Last week, the OBBBA was signed into law. There are some significant tax changes and other items from this act that may affect you. Here are some of the major items:
Individuals
- Permanently extends the “Tax Cuts and Jobs Act” (TCJ) passed in 2017 which was set to expire at the end of 2025.
- Tax Rates are made permanent, subject to inflation adjustments. Top Rate 37%.
- Standard Deduction, about the same. Over 90% of Americans use the Standard Deduction.
- SALT (State and Local income tax) Deduction increased to $40,000 through 2029 for AGI below $500k on a joint return. Applies to 2025 returns.
- Estate and Gift Tax Exemption permanently increased to $15 million per individual, $30 million per couple, indexed for inflation.
- Smaller items, with low AGI phase-outs -Overtime and tip pay, increased senior deduction, auto loan interest deduction above the line, increased childcare credit, newborn savings accounts and expanded 529 use for k-12 education.
Businesses
- The Qualified Business Income Deduction of 20% is made permanent. Service-based businesses eligibility phases out at slightly higher levels.
- 100% Bonus depreciation is restored and made permanent. It is available for qualified property acquired and placed in service after January 19, 2025. Prior to this change, bonus depreciation was scheduled to be 40% in 2025.
- Section 179 expensing was raised to $2.5 million (from $1 million) and applies to 2025.
- Full R&D Expensing for domestic research and experimental expenditures is made permanent.
- SALT workarounds for Pass-Throughs are preserved.
- Current business loss carryover rules remain largely unchanged.
- The Business Interest Deduction calculation has changed allowing great deductibility.
- Additional incentives for domestic production including Advanced Manufacturing Investment Credit for semiconductor equipment.
Key Tax Provisions by Income Level:
- All income groups benefit from the permanent extension of lower tax rates.
- Middle-class earners (roughly 3rd-7th deciles) gain from the new above-the-line deductions for tips, overtime, car loan interest and enhanced deduction for seniors.
- Upper-middle and high income households benefit the most from the permanent pass-through deduction, and a higher SALT cap (though that phases out at $500k of AGI).
- Top 10% also benefit from the expanded estate and gift tax exemption.
Conclusion: Your Individual Income Taxes for 2025 should not be significantly different than expected other than the SALT increase deduction and, for qualifying pass-through business owners, reductions for purchases of equipment and other business deductions. For small business owners, big increases in bonus depreciation and Section 179 deductions as well as R&D expense could mean big reductions in income taxes. Income tax projections for 2025 should be completed promptly to start the planning to save taxes in 2025. We look forward to helping our DWM clients understand how the OBBBA tax provisions impact their 2025 income taxes and strategizing with them on taking advantage of the new tax rules to reduce their income taxes in 2025 and future years in every way possible.