and ongoing loans.
• Employer student loan repayment assistance is now permanently tax-free.

Changes for Business Owners

• The Section 199A (QBI) deduction was made permanent, and phase-out limits were extended (so more now qualify).
• 100% bonus depreciation permanently reinstated, and the Section 179 expensing cap is increased to $2.5MM (on US-based property only).
  • This means business owners and real estate investors can deduct more expenses sooner.
• Changes to the Qualified Small Business Stock exclusion (QSBS Section 1202) include earlier holding periods for the exclusion (as early as a 3 year holding period) and increased exclusion and gross asset limits.
  • The changes to QSBS are impactful for those that qualify however most business owners’ stock will not qualify for Section 1202 treatment.

Changes Overseas

• Reporting Compliance:
  • Lower thresholds for reporting foreign gifts, inheritances, and financial accounts (FBAR, FATCA).
  • Accelerated filing deadlines for nonresident and expat taxpayers.
  • Changes to “Controlled Foreign Corporation” tax policies (applicable to those who have ownership in non-US companies).
  • Stricter eligibility for credits like the Child Tax Credit.
• Unfair Foreign Tax Surtax (on non-US citizens):
  • New surtax on US source income (US investments) ranging from 5%-20% for non-US individuals and entities in countries that are deemed to have “unfair” tax policies, restrictive to the US.
    • Currently, much of the EU, the UK, Canada, Australia, and Japan are a few of the countries or regions deemed “unfair” and subject to this surtax.

Portfolio Implications

Beyond the direct implications to your tax return, we should consider the implications to your portfolio as well.

While we can’t predict the future, the potential implications continue to stress the importance of diversification. Consider the following:

• Tax cuts can lead to economic stimulation.
  • If most people pay less in tax, this is good for the US consumer and can flow through to more spending and economic activity.
  • This implication would be a positive for US stocks.
• On the flip side, the OBBB is projected to add trillions of dollars to the US deficit.
  • As we’ve seen recently, ongoing large deficits can devalue the US dollar.
  • This can lead to inflation and increases in interest rates.
  • These implications would be positive for commodities, investments in currencies other than USD and investments that do well during times of inflation. On the negative side of this scenario, bonds would struggle as well as stocks that are sensitive to interest rates.
• With additional taxes on foreigners investing in US assets, there is more of an incentive for those investors to move their money out of the US.
  • This implication would be positive for non-US investments.
• Trump Accounts require holdings to be in a US stock index fund.
  • This forces investors into US, dollar denominated, investments. This impact may be limited, as these accounts have contributions limits and are brand new, but it’s another potential positive for US investments.

These conflicting potential implications are a good reminder of how diversification is so important. Proper diversification ensures your portfolio is prepared for varying scenarios.

 

Disclosures:

Commentary is provided only for informational purposes and should not be taken as advice. Commentary is general and advice should be unique to each individual. Please consult with a trusted advisor to receive advice specific to you.

Impact Financial, LLC (“Impact Financial”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Impact Financial and its representatives are properly licensed or exempt from licensure.