As we are sure you are aware, this July 4th a new bill was passed, commonly referred to as the “One Big Beautiful Bill Act” or OBBB which contained a multitude of changes to the tax code. We are focused on how this bill applies to each of our clients. Below are just some of the major areas that will affect many people and that we would like to highlight:
- Tax Rates – The federal tax rates for individuals, trusts and estates that have been in effect since 2017 were made permanent. The tax rates were scheduled to revert to pre-2017 levels starting in 2026 where the highest rate was going to be 39.6%. With the OBBB, the highest tax rate will now continue to be 37%.
- State and Local Tax deduction (SALT limitation) – The SALT deduction allows taxpayers who itemize their deductions to subtract a portion of certain state and local taxes, including property (real estate taxes), income, or sales taxes, from their federal taxable income. Before 2018, this deduction was mostly unlimited. Since 2017 this has been limited to $10,000 for married and single persons. Starting with the 2025 tax year, this limit has increased to $40,000 but only through the tax year 2029, when the $10,000 limitation returns. Depending on your individual tax situation, this could mean more deductions available that may have previously been disallowed. It is important to understand that there are income thresholds that prevent those with income over $600,000 from taking advantage of the $40,000 deduction and instead may be subject to the lower $10,000 limitation.
- SALT and PTET interaction– There are many businesses in MA or other states that have taken advantage of SALT workarounds referred to as Pass Through Entity Tax (PTET) or Entity Level Tax (ELT). These programs allowed businesses to pay the state tax that would normally be paid by the owners on their personal returns, and in turn receive a federal deduction on the business returns that were not limited by the $10,000 threshold on SALT. In MA that workaround allows businesses to pay the tax and provide the owner with a tax credit of 90% of the taxes paid. That meant more taxes were paid to MA than would normally be required, however the savings on the federal return which would have a much higher tax rate than MA outweighed those additional taxes. Now that the $10,000 limitation has been raised to $40,000 for many taxpayers, this ELT option in MA may no longer be as beneficial as it were before.
- Bonus depreciation made permanent at 100% – Certain long-life assets of a business must be capitalized and are subject to depreciation over a number of years instead of being able to be expensed all in the first year. Prior to this tax bill, there was an option to take “Bonus Depreciation” on certain capitalized assets in the first year, however the percent allowed was 60% in 2024 and was scheduled to reduce to 40% in 2025, 20% in 2026 and 0% in 2027 forward. This change now allows for 100% bonus depreciation for assets placed in service after January 19, 2025. You may hear that this 100% expensing now applies to commercial real estate, however that provision is very limited in scope and applies mostly to manufacturing buildings, which must also be placed in service after July 4, 2025.
- Clean energy and energy efficient tax credits terminated – Prior to this legislation, there were several clean energy credits available to both individuals and businesses, including for solar, electric or hybrid vehicles, heat pumps, or other energy efficient improvements to homes and businesses. The credits have termination dates ranging from as early as September 30, 2025, to June 30, 2026. We highly recommend contacting us if you are in the process of or were expecting to purchase property in the near future that would be eligible for one of these credits, to ensure you understand the termination dates of your specific situation.
- No tax on overtime – This is a highly reported on area in the media, and for anyone who thinks this could affect their business or personal returns should understand the application of this legislative change. For instance, overtime is compensation for hours worked beyond 40 in a workweek, as required by the Fair Labor Standards Act (FLSA). Certain industries are exempt from paying overtime to individuals who work over 40 hours in a week and therefore would not be eligible to pass on the information to those employees to take the deduction on their personal tax returns. However, for those businesses who do pay the required overtime, this change is in effect as of January 1, 2025, meaning information on overtime from the beginning of the year will need to be reported to the employee. If you are someone who receives such overtime pay, there are limitations to deduction. The max deduction is $12,500 per year for single filers or $25,000 for joint filers. Those with modified adjusted gross income (MAGI) above $150,000 (single filers) or $300,000 (joint filers) will see the deduction beginning to be phased out. It is important to understand that only the portion of compensation paid in excess of your normal wage rate is considered as overtime compensation eligible for the deduction. For example, if your normal pay is $10/hr. and you work 45 hours in a week, you would have 40 hours at $10 an hour and 5 hours that you are paid at $15/hr. ($10/hr. x 1.5) for total pay of $475. The amount of compensation eligible for the deduction would only be $25, which is the $5/hr. over your standard pay of $10. This deduction is currently set to end in tax year 2029.
- No tax on Tips – Another highly reported on area that needs to be fully understood if you receive or your business reports tips. Tips will still be reported as income on personal tax returns, however a new deduction of up to $25,000 in tips will be available to those whose income is below the $150,000 and $300,000 thresholds, similar to the overtime rules. Tip credits were previously only available to businesses in the food and beverage industry, however the tip credit is now expanded to other industries that customarily receive tips such as the barbering, haircare, nail care, esthetics, and spa service industries. This tax change is effective as of January 1, 2025 meaning businesses may need to retroactively figure employee tips. This deduction is currently set to end in tax year 2029.
- Senior deduction – A new exemption is available to taxpayers and their spouses aged 65 or older of $6,000 per eligible individual. This senior deduction is reduced by 6% (but not below zero) for adjusted gross income that exceeds $75,000 (or $150,000 for joint filers). This deduction is also slated to end in tax year 2029.
- Car loan interest deduction – Deducting car loan interest is a new addition to the tax code however the limitations significantly narrow the eligibility of this deduction. The most significant eligibility requirements are that the vehicle must be purchased new, the debt must be incurred after December 31, 2024, and final assembly must occur in the US. As with many of the other provisions in this bill, this deduction is subject to a phase out starting at $100,000 modified adjusted gross income (MAGI) for single filers($200,000 for joint filers). There are additional eligibility requirements which also must be met.
It is important to understand this legislation has many different implementation dates and sunset (termination) dates. There are some provisions that affect prior years, some that begin at the start of 2025 and others that take effect in a subsequent year. There are many provisions which are not permanent, meaning, barring additional legislation, certain provisions will end in 2029, similar to how many of the 2017 tax changes were scheduled to terminate at the end of 2025. We expect technical corrections and clarifications from the government as is the case with any legislation of this size and scope.
The above changes are only a handful of the changes that may affect you, and you will no doubt hear many different things between the media, family, and friends on what this bill could mean for you. While we continue to work to understand the far-reaching impacts, this has on all our clients, we welcome any questions you may have as it relates to your personal tax situation.
