The One Big Beautiful Bill Act: A New Era for Individual Tax Law

Signed July 4, 2025, the One Big Beautiful Bill Act (OBBBA) primarily focuses on providing clarity for 2026 and future years and also making permanent certain aspects from the Tax Cuts and Jobs Act (TCJA). Temporary deductions and credits have also been added for families, seniors, and small business owners starting in 2025.

Tax Rates and Brackets

TCJA’s seven brackets—10%, 12%, 22%, 24%, 32%, 35%, and 37%—are now permanent. These brackets will continue to be indexed for inflation with the top 37% for 2025 applying to income above $626,350 for single filers and $751,600 for joint filers.

Standard Deduction and Additional Seniors’ Deduction

The personal exemption is now permanently repealed. Standard deduction amounts for 2025 included:

• Single or Married Filing Separately (MFS): $15,750
• Head of Household (HOH): $23,625
• Married Filing Jointly (MFJ) or Qualifying Widow(er): $31,500
• Add $2,000 (Single/HOH) or $1,600 (MFS/MFJ) if age 65 or older or blind.

New senior deduction: For 2025–2028, taxpayers age 65 or older with valid Social Security Numbers can claim an extra $6,000 ($12,000 for married filing jointly where both qualify), phasing out at modified adjusted gross income (MAGI) of $75,000 (single) and $150,000 (MFJ).

Itemized Deductions

SALT Deduction Relief

The state and local tax (SALT) cap is increased to $40,000 in 2025 ($20,000 MFS), rising 1% annually through 2029, then reverting to $10,000 in 2030. The deduction phaseout starts at $500,000 MAGI ($250,000 MFS) but will never be below $10,000.

Mortgage Interest and Miscellaneous Deductions

• Mortgage Interest: The $750,000 cap on acquisition debt is made permanent.
• Mortgage Insurance Premium: The deduction is reinstated.
• Miscellaneous itemized deductions are permanently repealed.
• The Pease phaseout is permanently repealed, but taxpayers in the 37% bracket see itemized deductions capped at a 35% benefit.
• Gambling losses become deductible only up to the lesser of wagering income or 90% of losses.

Charitable Giving and Gambling Losses

Starting in 2026:

• Non-itemizers may deduct up to $1,000 ($2,000 MFJ) for cash gifts.
• Schedule A charitable deductions face a 0.5% floor.

Other Above the Line Deductions – Available for those with Either Itemized or Standard Deduction

Temporary Deductions: Tips, Overtime, and Car Loans on new Schedule 1A

For 2025–2028, OBBBA adds three temporary deductions:

• Tips: Employees in tipped occupations may deduct up to $25,000 in cash tips, subject to MAGI phaseouts ($150,000 single/$300,000 MFJ). Married filing separately filers are excluded. Tips must be voluntary and customer-directed; mandatory service charges don’t qualify. Sole proprietors are limited to net income after expenses.
• Overtime: Deduct up to $12,500 ($25,000 MFJ) for qualified overtime under Federal Labor Standards Act (FLSA). The deduction is limited to the overtime premium. For example, if an employee receives overtime at 1.5 times the regular wage, only the half portion is eligible for the deduction. The deduction is also subject to the MAGI phaseouts ($150,000 single/$300,000 MFJ).
• Car loan interest: Deduct up to $10,000 for interest on qualified passenger vehicle loans for new U.S.-assembled vehicles purchased 2025–2028. Vehicles must meet Clean Air Act standards, weigh under 14,000 pounds, and be titled to the taxpayer as the first owner. Electric, hybrid, and gasoline-powered vehicles qualify. Use the VIN Decoder to confirm assembly location at vpic.nhtsa.dot.gov/decoder. MAGI phaseout: $100,000 ($200,000 MFJ).

IRS Notice 2025-69: Reporting guidance for qualified overtime and tips

For 2025, employers are not required, but may report tips and overtime in Form W-2 Box 14 or provide a separate statement. If employers don’t report, employees may use any reasonable method to calculate amounts. Expect a revised W-2 for 2026 to include qualified tip and overtime amounts. While the act allows for overtime reporting on Form 1099-NEC, this remains rare but possible.

Educator Expense Deduction

For 2025, the educator expense deduction remains at $250. For 2026 onward, the deduction will be adjusted for inflation. The expenses eligible for deduction expands to include expenses of instruction in health or physical education.

Family Benefits

Starting in 2025, the Child Tax Credit rises to $2,200 per child, indexed for inflation in 2026. The refundable portion is $1,700 in 2025. Eligibility for the deduction requires valid SSNs for the child and one parent.

Employer-provided Dependent Care Benefit Accounts increase to $7,500 ($3,750 MFS) in 2026. The Dependent Care Credit expands to a 50% maximum rate, applying to expenses up to $3,000 for one child and $6,000 for two or more. Phase-down rules reduce the credit by 1% for each $2,000 above $15,000 AGI, but not below 35% for AGI up to $75,000 ($150,000 MFJ). For higher incomes, the credit phases down further but never below 20%, reaching its lowest percentage at $103,000 AGI ($206,000 MFJ). Credits coordinate with dependent care benefit accounts to prevent double benefits.

Education Benefits

Employers can permanently include student loan repayments in educational assistance programs, excluding up to $5,250 annually for tuition, fees, books, supplies, equipment, and loan payments—indexed after 2026.

529 plan enhancements:

• K–12 (July 4, 2025): Tax-free distributions are expanded to cover curriculum, tutoring, standardized test fees, dual enrollment, educational therapies for students with disabilities and other items.
• Higher education (after Dec. 31, 2025): Annual qualified expense limit doubles to $20,000, including professional certification costs—CPA exams, license fees, and continuing education.

Small Business: QBI Deduction

The 20% QBI deduction is now permanent. Starting in 2026, phaseout ranges widen by $75,000 (single) and $150,000 (MFJ). A new $400 minimum deduction applies for taxpayers with at least $1,000 of QBI from active trades or businesses with material participation.

Estate and Gift Tax

For 2025, the federal exemption is $13.99 million per individual and $27.98 million for couples. Starting in 2026, OBBBA permanently raises the exemption to $15 million, indexed for inflation. Portability remains available through Deceased Spouse Unused Exclusion, allowing unused exemption to transfer to a surviving spouse with Form 706. Reminder: 12 states and D.C. impose their own estate taxes.

Clean Energy Incentives: Sunset Accelerated

Clean energy credits sunset earlier:

• Residential Clean Energy Credit: 30% for solar, wind, geothermal, and battery storage ends for expenses incurred after Dec. 31, 2025 (was 2032).
• Energy Efficient Home Improvement Credit: For insulation, windows, heat pumps, and energy audits ends for property placed in service after Dec. 31, 2025.
• Clean Vehicle Credit: Up to $7,500 for new clean vehicles ends for those acquired after Sept. 30, 2025.
• Previously Owned Clean Vehicle Credit: Up to $4,000 for used clean vehicles ends for those acquired after Sept. 30, 2025.

Trump Accounts

Starting in 2026, OBBBA introduces Trump Accounts, a savings option for children under 18. Contributions allow up to $5,000 annually in after-tax dollars, plus employer contributions up to $2,500, excluded from taxable income. Withdrawals aren’t permitted until age 18; after that, traditional IRA rules apply, including contribution limits and the 10% early withdrawal penalty where no exception applies. The account may not be created before (July 4, 2026) and will apply only until the calendar year in which the child turns 18. Children born between Jan. 1, 2025, and Jan. 1, 2029, who are U.S. citizens with valid SSNs, receive a $1,000 Treasury seed deposit (not counted toward the annual limit).

To establish a Trump Account under OBBBA, an authorized individual must file Form 4547 (or use the online portal) for an eligible child under 18 with a valid SSN. The Treasury creates the account, and contributions (subject to annual limits and source rules) can begin July 4, 2026. The account must be invested in low-fee, broad-based U.S. equity index funds or ETFs, and is subject to strict custodial and reporting requirements. Distributions are generally prohibited until the child turns 18, at which point the account is treated as a traditional IRA.

While Trump Accounts offer a new savings tool, 529 plans may provide greater flexibility, including tax-free education withdrawals and the ability to roll over up to $35,000 to a Roth IRA.

Scholarship Credits

Beginning in 2027, OBBBA creates a $1,700 federal income tax credit for qualified contributions to Scholarship Granting Organizations (SGOs). A qualified contribution is a cash donation to an SGO that funds scholarships for eligible students within the state where the organization is listed. States must opt in and provide the IRS with approved SGO lists. If a taxpayer’s state does not participate, the credit may still apply for donations to SGOs in participating states. IRS guidance will clarify implementation.

Disclosure: Article generated using AI technology based on previously presented content by Karen E. Davis EA, MBA, PhD with contributing edits by Cheryl Leydon, Tax Director at WebsterRogers, and David Zaiken, Tax Director of Consulting at WebsterRogers.