Understanding the "OBBB"
We keep an eye out for rules and regulations that could impact you and your family. In President Trump’s "One Big Beautiful Bill," signed into law on July 4th, there is a significant shift in U.S. fiscal policy. Understanding the provisions is crucial for making informed financial decisions both now and for years to come.
Here’s What You Need to Know
The OBBB is a comprehensive budget reconciliation law that encompasses a range of tax and spending policies.
Who May Be Impacted
- Most Taxpayers: The permanence of the 2017 tax cuts and the increased standard deduction will likely benefit most individuals and families.
- Hourly Wage Earners/Service Industry Workers: Those who receive tips and/or overtime pay may see specific temporary tax benefits.
- Seniors: Will benefit from a temporary additional deduction.
- Small Business Owners: Expected to see significant tax relief and incentives for growth, including changes to the QBI deduction and bonus depreciation.
- Families with Children: Will see an increased Child Tax Credit.
- High-Income Earners: Will continue to benefit from the lower individual tax rates and changes to estate tax exemptions.
- Homeowners (in high-tax states): May benefit from the temporary increase in the SALT cap.
- Lower-Income Individuals/Families: Those who rely on Medicaid or SNAP may face significant changes to their benefits and eligibility due to program cuts and expanded work requirements, potentially leading to a loss of coverage or reduced assistance.
- Defense Industry: Stands to gain from increased funding.
- Fossil Fuel Industry: Benefits from policies promoting oil and gas development and phasing out clean energy incentives.
- Healthcare Providers: Hospitals and healthcare systems that serve a large number of Medicaid recipients, particularly rural hospitals, may face financial strain due to the cuts.
Core Components
Tax Policy:
- Permanent Tax Cuts: Makes most of the individual tax cuts from the 2017 Tax Cuts and Jobs Act permanent, including lower rates and reformed brackets.
- Increased Standard Deduction: Includes a permanent boost to the standard deduction (e.g., $15,750 (single) and $31,500 (joint), indexed for inflation after 2025).
- New Deductions (temporary, expiring 2028):
- Tipped Income: Deduction for tipped income up to $25,000 for workers earning under $150,000 (single) / $300,000 (joint).
- Overtime Pay: Deduction for overtime pay up to $12,500 (single) / $25,000 (joint) for workers earning under $150,000 (single) / $300,000 (joint).
- Auto Loan Interest: Deduction up to $10,000 per year for interest on auto loans for U.S.-assembled cars purchased between 2025-2028, phasing out for higher earners.
- Senior Deduction (temporary, expiring 2028): An additional tax deduction of up to $6,000 for seniors (age 65 and older), phasing out at incomes of $75,000 (single) / $150,000 (joint).
- Child Tax Credit: Permanently increases the maximum Child Tax Credit from $2,000 to $2,200 per child, indexed for inflation. The refundable portion is also indexed but not increased.
- SALT Cap Adjustment (temporary, expiring 2029): Increases the State and Local Tax (SALT) deduction cap from $10,000 to $40,000. This increased cap applies to taxpayers with modified adjusted gross income (MAGI) under $500,000 (applies to all filing statuses, including single and joint filers). For those with MAGI above $500,000, the $40,000 cap is phased down (but not below $10,000). These provisions are in effect for five years (2025-2029), after which the limitation reverts to $10,000 permanently.
- Business Tax Relief: Enhances flexibility for domestic R&D costs (allowing immediate deduction or amortization), reinstates 100% first-year "bonus depreciation" permanently, increases the Section 179 deduction cap to $2.5 million, and makes the 20% Section 199A (Qualified Business Income) deduction permanent. It also permanently increases the small business estate tax exemption and introduces changes to the Qualified Small Business Stock (QSBS) exclusion.
- International Tax: Modifies rules for Foreign Tax Credits (FTCs), Global Intangible Low-Tax Income (GILTI), Foreign Derived Intangible Income (FDII), and Base Erosion and Anti-Abuse Tax (BEAT), generally aiming to make them more favorable for U.S. companies. Imposes a 1% tax on remittances.
- Trump Accounts: Allows parents to create tax-deferred accounts for their children, with contributions up to $5,000 a year growing tax-free until withdrawal at age 18 or older (subject to capital gains tax).
Spending and Programs:
- Defense & Border Security: Significantly boosts defense spending (including a "Golden Dome" missile defense system and shipbuilding) and allocates substantial funds to immigration enforcement, including increased funding for ICE and Customs and Border Protection (CBP) and for finishing the border wall.
- Medicaid: Imposes a significant 12% cut to Medicaid spending over ten years and expands work requirements for some recipients, making states responsible for some costs. This is projected to increase the number of uninsured people. Rural hospitals are at particular risk.
- SNAP (Food Stamps): Proposes cuts for the Supplemental Nutrition Assistance Program ($186 billion over 10 years) and imposes stricter work requirements on more recipients, including able-bodied adults aged 55-64, veterans, people experiencing homelessness, and former foster youth. States will also take on more responsibility for costs.
- Energy Policy: Phases out clean energy tax credits from the Inflation Reduction Act, modifies some existing credits, and generally promotes fossil fuels over renewable energy, including unlocking oil and gas development on federal lands.
- Debt Ceiling: Raises the U.S. debt ceiling by $5 trillion.
- Medicare: Reverses aspects of Medicare's drug price negotiation program, particularly by expanding orphan drug exemptions, which could lead to increased costs for consumers.
What it Means
The OBBB represents a significant shift towards a supply-side economic approach, prioritizing tax cuts and deregulation to stimulate economic growth.
- For Individuals: Many individuals will see a reduction in their federal income tax liability due to the permanence of the 2017 tax cuts, increased standard deductions, and new specific temporary deductions for tipped income, overtime income, and for seniors. However, those relying on Medicaid or SNAP may experience reduced benefits or stricter eligibility, potentially leading to increased out-of-pocket costs or loss of coverage.
- For Businesses: The bill is largely seen as pro-business, particularly for small businesses, with permanent and enhanced deductions for qualified business income, increased expensing for equipment, and R&D tax benefits. These changes aim to incentivize investment, innovation, and job creation within the U.S.
- Federal Debt: The Congressional Budget Office (CBO) estimates that the bill will add a substantial amount to the national debt, projected to be around $2.8 trillion to $3.4 trillion over the next decade.
What Should You Do?
Given these changes, here are some actions to consider:
Review Your Tax Situation:
- Talk to us about how the permanent tax cuts, new temporary deductions, and changes to the SALT deduction specifically impact your personal or business tax liability.
- Understand your 2025 potential tax obligations or savings sooner rather than later, since some provisions take effect this year.
Evaluate Business Strategies (for business owners):
- Capital Expenditure Planning: With enhanced permanent bonus depreciation and Section 179 expensing, consider accelerating or re-evaluating plans for business equipment purchases.
- R&D Investments: If your business conducts research and development, explore how the revised R&D tax benefits can be leveraged.
- Succession Planning: For family-owned businesses, the increased estate tax exemption could significantly impact long-term planning. Review your estate plan with your legal and financial advisors.
- Assess Retirement and Investment Strategies:
- While the core of retirement savings vehicles (401(k)s, IRAs) remains, changes in overall tax rates could influence decisions about pre-tax vs. Roth contributions, especially if you expect to be in a lower tax bracket now due to the new cuts.
- Consider the long-term economic implications of increased national debt on inflation, interest rates, and overall market stability.
- Healthcare and Social Safety Net Planning:
- For those on Medicaid or SNAP: Stay informed about specific state-level implementations of the new work requirements and eligibility changes. Reach out to government agencies or social service organizations for guidance.
- Healthcare Coverage Review: If you're concerned about potential impacts on healthcare access or costs due to Medicare or Medicaid changes, review your health insurance options and financial preparedness for healthcare expenses.
Estate Planning:
The permanent increase in the unified credit and GSTT exemption threshold for estate and gift taxes means many more individuals and families will be exempt from federal estate taxes. Let’s review your estate plan to ensure it reflects these new thresholds and your current wishes.
