Trump's 'big beautiful bill' has a 'double taxation' trap for top earners, tax experts say

The "one big beautiful bill" came with many tax benefits for top earners, despite limiting how much they can deduct. However, lawyers and accountants for the wealthy said they have discovered a surprise buried in the footnotes of a tax law guide released last week by Congress' policy staff that could amount to double taxation.

The deduction cap is imposed on trusts and estates, the experts said, which was unexpected. Even if a trust gave all its income to its beneficiaries, it would have to pay taxes on a portion of that income, according to their interpretation of the document.

While the consequences are steeper for trusts and estates of the ultra-wealthy, trusts with as little as $16,000 in income would also be subject to additional taxes, the experts said.

"There is potentially an element of double taxation," said Dan Griffith, director of wealth strategy at Huntington Bank. "This is something that is going to affect somebody with a $400,000 special-needs trust. It's not just going to be something that $100 million dynasty trusts suffer with."

Griffith said he is especially concerned about trusts that are obligated to distribute all their income. Trusts will either have to sell assets to pay the taxes, sacrificing future investment returns, or reduce their distributions to beneficiaries, he said.

This provision creates a "mathematical nightmare" for tax lawyers and financial advisors, according to Justin Miller, national director of wealth planning at Evercore Wealth Management. Miller gave the example of a wealthy couple wishing to leave their estate to charity.

"If I have to pay income taxes, that means I'm giving less money to charity because I'm giving money to the IRS. That means I now have to adjust my deduction even more because less money is going to charity," he said. "Did Congress really intend to create an algebraic formula?"

Historically, trusts and estates have been able to deduct income given to beneficiaries, which is then taxed on the individual level. This distribution deduction is designed to make sure income is only taxed once.

However, the new deduction limitation on top-earning individuals now applies to trusts and estates, according to a footnote in the Joint Committee on Taxation's recent tax explainer, better known as the Bluebook. The JCT is nonpartisan and serves to explain legislation.

The One Big Beautiful Bill Act's limit on itemized deductions means that taxpayers in the top bracket only get a deduction benefit of 35 cents for every dollar, rather than 37 cents. It applies to charitable deductions, and experts say it has already influenced how top earners give.

While the Bluebook is an interpretation of the OBBBA rather than law in and of itself, this provision is causing concern in the financial advisory community, according to Robert Keebler, a certified public accountant. For instance, he frequently sets up trusts for clients on their second marriages that will provide their surviving spouse with income but leave the remainder for children from the first marriage.

Consider a trust that distributes all $370,000 of its net income to a widow, he said. Applying the deduction limit to trusts means that the trust can only deduct $350,000 from its distributable net income and $20,000 would be subject to taxes, even though the widow is taxed on the entire $370,000, according to Keebler. To pay the tax, the trust either has to dip into its corpus, reducing the children's future benefit, or get permission to give less to the spouse, which can require going to court.