Congressional Republicans delivered the much anticipated One Big, Beautiful Bill Act (OBBBA) to President Trump’s desk just in time for a symbolic July 4 signing. Now that many tax code changes proposed on the campaign trail have been codified into law, we can provide perspective on how the bill may potentially impact investors and how tax management could help.
What are the main provisions of the OBBBA?
Although the bill covers both individuals and corporations, this outlook highlights some of the most important changes that we think investors should know about.
Tax rates. The tax rates enacted in the 2017 Tax Cuts and Jobs Act (TCJA) have been made permanent, so the current tax rates ranging from 10% to 37% will remain in place. However, the tax bracket inflation adjustment will only apply to the lower-end brackets of 10%, 12% and 22%, as proposed by the Senate. That means higher-end earners will move into the next highest tax bracket as their income grows.
Standard deduction. The OBBBA makes permanent the higher standard deduction established by the TCJA, adjusted for inflation beginning in 2026. For 2025, the standard deduction is $15,750 for individuals and $31,500 for married couples filing jointly. The bill also includes a temporary $6,000 deduction for those aged 65 and older from 2025 through 2028. This deduction, however, is subject to phase-outs for higher earners.
State and local tax (SALT) cap. The SALT deduction cap will increase from $10,000 to $40,000 starting in 2025. This increase is intended to be temporary, however, with the cap reverting back to $10,000 in 2030. While in place, the higher cap will be adjusted for inflation by 1% annually. For high earners with modified adjusted gross income (MAGI) exceeding $500,000, the SALT deduction cap will phase down, but not below $10,000.
Estate and gift tax exemption amounts. The OBBBA makes permanent the TCJA increases to the estate tax exemption and the lifetime gift tax exemption amounts of $15 million for single filers and $30 million for those married filing jointly. Starting in 2026, these exemption amounts will also begin adjusting for inflation.
Endowment tax. Moving away from the 1.4% flat rate of the 2017 Act, the 2025 Act establishes tax tiers based on a school's “student-adjusted endowment.” Institutions with a student-adjusted endowment of $500,000 to $750,000 will continue to pay the 1.4% rate, but schools with larger student-adjusted endowments will face rates up to 8%. This is considerably lower than the top rate of 21% under consideration at one point, and institutions with fewer than 3000 students are exempted from the tax entirely.
What are our three key takeaways?
1. Individual income tax rates will be stable but can still be a drag on returns
With individual tax rates now locked in at current rates, investors can better plan for their future. But current tax rates can still take a big bite out of investment returns. And without the inflation adjustment, higher earners may quickly find themselves in the maximum tax bracket. We believe tax management can play a crucial role in helping to maximize their after-tax returns.
Direct indexing seeks to balance delivering beta exposure on a pre-tax basis while pursuing outperformance on an after-tax basis through tax loss harvesting and gain deferral. Active tax management works in up or down markets and can deliver greater benefits when volatility is higher.
April may already seem like a distant memory, but that month provided an example of how active tax management helped to capture losses when the market was down, while also maintaining a portfolio with risk characteristics similar to the benchmark. Even though the volatility was short-lived—the market was close to flat when all was said and done for the month—active tax management was able to take advantage of the opportunity.
Market volatility has subsided, at least for now, yet the potential still exists for higher volatility over the rest of the year. The impact of the tariffs are likely to remain unclear until third quarter earnings, and the future of tariffs remains unsettled. Current global conflicts could also drive volatility. As we saw in April, direct indexing is well positioned to deliver benchmark exposure while realizing losses when volatility hits again.
2. Endowments should care about tax management like never before
Now that higher tax rates are the law, institutions with large endowments may benefit substantially from the active tax management of their portfolios. An excise tax on net investment income (which includes interest, dividends and capital gains) up to 8% can jeopardize the research projects and various funding initiatives that universities have to plan for.
At the moment, the new law affects a limited number of institutions, yet it may be only a matter of time before many more endowments fall into the scope as contributions and market returns add to their assets under management (AUM). We think institutions in the “on deck” category have the great advantage of time to start preparing for this eventuality.
Commingled vehicles such as mutual funds, which are commonly used for passive exposure in endowments, can’t distribute losses, but they do generate capital gains regardless of any trading. By contrast, direct indexing for passive exposure helps on both fronts, seeking to generate net losses that can be used to offset gains from elsewhere in the overall portfolio.
3. Clarity on estate and gift taxes highlights the potential for direct indexing
With the current level of estate and gift tax exemptions made permanent, investors have more certainty—allowing them to breathe a sigh of relief that the legal and tax plans they already made can remain in place. Estates above the thresholds, however, still need to be cognizant of their tax liabilities, which require significant oversight and planning ahead.
Here again, direct indexing can play a vital role as a funding mechanism for various trust structures that are typical of the high new worth (HNW) investor’s circumstances.
The bottom line
Now that we know the provisions of the OBBBA in more detail, it seems evident that little has changed for HNW investors. While some aspects are an improvement in general terms, those benefits aren’t ultimately available or meaningful enough to make any impact for investors in this category. In our view, tax management still plays a crucial role in helping to maximize after-tax returns for investors.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Parametric and Morgan Stanley Investment Management do not provide legal, tax or accounting advice or services. Investors should consult with their own tax or legal advisors prior to entering into any transaction or strategy.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Morgan Stanley Investment Management and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent on behalf of any strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. All investments are subject to the risk of loss. Please refer to the Disclosure page on our website for important information about investments and risks.
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