Big & Beautiful

Key implications of the O3BA

President Trump had promised us “The One Big Beautiful Bill” and now it is here. The bill, whose passage was streamlined by “budget reconciliation,” was signed into law by the President without a minute to spare on the 4th of July.

As we had projected¹ the core of the “The One Big Beautiful Bill Act” (O3BA – I’ll take the liberty!) is to extend the 2017 Tax Cuts and Jobs Act (TCJA) which had been scheduled to sunset at the end of this year. It in fact not only extends it but makes it permanent.

So, from the perspective of the high-net-worth taxpayer, let’s take a look at its final shape.

• The “Big” thing is that the TCJA, as mentioned, was not merely extended but made permanent. That means individual tax rates will not increase, the alternative minimum tax will stay “defanged,” the estate tax exemption will stay at a forgivingly high level (now $15 million per person in 2026 and indexed for inflation), the Qualified Business Income (QBI) 20% deduction pass-through² and Qualified Business Opportunity Zone (OZ) investments will live on. Although with some modifications in the case of the OZ. If you pay taxes, these are all good things!

• Worth a breakout look (hello NY, NJ, CA. taxpayers) is the fate of the state and local tax (SALT) deduction limitation. Currently at a painfully low $10,000, had the TCJA died a natural death at year-end it would, once again, have become unlimited. Instead after a knife fight in Congress, the Act raises the limit to $40,000, however phasing it out for joint incomes above $500,000. The $40,000 limitation will be reduced by 30% of excess MAGI over that threshold. The deduction, however,  cannot be reduced below the original $10,000 limit.

And yet not as dire as it might seem. Because, while beyond the scope of this article, there is a complicated interplay between the SALT deduction and the Alternative Minimum Tax (Alt Min) that for many taxpayers could meaningfully reduce the benefits of the higher deduction limitation³. Moreover, this reprieve will sunset after 2029 returning the cap to $10,000.

• There is also a potpourri of other interesting things in (and not in) the Act. It did not increase the taxation of private foundations. The House bill had proposed to replace the current 1.39% excise tax on net investment income with a tiered system. On an asset size basis, the tax would rise incrementally to 10% for foundations above $5b. This did not become a part of the Act. It also broadly enhanced the Sec 1202 Qualified Small Business Stock (QSBS) tax-free capital gain incentive⁴. And on a separate note, there are now Trump Accounts initially known as Money Accounts for Growth and Advancement (MAGA)! …ask me about it.

• Finally, because it has been threatened for so many years, the bill does include provisions affecting carried interest, for private equity, venture capital and hedge fund managers. It can still qualify for long-term capital gains treatment if held for more than three years.

….so, I guess Big & Beautiful are relative terms; this is what we finally got.

Nick

1.  Here Comes the Sun(set)…. It Feels Like Years Since We’ve Here. May 2024; Will the Sun Never Set on the TCJA? December 2024.

2. Now expanded to include Business Development Companies (BDCs). And it remains at 20%, not the 23% proposed in the House Bill.

3. The SALT deductions reduce regular tax but are not deductible for the Alt Min. As a result, regular tax is reduced, and the Alt Min is not. Should the Alt Min be higher than the regular tax it is the tax payable obviating the benefits of a higher SALT limitation.

4. It: Shortened the holding period to access tax-free gain from 5 to 3 years; increased the per shareholder exclusion cap from $10 to $15m; increased the permitted small business gross asset level from $50 to $75m.