Maximizing your tax benefits: Key considerations for the OBBBA

When the One Big Beautiful Bill Act (OBBBA) became law, it made the current tax rate schedule permanent as well as introduced dozens of new tax changes that impact individuals and businesses as they consider tax planning well beyond income tax filing.

For individuals, there are provisions that may likely shape how workers save for retirement, itemize deductions, or assess their estate plans. New saving opportunities and tax credits are available. Multiple provisions were introduced that specifically target businesses including changes to the qualified business income deduction, changes in rules around business expensing and deductions for small businesses. See our article, “How business owners may benefit from the OBBBA.”

Planning considerations for the new tax law

Given the scope of these changes to the tax code, there may be important considerations for planning based on individual circumstances. Since many provisions apply to tax year 2025, this analysis should begin sooner rather than later to determine if there are steps to be taken.

1.  Maximize tax deductions by tactically managing income

While the new law introduces some valuable tax deductions, these benefits eventually phase out once income exceeds certain thresholds. Being aware of these thresholds—and managing income if possible—may yield valuable tax savings. The increase in the SALT (state and local tax) deduction cap from $10,000 to $40,000 will be a key benefit for certain taxpayers living in higher-taxed states. However, the phaseout in the deduction increases rapidly. For taxpayers with income at the phaseout level ($500,000 in modified adjusted gross income; at $600,000 the increased deduction is fully phased out) there may be planning considerations to avoid or reduce income to maximize the deduction. For example, one may want to delay a Roth conversion to another year if the income generated from the conversion would result in a phase-out of the expanded SALT deduction.

Here's a summary of new tax deductions under the law and their income phase-out levels:

2. Consider tax-smart charitable giving strategies

For those claiming the standard deduction, consider the new provision, which allows a charitable deduction for non-itemizers ($1,000 for single filers, $2,000 for married couples filing a joint tax return). Additionally, those over the age of 70½ can make a qualified charitable deduction (QCD) out of their IRA, which allows for a tax-free distribution if funds are directed to a qualified charity. This includes required minimum distributions (RMDs).

Those making larger charitable contributions may want to consider using a donor-advised fund (DAF) to “lump” several years’ worth of donations into a single tax year. For example, this lumping strategy may allow a taxpayer to itemize deductions in a single year while taking the standard deduction in other years. Timing larger charitable contributions in a year when income is expected to be higher can be an effective tax savings strategy.

Lastly, given the fact that, beginning next year, itemized charitable contributions are subject to a new “floor” of income before tax benefits are realized, does it make sense to accelerate charitable contributions into 2025? This new floor reduces the amount of a charitable deduction for itemizers by 0.5% of modified adjusted gross income (MAGI). Those who are charitably-inclined should consult with their advisor.

3. Explore strategies such as Roth conversions to achieve tax diversification

While the lower tax rates and brackets introduced by the TCJA in 2017 were extended permanently by the new tax law, there is really no such thing as “permanent” tax law since it’s only permanent until a future Congress makes changes. Given rising federal budget deficits and solvency challenges for major federal programs such as Social Security, it’s reasonable that taxes may increase for some taxpayers in the future. Tax diversification—holding investable assets over a mix of taxable, tax-deferred and tax-free accounts—may allow a taxpayer to better manage their tax bill in retirement based on their current tax bracket and income needs. For example, if a higher tax bracket applies for a certain year, one could consider drawing income from a Roth IRA and avoid taking additional income from a traditional, pre-tax IRA. t these tax rates and brackets, Roth conversions are still an important consideration for many.

4. Efficient wealth transfer focuses more on income taxes than estate taxes

With the lifetime exclusion for gifts and estates increasing to $15 million per individual next year and made permanent, the overwhelming majority of taxpayers will not be subject to federal estate taxes upon death. Higher-net-worth households under the threshold looking to transfer wealth to the next generation may want to focus on strategies to reduce or avoid income taxes such as:

• Pass highly appreciated assets in taxable accounts at death. This may allow heirs to benefit from a step-up in cost basis to avoid capital gains taxes if assets are eventually sold. This is in contrast to gifting while living, where the recipient inherits the original cost basis of when the asset was acquired for tax purposes.

• Leave a greater portion of tax-deferred savings like IRAs to heirs in lower or moderate tax brackets. With some limited exceptions, non-spouses who inherit an IRA or retirement account are required to distribute those funds within a 10-year timeframe. For inherited pre-tax accounts, this might result in a significant tax bill for beneficiaries. It may be more tax-efficient to name heirs likely to be in lower or moderate tax brackets as beneficiaries of traditional, pre-tax retirement savings accounts. Higher-income beneficiaries may potentially be subject to more taxes when distributing funds from an inherited retirement account.

• Build flexibility into estate plans if needs or tax laws change in the future. For example, “swapping powers” under IRC §675 allow assets inside of an irrevocable trust to be exchanged for other assets of equal value (such as cash, for example). This may allow removing highly appreciated assets from an irrevocable trust that would not generally benefit from a step-up in cost basis upon the death of the individual who placed assets inside the trust. Once the highly appreciated asset is removed from the trust, a step-up in cost basis upon the death of the owner may apply. Consult with an estate planning professional for other techniques to build flexibility into a plan.

For a deeper look at the OBBBA and more details about tax changes and strategies, see our overview, “The OBBBA: Overview and planning considerations.”

Tax law changes require careful review

Individual taxpayers and business owners should consult with a qualified tax professional to understand how these new changes affect their specific circumstances. There may be opportunities to take advantage of certain provisions or considerations for timing or realizing income. Working with a qualified financial professional may help uncover these types of opportunities.

WHAT ARE THE RISKS?

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