OBBBA: Key Impacts on Individuals & Business Owners

*This transcript has been prepared for reference and convenience. It may contain errors or omissions, and should not be considered a verbatim record of the podcast. For complete accuracy, please refer to the original audio.*

Welcome to Wealthy Behavior, talking money and wealth with Heritage Financial, the podcast that digs into the topics, strategies, and behaviors that help busy and successful people build and protect their personal wealth. I’m your host, Sammy Azuz, the president and CEO of Heritage Financial, a Boston-based wealth management firm working with high net worth families across the country for longer than 25 years. Now let’s talk about the wealthy behaviors that are key to a rich life. On this episode of the podcast, I’m talking once again to Heritage Financial’s Chief Planning Officer, Ed Jastrom, who’s been busy ripping through the big, beautiful bill and has some takeaways and updates for us, as well as I’m sure some things that he’s prioritizing when he’s looking at client questions and situations, and as well as probably some things that didn’t make it into the bill that we wanna make sure everybody is aware of, because there’s a lot of reporting as these things are built through the process. Welcome back to Wealthy Behavior, Ed. Thank you, Sammy. Certainly a lot to cover with this one, and I don’t think we’ll even really scratch the surface talking today. A lot of different topics that we’ll get to. I know we’re going to have plenty of material for follow-up blog posts and newsletters, but I’d love to start digging into it and at least share, like you said, what I’ve seen so far and maybe a few of the misconceptions have come about as well. So a big part of this is extending tax rules that were already in place, right? So how transformational is this bill, I guess, in your view? And maybe we can start by reminding folks what has been extended and is quote unquote not new. Yeah, that’s a good place to start. Let’s set the table for where we’re coming from before maybe we get into where we’re going. So if we look back to kind of the last really big fundamental tax legislation, that was the Tax Cuts and Jobs Act, the TCJA. That passed at the end of 2017. And that’s really the environment that we’ve been living in since then. So 2025 would have been the eighth tax year of that being in effect. So really we’ve been under a similar set of guidelines for almost a decade and we’ve really gotten used to it. And I think that’s the environment that we now need to realize what’s staying and what’s changing. So when the Tax Cut and Jobs Act came out, it did a few really big fundamental things that changed the tax code. It lowered all of the marginal tax rates and the income in those rates. It created a higher standard deduction. So many more people have been taking the standard deduction instead of itemizing. It created something called the QBI deduction, which is available for self-employed persons, partners, and business owners. The TCJA also made it so far fewer people were subject to AMT, so high income earners that might hit AMT. The TCJA really solved that problem. And on the estate tax side, it basically doubled the estate tax exemption. So if this legislation that just passed on July 4th of this year hadn’t gone through, or if similar legislation had not occurred this year, Those lower rates that we’ve been used to for a while would be back up to much higher rates. The standard deduction would go back down, the QBI deduction for self-employed people would go away completely, the estate tax exemption would be cut in half, and many more people would be subject to AMT. So that’s what this bill resolves is largely eliminating the what’s been known as the sunset from the TCJA that we were all kind of worried about and when that was going to happen. So there’s some relief that this bill was passed when it was mid-year. rather than, say, Thanksgiving or December 30th, where really you would not have had any time left in 2025 to make any key tax planning decisions. Yeah. And did it make those permanent or is there a sunset potential again? So what’s interesting about that is most of those elements from the TCJA that we’ve gotten used to have become permanent, or at least permanent until some other Congress in the future changes things again. What the big bill, the one big beautiful bill act or HR one or big bill did created a handful of new tax items, new deductions, new credits, and a lot of those are temporary. So what we’ve been used to for the last eight tax years, largely staying the same, but then some new things being introduced, not all of which are permanent. And they don’t all start at the same time either. So maybe we could focus on the elements that are new that are in effect right now, basically retroactive to the beginning of 2025. sure yeah that’d be a great start i think the biggest one that is likely to have the maybe not the biggest dollar impact but maybe the most voluminous impact in terms of number of people is what’s known as the salt cap salt state and local taxes so this is I live and work in Massachusetts. I pay a state income tax to Massachusetts. I own a home. I pay property tax to the town I live in. And if I earn money, I also pay federal income tax. In an effort to try to have some fairness about double taxation, I’m allowed on my federal tax return to deduct those state and local taxes that I pay, but only up to a limit. So that limit under the environment we’ve been under has been only $10,000. So if you think about a married couple earning a few hundred thousand dollars a year, paying taxes in a state like Massachusetts, you own a home, you could easily get above that $10,000 cap. The new law that’s in effect right now for 2025 potentially raises that cap from 10,000 to 40,000. So that could be very meaningful, especially if you think about high value homes, multiple properties or high income earners that have a large tax due. The kind of rub or the hang up is that higher deduction amount, the $40,000 gets phased down based on your income. So once your gross income is over 500,000 and to 600,000, it could go back down and eventually phased out to 10. So if your gross income is under 500,000, you could be seeing a big jump in your SALT deduction. If it’s between 500,000 and 600,000, it will really depend where you land in that scale. If your gross income is over 600,000, you’re still stuck with the 10. So I guess from that perspective, if you’re a very high income earner, you might not realize that benefit under the big bill. but you’re no worse off than you were before. You still get the 10,000 that you did before. And sorry, did you say that any of those are inflation adjusted or not? Or are those caps in place as long as that provision is in place? Those will be inflation adjusted. And this is one of the big bill provisions that is temporary. So this is 2025 through 2029. Everything will be inflation adjusted during that period. But then if nothing else happens in 2030, that SALT cap reverts back to 10,000. So this will be something where, again, with the cycle of Congress and taxing and spending debate and reform, you know, what happens before 2030. But that’s at least we have a little bit of time to do some management between now and then. Got it. Thanks. One of the other big items that is in effect already is something that’s probably also one of the items that caught the most attention for maybe being misleading and misunderstood. And that’s the now infamous no taxes on Social Security. So the Social Security Administration published a news post and email that went out that was at best I think misleading and at worse totally wrong alluding to the fact that Social Security beneficiaries would no longer be taxed on that income. What’s really in the bill is an extra deduction for seniors. So if you’re age 65 or older by the end of the year, whether you’re collecting Social Security benefits or not, you might be eligible for an extra $6,000 deduction, whether you itemize or not, starting in 2025, going through 2028. The downside or the bad news to be the buzzkill is somewhat like the expanded SALT cap. There is an income for that as well, where taxpayers with gross income for a couple above $150,000 start to see a reduction in that $6,000 bonus. So similar to my comment before, some people will see a big benefit from that. If your income is higher and you’re above those thresholds, you won’t realize it, but it isn’t taking anything away from you from before. So you might not get the benefit of the big bill, but you’re not necessarily any worse off. And that is something, like I said, that’s in effect now. That will be in place for the 2025 tax year. Ed, I’ve noticed that you’re leaving out the word beautiful when you’re talking about the bill, and I’m just curious why that is. I have found that as I’ve been talking about this with our colleagues here and my peers and LinkedIn, that it has become incredibly painful to keep typing out OBBBA and or saying the whole thing. So… For the sake of my expediency in learning and getting things across, I think I’m going to call it the Big Bill or HR1. HR1. The fastest way, but Big Bill sounds better. Everyone likes alliteration when you’re talking about something. So are those the only two things retro to the beginning of the year? There’s a few others that I think will be more impactful for the specific groups that they impact. Probably not as many people as those other two, but for the people that they do affect, I think it could be really notable. The two that come to mind are the TIP income deduction and the overtime income deduction. So for persons who receive TIP income and overtime income, there is the possibility that, again, based on your income levels, that you might be able to exclude from income some of your TIP income and or some of your overtime income. So that’s something that’s notable that is in place for 2025. Both of those items are temporary based on the big bill. They go through 2028. Another one for some people is an auto loan interest deduction. So this is for domestically assembled autos purchased 2025 through 2028. You may be able to exclude some amount of the interest paid. Again, there’s a income threshold on all of these things. Something that is notable due to its timeliness is not something that’s being created by HR1, but something that’s being removed. And this is actually noteworthy because it’s expiring. There’s a handful of tax credits that exist for clean energy related projects and energy efficient home improvements. And the bill is removing all of those. There’s a credit for purchasing an electric vehicle that is expiring after September 30th of this year. So anyone who’s in the process of potentially buying an electric vehicle should accelerate that if they’re doing it and be sure that they can get delivery of the vehicle before then. For homeowners who install certain energy efficient devices like heat pumps and solar panels, the tax credit for those ends after December 31st of this year. So again, those need to be purchased and put into service by then. The last main one is electric vehicle charging. So if you’re putting in charging equipment for an electric vehicle, that has to be put into service before June 30th of 2026. So those are all things to be kept on the radar if they were projects that you were in the middle of or considering the clock is ticking on those to still get the credits when you can. The tax benefit on tips. Do people consider tips to be an area of high compliance with the tax rules already? Meaning how much has been reported in tip income in the past that’s all of a sudden going to be exempt from tax treatment this year? Not to cast aspersions on anybody, but I always assumed cash tips were making their way out of tax returns to begin with. That could be the case. Fortunately, we don’t do tax compliance. There’s other experts that we rely on as professional go-tos for those sort of things. I don’t know. That’s a good question to kind of ponder. I haven’t seen any articles on that subject with the items I’ve been reading about the big bill, but I’m sure it’s something that’s being discussed in a lot of circles anything else um and and just in terms of those things that would pivot to next that uh haven’t been made retroactive to the beginning of the year just going through those when do they start and what are the ones that you find you know most impactful for things outside of starting in 2025 correct yeah sorry yep So thinking beyond those items that start now, the items that essentially are effective for the 2025 tax year, there’s a long list of items that roll out over the next few years. But the few that we could talk about today to focus on that I think are most impactful are potentially 529 plans and some limitations on itemized deductions the 529 plan one is very interesting because it really just keeps adding on to the appeal of 529 accounts not just for college savings but really for a wide variety of educational and professional development opportunities that parents of children who might end up pursuing non-traditional paths to education career development and even adults themselves might find a resurgent interest in 529 plans what’s interesting with the expansion of 529 plan expenses is the list of what’s allowable for a qualified withdrawal from a 529 plan, meaning no taxes on the earnings, no penalties, has been widely expanded to include a much broader list of items for K through 12 expenses in addition to tuition. And a whole new category of professional development for certifications and licenses has been established. So if you think about individuals who need to be licensed in the trades for plumbing or electricity, or even in our industry, the CFP, the Certified Financial Planner, there’s a broad spectrum of licenses, education, test taking that one needs to go through. And previously, 529 plans could not be used effectively for those costs because they weren’t considered part of a college program. They didn’t meet the criteria for what the IRS definition of a qualified education expense was. And they are now. And the bigger item that goes along with this is that starting in 2026, the allowable amount that one can use for those types of expenses per year for explicitly K through 12 is is going from 10,000 per person per year to 20,000. So we’ve seen consistently over many years of legislation, 529 plans being expanded upon and expanded upon beyond just college. And this act does another round of that, another layer of that. So really anyone who hasn’t thought about 529 plans because they weren’t sure about the path their children was taking or even professionals in a lot of industries might want to consider them for a lot of the advantages that they bring. Beyond 529 plans, I mentioned one of the other items on the horizon relates to restricting some itemized deductions. So we don’t see that yet really in 2025. other than the income range around the higher SALT cap. But in 2026, there’s two things that will be more important to people who itemize their deduction. One is a threshold on charitable giving where a very small percent of your deductible charitable gifts won’t be deductible. The way it’s going to work is a fraction of a percent of your gift is basically a hurdle that you need to clear before it becomes deductible if you’re making major gifts this this won’t be that big a deal but it’s something to to be aware of the bigger item i think is that there will be an overall limit on itemized deductions for the highest income persons starting in 2026 where at some level, each dollar that you give to charity or that you take as a deduction will no longer get you the highest deduction that it possibly could. So your deductions will still be valuable, but not as valuable as it appears that they otherwise would based on the tax bracket that you’re in. So a little more sensitivity to the highest income earners starting in 2026 around their deductions and the value that you get out of your deductions compared to, say, 2025. So Ed, we use two primary tax planning tools at Heritage to help our clients and our prospective clients. One of them is not exactly a tax planning tool, but our financial planning software has a lot of tax rules embedded in it so we can do scenario planning and show projections. And then we have a specific tax planning tool that we can dig into scenarios and summarize returns with. are those things that will automatically just get updated into those two softwares? And how long does it take until it’s basically reflective and being able to be utilized, both of them being able to utilize to do some tax planning and updated financial plans based on the bill that we’re just running through right now? Do we need to wait for more regulations to be put in place or how does that work? Yeah, good question. Because as we meet with our clients for the rest of the year, And as we get introduced to prospects, I think more questions are going to come up about individual circumstances, not just these generalizations. So the two tools that we use that you mentioned, the financial planning tool that really gives us our kind of longest projections of answering questions like, can I retire? How healthy is my plan? Can I afford to buy the second home? What impact does it have if I give more to charity? That software is incredibly intricate and at the moment they are still rolling out a lot of these changes. We do have the ability on our end to make some manual adjustments so that we can account for some aspects of the bill. And in fact, we’ve actually been doing that in some instances already for a while. Within the tool, we had the ability to effectively tell the software to not sunset the Tax Cut and Jobs Act. And that’s a close proxy to a lot of the things that we started this conversation talking about that would continue. the lower marginal tax rates, the higher standard deduction. So the software does have the ability to do that, but it hasn’t added a lot of the more intricate things from the bill yet. Our more detailed tax-specific software that lets us drill really into tax returns but not pull in all the other aspects of the financial plan was updated, I believe, the day after the bill was signed. So I really give that team credit and we’ve already been using it here and there for some approximations. There was a prospect in recently who happened to have a tax return that just fit a really good kind of profile for me to experiment with. So I used our tool to take their prior year return and basically do a copy and paste pro forma to see what it would look like with 2025, but allow them the higher SALT deduction that they would otherwise be able to get. And all else being equal from year to year, the higher SALT deduction that they were able to obtain provided them with an approximate 5,000 benefit in dollar terms, being able to take that bigger deduction. So that tool is in place. Everything that’s impactful for the next couple of years is in there. But you did raise an interesting point just at the end there. I think there are a few things in this process bill for sure that are going to be rolled out that we don’t know how to answer yet. A good example is the Trump accounts that a lot of people have heard about, read about, been talking about. And this is a new investment account designed for individuals under the age of 18 who it’s sort of a mix of an ira college savings account with a few interesting features and you know right now they exist on paper because the bill created them but you can’t open one we don’t know what the paperwork looks like we don’t know which investment firms will offer one we don’t know a lot about the exact setup so there’s things like that where conceptually it’s there But I think it’s still going to be some amount of time, perhaps into this time, 2026, before we actually know a lot more of the real administration of what that might look like. And there’s a few other things like that where the complexity of the code hasn’t been figured out yet for what is this actually going to look like on your tax return? What line item will it go under? So when the tax forms for the 2025 tax year actually come out in early 2026, that might answer some of those last few questions. So by and large, I think we’ve got a hold on it. with a handful of things still sitting out there waiting for either the Treasury or some other agents that are involved in the process to give us the details. Great. I appreciate that overview, Ed. I know there was some things in there related to business owners, and obviously we work with a fair amount of them and have a lot who listen to the podcast. Any big picture takeaways on the provisions related to business owners? The biggest one is probably the extension of the QBI deduction. Can you explain the QBI deduction? I don’t know if we’ve touched on it in the podcast. Yeah, at a high level, when the Tax Cut and Jobs Act was created, it allowed for corporations to potentially have a lower tax rate. If you are a self-employed individual or a partner in a partnership or an S-corp owner, you aren’t taxed as a corporation. The income and expenses of the business flow down to you as an individual. So if corporations got a tax break, but you didn’t, a small business owner or a self-employed person was kind of getting the raw end of the deal when corporations were getting a cut. So the TCJA created this deduction for business owners to be able to take a portion of their business income and basically get a deduction for some of that to try to make it more fair, regardless of whether you were an incorporated entity or taxed as an individual. So the QBI deduction has been around since the 2018 tax year. And a major concern was that if no legislation came about if we didn’t have the big bill and sunset occurred, QBI went away. So every single self-employed person, every small business owner, every partner who’d been taking advantage of the QBI for the last seven, eight years would potentially be hit with a much higher tax rate. And that could put a lot of pressure on profitability and the capital spending of those companies and hiring practices. And if you think about running a small business and all of a sudden you lose a valuable deduction like that, that could have a real impact on the choices that you make as a business owner for the economy. So the good news is that continues. There was some debate about increasing the rate of of the deduction. So it would be bigger to make it 23% instead of 20%. That didn’t happen. So it’s the same as it was before. So that’s really like I said, kind of the good news is the status quo for those people. Beyond that, there’s a few things that relate to depreciation and expenses, where if you’re a business owner who has on the docket any major purchases of equipment, this is something where I think the intricate details of it would really be the time to assess what your business plans are with your tax advisor because there are a number of items in the bill that potentially make the timing of decisions and the scale of decisions for large purchases of property a very important item to not go about lightly and far too detailed to go into here. But really, that’s the major takeaway that depreciation expenses, items that are capital costs for businesses should really be things that people are paying attention to, including some things on the research and development side. So it isn’t just You know, buying physical goods. There’s a number of items all related to expenses that could be valuable for business owners and timing those things in a way that coordinates with other parts of your tax plan could be very important. So Ed, as this bill was winding its way through, I think we heard a lot of things that may or may not have been on the docket to be included. And people may still feel like without this update that there were bigger changes than what was ultimately passed. So there’s a set, I think, of provisions that haven’t been altered that you wanted to share with folks. I do. And I think this is valuable because there was a wide number of topics that came out in discussion in the House version of this and the Senate version of this. A lot of back and forth, a lot of speculation. That dialogue included things that had been talked about in past years as well so if you looked at articles that were in the news kind of leading up to the passage of the bill and conversations on linkedin and twitter and everywhere else in social media there was a lot of potential items that came about but there’s a kind of core list of items that didn’t change and i think these are important to not lose sight of because they’re potentially just as valuable as the things that did change. So for example, on the kind of estate planning wealth transfer side, there’s no change to the step up in cost basis at death. So if you own a highly appreciated asset and you pass away with it in your estate, the value of it gets marked to market at the value of your date of death, your heirs could inherit it, potentially sell the asset without a capital gain. That didn’t change. The gift tax exclusion, you can still gift to anyone you want $19,000 a year and not have to file a gift tax return and it doesn’t use up your lifetime exemption. That didn’t change. So the annual exclusion did not change. There is no wealth tax or unrealized gain tax. There’s been dialogue about having some sort of provision where you’d have to report your net worth and pay a tax on unrealized capital gains. That didn’t happen. Nothing changed there. Certain types of trusts that are techniques that might be used to help transfer wealth or provide liquidity. some trust known as islets or irrevocable life insurance trusts or slats spousal lifetime access truts are tools that families have been using nothing change with those the estate tax and income tax provisions of those are in place so you can continue to do advanced planning with those. For individuals who aren’t able to make a Roth IRA contribution directly, but might be able to do the backdoor Roth, you can still do that. So no changes to being able to make a non-deductible IRA contribution and convert it directly to Roth. There’s no income cap on doing the conversion and you can still do the backdoor Roth. Likewise with Roth IRAs, there are still no required distributions on Roth IRAs while you’re alive. and there’s no cap on the accumulated balance. So there’s no RMD on a Roth once it reaches a certain size and there’s no excise tax on the Roth once it reaches a certain size. So Roth IRAs, backdoor Roths, gifting, advanced estate planning, step up in cost basis, all still in place, nothing changed. The same goes with QCDs or qualified charitable distributions from IRAs. Still able to do it, still not allowed to send those distributions to a donor advised fund. No change, same as before. Those are some of the more common repeated techniques that we talk about a lot with our clients and nothing changed with those despite there being a lot of kind of talk about some aspect of those being on the radar. So your main takeaway would be what, as it relates to this bill, but just more practically speaking for individuals and families, the types of folks that we work with, what should they do to better prepare themselves through the rest of this year and early into next year to capitalize on the planning opportunities and also not to miss anything? I think for business owners, we already said that I think there’s enough in this bill and in great detail to really spend some time assessing any major purchases, any major changes to the business, any major expenses to really dig deep into that with a tax advisor on the business owner side. Yep. For most households… I think there’s so much variety from person to person with where you are in your life stage, whether you have kids, whether you’re married, it’s hard to generalize. But one thing that might be worth a little extra effort now in 2025, before year end, with the change to the SALT cap specifically, I think there’s a lot of individuals that have gotten into a regular habit of not thinking about things that are deductible because they’ve been taking the standard deduction. Now might be the time to reassess that and almost do a mock-up of your itemized deductions and think about things like medical expenses, your state income tax, your property tax, mortgage interest, investment interest expense if you have any, charitable giving, and try to reassess if you might now be an itemizer instead of taking the standard deduction. And if you are an itemizer, try to reassess if you might be able to take a bigger deduction for your SALT expenses and not be phased out of it if you’re not in that above 500,000 AGI group. That’s probably going to be the biggest surprise, either good or bad, for people who don’t do that exercise. will be either a nice refund that they weren’t expecting or not getting a refund that you thought you might get. And you don’t want to have those surprises. So I think thinking about standard versus itemized and the SALT cap before 2025 ends is the most valuable thing for households in general. And one last thing, I think, result of this bill that we didn’t really touch upon but more big picture planning the bill extended and made permanent the higher estate tax exemption at the federal level so starting next year it’s going to be 15 million per person or 30 million for a married couple if the bill hadn’t happened and sunset occurred it would have been approximately cut in half and gone back down to about 7 million per person i would say even with that permanence of that higher exemption, when we hear that there’s no federal estate tax unless your household worth gets to a level that high, I think it tends to create some complacency But there is so much more to thoughtful estate planning than just the federal tax when it comes to efficiency, charitable giving, bringing your family into your values, when it comes to thinking about state estate taxes, and really the fact that the permanency is only as permanent as it is until there’s another legislature I would caution anyone to not just sit back on their heels, especially if you have multiple homes or a business or a large estate or live in a state with an estate tax or are worried about Disability or incapacity, those things don’t go away just because the federal estate tax exemption is higher. So that’s one other takeaway I’d want to leave people with is to not ignore the other aspects of estate planning, even with that higher exemption. That’s great insight, Ed, as usual. I thank you for running through this with us. I know that the firm is going to put out a lot of additional content as it relates to this bill and the planning opportunities. So look for that at our blog at heritagefinancial.net and subscribe if you are not already. And if you have questions about the bill and how it may impact you and their general questions, please feel free to email us at wealthybehavior at heritagefinancial.net. Thank you for listening to Wealthy Behavior. If you found the conversation useful, please leave a review wherever you listen to your podcasts and share this episode so those around you can live a rich life too. We appreciate your feedback and questions. Please email us at wealthybehavioratheritagefinancial.net. For more insights, subscribe to our weekly blog at heritagefinancial.net and follow us on Facebook, Twitter, and LinkedIn. Check out my personal finance blog at thebostonadvisor.com. Wealthy Behavior is produced by Michelle Kakamis. This educational podcast is brought to you by Heritage Financial Services, LLC, located in the greater Boston area. The views and opinions expressed in this podcast are that of the speaker are subject to change and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment or strategy discussed will be successful or will achieve any particular level of results. Investing involves risks, including the potential loss of principal. There has not been and will not be any compensation exchanged between Heritage Financial Services and Podcasts.