With the passage of the One Big Beautiful Bill Act (“Act”) on July 4, 2025, there have been some significant changes to the income tax laws. However, one constant that remains in the new law is that higher earners will continue to pay more income tax.
Significant Rule Changes: While the top tax bracket remains at a historically low 37%, there are significant changes in the new Act that affect high income earners. Some apply to tax year 2025, while others do not begin until 2026. For example:
- SALT Deduction Increased Through 2029: The state and local tax (“SALT”) cap has increased from $10,000 to $40,000 for tax year 2025, and will increase an additional 1% ($40,400 in 2026) going forward each year until 2029. In 2030, the SALT cap will revert to the pre-Act limit of $10,000. While this increase is helpful, for higher income earners it starts to phase out modified adjusted gross income (“MAGI”) over $500,000. The deduction is reduced by 30% of MAGI that exceeds $500,000, but the SALT deduction cannot go below $10,000.
- Itemized Deductions Are Reduced: The Act still eliminates most itemized deductions, including all deductions that used to be subject to the “2% floor.” However, starting in 2026, for those in the top 37% tax bracket ($640,600 single/$768,700 married) your deductions will be reduced by the lesser of: 2/37 times the amount of otherwise allowable itemized deductions or 2/37 times the amount of taxable income (before considering those deductions) in excess of the applicable threshold for the 37% tax bracket. Generally, what this means is taxpayers in the 37% tax bracket will be taking deductions at the rate of a 35% tax bracket.
- Charitable Deductions Are Reduced: Also starting in 2026, for those who itemize, the Act adds complex charitable deduction rules. While the qualifying requirements to take a charitable deduction remain, you must now meet a floor of 0.5% of MAGI to take a deduction. By way of example, if you have $500,000 in MAGI, and you make a $10,000 gift, you can only deduct $7,500 of the gift because the first 0.5% of your MAGI ($2,500) is a floor threshold that must be surpassed before you can take the deduction. In other words, if you only gifted $2,500 in this scenario, you would not be allowed to deduct any of the gift.
More of the Same: Along with the above changes, the familiar Affordable Care Act Taxes remain unchanged:
- Affordable Care Act Taxes. The 0.9% Medicare Health Insurance Surtax and the 3.8% Net Investment Income taxes remain for individuals earning more than $200,000 and married couples earning more than $250,000. The 0.9% surtax is levied on earned income, and the 3.8% Net Investment Income Tax applies to passive earnings like interest, dividends, capital gains, etc. Importantly, the $200,000/$250,000 thresholds are not indexed for inflation.
Consequently, if your income is higher now than in previous years, you may be subject to these taxes. Moreover, for the 0.9% surtax on earned income, employers are not required to withhold for this tax until you meet the applicable threshold from the employer’s payroll. If you have multiple income sources that collectively push you past the thresholds, or if you are married and you and your spouse’s income collectively pushes you over the $250,000 threshold, it is possible that none of your employers will withhold for this liability, and you will owe the tax when filing your return.
If your situation exposes you to these extra taxes or to the loss of significant deductions, be sure to review your withholding elections and your investment portfolio decisions. Be sure to address the changes that affect your 2025 return. And for 2026 and beyond, consider reviewing your financial planning and charitable giving plans to see whether you should modify your strategies. As always, work with your tax advisors and your Benjamin F. Edwards financial advisor to address these important decisions.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.