Posted:July 22, 2025
Categories: taxes, Financial Planning
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As a kid, I always looked forward to summer. The baseball games, ice cream, hot dogs, sweet corn, county fairs, family vacations, camping trips, and many memories are still ripe in my mind. So, to turn my attention to taxes during a time filled with fun and sun is, to say the least, unusual. Nevertheless, we turn to the world of taxes in this article after the passage of the "One Big Beautiful Bill Act.”
The One Big Beautiful Bill Act (OBBBA), signed into law by President Trump on July 4, 2025, is a comprehensive legislative package designed to extend and modify many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that were set to expire at the end of 2025. I will break down some of the most relevant tax changes in this article.
Tax Brackets
The tax brackets (as shown in Figure 1) legislated in 2017 under the TCJA are now permanent, and the dollar amounts for each bracket will continue to increase annually with inflation. Starting in 2026, the 10% and 12% tax brackets will receive an additional inflation adjustment, which will slightly increase their income thresholds compared to what they would have been without it, aiming to reduce effective tax rates for most households.
Figure 1: Tax Brackets
Source: Internal Revenue Service
Standard Deductions
For the 2025 tax year, the standard deductions are:
New “Bonus” Deduction for Older Adults (65+)
A new temporary deduction of $6,000 per qualifying person (or $12,000 for married couples if both are 65 or older) is introduced, effective from 2025 through 2028. This deduction is in addition to the existing standard deduction and the traditional additional standard deduction for those 65 or older.
There are phase-out rules for this deduction, with a threshold of $75,000 Modified Adjusted Gross Income (MAGI) for single filers and $150,000 MAGI for married couples. This bonus deduction is eliminated at $250,000 MAGI.
Social Security Taxation
The OBBBA does not make any changes to how Social Security benefits are taxed at the federal level. Despite claims to the contrary, Social Security income remains taxable based on provisional income rules. While the new age 65+ deduction can reduce overall taxable income, it does not directly exempt Social Security benefits.
Capital Gains Tax Brackets
Long-term capital gains have distinct brackets and rates from ordinary income, which were slightly adjusted upwards for 2025. The 0% long-term capital gains tax rate applies to married couples filing jointly with taxable incomes of $96,700 or below.
This provides a significant opportunity for retirees or those with low ordinary income to realize capital gains tax-free, especially considering the increased standard deduction.
Child Tax Credit
The OBBBA permanently increases the Child Tax Credit to $2,200 per qualifying child starting in tax year 2025. Further, this credit will be indexed for inflation beginning in 2026, a first in its history.
State and Local Tax (SALT) Deduction
Perhaps one of the most significant changes involves the SALT deduction limit, which was previously capped at $10,000, will increase to up to $40,000 for married couples filing jointly. This higher limit is temporary and will be applicable from 2025 through 2029. There are phase-out rules for married couples with MAGI exceeding $500,000.
Retirement Plan Contribution Adjustments
The OBBBA legislative package did not directly impact general retirement account contribution limits. As a reminder, the limits for the two main retirement vehicles (IRA/Roth IRA and 401k) for 2025 remain:
Of course, there are many other types of retirement plans and limits, but there is no need to spell them all out here. Finally, claims about the elimination of backdoor Roth or mega backdoor Roth IRAs are incorrect; no changes to these were made under the OBBBA.
No Tax on Tips & Overtime Compensation
Up to $25,000 of income from tips can be excluded from federal income tax. Tip income remains subject to Social Security and Medicare taxes. Phaseout ranges start at $150,000 MAGI for single filers and $300,000 MAGI for married filing jointly.
Up to $12,500 for single filers or $25,000 for married filing jointly of overtime pay can be excluded from federal income tax. This compensation is still subject to Social Security and Medicare taxes. Phaseout ranges start at $150,000 MAGI for single filers and $300,000 MAGI for married filing jointly.
New Auto Loan Interest Deduction:
Up to $10,000 of interest on qualified car loans can be deducted from income. This applies to interest on new loans taken after December 31, 2024, for new vehicles (cars, vans, SUVs, pickup trucks, motorcycles) with final assembly in the United States. Refinanced existing loans may qualify under certain conditions. Phaseout ranges start at $100,000 MAGI for single filers and $200,000 MAGI for married filing jointly.
Charitable Contributions
Permanent Deduction for Non-Itemizers
There is a new permanent deduction for charitable contributions for non-itemizers. Starting in 2026, individuals who take the standard deduction can claim a deduction for cash charitable contributions, capped at $1,000 for single filers and $2,000 for married filing jointly. This deduction has no income phaseouts and is not inflation-adjusted.
New AGI-based Minimum (Floor) for Itemizers
Starting in 2026, itemized charitable contributions will be subject to a new 0.5% of Adjusted Gross Income (AGI) floor. This means that the first 0.5% of qualified donations will not be deductible. High-income taxpayers who plan to make large charitable contributions may benefit from doing so in 2025 to avoid the new 0.5% AGI floor that takes effect in 2026.
Child Savings Accounts ("Trump Accounts")
The OBBBA creates a new type of IRA-like account called a "Trump account" for children under 18, intended to jumpstart retirement savings. These accounts become available starting in 2026, with contributions allowed from July 4, 2026.
Contributions are capped at $5,000 (inflation-adjusted after 2027). These contributions are not tax-deductible. There is no requirement for earned income to contribute. The creation of "Trump accounts" has led to speculation that they could be a step towards privatizing Social Security benefits.
Government Pilot Program
The government will make a $1,000 contribution per year to eligible U.S. citizens born between 2025 and 2028, potentially opening accounts automatically.
Investment Options
Limited to index exchange-traded funds (ETFs) or mutual funds with expense ratios no higher than 0.1%, tracking qualified U.S. equity indexes, such as the S&P 500.
Distributions
No withdrawals are allowed before the child turns 18, except for rollovers to ABLE accounts for disability. Upon reaching the age of 18, the account essentially converts to a traditional IRA, subject to the standard IRA distribution rules.
529 Plan Use Expansion
The bill expands the definition of "qualified higher education expenses" for 529 plans. 529 funds can now also be used for post-secondary credentialing expenses. For example, it can be used for tuition/fees for programs, exam fees, and continuing education for industry-recognized certifications. The annual limit for K-12 tuition and related expenses increases from $10,000 to $20,000 starting in 2026.
Estate and Gift Tax Exemption
The increased lifetime estate and gift tax exemption amounts, which were set to expire, have been made permanent by the OBBBA.
For 2025, the lifetime estate tax exemption is $13.99 million per individual, and the gift tax exclusion is $19,000 per person.
Starting in 2026, the lifetime exclusion amount will increase permanently to $15 million per individual (or $30 million for joint filers) and will be adjusted annually for inflation.
Section 199A Deduction (Qualified Business Income - QBI)
The 20% deduction for Qualified Business Income (QBI) for pass-through business owners is now permanent. Phaseout ranges are higher under the new law, at $272,300 for singles and $544,600 for joint filers.
Business Depreciation and Deductions
Permanently restores 100% bonus depreciation for business property placed in service after January 19, 2025, and increases Section 179 deduction limits, both inflation-adjusted from 2025. Additionally, it permanently allows for 100% expensing of U.S. research and experimental costs.
References
DISCLOSURES & INDEX DESCRIPTIONS
For disclosures and index definitions, please click here.
