By Lewis Braham
While the wealthiest must be overjoyed with all the tax giveaways in the One Big Beautiful Bill, the new legislation can create headaches for their financial advisors. There are unexpected changes in the ways income is calculated that are specific to this legislation. For wealthy investors, it affects whether or not they qualify for new deductions.
Consider the State and Local Tax or SALT deduction. The new OBBB bill raises the maximum deduction from $10,000 to $40,000, but only if one's income is below $500,000. From $500,000 to $600,000 the OBBB begins to phase out the deduction and above $600,000, the deduction falls back to $10,000.
That seems reasonably straightforward until you consider that the bill doesn't refer to standard Adjusted Gross Income $(AGI)$, but what is called Modified Adjusted Gross Income (MAGI). MAGI can be a nebulous term and is calculated differently depending on the tax statute. In some instances, including for determining the income level for taxation of Social Security benefits and the amount you pay for Medicare Part B prescription drug coverage, MAGI adds back normally tax-free items to adjusted gross income, such as municipal bond income. But in this SALT deduction case and the OBBB, it doesn't.
"MAGI is a complex term," says Mishkin Santa, a principal at tax advisor Wolf Group. "In fact, AGI is. I've been mentioning to my clients that AGI management -- just that term -- is the name of the game under the One Big Beautiful Bill, and it applies to tax returns moving forward. I think this is a golden opportunity for a lot of people to be looking at their AGI or their MAGI to make sure that they're going to qualify for certain deductions."
Uncertainty remains. Although the OBBB is law, the IRS hasn't issued guidelines on how the law should be interpreted for MAGI or final regulations codifying its interpretation. It may clarify confusion around municipal bond interest. Usually, the guidance comes first, then suggested regs with a comment period for the public, and finally, formal regulations. That leaves taxpayers and advisors in a gray area regarding the OBBB's quirks.
"There is often a delay on [IRS] guidance following government shutdowns, " says Aaron Borden, a partner at Grant Thornton, a wealth and tax advisory firm. "It could be very close to the [April, 2026 tax] filing deadline before we have that information. I would anticipate [the IRS] will try to expedite or prioritize guidance that taxpayers need for the filing."
The situation on MAGI and the SALT deduction is confusing enough that both Borden and another tax expert had to double check with the OBBB statute and other experts to confirm later, after their interviews, that it seems unlikely that muni bond income will count toward the SALT deduction version of MAGI.
Borden said in an email: "I refreshed on the language added to section 164 of the Internal Revenue Code regarding the [SALT] cap after the call. Based on that, I believe it highly unlikely that the IRS will issue guidance requiring the inclusion of muni bond interest in the calculation of MAGI. My reading of the statute is that this type of change would exceed the statute and require congressional change."
Meanwhile, after conferring with his colleagues, Leo Varner, managing director, National SALT Leader at tax firm UHY Advisors, stated "I'm not sure that clarifications [from the IRS] will be coming related to municipal bond interest. It should generally be excluded consistent with the prior law."
He also noted that the OBBB did clarify which income sources should be counted toward the MAGI phaseout for the SALT deduction -- foreign earned income, income from sources within Guam, Samoa and the Mariana Islands, and income from Puerto Rico. Does that mean interest on munis issued by U.S. territories counts toward MAGI? Hopefully coming guidance will clarify.
Confused yet? Imagine how your clients will feel.
Write to advisor.editors@barrons.com
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December 23, 2025 07:45 ET (12:45 GMT)
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