Tax Law Changes - For Individuals

Hi there! The tax law changes from "One Big Beautiful Bill Act" (OBBBA) have just passed through the House and Senate, and are now enacted into law. This post details some of the impacts of the OBBBA bill that will affect large numbers of taxpayers. There is more in the OBBBA that is not detailed here.

Before you start reading, I would like to state that tax law is complex. I'm here to help you to sort through the complexity to increase and preserve your after-tax wealth, both from an individual perspective and from a business perspective. I ask that you consider contacting me here at Cloud Financial Solutions, LLC for a free consultation about how I can help to increase your after tax wealth while efficienty and effectively staying in compliance with the appropriate tax authorities.

While we all have at least slightly different views about how the tax code should be, and I accept that, we can probably agree here and in other instances that "beauty is in the eye of the beholder". However, I think that you being armed and prepared for the changes stemming from the tax bill might be beautiful to you, regardless of who you are.

This post is to help individuals with how the OBBBA act would impact their tax returns. A separate post will be made for businesses. A third post will be offered for investors.

There were many changes made in the OBBBA act, and the good news is that there were not many changes that would signficantly alter how most people plan for and pay tax.

Tax rates staying the same as what we are used to

No need to worry about tax rate changes with the OBBBA, they are going to stay the same. Your tax bracket structure and tax rates will be the same as they have been since 2018, indexed for inflation. In addition, until further law is passed, the tax rates that are in place today are permanent, they will not automatically expire and revert to a higher rate in a later year.

One of the main purposes of the OBBBA was to continue the tax rates as have been since 2018. If the OBBBA would not be passed, most people's tax rates and tax due would have increased.

Effective date - the 2025 tax year and moving forward

Capital gains tax rates

Notably, the tax rates for capital gains and qualified dividends will not change as a result of the OBBBA.

State and local tax cap (as an itemized deduction)

Many higher income taxpayers were dismayed to have the tax deduction for state and local taxes capped at $ 10,000 in 2018 and moving forward from that year. The new limit for how much state and local tax can be deducted is changed to $ 40,000. The 40k limit will increase by 1% through the 2029 tax year. The $ 40,000 limit begins to be phased out for taxpayers with MAGI greater than $ 500,000.

It is notable for owners of pass-through entities like partnerships and S Corporations that Congress did not take steps to limit owner's deductions of state taxes paid at the business level.

Effective date - 2025-2029 tax years, in 2030 absent a new law the cap would automatically go back to $ 10,000.

Increased standard deduction & continued elimination of personal exemptions

One of the goals of the Tax Cuts & Jobs Act of 2017 was to simplify taxes for more people. As part of their effort to accomplish this, the standard deduction was increased, and the personal exemption was eliminated. These actions were the main catalyst for causing the percentage of taxpayers that itemized deductions, rather than taking the standard deduction, from 30% to less than 10%.

In 2025, the standard deduction will be slightly increased from what it was in 2024. The personal exemptions are still eliminated moving forward.

Effective date - 2025 and moving forward, these are permanent changes.

Itemized deduction phase-outs for taxpayers in the highest tax bracket

The new law from the OBBBA requires that if an indvidual taxpayers is in the highest tax bracket, the can only take itemized deductions at a rate of 35 cents to the dollar.

Effective date - 2025 and moving forward, these are permanent changes

New car loan interest deduction

In an effort to induce people to buy cars made in the U.S.A., a new deduction has been put into place to allow people to deduct interest paid for loans incurred to purchase cars that were assembled in the U.S.A. This deduction only applies to new car purchases, and the deduction limit is $ 10,000. This would be an above-the-line deduction that decreases AGI.

Effective date - 2025-2028, expires in 2029

Charitable deduction changes

One of the "errors" of the Tax Cuts and Jobs Act of 2017 was that while inducing people to not use itemized deductions, the deduction for charitable giving was eliminated for most people. Later, Congress took a tiny step to fix this by allowing a $150/$300 dollar non-itemized charitable contribution deduction. The question after the TCJA of 2017 was "does our government really want to hurt organizations that don't operate for profit"?

A larger fix is in play for 2025 and moving forward, is that taxpayers that don't itemize will be able to deduct $1000/$2000 single/joint filers of charitable contributions. This is a significant increase from the prior $150/300.

In addition, in an opposing way, charitable contribution deductions were further disallowed as an itemized deduction. they will only be allowed as a deduction starting from when they exceed .5% of a taxpayer's "contribution base", which will likely be defined as their AGI.

Effective date - 2025 and moving forward, these are permanent changes

No taxes on tips

To start, there will still be taxes on tips, just not federal income taxes. For example, tips will still be subject to FICA tax. The method that will be employed to not tax tips will be to create an "above the line" deduction for the tips. Employers of employees with tips will be required to furnish a statement to their tipped employes that informs them how much of their earnings in a given year was made in tips. The deduction will be limited at $ 25,000 and will begin to phase out at $150,000/$300,000 (single/joint).

Effective date - 2025-2028, expiring in 2029

No tax on overtime

There will also still be tax on overtime, but the federal income tax on overtime will be reduced as a result of the OBBBA. As with tips, the method used to make overtime not taxable will be to use an "above the line" deduction for the overtime. Only overtime up to $ 12,500/$ 25,000 will not be taxed, overtime above those levels will be taxed for federal income tax.

Effective date - 2025-2028, expiring in 2029

Additional senior tax deduction (intended to reduce tax on social security)

There will indeed be reduced tax for people over the age of 65 as a result of the OBBBA. The method employed to help people over the age of 65 is that there will be a new additional deduction of $ 6,000 for people in that age group. That deduction is intended to help those in that age group to limit the taxability of their social security income.

Effective date - 2025-2028, expiring in 2029

Child tax credit slight increase

The amount of the child tax credit increased from $ 2,000 to $ 2,200 as a result of the OBBBA. The bill also makes permanent the refundable portion of the CTC, being $ 1,400.

Effective date - 2025 and moving forward, these are permanent changes

Qualified business income deduction

The 20% deduction for qualified business income under code section 199A was scheduled to expire in 2025, which would have left a disparity between the corporate tax rate and tax rates for other business types. The OBBBA made permanent the 20% QBAI deduction, which is a good thing for owners of partnerships, LLCs, and S-Corps. In addition, the minimum QBAI deduction is now $400 for taxpayers with at least $ 1,000 of QBAI.

Effective date - 2025 and moving forward, these are permanent changes

Estate & gift tax exemption increase

The estate tax exemption would have reverted to being $ 5 million in 2025 if a law were not passed to change it otherwise. The OBBBA increases the exemption to $15 million in 2025 and moving forward, indexed for inflation.

Effective date - 2025 and moving forward, this is a permanent change

Whew, that was a lot, right? But wait, there is more in the OBBBA! A lot more. Here is a list of some of the other areas of the tax code that the OBBBA alters. I will not go into detail in this post about the items listed below.

Home equity debt remaining nondeductible, employer payments of certain scholarships remaining nontaxable, earned income tax credit requiring new verification, other dependent care credit being made permanent, casualty loss deduction being expanded into some state declared disasters, AMT exemption increase, wagering losses limited to 90% of total losses, moving expenses being permanently disallowed, and more.

All the above said, here is the summary as it relates to the services that Cloud Financial Solutions, LLC provides. Tax is complex, and the laws for it can change over time. There are many times that it is prudent to hire an experienced, competent tax professional to legally minimize tax due to increase one's after tax wealth.

Please reach out to us at Cloud Financial Solutions today for a consultation if you have any questions about your and/or your business' tax position.

Have a great day!