Tax Update
The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025. There are many changes to the tax law that are effective for the current 2025 tax year as well as changes that have effective dates for future tax years. The size of OBBBA was extensive and the actual tax law contained over 1000 pages. OBBBA repealed the expiration date of many provisions that were set to expire on December 31, 2025, under the Tax Cuts and Jobs Act (TCJA) of 2018, as well as adding many new provisions. Below are some highlights of some of the significant changes.
Tax Rates and Brackets – The current tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37% are now permanent. There will be annual inflation adjustments to the brackets after 12/31/25.
Capital Gain Rates and Net Investment Income Tax (NIIT) – Capital Gain and NIIT rates remain unchanged. The capital gain rates are 0%, 15%, and 20%. NIIT is 3.8%.
Estate and Gift Tax Exclusion– The annual Gift tax exclusion increased to $19,000 for 2025 and is expected to remain the same in 2026. The estate tax remains in effect. The exclusion for estate and gift tax purposes increased to $15 million and will be indexed for inflation starting in 2026.
Standard Deduction and Personal Exemptions – There is a permanent extension of the current increased standard deduction amounts with slightly increased amounts for 2025 to $31,500 (MFJ), $23,625 (HOH) and $15,750 (Single/MFS). Future years will be indexed for inflation. Additional deduction amounts for elderly/blind are retained. Personal exemptions have been permanently repealed except for the new temporary special senior deduction (see next item).
Special Senior Deduction – OBBBA creates a deduction of $6,000 ($12,000 MFJ) for taxpayers age 65 or older for tax years 2025 – 2028. Phase out for the deductions starts at $75,000 ($150,000 MFJ). The deduction is available to BOTH taxpayers that itemize their deductions and taxpayers that claim the standard deduction. If married, you must file jointly to claim the deduction.
Dependents – Exemptions and Child Tax Credit – OBBBA increases the child tax credit $2,000 ($1,400 refundable) to $2,200 ($1,700 refundable) for each qualifying child. Beginning in 2026, the credit will now have inflation adjustments. The phaseout threshold for the credit starts at $200,000 ($400,000 MFJ). Age eligibility for dependents remains at 16 years old as of year-end.
OBBBA makes the $500 non-refundable tax credit for other dependents that do not qualify for the child tax credit (ex. Children over 16 and other dependents who meet the other requirements) permanent.
Child and Dependent Care Credit - OBBBA increases the maximum credit rate in 2026 to 50% (from 35% for low-income families based on the taxpayer’s adjusted gross income.
Section 529 Plans – The definition of qualified higher education expenses for 529 plans has been expanded for distributions made after 7/4/2025 to include curricular materials; tutoring from licensed teachers and subject matter experts; fees for dual enrollment in an institution of higher education; education therapies for students with disabilities by licensed practitioners. In addition, distributions are now allowed to be used for public, private, and religious elementary and secondary credentialing expenses. The distribution limit for K-12 expenses increases from $10,000 to $20,000. (Note: these expanded items and K-12 expenses do not qualify for New York State).
Moving expenses – OBBBA permanently disallows the deduction for job related moving expenses except for active-duty military personnel, and certain members of the intelligence community.
Excess Advance Premium Tax Credit Repayment Cap – OBBBA removes the repayment cap for certain households with income within 200% - 400% (or more) of the federal poverty line. Taxpayers will have to repay excess advance premium tax credits in their entirety.
ITEMIZED DEDUCTIONS RELATED CHANGES:
State and Local Taxes (SALT) – OBBBA has temporarily increased the SALT limit of $10,000 beginning in 2025 to a potential maximum of $40,000 for all taxpayers other than those filing Married Filing Separately (MFS). The cap will increase by 1% annually for 2026 through 2029. In 2030, the maximum deduction will revert back to $10,000. The $40,000 limit is phased out for higher income taxpayers. The phase out begins at a Modified Adjusted Gross Income (MAGI) of $500,000 ($250,000 MFS) and is fully phased out at $600,000 ($300,000 MFS) of MAGI.
Mortgage Interest Deduction – OBBBA permanently lowers the debt limit for loans used to acquire a principal and second home to $750,000 for MFJ and $375,000 for MFS. The deduction for mortgage insurance premiums is once again available.
Charitable Contribution Deduction – OBBBA permanently increases the maximum contribution percentage limit to 60% of AGI. For 2026 forward, non-itemizers can deduct up to $1,000 ($2,000 MFJ). Itemizers must reduce their contributions by 0.5% of their AGI.
Unreimbursed Educator Expense Deduction - Unreimbursed educator expenses for eligible educators will be allowed as an itemized deduction to the extent that they exceed 2% of AGI. This potential itemized deduction replaces the current Educator Expenses deduction that was capped at $300.
Casualty and Theft Losses – OBBBA permanently suspends casualty and theft losses except for those losses incurred in federally declared disasters and certain state-declared disasters.
Car Loan Interest – Up to $10,000 of personal car loan interest (lease payments do not qualify) is deductible for new qualified vehicles purchased after December 31, 2024 through 2028 that meet certain requirements. The deduction is available to both itemizers and non-itemizers. The phase threshold starts at $100,000 ($200,000 MFJ).
Limitation on Itemized Deductions – Beginning in 2026, there will be a new itemized deduction limitation for taxpayers in the top tax bracket. The new limitation essentially lowers the tax benefit of itemized deductions from 37% to 35%.
NEW TAX PROVISIONS
Tips and Overtime Pay – A new deduction of up to $25,000 per tax return for qualified tips and $12,500 per taxpayer ($25,000 MFJ) for qualified overtime compensation for tax years 2025 – 2028. The phaseout threshold starts at $150,000 ($300,000 MFJ). The deductions are available to both itemizers and non-itemizers. If married, you must file jointly to claim these deductions.
NOTE: A qualified tip is a cash tip (including from credit cards and tip-sharing arrangements) received by an individual in an occupation that traditionally and customarily received tips (Treasury to publish a list).
NOTE: Qualified Overtime Compensation is compensation paid pursuant to Section 7 of the Fair Labor Standards Act of 1938 that is in excess of the employee’s regular compensation. (Only the “half” portion of time and half paid overtime qualifies). Qualified Overtime does not include tips.
Individual Trust Accounts (Trump accounts) – OBBBA creates a new tax deferred investment accounts for children under age 18. Annual contributions are limited to $5,000. There is a one-time $1,000 government funded deposit for children born between December 31, 2024 and January 1, 2029. Contributions can begin in 2026 (after 7/4/26) and the maximum contribution amount will be indexed for inflation beginning in 2028. The account grows tax-deferred until the account owner makes withdrawals. Withdrawals will be taxed in a manner similar to IRAs.
NOTE: the accounts must be invested in “eligible investments” which are low-fee non-leveraged mutual funds or certain ETFs.
TAX CREDIT RELATED PROVISIONS
Residential Clean Energy Credits – Various energy efficient and clean energy credits will sunset on December 31, 2025. (This includes the credit for energy efficient home improvements).
Clean Vehicle Credits – The credits for new and previously owned clean vehicles will expire after September 30, 2025.
Qualified Elementary and Secondary Scholarships Tax Credits – Starting in 2027, a new non-refundable tax credit is created for charitable contributions made by US citizens and residents to Scholarship granting organizations. The credit is limited to $1,700 and is reduced by any state tax credit received for the contribution. Excess amounts may be carried forward for 5 years. The contribution must be made to a 501(c)(3) organization that provides scholarships for qualified elementary or secondary education expenses of eligible students and must be made in cash. No charitable deduction is allowed for the amount contributed.
BUSINESS RELATED PROVISIONS
Qualified Business Income Deduction (QBI) – The QBI deduction remains at 20%. Qualified Business Income is also known as “pass-through” income and includes income from partnerships, S Corporations, LLCs and sole proprietorships. The deduction is available to both itemizers and non-itemizers. The restrictions and limitation rules are complicated. There will be slightly higher maximum income thresholds before the deduction is phased out for higher income taxpayers.
Bonus Depreciation - Bonus depreciation allows businesses to deduct 100% of the cost of qualifying property in the year placed in service. Used property qualifies for bonus depreciation with some restrictions. OBBBA reinstates 100% bonus depreciation for property acquired after January 19, 2025. (Note: many states do not conform with bonus depreciation).
Section 179 Expensing – OBBBA increases the Section 179 deduction to $2,500,000 and the phaseout threshold increases to $4 million for property placed in service after December 31, 2024.
Excess Business Losses – Excess Business loss limitations are now permanent. Disallowed business losses are carried forward and treated as part of the taxpayer’s net operating loss carryforward.
Information Reporting Threshold– OBBBA increases the threshold for the amount of payments that must be reported on Forms 1099-MISC or 1099-NEC from $600 to $2,000 for payments made in 2026. Beginning in 2027, this amount will be indexed for inflation each year.
This tax update is only a summary of SOME of the recent legislative changes under the OBBBA. Effective tax planning requires a year-round effort each year as your overall financial position changes and especially within the uncertain tax environment we face.
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