Goals-based planning
Apr 14, 2025
The One Big Beautiful Bill Act (OBBBA) covers a wide range of tax and economic policies. Here’s what’s included in the law, how it may affect your family, and steps you might take when its provisions become effective.
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Thank you for joining us. I'm BJ Goergen, the head of Morgan Private Advisory and the Global Private Bank. And we're here today to talk and unpack the One Big Beautiful Bill Act. This was an important piece of legislation for many of our clients. It's very important for high income taxpayers.
And we've been tracking this very closely for a few reasons. This new law touches everything from marginal income tax rates to estate planning to charitable giving to business structuring. And we're going to talk about what's changed, what hasn't changed, and really most importantly, what you can do next.
I'm joined by two of my colleagues, Jordan Sprechman who is our head of wealth advisory, and Adam Ludman, who's the head of our tax strategy. And Jordan, I want to start with you, and I want to know what were your reactions to this bill and the process that brought it about?
Well, BJ, I'm certainly not surprised that the bill passed. As I think everybody knows, Republicans have been thinking about the necessity to pass something before the midterm elections next year. A lot of the provisions of the Republican driven Tax Cuts and Jobs Act from 2017 were set to expire at the end of this year.
So the Republicans in control of the presidency in both houses of Congress, they felt the political need to do something, because otherwise they projected that 62% of all taxpayers would see a tax increase once the pre Tax Cuts and Jobs Act legislation came back in. So I wasn't surprised that--
Were you surprised that it happened as quickly as it did?
Yes. I and many others were figuring end of July, really, at the earliest. And we kept saying-- we would always hedge it a little bit and say, well, July, sometime in July. Turns out it was July, but we thought it would be more towards when summer recess was hitting. And Congress, we didn't expect it to happen as early as it did. The fact that it happened as early as it did actually creates a good opportunity for planning just generally. The more time you have to plan, the better.
The other somewhat surprising thing is that actually, this legislation constitutes something of a little bit of a stealth tax increase, especially for high income taxpayers, because most high income taxpayers itemize their deductions. And a lot of the deductions that they used to be able to take in full, they're not going to be able to take in full anymore. So it is a little bit of a stealth tax increase. And that's maybe the biggest surprise out of the whole process.
Adam, what about you?
Yeah, well, I certainly agree with the comment that this happened very quickly, really, from the initial introduction of legislation in May to its signing on July 4, was less than two months. And that was able to happen because the Republicans were able to use what's called budget reconciliation, which is this process where the party in control of the White House and Congress is able to pass legislation with a simple majority in the House and Senate. Ordinarily, you would require 60 votes in the Senate.
And so Republicans were able to do this without negotiating with Democrats. They were really just negotiating among themselves to sort out some of the few provisions they had disagreements on. And some of the big picture items, including the overall cost of the bill, to Jordan's point about mid-year enactment, I think that does create a planning opportunity. Many of the provisions, including the limitations on itemized deductions, are going to be effective starting in 2026.
So we're thinking about things like front loading charitable contributions in 2025, because they could have more value in 2025 than next year. But there are some provisions of the bill that are effective this year. Some of the things, like the provisions dealing with tips and overtime and enhanced deduction for seniors, all of which phase out for high income earners. So generally, not applicable to our clients. But there are also the state and local tax deduction cap increase, which we'll get into, effective this year. So there are some things effective this year.
But those provisions also expire in a few years, in either 2028 or 2029. So what that means is, though we have certainty and some of the permanence that you mentioned, extension of the tax cuts, it does set up a conversation in a few years for more tax negotiations and dealing with those potential expirations on things that could potentially be appealing to some on both sides of the aisle. So I think there will be discussion of that probably in a few years.
So when we talk about permanence, it is an extension of tax cuts, but there are limitations. How should people think about this in terms of permanence? So we should act on it, but give some context around what permanence means.
Permanence in this context really means indefinite. There's nothing permanent when the legislature is in session. And everybody should anticipate the likelihood that one day, when Democrats are back in control of the White House and Congress, that they will enact tax legislation in the same manner that Adam described via reconciliation, where they used, again, the 51 votes in the Senate and a simple majority in the House. I think we can expect that, but I don't think that's going to happen, certainly, for the next-- certainly not going to happen for the next three years, as long as there's a Republican president.
So actions to take but flexibility.
You always have to take-- you always have to build in a certain amount of flexibility in your tax planning, anticipating the possibility that with new administrations and new congresses, the laws could change.
So something that you two have been tracking and your teams were several provisions that actually ended up not being in the law. So let's talk about, Adam, what is not in here that surprised you or that you were tracking and watching closely?
Yeah, I think that's some of the biggest news, actually, is what didn't make it into the bill. And I'd put them in two categories. There has been a lot of speculation, really since the elections in November, as to what could be in a tax bill. Once it was known that Republicans were going to have full control of government, then there was a lot of speculation as to what provisions they would deal with or what they didn't.
And ultimately, things like carried interest, the tax treatment of muni bonds, things that were speculated about in the press, were left untouched. There were no changes to the long term capital gain rates, no changes to qualified dividend income. These provisions all remain intact. And then there are other proposals that were actually part of the legislative process and showed up in earlier versions of the bill. And this was an iterative process. We had proposals from the House, proposals from the Senate, and changes throughout the process.
And there were a number of things that we were watching. So an increased excise tax on private foundations was something that showed up in an earlier version of the bill. Some of the largest private foundations in the country would have been subject to an increased tax. These are generally tax exempt organizations, but they are subject to a small 1.39% excise tax on their net investment income. There was a proposal to increase that as high as 10%. That was ultimately pulled out of the bill.
So significant news for foundations.
Absolutely. There were also some changes to the so-called pass through entity tax elections, which we'll come back to, that were in earlier proposals that really would have significantly limited some structuring and opportunities there, and those were pulled out of the bill. Limitations on tax benefits for sports team owners. Again, those were things that were included in earlier version, ultimately pulled out.
Changes to business losses and their carry forward treatment. That was something not a lot of people were talking about, but it could have had a significant impact. And the changes to the way the carry forward provisions would have worked were ultimately pulled out as well, although those excess business loss limitation provisions were made permanent in the bill.
And then finally, there were some proposals to increase taxes on cross-border transactions. We were hearing a lot about so-called section 899 revenge tax. That was something that would have increased taxes on foreign investors in the US. That ultimately came out.
And finally, a remittance tax proposal that would have taxed transfers, foreign remittance transfers outside the US. And there were some key exceptions inserted into the bill later in the process that really carved out a lot of US financial institutions from having to implement those rules. So each of these, although they were part of the discussion, they were proposed, ultimately were removed from the final version.
And anything could happen in the future, but it's something to watch, what was considered and what was ultimately decided. Jordan, I want to start with you on what is in the bill. So what are the three things that you're looking at and watching and that you're already talking to clients about?
The three things that I'm talking to clients about most are the permanent indefinite increase in the estate and gift tax exclusion amount. Was 13.99 million on an inflation adjusted basis. It's going to be $15 million on January 1 of this year. And from $15 million, it is then scheduled to increase with inflation. That's actually a material change and creates a great deal more certainty than had existed until now, because that exclusion amount had been temporary under TCJA. Now it is permanent and actually increased again. That's one.
The second thing, which again, we'll talk about in a little bit, is this 0.5% floor on charitable contributions based on your adjusted gross income. And again, we'll get into a specific example in a minute. But basically, if you make a million, if your adjusted gross income is $1 million and you give money to charity, the first $5,000 of your charitable gift will not be deductible, basically, is what that particular provision stands for.
And then third, the overall limitation on itemized deductions. So when you itemize deductions, the itemized deductions that you take most often now are the state and local tax deductions, the so-called SALT deduction, about which, of course, there's been a lot of discussion. The charitable deduction, the investment interest deduction, which is important for what's known as tax aware borrowing. And then the mortgage interest deduction.
All of those are going to be subject to what's basically a 5.4% we're calling it a haircut. Those are the things that I'm spending most of my time talking to clients about, and especially on the first two items, which Adam alluded to, what to do about them. Obviously, be prepared to do more gifting in anticipation of the increase in the exclusion amounts. And secondly, front loading charitable giving so that you can avoid that 0.5% floor on giving.
Adam, do you have any insight on why the change to charitable giving and what was the intention behind the adjustment?
Well, it's interesting, because there's also a new law in the bill that allows non-itemizers to take a deduction for charitable giving. And that's up to $2,000 for married couples filing jointly. And this was really a pretty close offset to that. So you could look at it as that potentially broadening the base of individuals, taxpayers who are able to deduct charitable contributions.
But on the flip side, you have this limitation for itemizers. And the revenue, the scoring, the official scoring of the law that was ultimately enacted, is fairly close on those items. So I think they are closely related. And I think from a nonprofit perspective, they're going to be thinking about the potential impact on giving from both perspectives, for those who do not itemize and those who do.
And the advice you've heard Jordan mention, one big recommendation we have for our clients is that they may want to consider giving in 2025 versus 2026. What other insights would you provide around charitable giving? And also, will you spend some time talking about the SALT deduction cap and the potential workaround?
Yeah, sure. I think with charitable giving, it changes the conversation a bit, because of the half a percent limitation based on your adjusted gross income. And so one thing to think about is potentially stacking the benefit in different years where you're going to be less impacted. So maybe in a lower income year, and certainly in 2025, because the provision is not effective until 2026. So that's definitely one thing to think about how you're giving and how much you're giving in a particular year.
With respect to the state and local tax deduction cap, as Jordan said, that's something that there was significant discussion about and a lot of negotiation in Congress as to what was going to happen with the state and local tax deduction cap. Since the Tax Cuts and Jobs Act that was passed in the first Trump administration, there has been this $10,000 cap on that deduction.
And that's been a sensitive topic and an interesting political issue for those representatives in high tax states. Think New York, California, New Jersey. Because a lot of deductions for income taxes, property taxes have not been allowable, particularly for high income earners.
And so the two things I think to keep in mind for where we landed on the SALT deduction cap, I think a lot of people are hearing that that $10,000 went up to $40,000. But for high income taxpayers, it's phased back down to $10,000. So if you make more than $500,000 a year, you're going to start to see that phase down. And if you make more than $600,000 a year, then you're going to be completely phased down to the $10,000 cap. So I think for a lot of our clients, it may not have as significant an impact.
And the other thing, something I mentioned earlier, is what's known as the SALT cap workaround that really, since guidance issued by the IRS back in 2020, a lot of states have enacted laws. There's 41 states that impose an income tax. The vast majority of them have now enacted these so-called pass through entity tax rules that allow individuals who own, let's say, a business in a partnership or an S corporation to actually pay state and local taxes at the entity level.
And what that does is reduces the income that is allocated out to the owners. So it's seen as kind an indirect deduction in a way, because it reduces the impact of the SALT deduction cap on those individuals. And throughout the process, there were earlier proposals that would have really significantly limited the ability to do that, particularly for some services companies, for some consulting firms, CPAs, accountants, and investment management firms, many of whom take advantage of that. And ultimately, they were pared back and then pulled out of the bill at the end.
So that's a significant item to pay attention to.
Absolutely.
That our clients are looking at.
Yeah, and I think we'll talk a little bit more about business owners, but I think one of the things to keep in mind is if you're thinking about that or taking advantage of that, it's something worth, I think, revisiting, because many states have enacted those provisions. Some of them are expiring. Some of them have been extended. And so it's definitely something to take a look at with your CPAs and tax advisors and make sure that you can maximize that benefit going forward.
So let's talk a little bit about business owners. Because when we've been discussing this bill, and as you've been watching this bill, the changes have been fairly modest or even slightly tax increases, as Jordan mentioned earlier. But there are some things in here that are incentives for business owners. So will you touch on what those are? And also what are some of the recommendations because of those incentives?
Yeah, there were a number of changes, as you said, that are favorable for business owners. And I'll start with the big three, which people were watching pretty closely. One was 100% bonus depreciation being restored and made permanent effective this year. Another was the immediate deductibility of domestic R&D expenses. And another was more favorable interest deductibility for some large companies.
And collectively, these are really meant to encourage economic activity. I think whether that happens, the extent to whether that happens, remains to be seen. But that's the idea behind restoring these provisions. And just taking them one at a time. 100% bonus depreciation allows a business owner that is buying qualified property that they're using in their business to immediately deduct the cost of what they're buying. So think of things like vehicles and equipment and aircraft, major expenses in a business that traditionally have to be depreciated or deducted over time according to a depreciation schedule.
So if you just take a simple example where let's say I own a business and I buy a truck to use in that business, and it's $100,000. And let's assume that you can deduct the cost over a five year period under a depreciation schedule. Then you're effectively taking $20,000 a year and deducting that amount and reducing your taxable income.
Now, under 100% bonus depreciation, you might be able to write that off and deduct it immediately. And so that is helpful for businesses that are investing and buying property that they're going to use in a trade or business.
And when does that go into effect?
That's effective this year. Interestingly, effective January 20, not January 1, really tied to inauguration date, but for a property that's placed in service on or after that date.
The other issue, so immediate deductibility for domestic R&D expenses is something that under the Tax Cuts and Jobs Act that was passed back in 2017, there were a number of these provisions that were actually phased out over time, and this was one of them that back in 2022, the immediate deductibility started to change.
And so you actually had to capitalize the expenses and over a five year period get deductibility or amortize the cost of R&D expenses. This restores immediate deductibility for domestic R&D expenses. So that can be helpful, particularly for some small businesses or early stage companies that are investing in that type of R&D activity.
And then finally, the interest deductibility rules. Again, this is another change affected back in 2022 that curtailed interest deductibility for a number of larger companies. And now more favorable interest limitation rules are in play. And they were restored as well in 2025. So that's really meant to improve after tax cash flows. I think for a lot of companies that have maybe recently purchased companies that have a lot of goodwill or depreciation, I think they're probably going to benefit from these provisions. And they're all collectively seen, I think, by the business community as things that they were in favor of.
Two other things, I think, worth mentioning. Qualified small business stock. There were some enhancements in the law that was enacted. This is the idea. It's a very powerful exclusion of capital gains for certain qualifying companies. If you own stock of a C corporation, for example, domestic C corporation, you're able to-- and it's in a qualifying industry.
So typically, it comes up with tech founders, entrepreneurs, venture capital investors. If they have qualified small business stock and they sell that stock and they've held it for a period of five years, they're able to exclude up to $10 million or 10 times their basis. So that's a very significant exclusion.
And what the law did is enhance those benefits for stock acquired after the date of enactment. And so it increases the $10 million amount to $15 million. It increases the corporate gross asset test that companies use to determine whether they can issue qualified small business stock from $50 million to $75 million. And it also reduces the holding period required to qualify for partial qualified small business stock incentives. And so, again, those are generally business friendly and could encourage investments in companies that can issue qualified small business stock.
And the other thing we're hearing about that was in the law is qualified opportunity zones. Qualified opportunity zones have been around since the Tax Cuts and Jobs Act. And these are provisions that allow a variety of taxpayers, individuals, partnerships, and so on, to take capital gains and roll them into a qualifying investment. And they basically get three benefits. They're able to defer the tax under the current regime. They can defer the tax on those capital gains until the end of 2026.
If they met certain holding period requirements, they can get up to a 15% free basis step up. And if they held the investment for more than 10 years, then they can essentially get forgiveness on future appreciation. And the qualified opportunity zone provisions in this bill create a new permanent regime for qualified opportunity zone starting in 2027.
So what happens to the ones that end in 2026?
That's a really good question. I think a lot of people were hoping that deadline would be extended, but it was not. And so those that have deferred capital gains are still going to have to start thinking about how to pay the taxes that are due at the end of 2026, really in early 2027.
And we expect no changes to that. You can take action.
Yeah. At this point, I mean, the law is permanent. I mean, you never what's going to be taken up in the future. But people should start thinking about that. But the new benefits under the new regime for investments in 2027 are pretty close to the earlier regime. There are some new incentives for qualified rural opportunity zones. There is a five year deferral, a 10% basis step up if you hold for five years. And again, that ability to wipe out future appreciation up to a period of 30 years. So pretty significant issues to think about.
And I think those clients who are sitting on positions with appreciated gains, or maybe thinking they're going to sell a business, maybe in 2026, might want to start thinking about whether they can qualify for making an investment in a new qualified opportunity zone in 2027.
Jordan, anything else to add for business owners that comes to mind for you or that you've been hearing about in the last couple--
No, that pretty much covers it. The one thing I would add to what Adam said is that the qualified small business stock exclusion had been $10 million and the size of a small business was pegged at $50 million back when that law was enacted in 1993. So the bump up from 10 million to 15 million and the bump up from 50 to 75 million isn't even really an inflation adjustment, but it tries to approximate what the state of asset values was in 1993. But it is a nice incentive, and I think it will encourage people to think in terms of they may want to organize as a C corporation rather than as a pass through.
Yeah, and there's also a permanent extension of the 20% qualified business income deduction for pass through entities. So partnerships, S corporations. And I think to your point, Jordan, that entities and businesses should really be thinking about their classification. Should there be a pass through entity, should they be a C corporation given these changes? Because now that there is some permanence to that 20% deduction, but also some enhancements to qualified small business stock, I think that conversation changes a little bit and people should be thinking about whether they do want to incorporate or whether their structure is correct.
The one thing to be on the lookout for about that is the original QBI deduction in the original House bill that got changed in the Senate was actually for a 23% QBI deduction, Qualified Business Income deduction. We have heard that there is going to be sentiment in Congress to try to pass new legislation, maybe by the end of next year, maybe by the end of this year, maybe next year, to bump it up to 23% from the existing 20, which, again, is one of those things that business owners will factor into their calculus of how do I want to organize.
So before we talk about a couple of other things in this bill, that makes me think about we're not necessarily done. We do expect more tax legislation to come. To clarify, will you just talk a little bit about what you think will happen next?
I think it's possible, as you said. I mean, some members of Congress have been saying they would like to do another budget reconciliation bill. It's possible. Every now and then, I mentioned that this came together rather quickly, in less than two months. And every now and then when you have large legislation like this, you have people figure out after the fact that maybe technical corrections are needed.
And so it's possible, while the Republicans are still in control, that they could enact other legislation maybe to deal with some issues in this bill. And nothing comes to mind immediately, but certainly something might come up later. And then also to deal with other potential tax priorities. I think the QBI deduction, the 20% deduction potentially being raised, is one of those issues.
I think it remains to be seen. This was a pretty significant process. A lot of late nights for members of Congress kind of working all hours to get this done, and there were a lot of other priorities at stake. But it is possible that we could see more legislation later this year.
I actually think a lot of Republicans who had pet priorities agreed to put off their priorities in this round of legislation with the hope that or the expectation that whatever their issues were will be brought up again sometime, again, later this year or next year.
So that's something we're watching closely.
Yes.
I do want to just spend a minute on some of the interesting or planning things that we would take note of that happened in this bill. I'm thinking of 529 plans, Trump accounts, private scholarship deductions. Do you want to just talk about some of those items that are included?
Yeah, there were some enhancements to 529 accounts included in the law that was enacted. So expansion of so-called qualified educational expenses that can be used for 529. So in recent years, there was a change that now allows 529's to be used for elementary or secondary education, but really limited to tuition. And those provisions were expanded to allow them to be used for other educational related expenses.
And there was also a limit on the amount that could be used annually, $10,000. And that amount is scheduled to go up to $20,000 next year. So that's one interesting point.
The other thing, you mentioned these what's referred to in the law as Trump accounts. These are effectively a different type of retirement account that was created in the law. It went through a number of iterations throughout the process. But effectively, and these aren't going to be effective until the second half of 2026 when contributions can start being made.
But basically they allow for up to $5,000 a year to be contributed to these accounts for children under the age of 18. And they also have a provision in there that would allow employers to make up to a $2,500 what looks like a tax free contribution from employers. So if employers start establishing these plans, that could be helpful. But it's an interesting new provision and new opportunity to potentially save for children and contribute to an IRA type account a little bit earlier without regard to earning income and all of that you typically think about with IRAs.
And then, of course, there's this one time pilot program that they're doing that people have heard about. It's a $1,000 credit basically for children born from 2025 to 2028. So I think there may need to be more guidance issued to clarify some of the points, but they're definitely something that people are going to start thinking about. And how does that work with a existing 529 plan or other tax advantaged savings accounts? And I think some interesting provisions there.
And then, of course, there was a private school scholarship donation tax credit for scholarship granting organizations, effective in 2027, that allows the $1,700 tax credit. And again, I think that's something that states are going to have to be involved in certifying and figuring out who the qualifying organizations are. But that's something that clients might be able to take advantage of.
And there's no income limitations on receiving that, correct?
Right.
So that's significant to note on top of what you may already be giving charitably. Before we wrap, Jordan, anything that you would just want to re-underwrite that people should pay attention to that would be the most impactful thing in this bill that they should take up with their advisors?
Well, again, I always come back to the permanence of the estate and gift tax exclusions. A lot of people have been on the sidelines in terms of their planning because they didn't know is the $13 million, $14 million exclusion going to come back down to 7, as was speculated? Well, now we know it's a permanent 15.
So I sort of group people into three categories. The people who haven't been planning because of the uncertainty, just go ahead and plan. The situation that we have is as permanent as any situation involving politics and taxes is going to get.
For the people who have planned, I think there's a very interesting question that they have to look at. A lot of people have done planning in the last couple of years in anticipation of perhaps a reversion of the exclusion back down to $5 million or $7 million or whatever it is. Now that that's permanent, a lot of people made gifts to trusts, irrevocable trusts, that are out of their estates, but those assets are not going to get a step up in basis upon that person's death.
So now the question is, and this is one of these things where you have to go through a fairly careful analysis and do meaningful and realistic projections about what you expect your future assets to be, what you expect growth to be, what inheritances you might expect to get. Think in those terms and decide, well, maybe I parked money in a trust for the benefit of my spouse.
Should I do-- first of all, maybe should I do some tax free exchanges between myself and that trust, assuming that trust is a so-called grantor trust, which means that it's nonexistent for tax purposes to get higher basis assets into that trust now and put lower basis assets back on my balance sheet? Maybe I should even think in terms of making distributions from that trust. If my spouse and I, we don't have any realistic expectation of having estates exceeding $30 million, which is the new threshold, should we be making distributions out of those trusts in order to be able to take advantage of a basis step up on the first spouse to die, which would not be available if those assets are still in a trust?
So again, category one, people haven't done planning at all. Number two, people who have done planning with expectations of how the income tax system would look, and the estate tax system would look, that have now been changed by this law.
And the third group of people are the residents of the 13 states that have an independent estate tax. And if you don't know who you are, you live in Connecticut, DC, Hawaii, Illinois. Then you got the four M's, Maryland, Massachusetts, Maine, Minnesota. And then you've got New York, Oregon, Rhode Island, Vermont, and Washington State.
So if you're in any of those 13 states, your state has its own independent estate tax. And so if you're estate exceeds whatever their estate tax exemption level is, and most of those are well south of-- in fact, all but Connecticut are well south of $14 million, then you need to determine, do you have an estate tax bill that you're going to be looking at, even though the exemptions have gone up?
And always remembering that distinction between federal tax and state tax is important. It actually relates to 529 plans as well, because distribution from 529 accounts that might be subject, that might be tax free from the federal perspective, may not be tax free from the state perspective because not all states conform their laws to the federal laws.
Adam, any final thoughts that you would have people pay attention to in this bill?
I think, as I said, business incentives and focusing on that. Business owners should really be spending some time before the end of the year sitting down with their CPAs and running the numbers and trying to understand the impact on the bill, and also thinking about any potential investments they want to make to take advantage of some of the new provisions, like 100% bonus appreciation.
That's something we're hearing from a lot of people about and I think could encourage a lot of activity. And thinking too about, as we said, structuring and whether it's more efficient to operate as a pass through entity or a C corporation given some of the new considerations in the bill.
Can we just go back to the charitable deduction thing for just one second? I know we touched on it before. Again, just to do a little bit of quick math, let's assume a taxpayer has adjusted gross income of $1 million and decided to make a $100,000 charitable deduction next year. So this year, you're OK.
The first $5,000 of that donation is going to be subject to this haircut. So you don't get to deduct that $5,000. So now you have $95,000 of charitable deduction available. That donation is also then going to be subject to this roughly 5.4% deduction. So you have to take a haircut of 5.4% of the $95,000. So the net benefit of your charitable deduction, we've done the math on this, comes to, in that example, the examples are always going to change a little bit, comes to about $89,000 on your $100,000 gift.
And again, that 5.4% haircut applies to the SALT deduction cap, the investment interest expense, which means the tax we're borrowing, where you borrow money and then invest it somewhere else, it's going to be subject there. It applies to the mortgage interest expense, which is capped at the $750,000 of principal. And it applies to charitable deductions. So that, again, that double hit on charitable gifts is a reason to think about front loading deductions, especially this year.
And I think the fact that the half a percent floor is tied to your adjusted gross income means for higher income earners and higher income years, you're going to have to give more to be able to give to get that benefit starting next year. So definitely something to keep in mind. And as you said, the numbers could change depending on your income. But completely agree.
And these are the kinds of questions we can help model. We can help our clients model.
This is exactly where I wanted to end, Jordan, which is with every new tax bill, it's an opportunity to assess how it's going to impact you and your family. And one of the things we take great pride in is being able to help families walk through and consider what it means for them. So please reach out to your JPMorgan representative. We are watching trends, we're paying attention, we're seeing what's happening, and we're here to help you think about what to do next.
Thank you for joining us. Prior to making financial or investment decisions, you should speak with a qualified professional in your JPMorgan team. This concludes today's webcast. You may now disconnect.
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Bright metallic line writes out text in script J.P. Morgan in the dancing light
Text: ideas&insights
BJ Goergen, GLOBAL HEAD OF J.P. MORGAN PRIVATE ADVISORY
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Thank you for joining us. I'm BJ Goergen, the head of Morgan Private Advisory and the Global Private Bank. And we're here today to talk and unpack the One Big Beautiful Bill Act. This was an important piece of legislation for many of our clients. It's very important for high income taxpayers.
And we've been tracking this very closely for a few reasons. This new law touches everything from marginal income tax rates to estate planning to charitable giving to business structuring. And we're going to talk about what's changed, what hasn't changed, and really most importantly, what you can do next.
I'm joined by two of my colleagues, Jordan Sprechman who is our head of wealth advisory, and Adam Ludman, who's the head of our tax strategy. And Jordan, I want to start with you, and I want to know what were your reactions to this bill and the process that brought it about?
Well, BJ, I'm certainly not surprised that the bill passed.
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Text: Jordan Sprechman, PRACTICE LEAD FOR WEALTH ADVISORY
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As I think everybody knows, Republicans have been thinking about the necessity to pass something before the midterm elections next year. A lot of the provisions of the Republican driven Tax Cuts and Jobs Act from 2017 were set to expire at the end of this year.
So the Republicans in control of the presidency in both houses of Congress, they felt the political need to do something, because otherwise they projected that 62% of all taxpayers would see a tax increase once the pre Tax Cuts and Jobs Act legislation came back in. So I wasn't surprised that--
Were you surprised that it happened as quickly as it did?
Yes. I and many others were figuring end of July, really, at the earliest. And we kept saying-- we would always hedge it a little bit and say, well, July, sometime in July. Turns out it was July, but we thought it would be more towards when summer recess was hitting. And Congress, we didn't expect it to happen as early as it did. The fact that it happened as early as it did actually creates a good opportunity for planning just generally. The more time you have to plan, the better.
The other somewhat surprising thing is that actually, this legislation constitutes something of a little bit of a stealth tax increase, especially for high income taxpayers, because most high income taxpayers itemize their deductions. And a lot of the deductions that they used to be able to take in full, they're not going to be able to take in full anymore. So it is a little bit of a stealth tax increase. And that's maybe the biggest surprise out of the whole process.
Adam, what about you?
Yeah, well, I certainly agree with the comment that this happened very quickly, really, from the initial introduction of legislation in May to its signing on July 4, was less than two months.
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Text: Adam Ludman, HEAD OF TAX STRATEGY
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And that was able to happen because the Republicans were able to use what's called budget reconciliation, which is this process where the party in control of the White House and Congress is able to pass legislation with a simple majority in the House and Senate. Ordinarily, you would require 60 votes in the Senate.
And so Republicans were able to do this without negotiating with Democrats. They were really just negotiating among themselves to sort out some of the few provisions they had disagreements on. And some of the big picture items, including the overall cost of the bill, to Jordan's point about mid-year enactment, I think that does create a planning opportunity. Many of the provisions, including the limitations on itemized deductions, are going to be effective starting in 2026.
So we're thinking about things like front loading charitable contributions in 2025, because they could have more value in 2025 than next year. But there are some provisions of the bill that are effective this year. Some of the things, like the provisions dealing with tips and overtime and enhanced deduction for seniors, all of which phase out for high income earners. So generally, not applicable to our clients. But there are also the state and local tax deduction cap increase, which we'll get into, effective this year. So there are some things effective this year.
But those provisions also expire in a few years, in either 2028 or 2029. So what that means is, though we have certainty and some of the permanence that you mentioned, extension of the tax cuts, it does set up a conversation in a few years for more tax negotiations and dealing with those potential expirations on things that could potentially be appealing to some on both sides of the aisle. So I think there will be discussion of that probably in a few years.
So when we talk about permanence, it is an extension of tax cuts, but there are limitations. How should people think about this in terms of permanence? So we should act on it, but give some context around what permanence means.
Permanence in this context really means indefinite. There's nothing permanent when the legislature is in session. And everybody should anticipate the likelihood that one day, when Democrats are back in control of the White House and Congress, that they will enact tax legislation in the same manner that Adam described via reconciliation, where they used, again, the 51 votes in the Senate and a simple majority in the House. I think we can expect that, but I don't think that's going to happen, certainly, for the next-- certainly not going to happen for the next three years, as long as there's a Republican president.
So actions to take but flexibility.
You always have to take-- you always have to build in a certain amount of flexibility in your tax planning, anticipating the possibility that with new administrations and new congresses, the laws could change.
So something that you two have been tracking and your teams were several provisions that actually ended up not being in the law. So let's talk about, Adam, what is not in here that surprised you or that you were tracking and watching closely?
Yeah, I think that's some of the biggest news, actually, is what didn't make it into the bill. And I'd put them in two categories. There has been a lot of speculation, really since the elections in November, as to what could be in a tax bill. Once it was known that Republicans were going to have full control of government, then there was a lot of speculation as to what provisions they would deal with or what they didn't.
And ultimately, things like carried interest, the tax treatment of muni bonds, things that were speculated about in the press, were left untouched. There were no changes to the long term capital gain rates, no changes to qualified dividend income. These provisions all remain intact. And then there are other proposals that were actually part of the legislative process and showed up in earlier versions of the bill. And this was an iterative process. We had proposals from the House, proposals from the Senate, and changes throughout the process.
And there were a number of things that we were watching. So an increased excise tax on private foundations was something that showed up in an earlier version of the bill. Some of the largest private foundations in the country would have been subject to an increased tax. These are generally tax exempt organizations, but they are subject to a small 1.39% excise tax on their net investment income. There was a proposal to increase that as high as 10%. That was ultimately pulled out of the bill.
So significant news for foundations.
Absolutely. There were also some changes to the so-called pass through entity tax elections, which we'll come back to, that were in earlier proposals that really would have significantly limited some structuring and opportunities there, and those were pulled out of the bill. Limitations on tax benefits for sports team owners. Again, those were things that were included in earlier version, ultimately pulled out.
Changes to business losses and their carry forward treatment. That was something not a lot of people were talking about, but it could have had a significant impact. And the changes to the way the carry forward provisions would have worked were ultimately pulled out as well, although those excess business loss limitation provisions were made permanent in the bill.
And then finally, there were some proposals to increase taxes on cross-border transactions. We were hearing a lot about so-called section 899 revenge tax. That was something that would have increased taxes on foreign investors in the US. That ultimately came out.
And finally, a remittance tax proposal that would have taxed transfers, foreign remittance transfers outside the US. And there were some key exceptions inserted into the bill later in the process that really carved out a lot of US financial institutions from having to implement those rules. So each of these, although they were part of the discussion, they were proposed, ultimately were removed from the final version.
And anything could happen in the future, but it's something to watch, what was considered and what was ultimately decided. Jordan, I want to start with you on what is in the bill. So what are the three things that you're looking at and watching and that you're already talking to clients about?
The three things that I'm talking to clients about most are the permanent indefinite increase in the estate and gift tax exclusion amount. Was 13.99 million on an inflation adjusted basis. It's going to be $15 million on January 1 of this year. And from $15 million, it is then scheduled to increase with inflation. That's actually a material change and creates a great deal more certainty than had existed until now, because that exclusion amount had been temporary under TCJA. Now it is permanent and actually increased again. That's one.
The second thing, which again, we'll talk about in a little bit, is this 0.5% floor on charitable contributions based on your adjusted gross income. And again, we'll get into a specific example in a minute. But basically, if you make a million, if your adjusted gross income is $1 million and you give money to charity, the first $5,000 of your charitable gift will not be deductible, basically, is what that particular provision stands for.
And then third, the overall limitation on itemized deductions. So when you itemize deductions, the itemized deductions that you take most often now are the state and local tax deductions, the so-called SALT deduction, about which, of course, there's been a lot of discussion. The charitable deduction, the investment interest deduction, which is important for what's known as tax aware borrowing. And then the mortgage interest deduction.
All of those are going to be subject to what's basically a 5.4% we're calling it a haircut. Those are the things that I'm spending most of my time talking to clients about, and especially on the first two items, which Adam alluded to, what to do about them. Obviously, be prepared to do more gifting in anticipation of the increase in the exclusion amounts. And secondly, front loading charitable giving so that you can avoid that 0.5% floor on giving.
Adam, do you have any insight on why the change to charitable giving and what was the intention behind the adjustment?
Well, it's interesting, because there's also a new law in the bill that allows non-itemizers to take a deduction for charitable giving. And that's up to $2,000 for married couples filing jointly. And this was really a pretty close offset to that. So you could look at it as that potentially broadening the base of individuals, taxpayers who are able to deduct charitable contributions.
But on the flip side, you have this limitation for itemizers. And the revenue, the scoring, the official scoring of the law that was ultimately enacted, is fairly close on those items. So I think they are closely related. And I think from a nonprofit perspective, they're going to be thinking about the potential impact on giving from both perspectives, for those who do not itemize and those who do.
And the advice you've heard Jordan mention, one big recommendation we have for our clients is that they may want to consider giving in 2025 versus 2026. What other insights would you provide around charitable giving? And also, will you spend some time talking about the SALT deduction cap and the potential workaround?
Yeah, sure. I think with charitable giving, it changes the conversation a bit, because of the half a percent limitation based on your adjusted gross income. And so one thing to think about is potentially stacking the benefit in different years where you're going to be less impacted. So maybe in a lower income year, and certainly in 2025, because the provision is not effective until 2026. So that's definitely one thing to think about how you're giving and how much you're giving in a particular year.
With respect to the state and local tax deduction cap, as Jordan said, that's something that there was significant discussion about and a lot of negotiation in Congress as to what was going to happen with the state and local tax deduction cap. Since the Tax Cuts and Jobs Act that was passed in the first Trump administration, there has been this $10,000 cap on that deduction.
And that's been a sensitive topic and an interesting political issue for those representatives in high tax states. Think New York, California, New Jersey. Because a lot of deductions for income taxes, property taxes have not been allowable, particularly for high income earners.
And so the two things I think to keep in mind for where we landed on the SALT deduction cap, I think a lot of people are hearing that that $10,000 went up to $40,000. But for high income taxpayers, it's phased back down to $10,000. So if you make more than $500,000 a year, you're going to start to see that phase down. And if you make more than $600,000 a year, then you're going to be completely phased down to the $10,000 cap. So I think for a lot of our clients, it may not have as significant an impact.
And the other thing, something I mentioned earlier, is what's known as the SALT cap workaround that really, since guidance issued by the IRS back in 2020, a lot of states have enacted laws. There's 41 states that impose an income tax. The vast majority of them have now enacted these so-called pass through entity tax rules that allow individuals who own, let's say, a business in a partnership or an S corporation to actually pay state and local taxes at the entity level.
And what that does is reduces the income that is allocated out to the owners. So it's seen as kind an indirect deduction in a way, because it reduces the impact of the SALT deduction cap on those individuals. And throughout the process, there were earlier proposals that would have really significantly limited the ability to do that, particularly for some services companies, for some consulting firms, CPAs, accountants, and investment management firms, many of whom take advantage of that. And ultimately, they were pared back and then pulled out of the bill at the end.
So that's a significant item to pay attention to.
Absolutely.
That our clients are looking at.
Yeah, and I think we'll talk a little bit more about business owners, but I think one of the things to keep in mind is if you're thinking about that or taking advantage of that, it's something worth, I think, revisiting, because many states have enacted those provisions. Some of them are expiring. Some of them have been extended. And so it's definitely something to take a look at with your CPAs and tax advisors and make sure that you can maximize that benefit going forward.
So let's talk a little bit about business owners. Because when we've been discussing this bill, and as you've been watching this bill, the changes have been fairly modest or even slightly tax increases, as Jordan mentioned earlier. But there are some things in here that are incentives for business owners. So will you touch on what those are? And also what are some of the recommendations because of those incentives?
Yeah, there were a number of changes, as you said, that are favorable for business owners. And I'll start with the big three, which people were watching pretty closely. One was 100% bonus depreciation being restored and made permanent effective this year. Another was the immediate deductibility of domestic R&D expenses. And another was more favorable interest deductibility for some large companies.
And collectively, these are really meant to encourage economic activity. I think whether that happens, the extent to whether that happens, remains to be seen. But that's the idea behind restoring these provisions. And just taking them one at a time. 100% bonus depreciation allows a business owner that is buying qualified property that they're using in their business to immediately deduct the cost of what they're buying. So think of things like vehicles and equipment and aircraft, major expenses in a business that traditionally have to be depreciated or deducted over time according to a depreciation schedule.
So if you just take a simple example where let's say I own a business and I buy a truck to use in that business, and it's $100,000. And let's assume that you can deduct the cost over a five year period under a depreciation schedule. Then you're effectively taking $20,000 a year and deducting that amount and reducing your taxable income.
Now, under 100% bonus depreciation, you might be able to write that off and deduct it immediately. And so that is helpful for businesses that are investing and buying property that they're going to use in a trade or business.
And when does that go into effect?
That's effective this year. Interestingly, effective January 20, not January 1, really tied to inauguration date, but for a property that's placed in service on or after that date.
The other issue, so immediate deductibility for domestic R&D expenses is something that under the Tax Cuts and Jobs Act that was passed back in 2017, there were a number of these provisions that were actually phased out over time, and this was one of them that back in 2022, the immediate deductibility started to change.
And so you actually had to capitalize the expenses and over a five year period get deductibility or amortize the cost of R&D expenses. This restores immediate deductibility for domestic R&D expenses. So that can be helpful, particularly for some small businesses or early stage companies that are investing in that type of R&D activity.
And then finally, the interest deductibility rules. Again, this is another change affected back in 2022 that curtailed interest deductibility for a number of larger companies. And now more favorable interest limitation rules are in play. And they were restored as well in 2025. So that's really meant to improve after tax cash flows. I think for a lot of companies that have maybe recently purchased companies that have a lot of goodwill or depreciation, I think they're probably going to benefit from these provisions. And they're all collectively seen, I think, by the business community as things that they were in favor of.
Two other things, I think, worth mentioning. Qualified small business stock. There were some enhancements in the law that was enacted. This is the idea. It's a very powerful exclusion of capital gains for certain qualifying companies. If you own stock of a C corporation, for example, domestic C corporation, you're able to-- and it's in a qualifying industry.
So typically, it comes up with tech founders, entrepreneurs, venture capital investors. If they have qualified small business stock and they sell that stock and they've held it for a period of five years, they're able to exclude up to $10 million or 10 times their basis. So that's a very significant exclusion.
And what the law did is enhance those benefits for stock acquired after the date of enactment. And so it increases the $10 million amount to $15 million. It increases the corporate gross asset test that companies use to determine whether they can issue qualified small business stock from $50 million to $75 million. And it also reduces the holding period required to qualify for partial qualified small business stock incentives. And so, again, those are generally business friendly and could encourage investments in companies that can issue qualified small business stock.
And the other thing we're hearing about that was in the law is qualified opportunity zones. Qualified opportunity zones have been around since the Tax Cuts and Jobs Act. And these are provisions that allow a variety of taxpayers, individuals, partnerships, and so on, to take capital gains and roll them into a qualifying investment. And they basically get three benefits. They're able to defer the tax under the current regime. They can defer the tax on those capital gains until the end of 2026.
If they met certain holding period requirements, they can get up to a 15% free basis step up. And if they held the investment for more than 10 years, then they can essentially get forgiveness on future appreciation. And the qualified opportunity zone provisions in this bill create a new permanent regime for qualified opportunity zone starting in 2027.
So what happens to the ones that end in 2026?
That's a really good question. I think a lot of people were hoping that deadline would be extended, but it was not. And so those that have deferred capital gains are still going to have to start thinking about how to pay the taxes that are due at the end of 2026, really in early 2027.
And we expect no changes to that. You can take action.
Yeah. At this point, I mean, the law is permanent. I mean, you never what's going to be taken up in the future. But people should start thinking about that. But the new benefits under the new regime for investments in 2027 are pretty close to the earlier regime. There are some new incentives for qualified rural opportunity zones. There is a five year deferral, a 10% basis step up if you hold for five years. And again, that ability to wipe out future appreciation up to a period of 30 years. So pretty significant issues to think about.
And I think those clients who are sitting on positions with appreciated gains, or maybe thinking they're going to sell a business, maybe in 2026, might want to start thinking about whether they can qualify for making an investment in a new qualified opportunity zone in 2027.
Jordan, anything else to add for business owners that comes to mind for you or that you've been hearing about in the last couple--
No, that pretty much covers it. The one thing I would add to what Adam said is that the qualified small business stock exclusion had been $10 million and the size of a small business was pegged at $50 million back when that law was enacted in 1993. So the bump up from 10 million to 15 million and the bump up from 50 to 75 million isn't even really an inflation adjustment, but it tries to approximate what the state of asset values was in 1993. But it is a nice incentive, and I think it will encourage people to think in terms of they may want to organize as a C corporation rather than as a pass through.
Yeah, and there's also a permanent extension of the 20% qualified business income deduction for pass through entities. So partnerships, S corporations. And I think to your point, Jordan, that entities and businesses should really be thinking about their classification. Should there be a pass through entity, should they be a C corporation given these changes? Because now that there is some permanence to that 20% deduction, but also some enhancements to qualified small business stock, I think that conversation changes a little bit and people should be thinking about whether they do want to incorporate or whether their structure is correct.
The one thing to be on the lookout for about that is the original QBI deduction in the original House bill that got changed in the Senate was actually for a 23% QBI deduction, Qualified Business Income deduction. We have heard that there is going to be sentiment in Congress to try to pass new legislation, maybe by the end of next year, maybe by the end of this year, maybe next year, to bump it up to 23% from the existing 20, which, again, is one of those things that business owners will factor into their calculus of how do I want to organize.
So before we talk about a couple of other things in this bill, that makes me think about we're not necessarily done. We do expect more tax legislation to come. To clarify, will you just talk a little bit about what you think will happen next?
I think it's possible, as you said. I mean, some members of Congress have been saying they would like to do another budget reconciliation bill. It's possible. Every now and then, I mentioned that this came together rather quickly, in less than two months. And every now and then when you have large legislation like this, you have people figure out after the fact that maybe technical corrections are needed.
And so it's possible, while the Republicans are still in control, that they could enact other legislation maybe to deal with some issues in this bill. And nothing comes to mind immediately, but certainly something might come up later. And then also to deal with other potential tax priorities. I think the QBI deduction, the 20% deduction potentially being raised, is one of those issues.
I think it remains to be seen. This was a pretty significant process. A lot of late nights for members of Congress kind of working all hours to get this done, and there were a lot of other priorities at stake. But it is possible that we could see more legislation later this year.
I actually think a lot of Republicans who had pet priorities agreed to put off their priorities in this round of legislation with the hope that or the expectation that whatever their issues were will be brought up again sometime, again, later this year or next year.
So that's something we're watching closely.
Yes.
I do want to just spend a minute on some of the interesting or planning things that we would take note of that happened in this bill. I'm thinking of 529 plans, Trump accounts, private scholarship deductions. Do you want to just talk about some of those items that are included?
Yeah, there were some enhancements to 529 accounts included in the law that was enacted. So expansion of so-called qualified educational expenses that can be used for 529. So in recent years, there was a change that now allows 529's to be used for elementary or secondary education, but really limited to tuition. And those provisions were expanded to allow them to be used for other educational related expenses.
And there was also a limit on the amount that could be used annually, $10,000. And that amount is scheduled to go up to $20,000 next year. So that's one interesting point.
The other thing, you mentioned these what's referred to in the law as Trump accounts. These are effectively a different type of retirement account that was created in the law. It went through a number of iterations throughout the process. But effectively, and these aren't going to be effective until the second half of 2026 when contributions can start being made.
But basically they allow for up to $5,000 a year to be contributed to these accounts for children under the age of 18. And they also have a provision in there that would allow employers to make up to a $2,500 what looks like a tax free contribution from employers. So if employers start establishing these plans, that could be helpful. But it's an interesting new provision and new opportunity to potentially save for children and contribute to an IRA type account a little bit earlier without regard to earning income and all of that you typically think about with IRAs.
And then, of course, there's this one time pilot program that they're doing that people have heard about. It's a $1,000 credit basically for children born from 2025 to 2028. So I think there may need to be more guidance issued to clarify some of the points, but they're definitely something that people are going to start thinking about. And how does that work with a existing 529 plan or other tax advantaged savings accounts? And I think some interesting provisions there.
And then, of course, there was a private school scholarship donation tax credit for scholarship granting organizations, effective in 2027, that allows the $1,700 tax credit. And again, I think that's something that states are going to have to be involved in certifying and figuring out who the qualifying organizations are. But that's something that clients might be able to take advantage of.
And there's no income limitations on receiving that, correct?
Right.
So that's significant to note on top of what you may already be giving charitably. Before we wrap, Jordan, anything that you would just want to re-underwrite that people should pay attention to that would be the most impactful thing in this bill that they should take up with their advisors?
Well, again, I always come back to the permanence of the estate and gift tax exclusions. A lot of people have been on the sidelines in terms of their planning because they didn't know is the $13 million, $14 million exclusion going to come back down to 7, as was speculated? Well, now we know it's a permanent 15.
So I sort of group people into three categories. The people who haven't been planning because of the uncertainty, just go ahead and plan. The situation that we have is as permanent as any situation involving politics and taxes is going to get.
For the people who have planned, I think there's a very interesting question that they have to look at. A lot of people have done planning in the last couple of years in anticipation of perhaps a reversion of the exclusion back down to $5 million or $7 million or whatever it is. Now that that's permanent, a lot of people made gifts to trusts, irrevocable trusts, that are out of their estates, but those assets are not going to get a step up in basis upon that person's death.
So now the question is, and this is one of these things where you have to go through a fairly careful analysis and do meaningful and realistic projections about what you expect your future assets to be, what you expect growth to be, what inheritances you might expect to get. Think in those terms and decide, well, maybe I parked money in a trust for the benefit of my spouse.
Should I do-- first of all, maybe should I do some tax free exchanges between myself and that trust, assuming that trust is a so-called grantor trust, which means that it's nonexistent for tax purposes to get higher basis assets into that trust now and put lower basis assets back on my balance sheet? Maybe I should even think in terms of making distributions from that trust. If my spouse and I, we don't have any realistic expectation of having estates exceeding $30 million, which is the new threshold, should we be making distributions out of those trusts in order to be able to take advantage of a basis step up on the first spouse to die, which would not be available if those assets are still in a trust?
So again, category one, people haven't done planning at all. Number two, people who have done planning with expectations of how the income tax system would look, and the estate tax system would look, that have now been changed by this law.
And the third group of people are the residents of the 13 states that have an independent estate tax. And if you don't know who you are, you live in Connecticut, DC, Hawaii, Illinois. Then you got the four M's, Maryland, Massachusetts, Maine, Minnesota. And then you've got New York, Oregon, Rhode Island, Vermont, and Washington State.
So if you're in any of those 13 states, your state has its own independent estate tax. And so if you're estate exceeds whatever their estate tax exemption level is, and most of those are well south of-- in fact, all but Connecticut are well south of $14 million, then you need to determine, do you have an estate tax bill that you're going to be looking at, even though the exemptions have gone up?
And always remembering that distinction between federal tax and state tax is important. It actually relates to 529 plans as well, because distribution from 529 accounts that might be subject, that might be tax free from the federal perspective, may not be tax free from the state perspective because not all states conform their laws to the federal laws.
Adam, any final thoughts that you would have people pay attention to in this bill?
I think, as I said, business incentives and focusing on that. Business owners should really be spending some time before the end of the year sitting down with their CPAs and running the numbers and trying to understand the impact on the bill, and also thinking about any potential investments they want to make to take advantage of some of the new provisions, like 100% bonus appreciation.
That's something we're hearing from a lot of people about and I think could encourage a lot of activity. And thinking too about, as we said, structuring and whether it's more efficient to operate as a pass through entity or a C corporation given some of the new considerations in the bill.
Can we just go back to the charitable deduction thing for just one second? I know we touched on it before. Again, just to do a little bit of quick math, let's assume a taxpayer has adjusted gross income of $1 million and decided to make a $100,000 charitable deduction next year. So this year, you're OK.
The first $5,000 of that donation is going to be subject to this haircut. So you don't get to deduct that $5,000. So now you have $95,000 of charitable deduction available. That donation is also then going to be subject to this roughly 5.4% deduction. So you have to take a haircut of 5.4% of the $95,000. So the net benefit of your charitable deduction, we've done the math on this, comes to, in that example, the examples are always going to change a little bit, comes to about $89,000 on your $100,000 gift.
And again, that 5.4% haircut applies to the SALT deduction cap, the investment interest expense, which means the tax we're borrowing, where you borrow money and then invest it somewhere else, it's going to be subject there. It applies to the mortgage interest expense, which is capped at the $750,000 of principal. And it applies to charitable deductions. So that, again, that double hit on charitable gifts is a reason to think about front loading deductions, especially this year.
And I think the fact that the half a percent floor is tied to your adjusted gross income means for higher income earners and higher income years, you're going to have to give more to be able to give to get that benefit starting next year. So definitely something to keep in mind. And as you said, the numbers could change depending on your income. But completely agree.
And these are the kinds of questions we can help model. We can help our clients model.
This is exactly where I wanted to end, Jordan, which is with every new tax bill, it's an opportunity to assess how it's going to impact you and your family. And one of the things we take great pride in is being able to help families walk through and consider what it means for them. So please reach out to your JPMorgan representative. We are watching trends, we're paying attention, we're seeing what's happening, and we're here to help you think about what to do next.
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The latest on the tax landscape
The OBBBA includes tax benefits for individuals and business owners and spending offsets from cuts to Medicaid and renewable energy tax credits. According to the Congressional Budget Office, the OBBBA would increase the federal deficit by $3.4 trillion over 10 years compared to the current law, not including interest.
Our View:
- Donate to Charity Now: Consider front-loading your charitable contributions in 2025 before new limitations take effect.
- Review Business Entities: You may be able to benefit from higher thresholds and exclusions for some owners of qualified small business stock, more quickly deducting certain business expenses, and the new rules around deducting state and local taxes.
- SALT Check: The state and local tax (SALT) deduction cap is temporarily increased from $10,000 to $40,000 through 2029, with a phase-down for most households that make more than $500,000 (half those amounts for married couples filing separately).
- Pass on Wealth to Family: With reduced uncertainty around estate and gift taxes, you should think about transferring wealth to future generations.
- This is complex and we can help: Clients should consult with their J.P. Morgan team and tax advisor to assess the new law’s potential impact on them, their family and their businesses.
What’s in the new law?
For high-income taxpayers, the bill permanently retains the 37% top income tax rate.
The maximum that can be transferred free of estate, gift, and GST tax will increase from $13.99 million to $15 million on Jan. 1, 2026, an amount to be adjusted annually by inflation.
The interest paid on $750,000 of mortgage debt is deductible under current law and has been made permanent at that amount.
The exclusion of home equity lines of credit (HELOCs) from the definition of qualified residence interest has also been made permanent.
The state and local tax (SALT) deduction cap is temporarily increased from $10,000 to $40,000 through 2029, with a phase-down for most households that make more than $500,000 ($250,000 for married couples filing separately).
High-income taxpayers will effectively continue to be subject to the $10,000 cap. However, married couples should consider whether, by filing separately, the lower-income spouse might be able to take advantage of the increase of the SALT deduction cap.
In addition, the “SALT cap workaround” used by certain pass-through entities (such as partnerships, S corporations and certain LLCs) to deduct, indirectly, state and local taxes paid by the pass-through entity, beyond the current $10,000 deduction cap, is still in place. Therefore, owners of those entities should continue to be able to organize in such a way as to maximize the benefits of the workaround.
The AMT system is a parallel tax system that subjects taxpayers to income tax at a lower rate, but broadens the income base and disallows many deductions. Higher AMT exemptions have now been made permanent.
Miscellaneous deductions, which were previously suspended until 2026, have been permanently eliminated.
The value of itemized deductions more broadly has also been capped for clients in the top (37%) income tax bracket. This limitation applies to a range of itemized deductions, including charitable contributions and investment interest expense.
The new law also establishes a 0.5% floor on charitable contributions for taxpayers who itemize.
The twenty percent (20%) deduction for income earned by certain “pass-through” businesses (such as partnerships, S corporations and sole proprietorships) has been made permanent.
Washington Watch
The new law makes permanent many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that were scheduled to expire at the end of 2025. Here's a summary of some key provisions of the new law to help guide your planning decisions.
Deep Dive: What’s been enacted
Want to know how the tax-related provisions of the OBBBA may impact your financial plans? Reach out to your advisor to get our summary of the new tax law.
Our insights can help navigate a changing landscape
Volatility is inherent in investing and planning, and the proposals of a new administration can add to the noise and steal focus. To help you navigate this environment most efficiently, we’ve curated a set of strategic insights across wealth planning.
Trusts & Estates
Jan 13, 2025
How much you can gift tax-free is set to be cut in half. Are you ready?
Meet the J.P. Morgan Private Advisory team behind our insights and personalized advice
Important Information
JPMorgan Chase & Co. and its affiliates and/or subsidiaries do not practice law, and do not give tax, accounting or legal advice, including estate planning advice. The tax-related material contained herein has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction. We will, however, be pleased to consult with you and your legal and tax advisors as you move forward with your own planning.
