Tax Planning after the One Big Beautiful Bill Act

Albert Einstein once said: “The hardest thing in the world to understand is the income tax.” If Einstein felt this way, he probably had a point. That’s why we rely on simple frameworks to make sense of the complex.

The reality is that successful investors focus on what they can control. The tax code, however perplexing, offers a static playbook each year. Investors can take advantage of both timeless techniques and new opportunities with careful planning and competent advisory team.

This year’s tax bill – the One Big Beautiful Bill Act (OBBBA or the Big Beautiful Bill) – cemented many provisions first introduced in the 2017 Tax Cuts and Jobs Act (TCJA). It also added new and mostly temporary tax breaks for everyday Americans. Following are simple tax planning techniques, new and old, for investors of varying situations.

1. Review Tax-Loss Harvesting Opportunities

Tax-loss harvesting is a long-standing strategy used by investors to manage their tax bills. It involves selling investments that have declined in value, realizing those losses, then reinvesting in similar securities. The losses realized can be used to offset capital gains and, if applicable, up to $3,000 of ordinary income each year.

Losses are rare this year in a well-managed stock portfolio. However, investors may still have unrealized losses in their bond portfolios following the Fed’s rapid interest rate campaign after COVID. Investors should review their taxable accounts for any unrealized losses before year-end.

2. Optimize Asset Location

The starting point for building any portfolio is asset allocation. This is where an investor decides how to divide their money between stocks, bonds, cash, and other investments. That mix ultimately defines the risk and return profile for a given profile.

The next step is asset location. This involves placing investments in accounts where they will receive the most favorable tax treatment. Different assets generate different types of taxable income: bonds pay interest, stocks may produce dividends, REITs distribute income regularly, and mutual funds often realize annual capital gains. How those earnings are taxed depends on where the assets are held.

Investors should coordinate their holdings with the appropriate account type. It is generally prudent to hold high-tax assets, such as REITs and certain bonds, in IRAs and 401(k)s. Investors can then concentrate tax-efficient assets, like municipal bonds and certain growth stocks, in their taxable accounts.

 3. Maximize Contributions to Tax-Advantaged Accounts

One of the easiest tax-planning strategies is to optimize tax-advantaged accounts. These include 401(k)s, IRAs, HSAs, and others.

Readers should first confirm whether they are utilizing their company benefit plans. This can be accomplished with a simple trip to their HR departments. Benefits packages change every year, and many forgo important tax savings opportunities without realizing it.

Readers should also maximize their contributions to these accounts wherever possible. A less-publicized bill – the SECURE Act of 2022 – recently boosted the contribution (“catch-up”) limits for older workers. Individuals aged 50+ can contribute an additional $7,500 to their 401(k) plans beyond the ordinary limits. Moreover, workers aged 60 to 63 can contribute an extra $11,250 per year. Workers will be hard-pressed to find a better retirement savings vehicle than their company 401(k)s.

4. Evaluate Roth Conversions

Roth conversions are a common long-term tax planning strategy. The process involves transferring funds from a tax-deferred retirement account, such as a Traditional IRA or 401(k) Plan, to a Roth IRA. Individuals owe income taxes on any amount converted. However, future withdrawals from the Roth IRA are tax-free if certain conditions are met.

The chief advantage is flexibility. Someone with major one-time spending goals, such as a vacation home or a new car, can access large sums of money tax-free from a Roth IRA in retirement. Withdrawals from a Traditional IRA or 401(k) Plan are otherwise fully taxable. Moreover, Roth IRAs even allow tax-free withdrawals for heirs.

Roth conversions can also result in real tax savings. Our progressive tax system means that high earners pay higher tax rates than low earners. Using the previous example, an individual funding large expenses from a Traditional IRA or 401(k) plan risks temporarily spiking his or her tax bracket. This problem can be mitigated or avoided entirely with Roth conversions.

A growing national deficit makes Roth conversions even more compelling. Many speculate that tax rates will rise in the future to cover our nation’s growing deficit. The Big Beautiful Bill solidified our current tax rates for the foreseeable future. Many are choosing to pay their taxes now in order to benefit from today’s historically low rates.

5. Consider Charitable Contributions

Charitable contributions can be deducted against your taxable income for the current year. These deductions are particularly beneficial for high earners.

Charitable deduction limits depend upon the charity classification, gift type, and income level for the taxpayer. Public charities, such as churches and schools, typically allow higher current year deductions than private charities, such as foundations and fraternal orders. Unused deductions can generally be carried forward for up to five years.

An experienced financial planner can optimize charitable gifting strategies by evaluating both the type of charity and the timing of the contribution. The analysis should consider the charity type, the associated tax benefits, and your current circumstances. Certain life stages offer greater savings opportunities, such as years when a taxpayer’s income is unusually high.

6. Exploit New Depreciation Opportunities, Deduction Rules, and Tax Credits

The Big Beautiful Bill’s most publicized changes apply to specific taxpayer groups. That’s the inevitable outcome of a lobbying system where certain groups exert more influence than others.

Following are the bill’s key extensions, updates, and provisions.

• Bonus Depreciation: The bill permanently restored a provision allowing business owners to deduct 100% of the cost of new or used assets. The caveat is that the assets must have been purchased and put in service on or after January 19, 2025. The provision applies to tangible assets, including heavy machinery, vehicles, office equipment, and even computer software. This is a big advantage over traditional schedules requiring businesses to depreciate assets over multiple decades.
• Deduction for Tips: A temporary deduction for up to $25,000 of qualified tips is available for food servers, entertainment workers, and over 60 other tip-based occupations through 2028.
• Deduction for Overtime Pay: Another temporary deduction of $12,500 (Single) or $25,000 (Married Filing Jointly) is available for qualified overtime pay that exceeds an employee’s regular rate.
• Deduction for Seniors: An additional temporary standard deduction of $6,000 is available for individuals aged 65 and older (through 2028).
• Deduction for Car Loan Interest: There is a new temporary deduction of up to $10,000 for loan interest relating to a new, U.S.-assembled personal vehicle.
• Child Tax Credit: The credit is permanently extended at $2,200 per qualifying child – a slight increase from the $2,000 credit established in 2017. The law also codified larger income limits, allowing higher earning families to benefit.
• SALT Cap Increase: The cap on the State and Local Tax (SALT) deduction was raised from $10,000 to $40,000 for most earners. This is a significant benefit for taxpayers in high-tax areas, such as New York City and California.

Note that many of the deductions are phased out at specific income levels. Readers are encouraged to consult a financial planner and/or accountant to ensure they qualify.

Know Your Toolkit

The end of another taxing year (pun intended) reminds us that volatility is nothing new. Markets will continue to fluctuate and uncertainty will persist. Investors can take comfort in the unknown with a pragmatic approach. The good news is that you don’t need Einstein to implement a sound tax planning strategy (and if you did, history tells us he wouldn’t be of much help anyway).

The One Big Beautiful Bill Act may have rewritten parts of the playbook, but the fundamentals of smart tax planning remain timeless: remain proactive, stay informed, and keep Uncle Sam from claiming more than his fair share. Consult a competent Financial Planner and CPA to ensure your strategy is both adequate and up-to-date.

Financial planning emphasizes preparation over prediction. No one is certain what the future holds. A disciplined plan acknowledges this reality by focusing on matters purely within your control.