The One Big Beautiful Bill Unpacked: Key Tax Changes in 2025 and Beyond

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Nersesian: Hi everybody, I'm John Nersesian, Head of Advisor Education at PIMCO.

Text on screen: John Nersesian, Senior Consultant, Advisor Education

Thank you for joining us today for what is hopefully a relevant conversation around recently passed tax legislation. The One Big Beautiful Bill or what's often referred to as OB3. This legislation, which was enacted on July 4th, 2025, serves to extend many of the tax cuts that were provided in the original Tax Cuts and Job Act, that became relevant or applicable on January 1st, 2018.

Some of the provisions in this bill, however, are new and we'll discuss both during our time together today. Let's start first with maybe the most significant of issues, which is the impact on individual tax rates. As we know, the Tax Cut and Jobs Act lowered tax rates and expanded brackets for many taxpayers here in the US.

FULL PAGE GRAPHIC: TITLE – Federal income tax brackets: 2025 and estimated 2026. Table shows permanent federal tax brackets with inflation adjustments starting 2025, including new baselines for 10% and 12% rates.

We have a total of 7 marginal brackets. The maximum was reduced from 39.6 down to 37% for families at $750,000 and above. Good news under OB3, these tax rates have been made permanent, allowing individual investors to plan for the recognition of income and the benefit of tax deductions given these new permanently lower rates.

We should also refer to tax deductions that were definitely affected under OB3. We know that individual investors have an opportunity to either claim the standard deduction or to itemize their deductions under Schedule A, depending on which of the two provides a greater benefit.

FULL PAGE GRAPHIC: TITLE – Standard deduction. Table displays permanent standard deduction increases and temporary senior bonuses phased out by income through 2028.

We know that the individual standard deduction was increased, not starting in 2026, but effective this year in 2025 at a level of $31,500 for those who file a joint tax return. In addition, there are additional deductions for those who are over the age of 65 or greater. $1,600, if you file a joint tax return, 2000, if you file singly, and as an incremental or bonus deduction, there is a new $6,000 deduction provided for those who are over the age of 65.

Now, this incremental benefit of $6,000 applies to whether or not you claim the standard deduction or whether you itemize. It is what we refer to as an above the line deduction. This deduction was intended to make true the promise that was provided during the campaign trail of providing tax-free social security benefits for certain taxpayers. And while that wasn't directly achievable under reconciliation.

This offset of a $6,000 deduction is intended to provide a similar benefit. Some words of caution, once again, it only applies to taxpayers over the age of 65, and it is subject to a phase out, beginning at income levels of 150,000. Let's quickly review the individual income tax deductions, that are available for those who itemize under Schedule A.

FULL PAGE GRAPHIC: TITLE – 2025 individual income tax deductions. Table displays individual deduction changes for medical expenses, mortgage and auto loan interest and charitable gifts.

You're probably familiar with the big four medical expenses that they need to exceed 7.5% of our adjusted gross income. State and local taxes, those were capped to 10,000 and a big component, a big source of emphasis within OB3 is the idea that salt taxes have been increased from a maximum cap of $10,000 per individual to 40,000. Mortgage interest, mortgage interest is deductible, but now that cap of $750,000 of mortgage interest indebtedness is made permanent under OB3.

Now, there have been some minor changes regarding charitable giving. Charitable giving is deductible as an itemized deduction only if it exceeds a floor of 0.5% of adjusted gross income. So any contributions above that amount, provide a tax benefit.

And there's a new wrinkle on charitable gifts, those who do not itemize, but instead give directly to charity, where they're claiming the standard deduction have a new opportunity to claim up to $2,000 per individual if they file jointly, or $1,000 as single taxpayers in that particular regard. 

Then finally, another component that provides an itemized deduction, while most personal interest is non-deductible. There's a new wrinkle up to $10,000 of automobile purchase interest. Once again, it's got to be a new car and it's got to be made here in the United States. Interest payments in that endeavor do provide an itemized deduction for taxpayers.

Now, let's talk about salt in greater detail because that is of interest to many of our clients and to most taxpayers. As mentioned, the $10,000 cap has been increased to 40,000.

FULL PAGE GRAPHIC: TITLE – State and local tax (SALT) deduction. Table shows SALT deduction cap raised to $40K (2025-29) with income-based phaseout from $500K to $600K, indexed annually.

However, this deduction, of course is only available for those who choose to itemize under Schedule A, and that $40,000 limit is available starting in 2025. But please recognize that it is subject to a phase out, starting with taxpayers at income levels of $500,000 phasing out at a rate of 30%.

Now, the good news is that the maximum phase out takes us down to a minimum level of 10,000. So either way, clients will continue to receive a $10,000 salt cap as opposed to those who might receive a greater benefit of up to $40,000. You should also recognize that this cap of $40,000 will revert back to the original $10,000 level starting in the year 2030. This idea of a greater salt deduction provides significant benefit to many taxpayers, hopefully lowering their taxable income and reducing the amount of taxes paid, but it may have an unintended adverse consequence, the idea of an alternative minimum tax liability.

FULL PAGE GRAPHIC: TITLE – Alternative minimum tax (AMT). Tables show AMT phaseout lowered to $1M and phaseout rate doubled to 50% in 2026, increasing AMT exposure.

Now, I recognize that many of us are no longer affected by the AMT. As a reminder, TCJA increased the exemption amount to $137,000 and increase the phase out of that exemption to income levels of $1.2 million, suggesting that many taxpayers who were previously subject to the AMT were now outside of its grasp. However, under OB3, we're now dealing with a permanent exemption of this higher level, but the phase out begins to kick in at levels of $1 million and above, starting in the year 2026.

It's important for individual investors to recognize that a larger salt deduction, which does lower their taxable income under the regular code, is added back in, in the calculation of our alternative minimum tax liability, suggesting that investors need to be careful and to plan for or work around the possibility of an AMT liability.

There were a number of provisions that affect those who own closely held businesses.

FULL PAGE GRAPHIC: TITLE – Business owner provisions. Tables show permanent 20% QBI deduction for businesses, with expanded phaseout and increased bonus depreciation limits.

Section 199 A, the qualified business income provision that provides a 20% deduction for pass through businesses. The tax act expanded the income phase out levels starting in 26.

How about the first year bonus depreciation, providing a 100% bonus for those who put property into service starting in 2025. The 179 bonus depreciation was increased from 1.2 million to two and a half million, and the phase out income levels were increased, And then finally qualified small business stock, for those individuals who were selling a business and reinvesting proceeds. The market capitalization was increased from 50 million to 75 million, and the holding period requirement to avoid the recognition of the capital gain has been shrunk from five years down to three. 

There are a few additional policies that we should reference in closing. Maybe most importantly is the federal estate tax exemption. You all remember that the estate tax exemption was increased rather materially under the Tax Cut and Jobs Act, but was set to expire or to revert back to those lower levels at the end of 2025.

FULL PAGE GRAPHIC: TITLE – Additional provisions. The table lists those made permanent and/or increased in 2026, such as the estate tax, child tax credit, 529 plans and Trump accounts.

Good news, these higher estate tax exemptions have been made permanent and will increase in fact to $15 million starting in 2026 with annual indexing for inflation. How about the child tax credit? A marginal increase there from $2,000 to $2,200 per eligible child. 529 plans were enhanced by expanding the list of qualified educational expenses, including professional certifications and fees that may provide benefit to each of you as financial advisors.

And then finally, let's include with the Trump accounts. These are accounts established by the federal government for newly born children between the years of 2025 through 2028, where the federal government will provide immediate funding of $1,000 per child, regardless of family income. Parents also have the opportunity to add an additional $5,000 per year as a non-deductible contribution to be used or saved in these tax advantaged accounts, which were intended intentionally used for education purposes, training purposes, and maybe the purchase of a home.

Generally, although distributions are not allowed, the accounts convert to traditional IRAs beginning at age 18.

In conclusion, I'd like to thank you for spending some time with us today. I'd like to encourage you to read our article on this subject and to contact your PIMCO account manager for additional information. Thank you for spending time with us!

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