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Impact of the OBBBA on Lawyers
The One Big Beautiful Bill Act (OBBBA) introduces several tax changes that will impact lawyers and law firms. Here’s a detailed look at provisions most likely to impact legal professionals.
Key Provisions for Legal Professionals
Qualified Business Income (QBI) Deduction
- Enhanced Deduction: Lawyers operating as sole proprietors or through pass-through entities (such as partnerships or S-corporations) may benefit from the modifications to the QBI deduction. For example, a small law firm structured as an S-corporation might see an increase in the QBI deduction, reducing their taxable income and overall tax liability. The current phase-out of a Specified Service Trade or Business’ (SSTB) 199A deduction when taxable income exceeds $100,000 for married filing joint taxpayers ($50,000 for all others) was increased to $150,000 for married filing joint taxpayers ($75,000 for all others). The 199A deduction provides for a 20% deduction for taxable years beginning after December 31, 2025, which is now permanent.
Child Tax Credit
- Increased Credit: The child tax credit is permanently extended and increased to $2,200 per child.
- Refundable Portion: The refundable portion of the credit is made permanent at $1,700.
- SSN Requirement: The Social Security Number (SSN) of the taxpayer (or spouse) and qualifying child is required.
- Effective Date: These changes are effective for tax years beginning January 1, 2026.
- Annual Adjustment: The refundable portion is adjusted annually for inflation.
Alternative Minimum Tax (AMT)
- Permanent Extension: The AMT exemption is permanently extended.
- Phaseouts: The phaseouts revert to 2018 levels of $500,000 for single filers and $1 million for married filing jointly. This may impact high-income taxpayers like law firm owners, leaders and attorneys.
- Effective Date: These changes are effective for taxable years beginning after December 31, 2025.
Standard Deduction
- Permanent Extension: The increased TCJA deduction is permanently extended ($15,750 for single filers, $31,500 for married filing jointly and $23,625 for heads of household for 2025).
- Annual Adjustment: The deduction amounts are adjusted annually for inflation.
- Effective Date: These changes are effective for tax years beginning January 1, 2026.
State and Local Tax (SALT) Deduction Cap
- The SALT deduction cap is increased to $40,000 through 2029, reverting to $10,000 in 2030. This cap phases down for high-income earners based on modified adjusted gross income (MAGI), with a floor of $10,000.
- Reduction Based on MAGI: The $40,000 limitation is reduced by 30% of the excess of MAGI over the threshold amount, but not below $10,000.
- No Change to PTET Deduction Rules: The rules for Pass-Through Entity Tax (PTET) deductions remain unchanged. Attorneys may be able to take advantage of both the PTET deduction against Ordinary Income as well as an additional SALT deduction on Schedule A for other state tax paid or property taxes paid, subject to MAGI limitations.
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Charitable Contributions
Charitable giving strategies are increasingly relevant for law firms and their partners. Firms may consider advising partners to accelerate charitable contributions before 2026 to maximize deductions under current rules.
- Charitable Contributions for Taxpayers Utilizing the Standard Deduction: For taxable years beginning after December 31, 2025, allowing for an above-the-line deduction of $2,000 for joint filers, or $1,000 for other filers.
- Charitable Contribution for Taxpayers Utilizing the Itemized Deduction: A 0.5% floor is imposed on charitable contributions for itemizers.
- Law firm partners who itemize should be aware that, starting in 2026, the value of charitable deductions will be limited. This may affect year-end giving strategies and timing of large donations.
- Deduction for Non-Itemizers: Non-itemizers can deduct up to $1,000 ($2,000 for married filing jointly).
- Permanent Extension: The increased contribution limitation for cash gifts made to qualified charities is permanently extended.
- Effective Date: These changes are effective for taxable years beginning after December 31, 2025.
- Law firm partners who itemize should be aware that, starting in 2026, the value of charitable deductions will be limited. This may affect year-end giving strategies and timing of large donations.
Investment Incentives
- QSBS Exclusion: The expanded exclusion for gain on the sale of Qualified Small Business Stock (QSBS) encourages investment in small businesses. For example, a lawyer investing in a tech startup could take advantage of this exclusion, potentially avoiding capital gains tax on the sale of their QSBS after holding it for the required period.
Form 1099 Information Reporting
- Increased Filing Threshold: The bill increases the filing threshold for Forms 1099-NEC and 1099-MISC to $2,000 for tax years beginning after December 31, 2025, indexed for inflation.
- Estate Planning Adjustments
- Increased Exemption: The unified estate and gift tax exemption is permanently increased to $15 million per person ($30 million for married filing jointly).
- Effective Date: These changes are effective for decedents passing away after December 31, 2025.
- Annual Adjustment: The exemption amount is indexed for inflation after 2026.
- Learn more about the impact of the OBBBA on estate and trust planning.
Next Steps
The OBBBA brings significant changes to the tax code, impacting lawyers and law firms in various ways. By understanding these changes and adapting strategies accordingly, legal professionals can optimize their tax positions. Staying informed and proactive will be key to navigating this new tax environment successfully.
Author: Nisha Bhanushali, CPA | [email protected]