Inquire Editor, August 15th: Probing Tax Matters on OBBB, Tax Levels
The One Big Beautiful Bill (OBBB) has made some significant changes to the US tax system. One of the most notable is the confirmation that the lower federal income tax rates for individuals, introduced by the 2017 Tax Cuts and Jobs Act (TCJA), will continue indefinitely beyond 2025.
The lower rate brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37% are now permanent, with the top rate remaining at 37%, rather than reverting to the pre-TCJA rate of 39.6% that was scheduled to take effect in 2026.
The OBBB also locks in the larger standard deduction amounts as permanent, starting in 2025. Single filers will benefit from a standard deduction of $15,000, while married couples filing jointly can claim $30,000.
Certain itemized deduction limitations and modifications from the TCJA are also made permanent. These include the disallowance of miscellaneous itemized deductions and a 35% cap on itemized deductions.
In addition, the law increases the SALT deduction cap and enhances other tax credits. However, the key point is that the lower individual tax brackets from the 2017 law are now permanent, removing the prior sunset date at the end of 2025.
Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy Taylor questions about tax topics, including the 3.8% net investment income tax (NII tax). This tax applies to single filers with modified adjusted gross incomes (AGI) over $200,000, joint filers with modified AGI over $250,000, and married people filing separately with modified AGI above $125,000.
The 3.8% NII tax is due on the lesser of NII or the excess of modified AGI over the specified thresholds. Investment income, such as dividends, capital gains, taxable interest, annuities, royalties, and passive rental income, falls under this tax. Trade or business income derived through a passive activity is also considered NII, provided that the business income isn't otherwise subject to self-employment tax.
It's important to note that the 3.8% NII tax is added to the regular income tax. For more details on this tax, see the article "More People Are Paying This Tax On Investment Income Each Year."
Investment income of trusts and estates can also be hit with the 3.8% NII tax if their 2025 AGI exceeds $15,650 and they have undistributed net investment income. The 3.8% net investment income tax was not repealed in the OBBB.
In conclusion, while the OBBB has made the lower federal income tax rates for individuals permanent, it's crucial to understand the implications of the 3.8% NII tax, especially for those with significant investment income. For further guidance, subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy Taylor questions about tax topics.
Personal-finance advisors may find it beneficial to consider the permanence of lower individual tax brackets in defi, as a result of the One Big Beautiful Bill (OBBB). The 10%, 12%, 22%, 24%, 32%, 35%, and 37% rate brackets are now fixed, with the top rate remaining at 37%. On the other hand, the 3.8% net investment income tax (NII tax) continues to apply to personal-finance matters, impacting individuals with modified adjusted gross incomes over specific thresholds.
