This is the sixth in my series of tax updates to get my clients ready for their December Tax Planning Sessions. The One Big Beautiful Bill Act (OBBBA) changes discussed today include…
1 – The Extension Of Reduced Individual Income Tax Rates
The OBBBA makes permanent the reduced tax rates introduced by the Tax Cuts and Jobs Act (TCJA) in 2018.
• The 10% and 12% brackets will now be indexed from 2016.
• The 22%, 24%, 32%, 35%, and 37% brackets continue to be indexed from 2017.
2 – The Extension Of The Increased Standard Deduction
The OBBBA extends and provides an additional increase to the standard deduction starting this year. For years after 2025, the standard deduction continues to be annually adjusted for inflation.
Filing Status 2024 Amount 2025 Amount
Married filing jointly (MFJ) $29,200 $31,500
Single 14,600 15,750
Head of household (HOH) 21,900 23,625
Married filing separately (MFS) 14,600 15,750
3 – The Termination Of Deduction For Personal Exemptions
The TCJA suspended personal exemptions for tax years 2018 through 2025. The OBBBA permanently sets the exemption amount to $0 after December 31, 2017.
4 – And Retirement Plans
The Setting Every Community Up for Retirement Enhancement Act of 2022, or SECURE Act 2.0, is a law that aims to increase retirement savings participation in the United States. It was signed into law on December 29, 2022, and made many changes to retirement plans. Those changes include…
a – Expansion To Automatic Enrollment
SECURE 2.0 Act requires employers who establish a new 401(k) or 403(b) plan (after the date the law is enacted) to automatically enroll all new employees. They must be enrolled at a rate of at least 3%, which would increase annually until they reach at least 10%. Workers have the option to opt out or choose a lower or higher deferral rate that fits their needs.
b – More Catch Up Chances
Under this law, savers have more room to play catch up if they’re nearing retirement age. Right now, people who are 50 and older can save an extra $7,500 in catch-up contributions for 2025, in most retirement plans.
Also in 2025, the amount savers ages 60 to 63 will be able to sock away is the greater of $10,000 or 150% of the current catch-up limit. Under the new law, these catch up contributions must be made on a Roth basis, unless you earn $145,000 or less.
c – Raising The RMD Age
SECURE 2.0 Act raised the required minimum distribution (RMD) age, which is when workers must begin taking withdrawals from their retirement account, from 72 to 73. The RMD age will increase to 75 in 2033.
In addition, SECURE 2.0 Act also reduces the tax for failure to take an RMD from 50% to 25%, and potentially even 10% in certain instances, for a missed RMD.
d – Student Loan Help
Many borrowers choose paying back their debt over saving for retirement. Under this law, they may not have to make a choice. SECURE 2.0 Act allows companies the option to match student loan payments at the same rate as regular elective deferrals and to deposit a matching contribution into the employee’s retirement account.
Let me leave you with this…
The Fed votes today on whether or not it will lower its Fed Funds Rate by a quarter percentage point. Traders are currently predicting with probabilities from 87% to 90% that they will lower the rate by that amount.
The problem is that the voting members of the Fed are split on what they want to do to help our economy.
Some are more concerned about getting inflation under control. In this instance, higher interest rates slow the economy and aid in reducing prices.
Others are more interested in getting people back to work. Lower interest rates will speed up the economy, inducing employers to hire more workers.
Still others are worried about the potential of Stagflation. This is an economy where stagnant growth with a low GDP, high inflation, and high unemployment are all present simultaneously.
This is a nightmare, because there’s no reasonable solution to cure this problem.
These are the reasons why the Fed Governors were split on what to do going into this meeting. But assuming that they’ll lower the rates this afternoon, the question then becomes what’s next?
Many are predicting only one quarter point rate drop in all of 2026 and only another quarter point rate drop in 2027.
Given the fact that most banks price their commercial loans at an additional four points over the Fed Funds rate, that would put corporate borrowing rates at or around 7.5% to 7.75 for the most qualified borrowers in the best situations for next year. Other corporate borrowers with worse credit, cash flow, and collateral would continue to see rates in the nines or worse.
This would, of course, shelve many new projects that would have been green lighted in a lower interest rate environment.
It should be noted that the Fed Funds Rate does not drive home mortgage rates. It’s only one of the factors used in their determination.
Mortgage rates are set by a mix of big-picture economic forces like inflation, bond yields, and Federal Reserve Policy, and personal borrower factors like credit scores and down payments. Lenders will then, after taking those factors into account, base their rates on the 10 Year Treasury Yield and Mortgage Backed Securities.
We’ll see what happens next year. We may be in a longer-term, higher-interest environment, for quite some time.
If I were you, I’d be conservative in my risk-taking. I wouldn’t want to green light a project expecting rates to go down, and have them not do exactly that.
It’s better to have a clearer view of what the economy is going to do, before going out on a limb. The music could stop for no apparent reason at any time.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.AccountingSolutionsLtd.com
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