The OBBBA and you

Theresa Marx:
Hello and welcome to this special episode of the Wealth Planning Illuminated podcast series. I am your host, Theresa Marks, the Director of Wealth Planning and a senior wealth strategist at CIBC Private Wealth in the US. I am joined today by two of my colleagues, Keri Pankow and Lucy Bickford, both senior wealth strategists at CIBC Private Wealth. In today’s episode, Keri, Lucy and I will discuss the recently enacted legislation commonly referred to as the one Big Beautiful Bill Act or OBBBA. While this legislation covers a lot of different areas, we are going to focus our discussion on some of the individual income tax provisions that may impact you and your families. Alright, let’s get started.
So today we’re talking about the new legislation commonly called the One Big Beautiful Bill Act, or OBBBA. As you all know, we certainly covered a lot of different topics in OBBBA. So we thought today, Keri, Lucy, and I would talk a little bit about the individual income tax provisions that are in the act. There are certainly a lot of tax provisions that cover businesses and international concerns, but we’re really going to focus today on individuals and how that might impact this new legislation might impact their income tax picture. So Keri, I’m going to start with you and maybe we can just level set. In terms of income tax rates. There was a lot of discussion through the different campaigns and through the legislative process about income tax rates. So can you help us understand what did the ACT do when it comes to individual income taxes?
Keri Pankow:
Yeah, that’s a great question. There was a lot of talk around it and essentially it made the income tax rates that were implemented in the Tax Cuts and Jobs Act permanent. So there were seven rates there. It was 10%, 12%, 22%, 24, 32, 35, and the highest tax bracket being 37%. So had the Tax Cuts and Jobs Act sunsetted, as people were thinking it might, it would’ve reverted to 39.6%, but instead this new act, the One Big Beautiful Bill Act makes that highest tax bracket 37%. So it’s locking in those rates. And then one thing I just want to note as well is that capital gains rates weren’t covered under this legislation. Those are going to remain at that 20% tax rate and then some taxpayers are also going to be subject to net investment income tax at that 3.8% rate.
Theresa Marx:
So basically the rates kind of go status quo. We thought we were going to get this big change, this big increase in rates under the prior law, but we get status quo going forward with that 37% top bracket. Okay, so Lucy, maybe we can talk now, but now that we know the rates kind of deductions, I think that that’s another big component of somebody’s income tax picture that we often think about in our planning around. So where should we start when we think about deductions on an individual’s income tax return?
Lucky Bickford:
Well, there are a couple that are familiar to us that we could start with that were changed under the OBBBA one is the standard deduction, which is the basic deduction amount that most individual taxpayers apply to their income. If they don’t itemize their deductions, the OBBBA permanently increased the deduction amounts to $15,750 for individuals and $31,500 for joint filers for 2025. And then those amounts are going to be indexed for inflation after 2025. Another one that’s interesting is the OBBBA permanently extends the $750,000 limitation for deducting interest for a home acquisition mortgage. The ACT also permanently restricts the ability to deduct interest on home equity loans. People might be interested that miscellaneous itemized deductions are permanently repealed under the OBBBA, that’s a defined term and it includes things like investment advisory fees and tax preparation fees, but educator expenses were specifically addressed and are now handled as regular itemized deductions under a different area of the code.
Theresa Marx:
Okay. So thinking about deductions, and I know two of the big ones that I think a lot of people think of are in addition to the ones you just mentioned, Lucy, are really the state and local tax deduction or salt as everyone often calls it in the charitable deduction. So Keri, can you walk us through the changes they made to the salt deduction and how it might impact somebody?
Keri Pankow:
Sure. So the deduction cap for salt deductions has been temporarily raised to $40,000. It will revert back to that same $10,000 cap in 2030. But what this means for years 2025 through 2029 is that the salt increase gives people a larger deduction. It is phased down depending on a household’s adjusted gross income starting at $500,000 per household for both single filers and joint filers. Just to give an example of what this means, if the household is earning $550,000 worth of income, that $50,000 that exceeds that threshold would be subject to that 30% phase down. So 30% of $50,000 is $15,000. If the salt cup is at 40,000, you deduct that additional 15,000 fees down and now you’re left with 25,000. So someone having adjusted gross income of $550,000 would get a $25,000 deduction once income or adjusted gross income, I should say reaches $600,000, it’s fully phased out and then those filers will be able to use that $10,000 salt deduction. And I should also note that in 2026, both the deduction and the phase down will increase by 1% each year through 2029. So just to give an example of what that means is next year it will be a $40,400 deduction and the phase down threshold will be $505,000.
Theresa Marx:
I feel like there’s so much to unpack in there, so thank you for giving those examples. I will say I think it’s something just also interesting to point out is that that $500,000 phase down applies whether you’re filing single or you’re filing jointly so that essentially two people that are filing their return get the exact same phase down and deduction that somebody that’s single gets, which I think sometimes we’re so used to seeing things doubled when it’s married filing jointly, but this is one of those exceptions where it’s the same number regardless of your filing status.
Keri Pankow:
Yeah, that’s right. And I think that’s an important thing to point out.
Theresa Marx:
So Lucy, what about the charitable deduction? I know there were a couple of different tweaks in this new legislation that impact the charitable deduction for individuals.
Lucky Bickford:
Yes, starting in 2026, individuals who do not itemize their deductions, who take the standard deduction can deduct $1,000 for singles or $2,000 for joint filers for their charitable gifts. In addition to the standard deduction individuals who do itemize their deductions, which is beneficial if their potential deductions overall exceed the standard deduction amount, they may deduct only the amount of their charitable contributions that exceed 0.5% of their contribution base and that contribution base is their adjusted gross income without regard to operating losses. So that’s a new element in this act. The OBBBA also includes new carryover rules though that apply to those amounts associated with that 0.5% hurdle that are not entitled to be deducted in a certain year. And then in addition, the deduction limitation of 60% of adjusted gross income for cash contributions to public charities was made permanent in the OBBBA.
Theresa Marx:
So charitable deductions were touched in quite a bit of ways in this act that I think came out a little bit surprising for people. So thank you for highlighting those. What about some of the new deductions? A lot of the ones we just talked about were things that have been in the tax code for a long time, just we maybe tweaked over the years. So let’s talk a little bit about what might be new and in particular, what’s temporary.
Keri Pankow:
Sure. So as we recall, there was a lot of discussion during the campaign about no tax on tip and things like that. And so that was actually included as one of the new temporary deductions. It didn’t end up being no tax on tip, but there were some provisions around tip and overtime income. And so they’re included in this act. They are scheduled to sunset in 2028. So they are temporary provisions and I’ll discuss tip income and overtime pay. They have slightly different income limits, but about the same phase outs. So starting with tip, income workers in certain tipped industries can deduct up to $25,000. Their phase outs will start when their adjusted gross income is $150,000 for single filers or $300,000 for joint filers. Similarly, overtime pay can be deducted up to $12,500 for a single filer or $25,000 for joint filers. The phase outs are the same for as they were in tip income, meaning the phase out is $150,000 for a single filer and $300,000 for joint filers. And again, just as a reminder, both of these are scheduled to sunset in 2028.
Theresa Marx:
And something else I found interesting in particular about the tip income, I think there was a lot of talk about will we just be able to reclassify different types of income as TIP or as overtime, and I think the legislation made it clear that there’s going to be some regulations still to define who can actually deduct tip income. I think it’s typically kind of like industries that are kind of traditionally tip industries, like maybe a server at a restaurant, that kind of thing. So I think we’re still waiting for a little more detail and we might not have as much wiggle room there as we hoped maybe we could.
Lucky Bickford:
There are a couple of other interesting temporary deductions. One is one of the new rules allows individuals to deduct up to $10,000 for interest on loans used to purchase a new passenger car that was assembled in the us, but it has to be assembled here. The loan has to originate after December 31st, 2024, so it might apply to existing loans and the deduction phases out for income above $100,000 or 200,000 for joint filers. The OBBBA also provides a new additional deduction for seniors. Individuals who are aged 65 and older can deduct $6,000 or 12,000 for joint filers, but that phases out for people who are at income levels over $75,000 for individuals and 150,000 for joint filers.
Theresa Marx:
Okay, so let’s move on to something else that’s new. So those deductions were all new but focused on deductions. What about Trump accounts? That was something again kind of early on in the legislative process we heard a lot about, they frankly changed quite a bit from in the different versions of the bill that being passed around Congress. So Keri, can you tell us a little bit about those Trump accounts and where did we end up with those?
Keri Pankow:
Sure. So Trump accounts are like custodial IRA accounts. So starting in 2026, the government will contribute a thousand dollars into a tax favored Trump account for US citizens who are born between 2025 and 2028. Additionally, individuals can contribute to these accounts towards a child who is a US citizen who’s under 18 and individuals can give up to $5,000 annually towards these accounts. Also, they allow employers to make contributions to these accounts up to $2,500 per year on behalf of their employees dependent children. But as I mentioned because it’s like a custodial IRA, there are limitations on withdrawals, there are other tax provisions, there can be penalties for early withdrawals or how the money is used. There also are some exceptions around these accounts. So it’s certainly worth talking with your tax advisor before you contribute to it or take out from these types of accounts.
Theresa Marx:
And I think like we were talking about with the tip income, I think this is an area that we’re going to see more guidance from the IRS in terms of how these exactly work. So I think your point is really good to make sure you’re talking with your advisors about how they work before we get too far into funding them. Perfect. Lucy, what about other notable changes in the income tax space and that we should be thinking about?
Lucky Bickford:
There are several. A couple to mention are the child tax credit is going to be increased to $2,200 per child and that amount is indexed for inflation after 2025 under the act. Also, tax-free withdrawals from 5 29 plans are going to be permitted for additional elementary and secondary school expenses in addition to what’s already allowed and for certain certifications and licensing programs.
Theresa Marx:
I think this is an interesting one because states, and I think maybe you were starting to say this, states may treat this differently, right?
Lucky Bickford:
That’s right. They may have their own rules that impact those withdrawals too. And so it’s important again to talk with advisors before pulling money out of a 5 29 plan, but their use will be expanded onto the federal rules. The qualified small business stock rules have become applicable to more businesses. Those are designed to stimulate investment in startup companies and it does that by excluding some of the taxable gain on those investments. And so the thresholds for companies to qualify as qualified small business stock is increased so more companies will qualify and then the exclusion for gain on that stock is also adjusted upward. So there are more opportunities to use qualified small business stock to defer gain. Two things that didn’t change though our personal exemptions are going to remain at $0 and the section 1 99, a qualified business income deduction, which is 20% for pass through entities was made permanent. There was some discussion of increasing that to 23% at different points in time, but it’s going to stay at 20% for now.
Theresa Marx:
So let’s talk about a subject that is near and dear to all of our hearts being wealth strategists and estate planning attorneys by background and let’s talk about transfer taxes. So gift estate and GST taxes, we’ve been talking a lot over the last several years about the possible sunset, the possible reduction in those exemptions. So Keri, can you tell us a little bit about where did we end up for transfer taxes with the OBBBA?
Keri Pankow:
So just to give some background, as everyone recalls, the tax Cuts and Jobs Act increased the exemption amount that was available for a state gift and generation skipping transfer tax, often called GST tax. So it is currently 13.99 million per person. The OBBBA increased that and so starting in 2026, it will be 15 million per person, 30 million per married couple, and that will be ING adjusted for inflation. So both the estate and GIF moved up as well as the GST moving up to a $15 million exemption amount.
Theresa Marx:
So Keri, a lot of people have been talking about it was made permanent and I put permanent in air quotes even though no one can see air quotes. What do we mean by making it permanent?
Keri Pankow:
I suppose it just means until the law is amended, changed, updated, similar to what happened in this process. If someone wants to introduce a new bill to Congress, it can go through review, the House and Senate will vote on it, the president will have to approve it. So it could be revised in the future, but as of right now, this is the law that will be in effect.
Theresa Marx:
So we no longer have that threat of sunset that we’ve had for the last several years.
Keri Pankow:
Exactly correct.
Theresa Marx:
Okay, great. So Lucy, I think the question that comes from that, right, if we’ve got $15 million in 2026 per person and then it’s adjusted for inflation going forward, what does that mean for people with respect to estate planning? Do they just stop estate planning for somebody that has less than that exemption amount? Where does that leave us as estate planners?
Lucky Bickford:
Well, for many people it’s going to mean that there’s no federal estate tax and that when they go through an analysis, whether advisors, they’re not going to be as concerned about the federal estate tax, but paying attention to tax planning is still important because of the reasons that Keri just described. The rules could change. Also, people’s asset values can grow and should be expected to grow over time. So especially if they’re younger, this may well become an issue for them even under the high federal exemption rates. But there’s plenty of other reasons to do estate planning too. The basics are going to be important, choosing fiduciaries, deciding who’s going to receive your assets, how they’re going to receive them, on which terms any charitable giving that you want to include in your plan. Those are all fundamentals that will remain important for families going forward.
There’s also state estate taxes and those may apply even if the federal exemption is high enough to cover an entire estate. There are 13 states right now that have estate taxes and their exemptions are all at varying levels. Only one of them Connecticut has an exemption that’s the same as the federal exemption for 2025. All of the rest of them are lower. So even if you’re outside of the scope of the federal estate tax regime, because the size of your estate, you should still think about state estate tax. And of course no one knows if they might move to another state in the future. So that’s relevant to everyone unless you’re permanently situated in a state with no state estate tax and that’s only as long as they don’t change the rules.
Theresa Marx:
Exactly. I completely agree. I think that this is one of those things where maybe federal estate tax might not be the biggest driver in someone’s estate plan anymore, but certainly there are still so many reasons to plan. So thank you for delineating those for us. So thank you both for joining me today to talk about this. There are certainly so many provisions, as I mentioned at the beginning, that are included in OBBBA, and each person should really be looking at these as with respect to their own planning and talking to their advisors as to how each one of these provisions and the additional provisions that are included, may impact them, may impact their businesses. And I think there’s going to be more to come. So thank you both for joining me today and for sharing your insights on the one big beautiful Bill Act. Thank you. Thank you. Thank you for joining us for this episode of Wealth Planning Illuminated. We hope you found this topic interesting and that you will continue to explore the variety of wealth planning topics available to you on this channel. Thank you and have a great day.
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