How Will the "One Big Beautiful Bill" Impact You?

Over the past several days, we have been focusing on the details of the One Big Beautiful Bill (OBBB) and its potential impacts on our clients. I must admit, this is a rather welcome shift from focusing our research efforts on the tariffs and trade wars (even though this topic is likely to reappear in the near future).

My goal in this newsletter is to update you primarily on the impacts of the OBBB on taxes for those who are nearing or close to retirement. I specifically will not touch on the Medicaid adjustments, exemptions on tips and overtime pay and defense spending. These are important considerations and should be covered in a more comprehensive version of the OBBB analysis.

Please keep in mind there is a good possibility the final version of the bill will have some material changes as the negotiations continue. So stay tuned and feel free to reach out to us if you have any specific questions.

What are the major elements of the OBBB?

1.) Permanent Extension of 2017 Tax Cuts

The bill seeks to make the 2017 Tax Cuts and Jobs Act (TCJA) permanent. In short, when compared to what it was prior to the TCJA, the permanent provisions include lower individual tax rates, a higher standard deduction and reduced corporate tax rates.

This is actually a big deal.

Non-extension of the TCJA was one of the top concerns of many of our clients, specifically those who live in high tax states. As an example, the federal estate tax exemption would remain at $13.99M with future adjustments for inflation. Without the extension of the TCJA, the federal exemption would revert to around $7M.

We also work with many clients who are small business owners and benefit from the Qualified Business Interest (QBI) deductions. This helpful provision will also remain in place.

2.) Increased Standard Deduction 

The bill proposes increasing the standard deduction starting in 2025. For single filers, the increase is from $14,600 to $18,000. For joint filers, the increase is from $29,200 to $36,000. Keep in mind the additional deductions for seniors age 65+ and the blind remain in place.

This is clearly a positive change as a higher standard deduction reduces taxable income for retirees who no longer itemize, often leading to a lower overall tax bill. I know for a fact many of our clients will see the benefit of this provision.

3.) SALT Deduction Expansion

The bill proposes a significant change to the State and Local Tax (SALT) deduction, which has been capped at $10,000 per household since the 2017 TCJA. Under the new provisions, the SALT cap would be lifted or significantly increased, allowing taxpayers to deduct more (or all) of what they pay in:

State income taxes

Local property taxes

Sales taxes (if elected instead of income tax)

Exact cap levels are still being debated, but early versions suggest a cap as high as $30,000 for joint filers or even complete repeal of the cap for some income brackets. This is especially impactful for retirees in high-tax states like New York, California, or Maryland, where property taxes and state income taxes often exceed the $10,000 limit. Retirees who itemize deductions (rather than taking the standard deduction) may see a notable reduction in their taxable income.

4.) Social Security Tax Relief

For tax years 2025 through 2028, the bill offers a $4,000 deduction on Social Security income for individuals aged 65 and older. This deduction is subject to income-based phaseouts. If you are single, the deduction begins to phase out for adjusted gross incomes (AGI) over $75,000 and is fully phased out at $175,000. For those who are married and file jointly, the deduction begins to phase out for AGI over $150,000 and is fully phased out at $350,000.

This provision allows eligible seniors to reduce their taxable income, potentially lowering their federal tax liability. However, it does not fully exempt Social Security benefits from taxation, which was one of the earlier proposals from the President.

5.) No New Retirement Tax Increases

This point is important because over the past few years, many tax analysts circulated various ideas that would help the government raise revenue at the expense of retirees. Specifically, no additional Social Security taxes and no new surtaxes or penalties on Traditional IRA and 401(k)s.

For Roth IRA and 401(k) accounts, qualified withdrawals remain 100% tax-free regardless of your income level.

There will be no additional limitations on retirement contributions either.

How will the OBBB affect the government deficit?

The proposed budget is expected to increase the deficit by more than $3 trillion over the next 10 years. However, that number assumes that certain temporary tax breaks, such as no taxes on tips and overtime, will end in 2028 as planned. In reality, these breaks will likely be extended or made permanent. Just like the 2017 tax cuts, once people get used to them, it’s hard for politicians to take them away. If these temporary measures are made permanent, the real cost could grow to $5.3 trillion, according to the Committee for a Responsible Federal Budget.

How will the markets react to passing the OBBB?

This is a good question and depends on your overall perception of the new administration’s goals and priorities. One could argue the most notable provisions of the bill primarily benefit high-income earners who happen to hold the majority of equities in the U.S. As of 2024, the top 10% of Americans owned approximately 93% of all U.S. household stock market value. In terms of spending, which drives the U.S. economy, the top 10% of households account for almost 50% of all consumer spending.

If you continue with this line of thought, one of the logical conclusions is the OBBB will be positive for the stock market. Just so we are clear, I happen to believe the distribution of wealth in the U.S. will hurt us in the long run as more and more assets continue to accumulate in relatively few hands. However, it is my job to explain how things are instead of how they ought to be by being as objective and apolitical as possible.

What should you do about this?

For now, I suggest that you simply stay on top of it as things will likely change in the final version.

At least based on what we know today, the OBBB will provide more opportunities for Roth conversions as people would be able to convert more dollars while staying in the same tax bracket.

If you are retiring with a mortgage, which is not as bad as some may portray, the bill gives you more incentives to keep it for longer.

You may be able to deduct some or all of the interest if a combination of your SALT and mortgage interest deductions is higher than your standard deduction.

Finally, if you plan to move out of a high tax state to a lower tax state in retirement, the OBBB may make it more advantageous to stay where you are.