Big Beautiful Bill (ACT):

Congress passed the Big Beautiful Bill Act (BBAA) on July 4.  This is an extensive bill close to 1,000 pages long.  I wanted to provide an overview of some of the highlights and planning opportunities.

Income Planning:

• One of the most significant changes was no changes to a number of the temporary tax breaks that have been in place since 2017.  There were a number of laws scheduled to sunset on 12/31/2025 that are now permanent.  
• There are income planning opportunities particularly in the lower tax brackets (10% and 12%), as well as the higher tax brackets (35% and 37%).  Specifically, the lower tax brackets are being expanded and a number of phase outs begin in the 37% bracket.

Tax Deductions:

• One of the most significant changes was a substantial increase of the allowed SALT deductions (state and local taxes) from $10,000 to $40,000.  Very few people have been able to itemize deductions since 2017, but this will be shifting for many taxpayers.  Itemized deductions include state and local taxes (including real estate tax), mortgage interest, charitable contributions and medical expenses.  
• With this change, it will sometimes make sense to group deductions to receive a bigger tax benefit in a given year, such as prepaying real estate taxes.
• There are a number of changes to charitable deductions, including the ability to deduct $1,000 per taxpayer if you do not itemize (starting in 2026), a floor on itemizing charitable deductions (starting in 2026) and tax credits for certain contributions.  Donor Advised Funds are more attractive with these new provisions.
• There are also a number of tax law changes that are not effective until 1/1/2026, so there are some unique planning opportunities in 2025, particularly with charitable giving and tax payments.  
• The standard deduction is going up slightly for all tax payers. 
• Lastly, taxpayers over the age of 65 are entitled to an additional $6,000 deduction.
• Beginning in 2025, taxpayers can deduct interest paid on car loans that were assembled in the US.  I have read contradictory interpretations on whether or not the car has to be purchased new or if it can be purchased used.

Tax Free Planning:

• There was some discussion that municipal bonds would lose their tax exempt status, but this did not occur.
• Many taxpayers receiving tips or overtime compensation will not have to pay Federal taxes on the income.  This also creates a unique opportunity if your income is near the threshold of losing this benefit.
• With the expansion of the 10% and 12% brackets, there are increased opportunities to have tax-free qualified dividend income and long-term capital gains.  

Tax Credits:

• The tax credit for children under the age of 17 is expanding slightly, from $2,000 to $2,200.
• Tax credits for purchasing certain electric vehicles expire 9/30/2025 and the EV charger credit is expiring on 6/30/2026.
• Tax credits for solar installations are expiring in phases between 1/1/2026 and 12/31/2027.
• Beginning in 2027, there will be a tax credit up to $1,700 annually for cash donations to approved Scholarship Granting Organizations.  

Tax Deferral:

• The reform includes the creation of Trump Accounts.  These work much like 529 plans, as contributions are not tax deductible, and funds can be withdrawn tax-free for qualified education expenses.  However, you are limited to contributions of $5,000 annually and the funds cannot be withdrawn until the child is at least 18 years old.  The Treasury will be funding these initially with $1,000 the year that a child is born, starting in 2025.

Other Changes:

• There are many other changes in the new bill.  One of the most notable ones pertain to student loan reform.  This will impact all current and future borrowers with government loans.  The extensive changes are out of the scope of this email.
• Federal estate taxes do not apply for estates under $15 million.  State estate taxes STILL do apply.  

Phew!  Those are lots of changes!  There are significant planning opportunities with these new laws, and we still have several months to implement 2025 strategies.

Lars Lambrecht, Rehoboth resident and Certified Financial Planner, is available to answer questions or meet for a consultation.  617-947-6428