Tax planning for parents under OBBBA

The One Big Beautiful Bill Act hiked and enshrined some tax savings for parents into permanent law, but its many provisions will play out differently across financial advisors’ client households.

President Donald Trump’s July 2025 megalaw will primarily affect families’ payments to Uncle Sam through its extension of the federal tax brackets at the levels first set by the Tax Cuts and Jobs Act of 2017, tweaks to credits and deductions for certain parents, new possible savings incentives and restrictions on student loans. Itemization could rise slightly overall, even as a new cap of no more than 35% for filers in the top bracket reduces some of their savings.

In the complex calculations based on how the law tightened itemization and shifted the phaseout rules for the alternative minimum tax and deductions for state and local duties, some wealthy households’ bills “could actually go up this year, particularly for those of them who aren’t small business owners,” said Holly Swan, the head of wealth solutions in the global client strategy unit of asset management firm Allspring Global Investments. “There is some education that needs to be done in the ultrahigh net worth space so there aren’t big surprises on April 15.”

Nevertheless, she and Mike Bisaro, president and CEO of Troy, Michigan-based registered investment advisory firm StraightLine, pointed out that the Trump savings accounts, the expanded child tax credit and child and dependent care tax credit and adjustments to 529 plans could deliver some planning opportunities for parents and their advisors. 

Broadly speaking, the megalaw’s provisions “overall are pretty positive” for parents — particularly when taking into account the higher estate tax exemptions and the possible impact from the many parts of the prior law that would have expired at the end of the year, Bisaro said. “It’s political, so therefore automatically there’s a lot of controversy about it, regardless of what it does.”

Fortunately, the political uncertainty around taxes has moved to the back burner until the midterm elections next year, so planners can now analyze the tax and budget law and assist clients with their preparations.

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Trump accounts

Starting this year, the Trump accounts offer the parents of newborns $1,000 to open an investment account composed of cheap stock index vehicles, with annual contributions of up to $5,000 that can include $2,500 from an employer. Investors could begin making some qualified withdrawals from the tax-deferred accounts as early as the account holder’s 18th birthday, with unlimited outlays at age 30. Approved withdrawals come with taxes at the long-term capital gains rate, while nonqualified ones bring ordinary income and a 10% penalty in some cases.

Swan has been receiving about five calls a day from advisors about the accounts, which she said has been “the No. 1 child-related question that I’ve gotten” in the wake of the bill’s July 4 signing into law. Advisors and their clients might think of them as similar to a 401(k) or traditional individual retirement account but with more rules. A Roth IRA, a Uniform Transfers to Minors Act account or a 529 plan may be in the mix as well, depending on whether the client is thinking of the Trump accounts for retirement savings, educational costs or other goals, she said.

“There’s a lot of curiosity about those and wanting to understand how to think about those and how to prioritize those,” Swan said. “This is completely voluntary for employers, so I think it will be really interesting to see what the level of employer uptake is on that.”

READ MORE: Trump’s new law cuts both ways for Social Security beneficiaries

529 plans

The megalaw will adjust some aspects of 529 savings plans that have reached about 17 million accounts with $525 billion in assets, too. The tax-advantaged accounts help families save for kids’ education, although their rules and costs can come with some downsides.

In addition to keeping the increased allowances for more qualifying penalty-free educational expenses from 2018 in place, the legislation doubled the maximum withdrawals for K-12 costs to $20,000 beginning next year for wider categories of spending. The fees and training expenses for many professional credentialing programs have also become qualified expenses for penalty-free withdrawals.

“They’ve expanded the definition of qualified expenses. Those things have been liberalized quite a bit over the years,” Bisaro said. “We talk about 529s a lot in general, so it just means it can be used for more stuff.”

Those shifts are going in the opposite direction from the law’s impact on student loans. Borrowing limits and the end of the Saving on Valuable Education (SAVE) program could affect a lot of advanced degree paths and existing loan repayments.

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Child credits

On the other hand, the child tax credit and the child and dependent care credit will rise for eligible parents. The law prevented the child tax credit from reverting to its onetime maximum of $1,000 per child from its current level, and it pushed up the maximum amount by $200 to $2,200, which will be adjusted for inflation. The higher refundable portion of up to $1,700 per child got extended and tied to inflation, too. But individuals with incomes above $200,000, or $400,000 for jointly filing couples, cannot receive the credit.

Alongside boosting incentives for employers for onsite daycare and other childcare costs for workers, the law permanently pushed up the top percentage of qualifying child and dependent care credit expenses to 50% from 35% and retained the current total cap at $3,000 for one kid under the age of 13, or $6,000 for two or more. For taxpayers with adjusted gross income of at least $103,000 or spouses with $206,000, only 20% of the expenses qualify for the credit, with higher eligible percentages for households below those thresholds.

One aspect of the law’s impact on parents that may not have received much attention revolves around flexible spending accounts, Bisaro noted. Beginning next year, FSA holders can exclude up to $7,500 in employee pretax contributions for dependent care, which could add to some parents’ relief on their childcare costs.

“The amount for the FSA has been increased for the first time in years,” he said. “That’s been $5,000 forever.”

READ MORE: Financial advisors are divided over this RMD tax strategy

AMT + SALT could = question mark

The intense negotiations over the fate of state and local tax deductions and paying for at least part of the multitrillion-dollar cost of the law may have obscured some other details of the massive legislation. The law reset the floor level of the exemption from the alternative minimum tax to their 2018 levels of $500,000 for individuals and $1 million for couples in a complicated manner that means more upper-income households may be subject to that duty.

Starting in this tax year and through 2029, the legislation also set the deduction for state and local taxes at $40,000, which is four times the maximum available under the 2017 law. However, that deduction is lowered for taxpayers whose income is above $500,000, with those at $600,000 or above limited to the previous deduction cap of $10,000.

The new cap on itemization and complexities around exposure to the alternative minimum tax “sound like pretty minor changes,” but the political narrative surrounding the bill’s passage spoke of the “biggest tax cuts in history” compared to letting the 2017 law expire, Swan noted. For a lot of wealthy clients, it may not be as simple as an extension of the prior rules.

“The message they have heard is, ‘Tax cuts, tax cuts, tax cuts,'” she said. “It could be meaningful, particularly when combined with the fact that some of them are hearing, ‘Oh, I’m going to get my SALT deduction back.'”