FREE NEWSLETTER
THE OBBBA WAS SIGNED on July 4, 2025. There are a lot of different changes in various areas, including student loans, Medicaid, SNAP, etc
My goal is to focus on reviewing the Title VII – Finance, specifically focusing on Subtitle A – Tax.
There are many changes and my goal is to focus on the most important provisions impacting individuals and small business owners.
Let’s get into it:
Section 70101. Extension of the tax rates.
The OBBBA makes the tax rates enacted in the TCJA 2017 permanent.
As a reminder, if this bill didn’t pass, the tax rates would’ve reverted back to the pre-TCJA tax rates (15%, 25%, 28%, 33%, 39.6%).
In addition, starting in 2026, there will be an extra year of inflation adjustment for the 10% and 12% brackets. This roughly equates to ~$100 of tax savings as long as you are over the 12% bracket due to more of your income being taxed in lower brackets due to inflation adjustments.
Section 70102. Extension and enhancement of increased standard deduction
The bill makes the TCJA standard deduction permanent. This also means that the personal exemption will not be coming back.
It also increases the base standard deduction from:
$15,000 → $15,750 (single)
$22,500 → $23,625 (head of household)
$30,000 → $31,500 (married jointly) for 2025
The standard deduction will continue to get inflation adjusted after 2025.
Section 70103. Senior deduction
Before Jan 1, 2029, a deduction of $6,000 will be allowed for each taxpayer who is age 65 before the close of the taxable year, effective 2025.
This means that if you are married filing jointly, and both are 65 or older, you may qualify for a $12,000 deduction.
However, the $6,000 amount will be reduced by 6% of the amount by which your modified adjusted gross income exceeds $75,000 ($150,000 if you are filing jointly).
For example, say you are single and have $85,000 MAGI ($10,000 over the threshold). $10,000 * 6% = $600.
The maximum senior deduction is $5,400. Also, the deduction applies regardless of whether you take the standard or itemized deduction.
Tax planning opportunity: consider the additional impact of the $6,000/$12,000 deduction on Roth conversions. Effectively, older taxpayers could harvest more conversions at a lower tax rate. However, an analysis is needed on the impact on IRMAA and/or the taxability of their Social Security benefits.
Section 70104. Child tax credit
The child tax credit amount is increasing from $2,000 to $2,200, effective 2025.
In addition, the child tax credit amount will be permanent (as a reminder, it was going to sunset to $1,000, the pre-TCJA amount, if it wasn’t enacted).
Starting in 2026, the $2,200 amount will also be increased by a cost-of-living adjustment. The Social Security number of a child is required to claim this credit on the parent’s tax return.
In addition, starting in 2025, the $1,400 refundable credit (the maximum amount you can get refunded if you have no tax liability) will also be adjusted based on the cost of living.
Section 70105. Deduction for qualified business income
The bill makes the 199A (QBI) deduction permanent. As a reminder, it was supposed to sunset after 2025 (starting with 2026). This is great news for self-employed business owners and owners of pass-through businesses (like partnerships and S corporations) who receive a 20% qualified business income tax deduction.
The tax bill also increases the income phase-out range for SSTBs (businesses providing services in healthcare, law, accounting, consulting, etc.) from $50,000 to $75,000 (single) and from $100,000 to $150,000 (married jointly) starting in 2026.
It also creates a minimum $400 deduction as long as you have at least $1,000 of qualified business income, starting in 2026.
For example, say you have a small business where you materially participate and earned $1,000 net income. Your QBI deduction will be calculated as:
20% * $1,000 = $200, but the minimum is $400, so your deduction will be $400.
Both the $400 amount and the $1,000 income threshold are increasing for inflation starting in 2027.
Section 70106. Increased Estate and Gift Tax Exemption
The estate and gift exemption ($13.99M per individual, or $27.98M for married couples) was going to be significantly lowered to ~$7M per individual as part of the TCJA expiration.
But with the bill, the estate and gift tax exemption is increasing from $13.99M to $15M, effective in 2026.
It will also increase with inflation, as has been the case, after 2026.
Section 70108. Extension and modification of qualified residence interest
You can claim an itemized deduction for “qualified residence interest,” which includes interest paid on a mortgage secured by a primary or secondary home.
For mortgages incurred after December 15, 2017, the maximum limit of debt that you can receive a mortgage interest deduction for is $750,000.
The bill extends the $750,000 amount and makes it permanent.
There is also a section that allows mortgage insurance premiums (related to FHA loans) to be treated as interest, so this amount will be treated like interest for the purpose of the mortgage interest deduction, effective 2026.
Section 70111. Limitation on tax benefit of itemized deductions
You may remember that pre-TCJA there was a “Pease limitation” that put a limit on the maximum amount of itemized deductions that you can take.
This new bill brings back a much more modified version of the “Pease Limitation,” effective in 2026 for high earners.
The total itemized deduction will be reduced by 2/37 (~5.4%) times the lesser of:
Effectively, if your taxable income is less than ~$626,350 (for single) or $751,600 (for married jointly), you wouldn’t be impacted by the limitation.
For example, say you make $700,000 as a single individual ($73,650 over the 37% bracket) and have $50,000 of itemized deductions. The lesser of the two is $50,000 * 5.4% = ~$2,700. The final itemized deduction is $47,300.
Note that this section shall be applied after the application of any other limitations for itemized deductions (i.e. SALT cap of $40,000).
Tax planning opportunity: if you are a high earner and considering making a large donation (e.g. using a DAF), it makes more sense to do so in 2025 rather than 2026 due to the limitation.
Section 70114. Extension and modification of wagering losses
The bill limits how much you can deduct for gambling losses to 90%, effective in 2026.
In addition, the “up to the extent of winnings” limitation still stands.
For example, say an individual has $50,000 of gambling losses and $50,000 of gambling winnings.
The new law only allows taking 90% * $50,000, or $45,000, as an itemized deduction (since we have sufficient winnings of $50,000).
If the winnings were $30,000, we would only be allowed to take the $30,000 as a loss deduction.
There is talk to change the 90% limit back to 100% after certain members of Congress learned about this change. They are calling it the “FULL HOUSE Act,” so it’s unclear whether this will still be implemented.
Note: in order to claim gambling losses, you have to itemize the deductions. Considering that most people take the standard deduction, you would effectively sacrifice a tax-free portion of income just to claim the loss, which may or may not even be worth it depending on the losses.
Section 70120. Limitation of state and local taxes
The state and local tax deduction cap is increasing to $40,000 in 2025 for itemized deductions. The $40,000 limit applies to both single individuals and married filing jointly (the “marriage penalty” still applies).
The $40,000 amount will increase to $40,400 in 2026 and continue to increase by 1% annually until 2030. In 2030, the state and local tax deduction cap will revert to $10,000.
Importantly, there is a $500,000 modified adjusted gross income (MAGI) threshold (for both single and married filers), and the deduction will be reduced by 30% of the amount by which it exceeds that threshold, but not below $10,000. This means that after $600,000 of MAGI, the SALT limit is $10,000.
Interestingly, the MAGI is defined as “adjusted gross income increased by any amount excluded from gross income under section 911 (foreign earned income), 931 (income from Guam, American Samoa, or the Northern Mariana Islands), or 933 (income from Puerto Rico).”
This means that tax-exempt interest is not included in the definition of MAGI, as it normally is.
In addition, if you are in the $500,000-$600,000 MAGI range, you will lose 30 cents of SALT deduction for every $1 you earn in this income. Taxpayers could experience the “SALT torpedo” due to the high marginal tax rate (~40%) in this range.
Tax planning opportunity: If you are in this income range, consider calculating the impact of shifting taxable savings interest products (like HYSA) toward tax-exempt interest (Muni bonds) due to the MAGI definition.
Tax planning opportunity: If you are in this income range, consider doing tax loss harvesting, maximizing your pre-tax contributions, HSAs, and accelerating deductions or postponing income (for business owners) to reduce your MAGI.
Section 70201. “No tax on tips”
A new $25,000 deduction is created for “qualified” tips, effective from 2025 through 2028.
The qualified tips are defined as “tips that are paid voluntarily without any consequence in the event of nonpayment, are not subject to negotiation, and are determined by the payor,” and conform with the Treasury list.
The Treasury will publish a list of qualifying occupations and provide guidance to clarify any additional information to prevent abuse.
Sorry lawyers and accountants… You can’t change your billing structure to be tips only.
The $25,000 deduction is reduced by $100 for each $1,000 by which your modified adjusted gross income exceeds $150,000 (single) or $300,000 (married).
The deduction is allowed even if you take the standard deduction. In other words, you don’t have to itemize to claim this deduction.
Example:
You make $50,000, of which $30,000 is from tips, and are single. You will receive a $25,000 deduction for the tip income, saving ~$3,000 on your federal taxes.
The IRS also announced that for 2025 there will be no changes to any W-2 forms, potentially including the tip amount on them. However, more information is coming on how this deduction can be taken for 2025 (perhaps the taxpayer will just need to keep good records for 2025).
Section 70202. “No tax on overtime”
A new $12,500 deduction (single) or $25,000 (married jointly) is created for “qualified overtime compensation,” effective from 2025 through 2028.
Qualified overtime is defined as overtime pay required under Section 7 of the Fair Labor Standards Act of 1938.
The deduction is reduced by $100 for each $1,000 by which your modified adjusted gross income exceeds $150,000 (single) or $300,000 (married).
Also, this deduction is on a per-return basis, so if you file jointly and only one spouse works overtime, you can take a $25,000 deduction assuming you meet other qualifications.
Overtime will be included on the W-2 in 2026, and will be “reasonably estimated” for 2025, similarly to the tips deduction. More clarification is coming on this. As with the “no tax on tips” provision, the deduction is allowed even if you take the standard deduction.
Example:
Your MAGI is $100,000, of which $10,000 is from overtime, and you are single. You will receive a $10,000 deduction for this overtime, saving ~22%, or about $2,200 on your federal taxes.
Importantly, the overtime deduction is calculated as the overtime rate minus the regular rate, not the full overtime rate. In other words, if you make $45/hr as overtime and your regular wage is $30/hr, only $15/hr of overtime will count toward the deduction.
Section 70203. No tax on car loan interest.
There will be a $10,000 deduction on car loan interest, effective from 2025 through 2028.
The deduction will be reduced by $200 for each $1,000 by which your modified adjusted gross income exceeds $100,000 (or $200,000 if married).
The interest must:
In terms of a vehicle, it must be a car, minivan, van, SUV, pick-up truck, motorcycle with gross weight of less than 14,000 points AND final assembly must be in the United States to qualify.
The IRS recently clarified how the final assembly would work: “the location of final assembly will be listed on the vehicle information label attached to each vehicle on a dealer’s premises” or “taxpayers may rely on the vehicle’s plant of manufacture as reported in the VIN number to determine if a car has undergone final assembly in the United States” using the National Highway Traffic Safety Administration (NHTSA) Vin Decoder.
Refinancing qualifies as long as the initial loan qualifies (after Dec 31, 2024, new car, etc.) and only up to the amount of the original loan you refinance. Any extra amount borrowed beyond the original balance doesn’t qualify for the interest deduction.
Lenders will be required to report the interest paid to the taxpayers.
Section 70204. Trump accounts and contribution pilot program
A Trump account, defined as an individual retirement account (IRA) which is not a Roth, could be established for the exclusive benefit of an individual under 18 years old.
The maximum contribution amount per year is $5,000. No contribution will be allowed for 12 months after the enactment of the law (July 4, 2025), so no immediate action is needed at the moment. No tax deduction is allowed for contributions to the Trump account. No withdrawals are allowed before age 18.
The account also must be invested in an “eligible investment,” which is defined as a mutual fund or ETF that:
A qualified index must be broad-based, primarily U.S. company equities, and not industry/sector-specific.
Once the beneficiary turns 18, the account is treated similarly to a traditional IRA, but further clarification is needed on the details from the IRS.
Employers can also contribute to a Trump account on behalf of an employee (or dependents), subject to a $2,500 limit.
A new pilot program is also created that provides a $1,000 tax credit for a child who is a U.S. citizen, born between January 1, 2025, and before January 1, 2029.
Section 70301. Full expensing for certain business property
Bonus depreciation is made permanent and is now 100% as long as the property is placed in service and acquired after January 19, 2025. This is great news for all of you who invest in rental properties and perform cost segregation studies.
The bill also increases the maximum amount a taxpayer may expense under Sec. 179 to $2.5 million, reduced by the amount by which the cost of qualifying property exceeds $4 million.
Section 70404. Dependent care assistance program
A Dependent Care Flexible Savings Account is a tax-advantaged benefit offered by some employers, which allows employees to use pre-tax dollars to pay for eligible dependent care expenses.
As part of the bill, the dependent care FSA limit is increasing from $5,000 to $7,500, effective in 2026.
Section 70405. Enhancement of Child and Dependent care tax credit
The bill raises the maximum percentage of qualified expenses you can claim for child and dependent care from 35% to 50%, effective in the 2026 tax year.
The 50% will be reduced by 1% for each $2,000 by which your adjusted gross income exceeds $15,000 (but not below 35%) and further reduced by 1% for each $2,000 ($4,000 if married jointly) by which your adjusted gross income exceeds $75,000 (single) or $150,000 (married jointly).
Section 70413. Additional expenses treated as qualified higher education expenses for 529 accounts
One of the limitations of 529 plans was that you weren’t able to use them for certain costs outside of tuition.
So, parents of a high school child who attends a public school weren’t able to use their 529 plans to offset some costs, but that changes with the following expenses qualifying for students attending a public, private, or religious K–12 school:
→ Tuition
→ Curriculum and curricular materials (i.e., any specialized courses needed as part of the enrollment in class)
→ Books or other instructional materials
→ Online educational materials
→ Tuition for tutoring or educational classes outside of home (tutor must not be a family member and must be licensed) as part of the enrollment or attendance of K–12 school (so doesn’t apply for homeschooled children).
For example, say your child is struggling with math in high school or even middle school. Tutoring could be classified as an eligible distribution for purposes of the 529 plan.
→ Fees for a nationally standardized achievement test, an advanced placement examination, or any examinations related to college or university admission (think ACT/SAT tests, AP exams)
→ Fees for dual enrollment in an institution of higher education (for example, say your high school child takes college credits)
→ Educational therapies for students with disabilities provided by a licensed provider (huge!)
The effective date for these changes applies to distributions made after “the date of the enactment of this Act,” which is July 4, 2025.
So, for any distributions after such a date, these expenses will be qualified on the federal level.
Quick note – different states do it differently, and this will apply to all the 529 changes discussed in this email.
Some states say, “we will follow whatever the IRC Section 529 says,” also called conforming 529 states (about 20 states). Some states say, “we create our own rules,” also called non-conforming states.
So, it’s important to check what your state will end up doing. Additionally, OBBBA increases the annual limit for these types of expenses from $10,000 to $20,000 per year beginning in 2026.
This probably doesn’t really matter unless your child is attending a private school.
Section 70414. Certain postsecondary credentialing expenses treated as qualified higher education expenses for 529 accounts
Many people didn’t want to contribute to 529 plans because of “what if my child doesn’t go to college!”
This section helps ease that concern a bit.
This new section covers tuition, fees, books, supplies, and equipment required for enrollment or attendance in a recognized postsecondary credential program. It also covers fees for testing and fees for continuing education required to maintain a credential.
So, what is a “recognized postsecondary credential”?
It means:
> Any postsecondary credential that is industry-recognized and is issued by a program that is accredited by the Institute for Credentialing Excellence (for example, Certified Information Systems Security Professional (CISSP))
> Any certificate of completion of an apprenticeship that is registered with the Secretary of Labor (for example, finishing an electrician apprenticeship program that earns a certificate)
> Any occupational or professional license issued or recognized by a state or federal government (CPA license, yay!)
> Any recognized postsecondary credential as defined in Section 3(52) of the Workforce Innovation and Opportunity Act
Note that it’s not just enough to earn a certificate.
The program itself must qualify and be a legitimate pathway to earn that credential. The bill defines programs that are on official state lists under WIOA, listed in the Veterans Benefits directory, or identified by the Secretary as reputable programs.
Section 70421. Opportunity zones enhancement
The tax bill makes opportunity zone investments (economically distressed areas) permanent, effective 2027 with certain ch