OBBBA-Di, Ob-La-Da…Tax Goes On, Brah

On July 4, 2025, the legislation known as the “One Big Beautiful Bill” was signed into law. The new tax laws contained in this bill are as much about old tax laws as they are about new ones.  So, to fully appreciate these tax provisions, we must first briefly touch on some tax history (yes, we do find this exciting!).  The Tax Cut and Jobs Act (TCJA) was passed in 2017, marking the first major change in our tax code in decades.  Because of the way this bill passed through Congress, its provisions were temporary and set to expire at the end of 2025.  Had it expired, the tax laws were set to revert to those from 2017 and we would have been dusting off the cobwebs on our old versions of the Internal Revenue Codes.  Instead, the One Big Beautiful Bill Act (OBBBA) was signed into law, making many once-temporary tax changes permanent and finally putting nearly eight years of speculation to rest over what tax would look like at the start of 2026.

 

Most of the changes in the OBBBA take effect on January 1, 2026, but some are retroactive and could impact your 2025 tax returns that you file in 2026.  Many of the changes have certain requirements such as adjusted gross income limits, and some are temporary, only lasting for a few years.  Below we will break down some of the most notable tax provisions of the bill and provide insights that may be relevant to you.

 

Ultimately, while many of the individual provisions under OBBBA are relatively minor changes from existing law, together they represent a substantial shift in tax policy – one that adds a significant amount of complexity to tax planning with the number of new deductions, phaseout rules, and effective dates.  As always, we are here to answer any questions that you may have and discuss how any of the above provisions may impact your personal tax situation and planning!

 

 

Tax Brackets (Effective January 1, 2026)

The new law permanently extends the tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37% that have been in place since TCJA became effective in 2018.  The one minor change, which will begin in 2026, is to set the ‘base’ year for inflation adjustments for the 10% and 12% tax brackets.  Effectively, this means that the 10% and 12% brackets will receive an extra inflation adjustment bump in 2026, slightly increasing their income thresholds compared to what they would have been without the adjustment.  The result of these adjustments will be to slightly reduce effective tax rates for most households by having more income taxed in the lowest two brackets. However, the change may not be large enough to make a noticeable difference in the total taxes paid.

 

 

Personal and Dependent Exemptions (Effective Tax Year 2025)

The new law permanently eliminates personal and dependent exemptions.  Prior to the TCJA, individuals could deduct up to $4,050 for themselves, a spouse, and each dependent.

 

 

Standard Deduction (Effective Tax Year 2025)

The new law permanently extends the increased standard deduction enacted under TCJA and further increases the allowable standard deduction for tax year 2025.  The new law also permanently extends the additional standard deduction given to individuals who are either over the age of 65 or blind.

 

 

Itemized Deductions

The final version of OBBBA makes several changes to itemized deductions, with varying degrees of impact.  In fact, the only itemized deduction that appears to be completely untouched under the new law is the deduction for qualified medical expenses exceeding 7.5% of AGI.  Every other category of itemized deduction has been changed in some way.

 

• State & Local Income Tax Deduction (Effective January 1, 2026) – The new law temporarily increases the allowable SALT deduction to $40,000 starting in 2025.  That limit increases by 1% each year from 2026 – 2029, with the cap then reverting to $10,000 in 2030.  The deduction limit is phased down by 30% of the amount by which the taxpayer’s Modified Adjusted Gross Income (MAGI) exceeds $500,000.  The deduction limit is phased down to a minimum of $10,000 after MAGI reaches the upper limit of the phasedown range (i.e., $600,000 in 2025).  Please note, married couples filing separately are subject to a lower deduction limit. The new cap for such filers is $20,000, reverting to $5,000 in 2030.  Please note, this is the only change to itemized deductions that is effective in tax year 2025, with the rest commencing January 1, 2026.
• Mortgage Interest Deduction (Effective January 1, 2026) – The new law makes permanent the $750,000 indebtedness limit and acquisition indebtedness requirements from the TCJA and permanently eliminates the interest deduction on home equity debt unless it is used for qualifying purposes (i.e., buying, building or substantially improving the taxpayer’s home).  It also permanently restores the deductibility of mortgage insurance premiums.
• Charitable Donations (Effective January 1, 2026) – The new law makes permanent a series of changes surrounding charitable giving. The extent of these changes requires a separate newsletter.  Please refer to our “To Give or Not to Give” newsletter for additional details.
• Moving Expenses (Effective January 1, 2026) – The new law permanently eliminates the deduction for moving expenses except for members of the armed forces and intelligence communities.
• Casualty Losses (Effective January 1, 2026) – The new law broadens the rules under the TCJA to allow taxpayers to deduct losses from state-declared disasters.  Previously, only Federally declared disasters qualified.  The casualty loss deduction remains limited to losses not compensated by insurance and only to the extent the losses exceed 10% of the taxpayer’s AGI.
• Gambling Losses (Effective January 1, 2026) – The new law creates a 90% limit on deductible wagering (i.e., gambling) losses.  Previously, wagering losses were deductible to the extent of a taxpayer’s wagering gains resulting in zero net income from wagering.
• Educator Expenses (Effective January 1, 2026) – The new law adds “educator expenses” to the list of itemized deductions that are not considered miscellaneous deductions. This means that educator expenses become their own itemized deduction beginning in tax year 2026 and are no longer subject to the previous limitations of $300 per educator.  Educators will need to itemize to take advantage of this new deduction.
• Miscellaneous Itemized Deductions (Effective January 1, 2026) – The new law permanently eliminates the deduction for miscellaneous itemized deduction (i.e., hobby expenses, investment expenses, club and union dues and certain unreimbursed employee expenses).
• Overall Itemized Deduction Limitation (Effective January 1, 2026) – The new law permanently repeals the Pease limitation, replacing it with a new limitation that applies only to taxpayers in the top 37% Federal tax bracket.  The new limit cuts the tax benefit from itemized deductions by 2%, effectively limiting the benefit from itemized deductions to a maximum of 35%. As an example, if you are in the 37% tax bracket, a $1000 deduction will only yield a $350 tax benefit as opposed to a $370 benefit (as if taken in 2025).

 

 

Qualified Business Income Deduction (Effective January 1, 2026)

The new law permanently allows pass-through business owners to deduct up to 20% of their qualified business income. While versions of the OBBBA included significant changes to this deduction, the law ultimately passed is primarily a continuation of the deduction that has existed since its implementation under the TCJA in 2018. The new law does amend the deduction’s phaseout rules so that the deduction will phase out at slightly higher income levels.  In addition, the new law creates a new minimum deduction of $400 for taxpayers with at least $1,000 of “active qualified business income” starting in 2026.  Both the $400 minimum deduction and the $1,000 active QBI requirement will be indexed to inflation, beginning in 2027.

 

 

NEW Below the Line Deductions

Previously almost all below-the-line deductions were only available if you were itemizing deductions on Schedule A.  The OBBBA introduces five new below-the-line deductions that are available whether you take the standard deduction or itemize.

 

• Charitable Contributions Deduction When Taking Standard Deduction (Effective January 1, 2026) – For taxpayers taking a standard deduction, the new law creates a permanent deduction of $1000 (single) or $2000 (joint) for charitable donations.  It is worth noting that contributions must be in cash and contributions to a donor-advised fund do not qualify for these purposes.  Please note, this below-the-line deduction is only available if you are taking a standard deduction (i.e., the new laws surrounding charitable donations when taking the itemized deduction do not apply here).
• Additional Senior Deduction (Effective Tax Year 2025) – The new law creates an additional, temporary (tax years 2025 – 2028) deduction for seniors age 65 or older. The new deduction is set at $6,000 per individual or $12,000 for joint filers where both spouses are over age 65. The deduction phases out at a rate of 6% of the amount of the household’s Modified Adjusted Gross Income (MAGI) over $75,000 (single) or $150,000 (joint). This means households with MAGI over $175,000 (single) or $250,000 (joint) will not get this deduction. Notwithstanding this additional deduction, the OBBBA does not exempt any Social Security income from taxation.  While the new deduction will offset some income for those who are eligible for it, the deduction doesn’t directly tie to Social Security benefits in any way.  Please continue to plan for Social Security to be taxed as it always has.
• Qualified Overtime Compensation Deduction (Effective Tax Year 2025) – The new law creates a temporary (tax years 2025 – 2028) deduction for up to $12,500 (single) or $25,000 (joint) of qualified overtime compensation.  The deduction phases out, however, at a MAGI of $150,000 (single) and $300,000 (joint), with the phaseout occurring at a rate of $100 per $1,000 of income over the threshold.  Please note, the deduction only applies to the amount of overtime compensation paid above the employee’s normal base wage rate.
• Qualified Deduction for Tips (Effective Tax Year 2025) – The new law creates a temporary (tax years 2025 – 2028) deduction for up to $25,000 of qualified tip income.  The deduction phases out at a MAGI of $150,000 (single) and $300,000 (joint), with the phaseout occurring at a rate of $100 per $1,000 of income over the threshold.
• New Auto Loan Interest Deduction (Effective Tax Year 2025) – The new law creates a temporary (tax years 2025 – 2028) deduction of up to $10,000 for qualified passenger vehicle loan interest.  The deduction phases out by $200 for every $1,000 (or portion thereof) of MAGI over the threshold of $100,000 (single) and $200,000 (joint). This means the deduction would be completely phased out for filers with MAGI over $149,000 (single) or $249,000 (joint).  Please note, the deduction only applies to interest on new loans taken after December 31, 2024.  However, if an existing loan is refinanced in 2025 or later – without increasing the balance of the original loan – the interest on the refinanced loan qualifies.  By contrast, taking out a new loan on a car that’s already paid off would not qualify.
  

 

 

Child Tax Credits (Effective Tax Year 2025)

The new law permanently increases the Child Tax Credit to $2200 per child under the age of 17, with an annual inflation adjustment (marking the first time in the Child Tax Credit’s nearly three-decade history that it will automatically increase with the cost of living).  The credit phases out by $50 for every $1000 of MAGI over the threshold of $200,000 (single or head of household) and $400,000 (joint).  These thresholds are not indexed to inflation, however, and would remain fixed at those levels unless changed by future legislation.

 

 

Other Dependent Credit (Effective January 1, 2026)

The new law makes permanent the nonrefundable credit of $500 per qualifying dependent who does not qualify for the child tax credit.

 

 

Child and Dependent Care Credit (Effective January 1, 2026)

The new law increases the applicable percentage of care expenses used to calculate the Child and Dependent Care credit beginning in tax year 2026.

 

 

Adoption Credits (Effective Tax Year 2025)

Under the current law, up to $16,810 is available as a nonrefundable credit for expenses incurred to adopt a child. This credit amount is indexed for inflation to increase every year. The new law allows up to $5,000 of this credit to be refundable.

 

 

Eligible 529 Plan Expenses (Effective July 4, 2025) 

The new law expands the types of expenses eligible for tax-free distributions from 529 plans by broadening the definition of “qualified higher education expenses”.  Specifically, the new law adds several new K–12-related costs that would qualify for tax-free distributions, including testing fees, tutoring outside the home and education therapies for students with disabilities.  Further, the new law introduces a new category of qualified expenses for certain postsecondary credentialing programs (i.e., CPA exam prep if this tax stuff gets you as excited as us!). The new rules would apply to any distributions taken after the bill’s enactment – meaning that any of the above expenses incurred this year, regardless of whether they were incurred before or after the bill’s enactment, may be reimbursed through 529 plan funds if the distribution also happens this year.

 

 

Alternative Minimum Tax (Effective January 1, 2026)

The TCJA greatly reduced the number of taxpayers subject to the Alternative Minimum Tax (AMT).  The elimination of personal exemptions and the limited SALT deduction were contributing factors, but the largest driver of this change was the substantial increase in the AMT exemption and the higher income levels where those exemptions phased out.  The new law permanently extends those AMT exemption amounts and phaseout thresholds, while increasing the exemption phaseout rate.  The result – a moderate increase in the likelihood of AMT exposure for certain taxpayers.

 

 

Lifetime Gift and Estate Tax Exemption (Effective January 1, 2026)

One of the most significant provisions of the TCJA from an estate planning perspective was its doubling of the gift and estate tax exemption in 2018, from $5.6 million to $11.2 million per person. The exemption has since grown to $13.99 million in 2025, meaning that a couple with up to $27.98 million of assets between them could pass away without being subject to estate tax.  Absent the OBBBA, the TCJA’s gift and estate tax exemption amount would have decreased by 50% at the end of 2025.  Instead, the increased exemption is made permanent under the new law and, in fact, increased to $15 million per person starting in 2026, with further annual inflation adjustments thereafter.  The portability election for a surviving spouse is still in effect. The new law also makes the generation-skipping transfer tax exemption equal to the estate and gift exclusion amount of $15 million.

 

 

Clean Energy Initiatives

The new law accelerates the termination of many clean energy tax incentives established under the Inflation Reduction Act, with some credits already phased out as of September 2025.  Please refer to our separate “Going Green to Save Green” newsletter, especially if you are planning to go green – now is the time!

 

 

Trump Accounts

The new law creates a new type of tax-exempt savings account for children to be used for qualified expenses (higher education, small business loan, first-time purchase of a principal residence) and includes initial government funding of $1,000 for children born in 2025 through 2029.  Beginning in July 2026, these new “Trump Accounts” are fundable up to $5000 a year (indexed for inflation) until the child reaches the age of 18.  While there is no earned income requirement, contributions made directly by a parent or other individual to a Trump account are not tax-deductible.  No distributions can be made from a Trump account until the year in which the beneficiary turns 18, except to roll over the entire account balance into a 529A ABLE account in the year the beneficiary turns 17, assuming the beneficiary qualifies due to disability.  Trump accounts may be rolled over into other Trump accounts at any time, provided they are rolled over in their entirety, but they cannot be rolled into other types of IRAs. Once the beneficiary of a Trump account reaches the year in which they turn 18, the account starts to look much more like a standard traditional IRA, though it contains a mix of after-tax dollars (direct contributions) and pre-tax dollars (contributions from other sources that were excluded from gross income plus all growth). It’s still unclear whether a Trump account could be rolled into a standard IRA or converted to a Roth IRA once the beneficiary turns 18.

 

 

Overseas Remittance Transfers Tax (Effective January 1, 2026)

The new law imposes a 1% tax on all remittances sent overseas that are initiated at institutions not subject to the Bank Secrecy Act.  This has the potential to affect US taxpayers who send funds to family members and other individuals overseas.

 

 

Business Provisions

Business owners – we did not forget about you!  There are quite a few business provisions in the OBBBA so please refer to our separate “Let’s Get Down, Let’s Get Down to TAX Business” newsletter.