President Donald Trump signed into law the far-reaching reconciliation bill known as the One Big Beautiful Bill Act (OBBBA) on July 4. The tax title of this massive legislation affects many aspects of the U.S. tax regime, including numerous provisions relevant to high-net-worth individuals, discussed below.
Extension of TCJA Tax Rates
The lower individual marginal tax rates enacted under the Tax Cuts and Jobs Act (TCJA) were set to expire at the end of 2025. The OBBBA makes these rate reductions permanent, while adding an additional year of inflation adjustment to the 10% and 12% brackets. This provision is effective for tax years beginning after December 31, 2025.
The applicable tax rates and rate brackets are of great importance to high-net-worth individuals. For those in the top bracket, the rate would have increased from 37% to 39.6% if mandatory sunset for those rates under the TCJA had not been avoided with the passage of the OBBBA. The TCJA rates have been made permanent, subject to change by future legislation.
Taxpayers should continue to focus on generating income that qualifies for long-term capital gains rates, including qualified dividend income. When appropriate, taxpayers may consider deferring income by using charitable remainder trusts or like-kind exchanges of real estate. To the extent that taxpayers can conduct their affairs to exclude income entirely, such as by selling qualified small business stock with gain below the exclusion amount, or by selling a principal residence held for the requisite period, with gains below the exclusion amount, they should consider doing so.
Qualified Business Income Deduction
The TCJA introduced a provision whereby certain noncorporate taxpayers could deduct up to 20% of their qualified business income (QBI) derived from a partnership, S corporation, or sole proprietorship, certain REIT dividends, and publicly traded partnership income. The OBBBA permanently extends the QBI deduction. In addition, it expands the taxable income phaseout limitations by increasing the current $50,000 (for non-joint returns) and $100,000 (for joint returns) amounts to $75,000 and $150,000, respectively. This provision introduces a new, inflation-adjusted minimum deduction of $400 for taxpayers who have at least $1,000 of QBI from one or more active trades or businesses in which the taxpayer materially participates. This provision is applicable to tax years beginning after December 31, 2025.
For individuals who own interests in certain operating businesses held in partnerships or S corporations, or as sole proprietors, this deduction represents a significant benefit intended to try to bring parity between closely held business owners operating as a sole proprietor or in a pass-through entity and those operating as a C corporation subject to a 21% tax rate.
The qualified small business deduction represents a valuable opportunity for taxpayers with pass-through entities to reduce their overall effective tax rate by earning qualified business income. Taxpayers should consult with their tax advisors to model adjustments that may enhance their qualified business income deduction.
Estate and Gift Tax Exemption Amount
The unified estate and gift tax exemption amount for 2025 is $13.99 million, but that amount was set to reduce to approximately half starting in 2026. The OBBBA permanently increases the base exemption amount in 2026 to $15 million for individuals and $30 million for married couples (indexed for inflation thereafter). The provision is applicable to estates of decedents dying and gifts made after December 31, 2025. The generation-skipping transfer (GST) tax exemption amount is linked to the estate tax exemption amount, so these adjustments are also applicable to the GST exemption.
The permanent increase in the gift, estate, and generation-skipping exemption amounts allows individuals to carry out estate planning without concern that the exemption amounts would be significantly reduced, except through future legislative change. Individuals with significant net worth in excess of the exemption amount should consider making gifts to take advantage of the exemptions to shift future appreciation and income from the parent to children and descendants. Typically, that plan would utilize trusts to provide asset protection and, to the extent possible, prevent future wealth transfer taxes on the assets held in the trusts.
Although the increased gift, estate, and GST tax exemptions were made permanent, taxpayers should understand that subsequent legislation could alter that permanence. Many wills and revocable trusts may contain provisions that do not consider the increased size of the exemptions. Those documents should be reviewed and amended accordingly. Larger estates should continue to engage in planning to shift future income and appreciation to future generations, typically by utilizing irrevocable trusts for creditor protection and protection from subsequent wealth transfer taxes. Taxpayers also should review assets held personally, and by trusts established to carry out estate planning, to determine if adjustments should be made for federal income tax savings when assets held at death receive a new basis equal to fair market value.
Itemized Charitable Deductions
The OBBBA creates a new “floor” on charitable deductions. The itemized deduction for charitable contributions will be allowed only to the extent that total contributions exceed 0.5% of an individual’s adjusted gross income. This limitation applies for tax years beginning after December 31, 2025.
In addition to the itemized charitable contribution deduction floor, and as discussed below, the OBBBA implemented a cap on the benefit individuals may receive from itemized deductions to 35%, which is below the top marginal individual income tax rate of 37%.
Finally, cash contributions to qualifying public charities remain subject to the 60% of adjusted gross income limit, which the OBBBA made permanent.
High-net-worth individuals often make large charitable donations to public charities, donor-advised funds, and private foundations. Starting in 2026, the donations must exceed 0.5% of adjusted gross income before they can be deducted, and the maximum tax benefit will be at 35% instead of the top marginal tax rate of 37%. Therefore, individuals considering making large donations may want to analyze the benefit of making those contributions in 2025 rather than in future years.
Later this year, taxpayers should review their charitable gifts and determine if any planned gifts should be increased or accelerated, as the new floor will not apply until 2026.
Section 1202 Qualified Small Business Stock Gain Excluded From Gross Income
For qualified small business stock (QSBS) issued after July 4, 2025, the OBBBA introduces a three-tiered gain exclusion rule that depends on the holding period:
- For QSBS held for three years or more up to four years, taxpayers may exclude 50% of the gain;
- If the QSBS is held for four years or more up to five years, taxpayers may exclude 75%; and
- For QSBS held for five years or more, taxpayers may exclude100%.
With respect to the 50% and 75% exclusions, the excess that is not excluded will be considered Section 1202 gain subject to a 28% capital gain rate plus the 3.8% tax on net investment income. There will be no alternative minimum tax (AMT) preference amount for stock issued after July 4, 2025, similar to the rule imposing no AMT for QSBS issued after September 27, 2010.
The QSBS exclusion was previously the greater of $10 million or 10 times the taxpayer’s basis or cost in the stock. The OBBBA increases the $10 million limit on the exclusion to $15 million (or 10 times basis) for QSBS issued after July 4, 2025. Furthermore, the aggregate gross assets test to determine if a corporation qualifies as a small business under Section 1202 is increased from $50 million to $75 million for QSBS issued after July 4, 2025. Both the $15 million exclusion and the $75 million gross assets test will be adjusted for inflation starting in 2027. If a taxpayer has fully utilized the $15 million exclusion, the inflation adjustment will be zero for purposes of determining any further use. If a married couple is filing separately, the exclusion amount for each spouse is one half of the $15 million, as it was one half when the cap was $10 million. The revised Section 1202 does not clarify the issues concerning the available exclusion for a married couple filing jointly when both spouses own and sell QSBS.
Individuals may take advantage of a portion of the $15 million exclusion offered for QSBS once they have reached at least a three-year holding period for stock issued after July 4, 2025. Furthermore, with a $75 million gross assets threshold, more small businesses will qualify to issue QSBS. The availability of the exclusion is a major factor in determining the choice of business entity upon inception, or perhaps a consideration for converting an existing pass-through to a corporation.
Taxpayers should review whether restructuring their businesses could qualify them for qualified small business stock exclusions. For businesses already structured as C corporations, they should consider whether additional stock can be issued to shareholders given the increase in the gross asset test from $50 million to $75 million.
Excess Business Losses
The OBBBA makes the excess business loss provision in Section 461(l) permanent, but reduces the threshold at which it applies by clawing back recent inflation adjustments. Unlike some prior versions of the bill, the final version provides that the excess will continue to be treated as a net operating loss in the subsequent year.
This limit on excess business losses impacts many individuals, because their excess business losses are not available in the year incurred. This provision is now permanent, but the final version retains the treatment allowing the excess loss to be considered a net operating loss for carryover to future years.
Clients and tax advisors often overlook the inability to deduct current business losses against other sources of income. Taxpayers should not enter into transactions to accelerate income into the current tax year believing it will be offset by business losses without consulting with a tax advisor, who could run income tax projections to determine the impact of accelerating that income. An example of a strategy to accelerate income might be the conversion of a standard individual retirement account to a Roth IRA.
Limit on Itemized Deductions
The OBBBA permanently replaces the Pease limitation with a new overall limitation on the tax benefit of itemized deductions, effectively capping the value of each dollar of allowable itemized deductions at 35 cents. This provision is effective for tax years beginning after December 31, 2025. Unlike the Pease limitation, this new limitation provision does not exclude medical, investment interest, and casualty and theft deductions from application of the limit.
High-net-worth individuals generally will be in the 37% tax bracket. Limiting the benefit of itemized deductions to 35% in effect created a 2% tax on itemized deductions for those with income in the top bracket. Many high-net-worth individuals incur investment interest expense as part of their investment strategies. Starting in 2026, the benefit from that deduction will be limited to 35%.
Taxpayers with substantial itemized deductions who are in the 37% bracket may see an increase in their tax liability from 2025 to 2026 simply due to this reduction in benefit. One itemized deduction that will be included is investment interest expense. The effective after-tax cost of that interest expense will increase in 2026 for those in the 37% bracket. Taxpayers may want to have their advisor run projections for the 2026 tax year to assess the potential impact on their taxable income and determine if changes in behavior are advisable.
Pass-through Entity Tax Workaround for Deduction of State and Local Taxes
The OBBBA does not include provisions limiting the application of this workaround.
Although the OBBBA does make permanent the $10,000 limit on a taxpayers’ ability to deduct state and local taxes, it creates a new temporary $40,000 limit that will phase down to $10,000 for income in excess of $500,000 (at $600,000 the limit will be $10,000) for married couples. This higher limit will be in place from 2025 through 2029, with the limit and thresholds increasing 1% in 2026, 2027, 2028, and 2029. High-net-worth individuals typically have income that will cause them to be subject to the limit. For those with businesses operating in a pass-through entity, many states allow taxpayers to elect to pay state taxes at the entity level, typically generating a substantial federal deduction not subject to the $10,000 limit.
Taxpayers with income below the phaseout threshold for the $40,000 deduction should run projections for their 2025 taxable income to determine if adjustments to withholding or estimated tax payments are needed. Taxpayers operating businesses in partnerships, LLCs taxed as partnerships, or S corporations located in states with income taxes should consult with their tax advisor to determine if the pass-through entity should elect to pay those taxes at the entity level.
529 Plans
The OBBBA expands the types of educational expenses that can be paid tax-free from Section 529 savings plans with respect to enrollment or attendance at an elementary or secondary school to include tuition, curriculum and curricular materials, books or other instructional materials, online educational materials, certain tutoring or educational classes outside the home, certain testing fees, fees for dual enrollment in an institution of higher education, and certain educational therapies for students with disabilities. The provision applies to distributions made after the date of enactment, July 4, 2025. However, the $10,000 annual limit on using 529 plan assets for K-12 expenses will increase to $20,000 for tax years starting in 2026.
Tax-exempt distributions from Section 529 savings plans will also be expanded to include qualified postsecondary credentialing expenses in connection with recognized postsecondary credential programs and recognized postsecondary credentials. The provision applies to distributions made after July 4, 2025.
There is no income limit to establishing 529 plan accounts. Thus, high-net-worth individuals frequently use these accounts to fund college expenses. The changes described above continue to expand the range of available tax-free distributions of the funds beyond certain college expenses.
Section 529 plans are popular income tax planning accounts because there are no income level phaseouts, and the income in the accounts grows income tax-free. Later distributions from the account spent towards certain qualified expenses also are tax-free. The act expands the available tax-free expenses, which only enhances the benefits of these plans. Taxpayers should consider contributing to 529 plans to take advantage of these income tax savings.
Opportunity Zones
The OBBBA makes the opportunity zone (OZ) incentive permanent. For investments made after 2026, taxpayers will be required to recognize the deferred gain five years after the date of the investment, but may receive a basis step-up of up to 10% for holding the investment the full five years. Investments in newly created rural OZs can receive up to a 30% basis step up.
With the permanent extension of opportunity zones, this program remains a powerful tax incentive that allows both the deferral of taxes on capital gains when those gains are invested in opportunity zones, and gain-free appreciation on the underlying investments if they are held 10 years.
The next set of opportunity zones will be designated in July 2026, with the new zones going into effect on January 1, 2027. If a taxpayer expects to realize gains prior to 2027 they should consult with their tax advisor to explore opportunities for deferring the gain until 2027 and thereafter.
Residential Clean Energy Credit
The OBBBA accelerated the expiration date of the 30% residential clean energy credit for expenditures made after December 31, 2025.
The law prior to the enactment of the OBBBA provided a credit for some residential clean energy project expenditures up to the year 2032. Installation of solar panels has been a popular expenditure among high-net-worth individuals. Taxpayers intending to take advantage of this credit must incur the expenditures prior to the beginning of 2026.
Consider installing solar panels prior to the end of 2025.
Trump Accounts
The OBBBA establishes a new tax-preferred account – similar to individual retirement accounts -- available for individuals under the age of 18. Contributions, which may not begin until one year after enactment, can be made until the calendar year before an individual turns 18 and are capped at $5,000 per year. Employers are allowed to make tax-free contributions of up to $2,500 (for 2026, adjusted for inflation for subsequent years) to Trump accounts, and those contributions will not be considered income to employees. Employer contributions excluded from gross income are limited to $2,500 per year. Other provisions allow governmental and charitable contributions to classes or categories of eligible beneficiaries. The bill restricts investment until age 18 to S&P 500 indexes and other similar indexes for equity investments primarily in U.S. companies.
The OBBBA includes a provision that creates a pilot program for a government-funded $1,000 tax credit to the Trump accounts of children born between January 1, 2025, and December 31, 2028. Distributions cannot begin until the calendar year an individual turns 18, and then are subject to the same general rules as individual retirement accounts.
There are no income limitations for setting up these accounts. The act does not mention the gift tax implications of contributing to such accounts. Since a child may not access the account until the age of 18, a transfer by a parent to a Trump account appears to be a gift of a future interest. However, since the gift is for the benefit of a person who has not attained the age of 21, transfers to these accounts should be eligible for the gift to a minor exception to the future interest rule. Thus, a gift by a parent to such an account should qualify for the gift tax annual exclusion, which in 2025 is $19,000.
These accounts will not be available until July 2026. Parents with children born during the eligible years should establish accounts to receive the $1,000 tax credit. In the meantime, taxpayers should stay informed about developments related to these accounts to determine if they should make the $5,000 annual contribution for children under age 18.
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