The enactment of the One Big Beautiful Bill Act (OBBBA) has ushered in significant tax legislation based predominantly on the Trump administration’s stated priorities. The key areas include:
Below we summarize some of these key changes and note potential considerations for planning in light of these new rules.
KEY CHANGES FOR INDIVIDUALS
GIFT, ESTATE AND GENERATION-SKIPPING TRANSFER (GST) TAXES
Comment: Apart from the permanent increase in the exemption amounts, the rules related to gift, estate and GST taxes remain largely unchanged from the TCJA. The larger exemption amounts will continue to facilitate significant wealth transfers, and high net worth families may want to reevaluate their estate plans to ensure they are taking full advantage of these exemptions.
Families whose assets currently fall under the new exemption amount also should consider additional planning. As history has shown, “permanency” is a relative term when it comes to tax legislation, and these transfer tax changes could be reversed by a future Congress and administration. There also are numerous nontax reasons for estate planning, including providing creditor protection and financial and asset management for beneficiaries, implementing a business succession plan, addressing any required special needs planning for disabled beneficiaries, promoting philanthropic goals, etc. In addition, several states still impose state estate taxes, and we may see increases in other state taxes to generate additional revenue in response to changes in government spending, federal funding and economic conditions. Properly structured and funded irrevocable trusts can still provide benefits for state and local tax planning.
CAP ON SALT DEDUCTION
Comment: The TCJA’s cap on the SALT deduction has been a hot-button issue for individuals who reside in high-tax states like California and New York. Despite OBBBA’s temporary increase in the cap from $10,000 to $40,000 until 2030, high-income taxpayers may see limited benefits due to the phasedown for taxpayers with modified AGI in excess of $500,000 and the additional limits imposed on itemized deductions for top bracket taxpayers, as discussed below.
OBBBA does not limit the use of the state-level pass-through entity tax (PTET) as a SALT cap workaround, although earlier versions of the bill in both the House and Senate had placed limitations on these workarounds. Generally, with a PTET regime, pass-through entities like partnerships, LLCs and S corporations can pay state income taxes at the entity level. Since the SALT deduction cap generally applies to individuals and not entities, the pass-through entity can deduct the full amount of the state tax paid, thus reducing the taxable income allocated to the pass-through entity owners and effectively bypassing the $10,000 SALT limit that would have applied if the individual had paid the taxes directly. The pass-through entity owners then receive a state tax credit equivalent to the amount of tax paid at the entity level. We may see more states retain or implement PTET regimes under OBBBA.
In trust planning, trustees of existing nongrantor trusts may consider distributing less income to trust beneficiaries to capture the full SALT deduction within the trust. Individuals with grantor trusts also may want to compare the potential benefit of turning off grantor trust status to allow the trust to take the SALT deduction versus the flexibility and other planning advantages provided by grantor trust status, including the ability to swap trust assets or engage in loan or sale transactions with the grantor trust without triggering income tax recognition.
SELECT INDIVIDUAL INCOME TAX PROVISIONS
Comment: The extension of the individual tax rates and standard deduction may particularly benefit higher-income earners and those considering Roth IRA conversions or income acceleration strategies. The elimination of miscellaneous itemized deductions and the overall cap on itemized deductions for top-bracket taxpayers will increase the importance of the timing of income recognition and the taking of deductions to minimize the cap’s impact.
QUALIFIED BUSINESS INCOME (SEC. 199A) DEDUCTION
Comment: Owners of pass-through entities that may benefit from the QBI deduction will want to review their entity and compensation structure to identify opportunities to maximize QBI. The changes to the QBI rules may allow more service business owners to take the QBI deduction; however, the income phaseouts still apply at relatively low thresholds, so the deduction may not be material for higher earners.
QUALIFIED SMALL BUSINESS STOCK EXCLUSION
Comment: Expansion of the QSBS gain exclusion, combined with the higher gift and GST tax exemption, may provide additional opportunities for planning with QSBS, including funding of nongrantor trusts with QSBS that may be eligible to take their own QSBS exclusion on the sale of the QSBS.
KEY CHANGES FOR TAX-EXEMPT ORGANIZATIONS
SELECT EXEMPT ORGANIZATION INCOME TAX PROVISIONS
Comment: OBBBA, as enacted, deleted many provisions found in earlier versions of the legislation that would have more aggressively affected tax-exempt organizations. In particular, the final bill eliminated provisions that would have increased the net investment income tax on private foundations under IRC §4940, modified several unrelated business taxable income rules, and dramatically increased the tax on colleges and universities while also limiting their ability to count foreign students in determining their per-student endowment size. With the removal of those provisions, OBBBA’s overall impact on tax-exempt organizations was narrowed to expanding the tax on the compensation of certain nonprofit employees earning over $1 million and providing a more modest increase to the net investment income tax on colleges and universities.
Through OBBBA’s changes to IRC §4968, Congress seeks to more aggressively monitor and regulate private universities’ endowments, but this trend is not new. Congress has attempted to pass several bills in recent years that targeted educational institutions with large endowments, such as the Woke Endowment Security Tax Act of 2023, which would have imposed a 6% excise tax on private educational institutions with endowments of at least $12.2 billion and on educational institutions with state college contracts and endowments of at least $9 billion, and the Protecting Endowments from Our Adversaries Act of 2024, which would have imposed a 50% or 100% excise tax on universities on the acquisition of, or receipt of income from, certain listed investments.
It is important to note that the changes to the executive compensation excise tax under IRC §4960, which expand the definition of “covered employee” for purposes of the tax, are retroactive and require organizations to look at any employee (as opposed to the five highest-compensated employees) or former employee who was an employee during any taxable year beginning after Dec. 31, 2016. Although there still may be nuances associated with identifying who is an employee for purposes of the tax, this provision has the greatest impact on those organizations that pay compensation of over $1 million to a significant number of employees, as it requires them to pay tax on the compensation of a broader group of individuals and largely limits any advance planning such organizations might typically undertake to limit the effect of the tax.
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