With Tax Day quickly approaching, now is a great time to review key provisions of the One Big Beautiful Bill Act (OBBBA) and reflect on how it may impact your tax bill. This overview highlights several of the most impactful changes (compared to 2024), along with planning strategies worthy of future consideration. While not a comprehensive summary of the legislation (which spans well over 800 pages), we focus on areas likely to matter most for a range of taxpayer profiles. Please note that while some taxpayers will experience a meaningful drop in taxes (especially seniors with low to moderate incomes in high-tax states), others may see an increase (most noticeably charitably inclined, high earners with incomes over $600,000).
Itemized Deduction Cap
Itemized deductions are effectively capped at the 35% tax rate. For taxpayers in the highest 37% marginal bracket, itemized deductions are reduced by 2/37ths of the lesser of 1) total itemized deductions or 2) taxable income in the 37% bracket.
Why this is important – High earners may experience a decrease in the economic value of their deductions which, in turn, has the potential to increase their taxes.
State and Local Tax (SALT) Deduction Cap
The deduction cap was increased to $40,000, from $10,000, for both single and joint filers ($20,000 for married filing separately). SALT taxes include state and local income taxes (or sales tax), real estate taxes, and excise taxes. For high earners, however, the expanded deduction begins to phase out once income reaches $500,000. By the time income hits $600,000, the increased cap is fully eliminated, and the limit drops back down to $10,000.
There is an important exception worth noting: individuals who own pass-through businesses may still be able to deduct state and local taxes at the business level. In many cases, this allows those taxes to be treated as a business expense which effectively circumvents the individual SALT cap and preserves more of the deduction’s value.
Why this is important – This means that many taxpayers who did not itemize deductions in prior years will once again qualify for itemized deductions. Therefore, inform your tax preparer of all state and local taxes you paid. This higher cap is in effect through tax year 2029 and could be meaningful, especially if you reside in a high-tax state.
Strategy – If possible, consider timing the receipt of income to stay under the $500,000 limit.
Charitable Deduction Changes
There is a 0.5% of Adjusted Gross Income (AGI) floor for charitable giving. This means that, if a taxpayer has an AGI of $300,000 for example, the first $1,500 given to a charity is not deductible. It should be noted that fewer taxpayers were itemizing deductions in recent years, and many did not receive any financial benefit from charitable giving as a result. Therefore, the OBBBA may increase the tax benefit of giving for some people despite the new giving threshold. However, for higher earners who will not benefit from the higher SALT cap, this further reduces the deductibility of charitable giving. On the positive side, taxpayers who do not itemize can now claim a charitable deduction of up to $1,000 ($2,000 for joint filers).
Strategy – For taxpayers over age 70 ½, making charitable gifts directly from their IRA (called qualified charitable distributions or QCDs) remains a tax-efficient way to give to charity. Taxpayers younger than 70 ½ may consider stacking multiple years of charitable contributions into a single year to maximize deductibility. Please be aware that there is also a charitable deduction ceiling.
New Senior Deduction
An additional $6,000 deduction is available for each individual age 65 or older ($12,000 for those filing jointly). This deduction is on top of the itemized or standard deduction. However, this deduction begins to phase out once AGI reaches $75,000 (joint return over $150,000) and is completely phased out at $175,000 ($250,000). This deduction is available through tax year 2028.
Strategy – Similar to the SALT deduction, the timing of income becomes important.
Auto Loan Interest Deduction
For newly purchased cars that had final assembly in the United States, taxpayers can deduct up to $10,000 per year of auto loan interest. The vehicle must be for personal use. The deduction is reduced when MAGI exceeds $100,000 ($200,000 for joint filers) and is phased out completely at $150,000 ($250,000 for joint filers). Similar to the senior deduction, the auto loan deduction is 1) available to taxpayers that itemize their deductions as well as to those who use the standard deduction and 2) will last through tax year 2028.
Why this is important – When considering the financial implications of borrowing to purchase a vehicle, you should assess the benefits of interest deductibility or lack thereof.
Estate Tax Changes
The federal estate tax exemption was increased to $15 million per person ($30 million for a married couple). This exemption amount is scheduled to inflate each year. Therefore, fewer estates will be subject to a federal estate tax. The annual gift exclusion remains unchanged at $19,000 per person.
Strategy – Individuals with large estates above the federal exemption limit might consider making gifts to their heirs (either outright or in trust) to reduce their taxable estate. For taxpayers that gifted the full exemption amount in prior years, there is now additional room to top off those gifts.
Trump Accounts
Starting in July 2026, parents can open and fund up to $5,000/year into “Trump Accounts” for their children under age 18. For children born in years 2025 – 2028, the U.S. Treasury will seed the account with $1,000. These accounts are very similar to IRAs given they are tax-deferred, intended to help fund retirement, and can be withdrawn penalty-free for higher education, starting a business, or purchasing a first home. The main difference between Trump accounts and IRAs is that the child is not required to have earned income. The accounts must be opened with the government, and the investments are limited to index funds.
Strategy – While this is a very new concept and IRS guidance is not yet available, we believe the parents’ gifts will become basis in the Trump accounts. Once the child reaches their twenties (and, importantly, is no longer subject to the Kiddie tax), it may make sense for the child to convert this basis to a Roth IRA while they are likely in lower tax brackets. The basis would be converted tax free, while the growth would be converted at the child’s tax bracket. This could be a way to super-charge a child’s retirement funding. Please note that there is uncertainty as to whether gifts into Trump Accounts will qualify as an annual gift. To qualify, a gift must be a present interest – the recipient must have immediate use of the funds. The fact that a child cannot access a Trump account until they turn 18 would seem to disqualify these gifts. Given that this would create complication, we expect the IRS to eventually provide clarity on this issue.
To learn more about how these changes may apply to your personal situation, contact the team at Stage Harbor Financial at 781-934-3130.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.
Stage Harbor Financial, LLC (“Stage Harbor”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Stage Harbor and its representatives are properly licensed or exempt from licensure.
