One Big Beautiful Bill Act (OBBBA)

OBBBA resets the three potential tax benefits for Qualified Opportunity Zones (QOZs) originally introduced under the 2017 Tax Cuts and Jobs Act. Beginning January 1, 2027, investors with significant capital gains can reinvest in QOZs and potentially receive:

A 10% step-up in basis after holding the investment for 5 years,
Deferral of the original capital gain until the 2033 tax year, and
Full exclusion of future gains on the QOZ investment if held for at least 10 years.

In addition, OBBBA introduces Rural Qualified Opportunity Zones (RQOZs), which offer an enhanced 30% basis increase for investments held at least 5 years.

Given that the tax benefits are only available to investments made in 2027 or later, investors looking to defer or eliminate capital gains before then should carefully consider their options. One potential strategy for investors with large capital gains is to contribute the appreciated assets to a charitable remainder trust (CRT). The CRT can then sell the assets without immediate tax consequences and pay the grantor an annuity over time. Because capital gains are recognized only as distributions are made, the grantor could reinvest those proceeds in 2027 or later, when Qualified Opportunity Zone (QOZ) investments once again become eligible for tax benefits. Alternatively, an installment sale could be used to defer recognition of gains from the sale of a business interest or real estate until 2027, aligning with the new QOZ timeline.

That said, investors should be aware that the areas eligible for qualified opportunity zones will now have a narrower criteria to fit. Under the new bill, the median family income in a QOZ census tract must be no more than 70% of the statewide average, down from 80% under the TCJA. In theory, this narrower definition could limit the pool of eligible investment areas and potentially increase the risk profile of available QOZ opportunities.

SALT Deduction Cap Up To $40K

Many high-income earners in high-tax states stand to benefit significantly from the state and local tax (SALT) cap which was increased from $10,000 to $40,000. It should be noted that limitations on SALT workarounds, like the Pass-Through Entity Tax (PTET) in New York, were not included in the bill. Unfortunately, for highest earning tax payers, the bill introduces a phaseout of the SALT deduction, reducing the cap back to $10,000 for those with incomes over $600,000. This phaseout, which applies to incomes between $500,000 and $600,000, effectively results in an additional $30,000 being taxed as the taxpayer’s earnings increase from $500,000 to $600,000.

Business owners earning mid six figures should explore opportunities to defer significant income through qualified retirement plans such as cash balance and profit-sharing plans. For real estate owners in the highest tax brackets, establishing separate non-grantor trusts for vacation homes could allow property taxes to be deductible up to the $40,000 limit. While there are new charitable contribution limitations outlined below, non-grantor trusts remain a potential strategy to maximize the deductibility of charitable donations.

Roth Conversions Now Have More Potential Pitfalls

With the OBBBA, Roth conversions, a common strategy to reduce overall lifetime tax liability, are suddenly much more complicated. Typically, in a Roth conversion you would convert pre-tax IRA money into a Roth IRA account, if you expect the marginal tax rate you pay today on the distribution would be lower than the marginal rate you expect on distributions in the future. With so many new phaseouts, including the new senior deduction phaseout, the SALT deduction phaseout, the tips deduction phaseout, the auto loan deduction phaseout, and the overtime deduction phaseout, it makes sense to tread carefully to model out the impact of additional income of a potential Roth conversion with your CPA or financial planner. Speaking of tips and overtime, business owners will now be responsible for providing income information on tips and overtime on the W2s they provide to employees.

Alternative Minimum Tax (AMT) Changes and Stock Option Planning

Many startup founders and employees caught a break as the OBBBA for the most part continues the post-TCJA favorable high exemption and phaseout exemptions. Large AMT payments can be triggered when executing incentive stock options (ISOs) with 409A valuations above their strike price. However, between 2025 and 2026 the exemption phaseout will decrease from $1,252,700 to $1,000,000 (MFJ), and the exemption phaseout will decrease at a faster rate (50% versus 25%). For some, it may make sense to run an analysis on exercising some ISOs in 2025 while the current, more favorable exemption is still in effect. The good news is that the phaseout income threshold will continue to rise with inflation after 2026.

Should Prior Planning Around the Estate Exemption Be Reversed?

America’s wealthiest families avoided a significant reduction in the estate and gift tax exemption with OBBBA’s passage, and will see a lifetime limit of $15 million for individuals ($30 million per married couple) in 2026 with inflation increases thereafter. For families that engaged in significant gifting to non-grantor trusts, irrevocable life insurance trusts (ILITs), spousal lifetime access trusts (SLATs), family limited partnerships (FLPs) for family business owners, and other planning vehicles in anticipation of lower gift and tax exemption, several strategic options remain. One approach is simply to hold steady, recognizing that future legislative changes could once again lower the exemption.

Some families may now consider reversing earlier planning strategies by bringing previously gifted assets back into their estate. This could provide greater access to those assets without the restrictions of trust structures, or allow them to benefit from the step-up in basis at death, something that assets held in non-grantor trusts typically do not receive. For families exploring this path, it may be worth evaluating options such as unwinding trusts, adding a general power of appointment through decanting, engaging a trust protector, or seeking court-approved modifications.

If bringing assets back into the estate proves to be the best strategy, it’s also wise to incorporate flexibility for future legislative changes. For example, a trust could include a general power of appointment to include the assets in the estate, while also allowing for the power to be converted to a limited power, effectively removing the assets from the estate again if needed.

While many families won’t have to do significant Federal estate tax strategies anymore, many states still have an inheritance or estate tax at much lower thresholds. There are numerous estate tax mitigation strategies that high net worth New Yorkers should consider, given its $7.16 million 2025 estate tax exemption, which isn’t portable.

$750K Home Interest Deduction Cap Made Permanent

In a setback for homeowners, the TCJA’s $750,000 cap on mortgage interest deductibility has been made permanent. Compounding the averse effects of this provision is that both average home prices and mortgage rates are significantly higher than when this limitation was enacted in 2017. However, for those with substantial balance sheets, one potential workaround is to pay down mortgage debt exceeding the cap using asset-based lending secured by their investment portfolio. Investors with sizable accounts can often negotiate favorable borrowing rates through custodians like Schwab or Fidelity. Investment interest may be deductible to the extent it’s offset by net investment income on the tax return. That said, this strategy carries risk and may not be suitable for those without a strong financial foundation. It should be noted that the OBBBA still allows those with mortgages that were issued December 15, 2017 or earlier, and any related refinancing, to deduct interest up to $1,000,000 of principal.

QBI Deduction Made Permanent