Key Tax Provisions of the OBBBA

Individual and Estate Tax Provisions

Many of the temporary provisions from the Tax Cuts and Jobs Act of 2017 were made permanent. Of significance for individual taxpayers, the OBBBA:

• Preserves lower individual tax rates across all tax brackets, continuing the rates set in the 2017 TCJA with a top tax rate of 37%
• Maintains an increased standard deduction which will be $31,500 for joint filers in 2025 ($15,750 for single filers) and adds a $6,000 boost from 2025 through 2028 for those aged 65 and older. The boost will phase out at modified AGI (MAGI) in excess of $75,000 single ($150,000 joint)
• Increases the child tax credit to $2,200 per child in 2025. This still phases out at $400,000 of income for joint filers ($200,000 single) but will also be indexed for inflation
• Retains the limit on mortgage interest deduction to interest on $750,000 of debt
• Permanently eliminates the deduction for interest on home equity debt, although home equity debt used to buy, build or substantially improve the taxpayer’s home is considered acquisition debt
• Increases the state and local tax deduction (SALT) limit to $40,000 for 2025, increasing by 1% annually through 2029 but subject to a phaseout for taxpayers with incomes above $500,000. Higher income taxpayers will still be subject to the $10,000 SALT limit. The deduction will revert to $10,000 in 2030. There will be no SALT limitation for pass-through entities
• Creates a $1,000 charitable contribution deduction for taxpayers who don’t itemize ($2,000 for joint filers). This deduction starts after 2025.
• Imposes a 0.5% floor on charitable contributions for itemizers; beginning in 2026, charitable deductions will be allowed only for amounts exceeding 0.5% of adjusted gross income.
• Adds a deduction for up to $12,500 ($25,000 joint) of overtime pay from 2025-2028, phasing out at a 10% rate for modified adjusted gross income (MAGI) exceeding $150,000 single / $300,000 joint (payroll taxes still apply)

Makes up to $25,000 of tip income deductible from 2025-2028 for those in traditionally tipped industries (phases out at a 10% rate at MAGI above $150,000 single / $300,000 joint)

Provides for a deduction of up to $10,000 for auto loan interest for both itemizers and non-itemizers for new cars with final assembly in the US for years 2025-2028. This deduction phases out at a 20% rate for incomes exceeding $100,000 (single) and $200,000 (joint).

• Limits itemized deductions for taxpayers in the top 37% income bracket, beginning in 2026
• Establishes tax-favored “Trump Accounts,” which will provide eligible newborns with $1,000 in seed money, beginning in 2026
• Eliminates several clean energy tax credits, generally after 2025, including the clean vehicle, energy-efficient home improvement, and residential clean energy credits
• Restricts eligibility for the Affordable Care Act’s premium tax credits
• Increases and makes permanent the estate tax exemption to $15 million ($30 million joint) in 2026, indexed for inflation

Business Tax Provisions

For owners of medical practices and other businesses, the OBBBA also:

• Makes permanent the 20% Qualified Business Income (QBI) deduction for pass-through entities and increases the phase-in range for limitation by $50,000 ($100,000 for joint filers)
• Restores the immediate expensing for research and development expenses
• Permanently restores 100% bonus depreciation for property placed in service after January 19, 2025
• Increases Section 179 expensing to $2.5 million with the phaseout threshold raised to $4 million and both indexed for inflation after 2025
• Expands the qualified small business stock gain exclusion for stock issued post-enactment. The OBBBA provides a tiered exclusion of 50% for stock held for 3 years, 75% for stock held for 5 years, and 100% for stock held for 10 years. Increases eligibility for the exclusion by increasing eligibility for corporation’s aggregate gross assets at issuance from $50 million to $75 million limit
• Renews and enhances the Qualified Opportunity Zone program
• Increases the form 1099 reporting threshold from $600 to $2,000 in 2026, and provides that this threshold will be indexed for inflation beginning in 2027

Now that we have clarity related to tax rates for the near future, it is an opportune time to review retirement planning and financial modeling as well as examine the tax diversity of assets. Periods of lower tax rates can provide a window for ratcheting up contributions to permanent life insurance policies and post-tax retirement accounts, such as Roth 401(k)s and Roth IRAs, to build up a tax-free bucket of assets.

Conclusion

In summary, the OBBBA introduces significant changes to the tax landscape, offering numerous opportunities for physicians and high-net-worth individuals (as well as medical practices and other businesses) to optimize their tax planning. However, navigating these changes and maximizing the benefits requires careful analysis and expertise. This is where the guidance of a financial advisor becomes invaluable.

A financial advisor can help you identify the specific tax planning opportunities afforded by the OBBBA and tailor strategies to your unique financial situation. They can assist in understanding the implications of new tax rates, deductions, and credits, ensuring that you take full advantage of the provisions that apply to you. Moreover, a financial advisor can help integrate these tax planning strategies into your long-term financial plan, aligning them with your overall financial goals and ensuring a cohesive approach to wealth management.

By working with a financial advisor, you can make informed decisions that not only minimize your tax liability but also enhance your financial well-being. Their expertise can provide peace of mind, knowing that you are making the most of the opportunities presented by the OBBBA and positioning yourself for long-term financial success.