The One Big Beautiful Bill Act
What the New Tax Law Means as We Head Into the New Year
Many of you have been asking about the One Big Beautiful Bill Act (OBBBA) and when I would be sharing an update. I wanted to take the time to read the law, review the technical provisions, and wait for additional IRS guidance before putting anything in writing.
With year end behind us and the IRS now releasing clarification on several of the new provisions, this is my long-awaited update so we can properly prepare for the new year and the upcoming filing season.
Some of the changes apply to 2025 tax returns, others begin in 2026 and later. Many provisions are permanent, some are temporary, and some change how existing tax rules are calculated or limited.
Standard Deduction Increase
The OBBBA permanently increases the standard deduction and keeps it indexed for inflation.
For 2025, the standard deduction is $31,500 for married filing jointly, $23,625 for head of household, and $15,750 for single filers and married filing separately. The standard deduction reduces taxable income before tax is calculated and applies to every taxpayer filing a return.
State and Local Tax Deduction for Itemizers
The deduction for state and local taxes, commonly referred to as SALT, applies only to taxpayers who itemize deductions.
Beginning in 2025, the SALT deduction cap increases to $40,000. The cap increases slightly each year through 2029. After 2029, the deduction returns to $10,000.
For higher income taxpayers, the expanded deduction phases down when income exceeds $500,000, or $250,000 for married filing separately. Even with the phaseout, the deduction does not fall below $10,000 during the expansion period.
Additional Senior Deduction
For tax years 2025 through 2028, taxpayers age 65 or older receive an additional deduction of $6,000 per qualifying individual.
This deduction is taken in addition to the standard deduction that every taxpayer receives when filing a tax return. It applies whether or not the taxpayer itemizes deductions.
The deduction begins to phase out when modified adjusted gross income exceeds $75,000 for single filers or $150,000 for married filing jointly.
This deduction is separate from and unrelated to Social Security taxation. Social Security benefits remain taxable under existing law, with up to 85 percent of benefits taxable based on income.
Child Tax Credit Increase
Beginning in 2025, the Child Tax Credit increases from $2,000 to $2,200 per qualifying child under age 17. The credit continues to phase out at $400,000 of income for married filing jointly and $200,000 for other filers. The refundable portion of the credit remains available.
No Tax on Certain Tip Income
For tax years 2025 through 2028, the OBBBA allows an above-the-line deduction for certain tip income.
Eligible taxpayers may deduct up to $25,000 of qualified tip income. The deduction begins to phase out when adjusted gross income exceeds $150,000 for single filers or $300,000 for married filing jointly.
The IRS has clarified that qualified tip income must be earned in an occupation where tipping was customary and regularly received before January 1, 2025. Tips must be reported as income to qualify. Tips paid in cash, credit cards, debit cards, electronic settlement, mobile payment applications, and tip pools may qualify if properly reported.
Tips remain subject to Social Security and Medicare taxes. This provision affects income tax only.
No Tax on Certain Overtime Pay
The law also allows an above-the-line deduction for the premium portion of overtime pay.
For 2025 through 2028, taxpayers may deduct up to $12,500 of overtime premium pay, or $25,000 for married filing jointly. Only the portion of overtime pay that exceeds the employee’s regular rate qualifies.
The IRS has clarified that overtime must be separately identifiable through payroll records. Regular wages do not qualify. Overtime pay remains subject to Social Security and Medicare taxes.
Car Loan Interest Deduction
The OBBBA allows a deduction for interest paid on certain passenger vehicle loans for tax years 2025 through 2028.
The statute defines qualified passenger vehicle loan interest as interest paid on indebtedness incurred after December 31, 2024, for the purchase of a passenger vehicle secured by a first lien for personal use. The statutory definition references vehicles originally used by the taxpayer and assembled in the United States, which points toward new vehicles.
Current IRS public guidance describes the deduction more broadly as interest paid on a loan used to purchase a passenger vehicle for personal use, secured by a first lien, subject to income limits and a $10,000 annual cap. IRS summaries do not currently distinguish between new and used vehicles.
Because tax law is governed by statute, taxpayers should proceed cautiously until further IRS regulations or court guidance are issued.
The deduction is limited to $10,000 per year and phases out when income exceeds $100,000 for single filers or $200,000 for married filing jointly. It is available whether or not the taxpayer itemizes deductions.
IRS Documentation Reminder
Taxpayers claiming the car loan interest deduction should bring and retain the vehicle purchase agreement and loan documents, including information identifying the vehicle such as the VIN. While the VIN is not currently transmitted to the IRS with the return, tax preparation software requires it to support the deduction, and documentation may be requested by the IRS.
Adoption Credit Changes
The adoption credit is expanded by allowing up to $5,000 of the credit to be refundable. This allows eligible taxpayers to benefit even if they do not owe tax.
The remaining portion of the credit remains non-refundable and subject to carryforward rules.
Expanded Use of 529 Education Accounts
529 education accounts may now be used for more than college tuition.
Qualified expenses include professional licenses, required certifications, apprenticeship programs, and continuing education required to maintain professional credentials. This applies to distributions made after July 4, 2025.
Trump Accounts
The OBBBA creates a new type of savings account commonly referred to as Trump Accounts. These accounts are designed to encourage long term savings for children, with specific rules around age, timing, and contribution limits.
A Trump Account may be established for an eligible child beginning at birth and no later than the year the child turns 18. Contributions may be made each year until the beneficiary reaches age 18. Once the beneficiary reaches age 18, no additional contributions are allowed, but the account may continue to grow.
Annual contributions are limited to $5,000 per year, indexed for inflation. Contributions are made with after tax dollars. There is no tax deduction for contributions.
In addition to family contributions, the law provides for a one time $1,000 federal contribution for certain children. This $1,000 contribution applies to children born after December 31, 2024, and before January 1, 2029, who are U.S. citizens at birth and have a valid Social Security number. The federal contribution does not count toward the annual contribution limit.
Investment earnings grow tax deferred. Qualified distributions are tax free when used for permitted purposes. Permitted uses include education expenses, job training and credentialing programs, certain small business startup costs, and first-time homebuyer expenses, subject to future IRS guidance and dollar limits.
Distributions generally may not be taken before the beneficiary reaches age 18. Distributions used for non-qualified purposes are subject to income tax on the earnings portion and may also be subject to penalties.
Trump Accounts are separate from 529 plans, custodial accounts, and Roth IRAs. They do not replace existing savings vehicles but instead provide an additional planning option for families who want broader flexibility beyond education only accounts.
The IRS is expected to issue additional guidance addressing account setup, reporting requirements, qualified distributions, and penalties. Taxpayers should wait for that guidance before opening or funding an account, particularly when coordinating these accounts with other savings strategies.
Clean Energy Credits Phase Out
The OBBBA significantly reduces clean energy tax incentives.
Credits for electric vehicles, both new and used, terminate for vehicles placed in service after September 30, 2025.
Residential credits for solar panels and energy efficient home improvements end after December 31, 2025.
Commercial clean energy credits related to energy efficient buildings, wind, solar, hydrogen, and alternative fuels phase out between 2026 and 2028, depending on the specific credit and when construction begins.
Projects already under construction may qualify under transition rules.
Business Owners, Depreciation and Research and Development
The law restores 100 percent bonus depreciation for qualifying property placed in service
after January 19, 2025.
Section 179 expensing is expanded, allowing up to $2.5 million of qualifying property to be expensed, with a phaseout beginning at $4 million.
Domestic research and development expenses are once again fully deductible in the year incurred. Foreign research and development expenses must continue to be amortized over fifteen years.
Business Loss Limitations
The limitation on excess business losses for noncorporate taxpayers is extended and effectively permanent.
For 2025, business losses in excess of approximately $305,000 for single filers or $610,000 for married filing jointly cannot be used to offset other income in the same year. Excess losses carry forward and are treated as net operating losses in future years.
Income From Payment Apps and Online Sales, Form 1099-K Reporting
The OBBBA reverses the previously announced reduction in Form 1099-K reporting thresholds.
Under current law, Form 1099-K, Payment Card and Third-Party Network Transactions, will be issued by payment card companies for any amount of payment card transactions. Payment apps and online marketplaces will issue Form 1099-K only when payments exceed $20,000 and more than 200 transactions occur during the year.
This change affects reporting only. All income remains taxable, regardless of whether a Form 1099-K is issued. Income from part-time work, gig activities, freelance services, and sales of goods or services must still be reported on the tax return.
This applies even if payments are received through Venmo, PayPal, Zelle, Cash App, Etsy, eBay, or similar payment platforms.
Receiving fewer Forms 1099-K does not mean income is no longer taxable. Taxpayers should continue to maintain records of income received through payment apps and online.
Charitable Contributions
For individuals who itemize deductions, charitable contributions are deductible only to the extent they exceed 0.5 percent of adjusted gross income.
For example, a taxpayer with $200,000 of adjusted gross income must contribute more than $1,000 before charitable contributions begin to reduce taxable income.
Taxpayers who do not itemize may claim an above-the-line charitable deduction of up to $1,000 for single filers or $2,000 for married filing jointly. Only cash contributions qualify. Donations of property, clothing, or household items do not qualify.
For corporations, charitable deductions apply only to the extent total contributions exceed 1 percent of taxable income and do not exceed 10 percent.
Estate and Gift Tax Exemption
The higher estate and lifetime gift tax exemption does not expire.
Beginning in 2026, the exemption is approximately $15 million per individual or $30 million for married couples, indexed for inflation. This applies to lifetime gifts and estates at death.
What to Keep if You Plan to Claim Certain New Deductions
With several new deductions available under the One Big Beautiful Bill Act, documentation will matter more than in prior years, especially during this first year of implementation. The IRS has emphasized that taxpayers should rely on records, not estimates, when claiming these benefits.
For the car loan interest deduction, taxpayers should retain the vehicle purchase agreement, loan documents showing the loan was incurred after December 31, 2024, confirmation that the loan is secured by a first lien, and year-end loan statements showing interest paid. These records should be kept with your tax documents even though the deduction is claimed above the line.
For tip income deductions, taxpayers should retain Forms W-2, pay stubs, employer tip reports, and any records used to report cash or electronic tips. Tips must be reported as income in order to qualify for the deduction.
For overtime deductions, payroll records must clearly show regular pay and the overtime premium portion separately. Pay stubs and employer payroll summaries should be retained.
For charitable contributions, cash donation receipts or bank records are required. Donations of clothing, household items, or other property do not qualify for the above-the-line charitable deduction.
Keeping these records with your tax documents will help support the deductions if questions arise later.
The One Big Beautiful Bill Act makes meaningful changes to how income is taxed and how deductions are calculated. Some provisions reduce taxable income directly. Others limit deductions or require closer attention to documentation and timing.
I wanted to wait to publish this update until the law was finalized and the IRS began releasing guidance, so the information reflects how these rules are expected to be applied as we move into the new year.
Wishing everyone a Happy, Healthy New Year.
