July 4th the One Big Beautiful Bill (OBBB) was signed into law. Personally, I am saddened by the huge cuts to Medicaid and SNAP and the likelihood that many rural hospitals will close while the Federal deficit balloons to the tune of $2.7 TRILLION dollars.
But professionally and immediately, the OBBB will decrease many of your taxes. You may have read that this bill disproportionately helps higher earners. If you make $100K+ that is you. It also creates some opportunities to plan.
Here are five ways OBBB will impact you.
- If you own a house or are thinking about buying, your tax bill will probably go down. Previously, the tax code capped at $10K the amount of state and local property taxes you could deduct from your Federal income tax. As an example, a couple making $330K living in MA might owe ~$15.5K in MA state income tax. If they own a home, they might pay another $7K in MA property taxes. Before the OBBB passed, that couple could only deduct $10K in total state and local property taxes even though they paid $22.5K. Under the new law you can deduct up to $40K. For this couple, earning $330K, the additional $7.5K in deductions, might save them $3K in taxes or $12.5K x 24% (their marginal tax bracket). This change only impacts you if you are itemizing your deductions i.e., you have more itemized deductions than the $31,500 standard deduction. Since more of you will be able to deduct more state and local income taxes (SALT), you are more likely to itemize under this new bill. If you’re hesitating to buy because the payments will be so much higher than your rent, this can help. This assumes you are buying a more expensive house in a region with higher property and state income tax. You can work with a CFP® like me or a CPA to help you run the numbers.
- If you have kids, your taxes will also go down a little (~$200 / kid). The child tax credit for children under 17 who live with you full time is increasing from $2,000 to $2,200. If you earn less than $200K as a single parent or $400K as a married couple, then you can deduct an extra $200 from your taxes. If the same married couple making $330K has two kids, this would cut their tax bill down by $400 ($200 per kid). Tax credits are different than deductions because they reduce your tax bill dollar for dollar. If your tax bill was $5,000 before credits, a tax credit of $2,200 per kid would reduce what you owe to $600.
- Student loan payments will come back and be higher. If you have private loans or are on a standard repayment plan, the OBBB will not impact you. However, if you are on an income-driven repayment plan pursuing Public Service Loan Forgiveness (PSLF), your options will be more limited and your payments will likely be higher in the future. If you are currently in SAVE forbearance, we still do not know when it will end but prepare to make student loan payments again in the fall. If you’re currently on PAYE, you will have to switch to old or new IBR (depending on when you originally borrowed) between mid 2026 and 2028. You will also have the option of a new RAP plan. Plan for your student loan payments to be higher. I’m seeing a lot of people’s student loan payments go from $300-$500 / month up to $1,000 or $1,500 / month. Many of you have still not recertified your income since 2019 before COVID. If you’re making much more today, you may have a BIG bump in student loan payments. If you want to set up a consultation to figure out what your payments could be, please reach out.
- If you have a baby in 2025 through 2028, they will receive $1,000 in a new Trump account. This is free money and is modeled off of the bipartisan concept of baby bonds. Families with children under 8 can also set up these accounts, but will not receive the $1,000 dollars. Outside of the $1,000, parents can contribute $5,000 per year. The money must be invested in an index fund that tracks a stock index like the S&P. It will grow tax-deferred but qualified withdrawals, for college, buying a home, or starting a business, will be taxed at long-term capital gain rates. The account cannot be accessed until 18 without incurring penalties and only 50% can be touched at 18. The entire balance MUST be withdrawn at 31. In general, these accounts have fewer tax perks than a 529. However, employers will also be able to contribute $2,500 to these accounts. If you work for a employer with good perks, watch to see if they add this. We are still short on a lot of details including how babies born from 2025 to 2028 will receive their $1,000, but in some instances, these can be a nice way to save more for your kids.
- You can contribute $2,500 more to a Dependent Care FSA. If you’re in the 24% marginal tax bracket, like my hypothetical couple earning $330K, that would save you $600 in taxes. It will also reduce your income if you’re on an income-driven repayment plan pursuing PSLF. This can reduce your loan payment too.
Phew, that was a lot and the above is far from a comprehensive list. I didn’t include the phase out of some energy credits, a new $1,000 charitable deduction, the higher standard deduction for seniors or the auto interest deduction (you probably make too much money). You can read more about all the changes here.
When selecting the five things to focus on, I chose those that would most impact my average financial planning clients: individuals and couples earning $250-$500K with young children living in high-cost of living areas like Massachusetts and New York with student loans.
Most of these changes go into effect in 2025 so they will impact your taxes for this year. Please reach out if you have questions and want to set up time to go deeper.