How The New Tax Law Affects You Going Forward

MAIN TAKEAWAY

Signed into law this past July, the "One Big Beautiful Bill Act" (OBBBA) provides a mix of permanent and temporary provisions. Permanent changes reflect greater stability, making financial planning opportunities more straightforward. Temporary changes have created a window of opportunity for certain tax-saving strategies.

KEY TALKING POINTS

• The 7 federal tax brackets included in 2017’s Tax Cuts & Jobs Act became permanent.

• Compared to recent years, more taxpayers are likely to itemize deductions due to an increase in the SALT deduction.

• Many individuals age 65 and older can claim a new deduction of $6,000 ($12,000 for married folks) against income.

• If you donate to charity and take the standard deduction, you can receive a deduction up to $1,000 for individuals ($2,000 for married folks).

• The 20% “qualified business deduction” was made permanent for business owners.

• Other miscellaneous provisions worth noting include caps on student loan borrowing, deductible vehicle loan interest on select cars, general cuts and work requirements for Medicaid recipients, the elimination of clean energy credits, and a new “Trump” account for kids.

• Financial planning can be more accurate now that tax uncertainty has been removed for the foreseeable future.

TAKE A DEEPER DIVE

As a financial planner, I like that the new tax bill has reduced “unknowns” in favor of “knowns”. This doesn’t mean that financial planning is now just a simple equation. It has and always will contain elements of assumption. However, when we strengthen assumptions in any analysis, we can be more confident in the results.

Every Roth conversion analysis, financial plan probability of success, charitable donation recommendation, and contribution strategy is now more accurate. Why? Because we now have more clarity on the timing and scope of how taxes affect our financial decisions.

What follows is not an exhaustive thesis dissecting every new provision in the Act. It’s a toe dip in the water, shedding some light on the changes most likely to affect you.

All changes summarized below are set to begin in the current tax year (2025) unless otherwise noted.

Tax Brackets

According the Michael Kitces’ Nerd’s Eye View blog,

“The new law permanently extends the tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37% that have been in place since TCJA became effective in 2018.

The one minor change, which will begin in 2026, is to set the 'base' year for inflation adjustments back one year to 2016 – but only for the 10% and 12% tax brackets. Effectively, this means that the 10% and 12% brackets will receive an extra inflation adjustment bump in 2026, slightly increasing their income thresholds compared to what they would have been without the adjustment.”

SALT Deduction

This deduction for folks who itemize increases from $10,000 to $40,000, phased out for folks earning more than $500,000.

The SALT deduction is temporary. Although the deduction will increase by 1% per year from 2026 through 2029, by 2030 the deduction will return to its current $10,000 deduction cap.

For investors who are 1. still working, 2. live in high property tax areas, and 3. generally pay high sales tax, the SALT deduction is worth more than it has been in the last several years.

Folks who satisfy a healthy amount of #1 - #3 will see their SALT deduction figures contribute more towards the decision of whether or not it makes sense to take the standard deduction or to itemize.

The new SALT deduction alone probably won’t be the single driver that pushes taxpayers to itemize. It simply is a bigger part of the equation than it was in prior years.

Senior Deduction

Many taxpayers over age 65 will receive a $6,000 deduction ($12,000 if married filing jointly and both taxpayers are over 65) against ordinary income.

What’s good about this deduction is that it can still apply whether one itemizes or takes the standard deduction.

What’s potentially problematic is that once a taxpayer’s Modified Adjusted Gross Income breaches $75,000 ($150,000 for married filing jointly folks), the deduction phases out.

Conclusion: most “seasoned” taxpayers will benefit from this deduction, except in a few situations such as selling a highly appreciated property, employment income(s) after age 65, excessive investment capital gains recognition, or executing extra-large Roth conversions.

Charitable Donations

This applies only to cash donations for taxpayers who elect the standard deduction. For these folks, they’ll enjoy a permanently reinstated deduction of $1,000 ($2,000 for married folks).

There are a few other strings attached, but for the majority of folks who donate cash to qualifying charities, they can now deduct at least a portion of their donation, worth a couple of hundred bucks off their tax bill.

Clean Energy Credit Eliminations

Effective September 30th, 2025, all credits for electric vehicles (EVs) are gone. This includes new clean vehicle credits, used clean vehicle credits, and commercial clean vehicle credits.

Already repealed for 2025 are all Energy Efficiency Home Improvement credits, as well as the Residential Clean Energy credit.

Slated for 2026, the Alternative Fuel Vehicle Refueling Property credit is terminated for property placed in service after June 30, 2026.

From a financial planning standpoint, new cars and home improvement projects are more straightforward to model.

On the negative side, new cars and home improvement projects are already expensive due to inflation and tariffs, and now they’re even more expensive with the elimination of tax credits.

2026 Tax Changes

Starting next year, we can expect new items such as child and dependent care credit expansions, restrictions & reductions to the “Advanced Premium Tax Credit” folks receive when purchasing health insurance from an exchange, and both positive and negative adjustments to education-related credits.

Most of these are highly specific and can be assessed next year if they’re applicable.

There is even a new tax-deferred “Trump” account that’s coming. My initial review is that it can be set up for minors, and that becomes an IRA in their name when they reach age 18.

Contributions are allowed from parents, grandparents, extended family, friends, and even employers. Total contributions will be capped at $5,000/per kid/per year, and they will be non-deductible in most cases.

Big Picture Implications

According to the YALE UNIVERSITY BUDGET LAB, the bottom 20% of income earners will see their after-tax income drop by 2.3%, middle-income earners should see a small increase in after-tax income (highly situational though), and the top 20% of earners are expected to net an additional $5,700/year in after-tax income.

Note that these tax changes summarized above are only part of the tax story. When we account for the downstream increased consumer costs of tariffs (a tax on imported goods), what we see in the projections is that the bottom 10% of households will see a 7% income decrease in after-tax income. Compare this to the top 10% who are projected to receive a net income increase of only 1.5%.

Conclusion: assuming the Yale University projections are at least in the ballpark, only the top 10% of all income earners will see a net positive outcome from the combined effect of OBBBA and tariffs. The remaining 90% of income earners are likely to see their purchasing power erode.

There are additional provisions in the OBBBA that I purposely left out. I wanted to focus on the main themes that affect the majority of my clients & blog readers.

You can brush up on what I omitted by checking out Fidelity’s excellent OBBBA summary found HERE.