Big changes for 2025 tax planning and beyond!
While you have probably heard a lot about the new tax law, the One Big Beautiful Bill Act (OBBBA) whether you consider it to be a good thing or a bad thing, it is time to concentrate on figuring out how it is going to affect you. Even if you have never considered tax planning before, now you should probably consider it.
The new tax law has been talked about as having “extended the tax rules in the TCJA of 2017,” which is largely true, but there are quite a few new provisions which may affect your taxes going forward and could influence your decision-making.
One new provision you should be aware of is the new itemized deduction reduction for high-net-income taxpayers. If you and your spouse earn more than $1 million in taxable income, a new rule could reduce the amount you’re allowed to deduct on your tax return. The IRS will reduce your itemized deductions by whichever is smaller:
- About 5.4% of your total deductions before the rule kicks in, or
- About 5.4% of your taxable income before the rule applies.
The tricky part? The calculation seems to loop back on itself, which might make it harder to figure out exactly how much you’ll lose in deductions. We’ll have to see how the IRS implements this new provision.
Another new provision now limits how much you can deduct for charitable contributions if you itemize your deductions. Specifically, the IRS will subtract 0.5% of your income from the total amount you claim for charitable contributions on Schedule A of your tax return—similar to how medical expense deductions work.
But there are exceptions:
- Donations made directly from your IRA aren’t affected by this rule.
- If you don’t itemize and instead take the standard deduction, you can still claim up to $1,000 ($2,000 for married couples) in charitable contributions without this limitation.
This change could make tax planning more complicated. For example, giving directly from your IRA (up to $108,000 allowed) lowers your adjusted gross income (AGI), which in turn reduces the threshold—or “floor”—used to calculate both your charitable and medical expense deductions.
The news isn’t all bad, though. The state and local tax (SALT) deduction limit was raised from $10,000 to $40,000, but the increase from $10,000 to $40,000 phases out between $505,000 and $606,333 of Adjusted Gross Income, and the amount which is deductible for taxpayers reporting AGI over $606,333 is limited to $10,000, the SALT limit since 2017. The ability to pay state taxes on “pass-through income” has been retained under the new law. This significantly reduces taxes for anyone who receives income from partnerships and S-Corporations (even if through trusts), which elect to pay your state taxes through the entity. This applies even for those with Adjusted Gross Income higher than $500,000.
In addition, the new tax law retains the lower income tax rate structure put in place in 2017. The exemption amount for transfers as gifts or through estates has been permanently increased to $15,000,000 ($30,000, 000 for married couples), with additional increases linked to annual CPI increases. What makes it “permanent” is that unlike the increase in the 2017 tax act, the increased exempt amount does not “sunset” = automatically disappear at some point in the future. In addition, Social Security recipients are now allowed to deduct $6,000 from the reportable amount.
Changes unrelated to the new tax law now affect when and how you must handle accumulated retirement plan assets, which can significantly impact your tax planning strategies.
Let’s talk about how these tax changes could impact your planning strategies—and how to make the most of them moving forward. Call today to book a session with one of our expert tax advisors.
