The recently passed One Big Beautiful Bill Act added a sweeping array of provisions affecting individuals as well as businesses.
Andrew Whitehair, director in the national tax practice of Top 10 Firm Baker Tilly, noted that one major area it's making sure its clients understand is the many Tax Cuts and Jobs Act changes that have been made permanent.
"We had been starting to prime a lot of our clients earlier this year and last year, in the absence of some new legislation, to expect there to be a sunset and a reversion back to the pre-TCJA tax rates and brackets," he said. "We were warning some of our clients that they might want to engage in what I would call reverse tax planning, where you accelerate income into 2025 in anticipation of higher rates in 2026, and then defer deductions. But with the OBBBA that didn't happen."
"Instead, the TCJA rates have been preserved and extended, so for most of our clients we probably want to defer income and accelerate deductions," he explained.
Whitehair noted that the SALT deduction was a big area of conversation and back-and-forth as the many iterations of the bill were being debated.
"Ultimately, we got this temporary increase in the limit of state and local taxes that could be deducted, which went from $10,000 to $40,000. For a lot of clients, this is going to be a nice bonus, but it did come with a phaseout limitation," he said. "There's a lot of higher-net-worth clients that aren't going to benefit from this. The cap phases down to the old $10,000 limit at $500,000 of adjusted gross income. The effect of the SALT phase-down is that the taxpayer will incur a federal tax rate of about 45% of that income."
"So for clients that we have in that range, we're talking to them about some other ways to manage their income," he continued. "For example, we wouldn't want to do a Roth conversion, which might put them in a punitive phase-down range. Or they could switch over from Roth 401(k) contributions to deductible pre-tax contributions."
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When the TCJA went into effect, a number of states responded by implementing pass-through entity regimes.
"These would effectively allow the taxpayer to do an end run around the SALT cap," Whitehair observed. "Although early versions of the OBBBA would either have limited PTE deductions for either everybody or for certain groups of people, that did not make it into the final bill. So for people that are business owners and participate in pass-through entities, these are still available and will be an important strategy for them in order to maximize their state and local tax deductions."
The tax brackets are largely unchanged, Whitehair noted.
"There were some minor changes at the 10% and 12% brackets, but those are not going to be significant in the grand scheme of things," he said. There are some undecided issues regarding items such as no tax on overtime, no tax on tips, and Social Security. "There are a lot of areas where we're going to need additional guidance from the Treasury to implement some of this."
The TCJA eliminated the Pease limitation on itemized deductions, and the new bill makes this permanent, Whitehair noted.
"However, it replaced it with essentially a new Pease limitation," he said. "One of the things we've been grappling with is that they removed the exception to the itemized deduction limitation. But the old Pease limitation never applied to estates and trusts; it just applied to individuals. We're thinking that probably this new itemized deduction limitation is going to apply to estates and trusts as well. The way that it's set up to work is that it's only supposed to limit the deductions for individual taxpayers that are in the top 37% bracket. But if you're a trust or an estate, the top 37% bracket kicks in at a very low threshold. So we believe that this is probably going to be a big issue for a lot of trusts come 2026 when this provision takes effect."
One of the issues Whitehair is discussing with charitably minded clients is accelerating contributions into 2025. "Part of that is this new itemized deduction limitation that applies to taxpayers in that top bracket. But there's also a new charitable floor for itemized deductions related to charitable contributions. If you remember how the old medical expense deduction works, where you only get to take a deduction once your medical expenses are over a certain threshold, they took that concept and applied it to charitable contributions as well."
"We're still waiting on detailed guidance from the IRS on the OBBBA's overtime tax provisions," said Whitehair's colleague Gillian Florentine, a director with Baker Tilly's human resource consulting team. "In the meantime, employers should begin tracking 'qualified' overtime carefully. This means tracking overtime pay that is required under the FLSA and only the premium portion exceeding the employee's regular rate. For example, if an employee earns $20 per hour and works 50 hours, only the additional $10 per hour premium for those extra 10 hours qualifies, not the full overtime pay."
"It's important to note that overtime paid beyond FLSA requirements, such as daily overtime premiums required by state laws or contracts, does not qualify for the deduction," Florentine said. "Additionally, employers will need to report qualified overtime compensation separately on Form W-2, although the IRS has not yet issued updated forms or final reporting guidance. The act specifically applies to overtime worked over 40 hours in a workweek, as noted in the FSLA requirements. Employer policies on overtime may be more generous than the FLSA requires, but that won't qualify for the tax benefit under OBBBA."
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