Three Strategies to Take Advantage of OBBB Changes
The One Big Beautiful Bill (OBBB) brought a considerable number of changes across a full spectrum of American institutions. With so much being discussed in the news, it can be easy for the important details to get lost in the noise.
If you’re sticking to your retirement plan or are currently enjoying the retired life, the provisions in this legislation are worth paying attention to.
Here are four important changes to consider and the steps to take in response.
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1. TCJA extension: Locking in lower tax rates
The Tax Cuts and Jobs Act (TCJA) rates enacted in 2018 have been extended, preserving lower individual income tax rates and pushing beyond their original 2025 expiration date.
While many of the bill’s changes are temporary, extending through 2028 or 2029, the updated brackets are permanent. The Congressional Budget Office estimates these changes will add $2 trillion to the national debt in the next decade.
Supporters see this move as ensuring tax stability, while opponents warn of future tax hikes and cuts to federal programs. In either scenario, it means a change to your retirement plan.
2. Increased standard deduction for older people
The bill introduces a $6,000 increase to the standard deduction for Americans age 65 and older. This enhanced deduction can reduce tax liability on Social Security income.
However, there are two important factors to consider:
- The first is that the benefit phases out for individuals with incomes above $75,000, or joint filers above $150,000.
- The second is that the deduction is temporary, expiring in 2028. This extension of the pre-existing standard deduction means that a qualifying 65-year-old couple could deduct up to $46,700.
3. SALT deduction cap quadrupled (with limits)
The new legislation raises the state and local tax (SALT) deduction cap from $10,000 to $40,000 for households earning less than $500,000.
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The aim is to ease the federal tax burden in high-tax states such as California, New York and New Jersey.
These changes are also set to expire in 2029 and similarly do not impact higher earners above the $500,000 threshold.
4. Estate tax exemption increased
In another permanent change, the bill extends the raised federal estate tax exemption to $15 million per individual when adjusted for inflation.
The previous exemption was $5.49 million, adjusted for inflation, and was increased with the TCJA in 2018.
This change enables a much larger sum of wealth to be passed from one generation to another.
The question you should ask: “What do these changes mean for me?”
Here are three considerations.
1. Revisit your withdrawal strategy
Coordinate the distributions from your taxable, tax-deferred and Roth accounts to ensure you’re maximizing your after-tax income in retirement.
2. Review estate planning documents
In light of the increased exemption limits, it’s time to re-evaluate your existing estate strategy. Trusts, gifting strategies and legacy plans might need to be updated.
3. Plan for legislative uncertainty
Ensure that you understand which updated provisions are temporary and which are permanent. You’ll want to make your financial plan flexible enough to adapt to policies that are set to expire, as laws are certain to change in the future.
Navigating complicated policy documents is a near-impossible task for the average individual.
If you find yourself feeling the need to take action but are unsure how to do so, it’s imperative that you consult a financial professional to advise you on potential next steps.
When it comes to taxes in retirement, it’s not about what you make, it’s about what you keep. The most important factor is having a purpose-driven plan and being ready to adapt it as new policies are put in place.
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