Dan Reiter, CFP®, CPA
The recently enacted One Big Beautiful Bill Act (OBBBA) is a comprehensive legislative package spanning 870 pages. While its scope extends to critical areas such as Medicare and Medicaid reform, military spending adjustments, border security, immigration enforcement, and a $5 trillion increase in the debt limit - this blog post will focus on approximately 350 pages dedicated to significant tax provisions. These changes are poised to impact a wide range of taxpayers, from individuals to business owners.
Broadly Applicable Changes to Income Taxes
The OBBBA introduces several key modifications to income taxes:
- Permanent Extension of Tax Rates Enacted by the Tax Cuts and Jobs Act: The tax rates, standard deductions, and the elimination of personal exemptions established under the Tax Cuts and Jobs Act (TCJA) are now permanently extended.
- Enhanced Deduction for Seniors (Temporary): It is worth mentioning that the promise of not taxing Social Security is notably absent from the new law. However, taxpayers aged 65 or older before the close of the tax year may claim an additional deduction of $6,000. This deduction is subject to a limitation based on one’s Adjusted Gross Income (AGI). Specifically, this additional deduction is reduced starting at incomes of $75,000 for single filers or $150,000 for those married filing jointly and is eliminated entirely for those with incomes higher than $175,000 (single) and $250,000 (married). This enhanced deduction is in effect from 2025 through 2028.
- State and Local Tax Deduction Increase (Temporary): Effective in 2025, the State and Local Tax (SALT) deduction cap will increase from $10,000 to $40,000. However, this increase is temporary, reverting to $10,000 in 2030. Furthermore, the increased deduction is reduced starting with modified adjusted gross incomes of $500,000 and is completely phased out at $600,000 of income (although the maximum deduction is never less than $10,000).
- Exclusion for "Qualified Tips" (Temporary): A new deduction allows for the exclusion of "qualified tips" from taxable income, up to a limit of $25,000. This deduction begins to be limited once modified adjusted gross income exceeds $150,000 (single) or $300,000 (married filing jointly) and phases out completely at $400,000 (single) or $550,000 (married). This provision applies only through 2028 and is limited to tips received in occupations "which customarily and regularly received tips on or before 12/31/2024," with the Secretary of the Treasury expected to publish a list of such occupations.
- Exclusion for Overtime Compensation (Temporary): Like qualified tips, a deduction is now allowed for "qualified overtime compensation" up to a limit of $12,500 (single) or $25,000 (married). This deduction is also subject to a MAGI phase-out, reduced when modified adjusted gross income exceeds $150,000 (single) or $300,000 (married), and is fully phased out at $400,000 (single) or $550,000 (married). "Qualified overtime compensation" is defined as compensation paid in excess of the regular rate as required under Section 7 of the Fair Labor Standards Act of 1938. This provision also applies only through 2028.
- Deduction for Car Loan Interest (Temporary): A new deduction for "qualified passenger vehicle loan interest" is permitted, up to $10,000. The allowable deduction is reduced when modified adjusted gross income exceeds $100,000 (single) or $200,000 (married), with no deduction allowed for incomes exceeding $150,000 (single) or $250,000 (married). This applies only between 2025 and 2028 and is for loans secured by an "applicable passenger vehicle for personal use," which must be new, have a gross vehicle weight less than 14,000 pounds, and have undergone final assembly within the United States. Lease financing is excluded.
- Non-Itemized Charitable Contributions: Beginning in 2026, taxpayers may deduct charitable contributions of up to $1,000 (single) or $2,000 (married) without otherwise itemizing their deductions. However, this deduction is subject to a floor of 0.5% of adjusted gross income. This means, for example, if married taxpayers have an adjusted gross income of $200,000 they must donate $3,000 to be eligible for the $2,000 deduction.
- Premium Tax Credit and HSA Eligibility: The limitation on the recapture of advanced premium tax credit payments has been eliminated. As such, those who are receiving advanced payments of premium tax credits must be extra judicious when estimating their income during enrollment periods. Additionally, plans that are eligible for Health Savings Accounts are broadened, with bronze and catastrophic health plans now treated as HSA-eligible.
- Elimination of Certain Energy Credits: Many previously allowed energy credits, including clean vehicle credits and credits for expenditures for home energy efficiency, have been eliminated.
Income Tax Changes for Education Accounts and Those With Children
Families and those planning for education will see these changes:
- Increased Child Tax Credit: The Child Tax Credit has been increased from $2,000 to $2,200 per child.
- Introduction of "Trump Accounts": A new type of individual retirement account, dubbed "Trump Accounts," has been introduced. These accounts are generally for the exclusive benefit of individuals under 18 years old at the end of the calendar year.
- Contributions will not be accepted until 12 months after the act's passage and will be capped at $5,000 per year. Note, however, that unlike traditional IRAs contributions are made after tax. In other words, no deduction is allowed for contributions. However, money within the account will grow within the account on a tax deferred basis until distributions are later made. Distributions are not allowed until the beneficiary turns 18.
- Only "eligible investments" are permitted in Trump Accounts, defined as mutual funds or ETFs that track a qualified index (such as the S&P 500 or other indices of primarily US companies), do not use leverage, and have annual fees and expenses of no more than 0.1%.
- A one-time $1,000 refundable credit is available for those born between December 31, 2024, and January 1, 2029 for which a Trump account is set up and established.
- Expanded 529 Plan Use: Beginning in 2026, qualifying expenditures from 529 plans for K-12 education have been broadened, and the limit increased from $10,000 to $20,000. Credentialing expenses are also now considered qualifying expenses for 529 plans.
- Student Loan and Repayment Program Changes: The act includes various modifications to student loan provisions and repayment programs.
Broadly Applicable Changes for Business Owners
Business owners will experience the following significant adjustments:
- Qualified Business Income Deduction Enhancements: Previously set to expire at the end of 2025, the Qualified Business Income (QBI) deduction has been made permanent. Furthermore, the income phase-out range has been made slightly less punishing with an expansion from $50,000 (for single taxpayers) and $100,000 (for married taxpayers) to $75,000 and $150,000, respectively. There are no changes, however, for those considered “specified service trade or businesses” and income thresholds where limitations in the deduction start to apply. A new minimum deduction of $400 is also now available for those with QBI of at least $1,000.
- Permanent Expensing and Depreciation Rules: Special expense and depreciation rules under Section 168 for businesses have been made permanent, applying to property acquired after January 19, 2025. Additionally, Section 179 limits have been increased from $1,000,000 to $2,500,000.
- Full Expensing of Domestic R&D: Domestic research and experimental expenditures can now be fully expensed, rather than amortized.
Estate and Gift Tax Exemptions
- Increased Exemptions: The estate and gift tax exemption has significantly increased to $15,000,000 per taxpayer, beginning in 2026.
This summary highlights the most impactful tax changes introduced by the One Big Beautiful Bill Act. It is important to consult with a qualified tax or financial professional to understand how these provisions may specifically affect your financial situation.
For existing Prosperity clients that have any specific questions about any provisions in the new law and how those may impact you, please do not hesitate to reach out to your service team.
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