The OBBBA was signed into law on 07/04/2025, and its passage marks one of the largest packages of tax legislation since 2017.
The OBBBA will maintain the overall federal income tax framework as it has been since the passage of the last major tax legislation bill in 2017. This is mainly because the OBBBA extends many provisions from the prior 2017 bill, while adding some new elements and modifying existing rules.
Let’s run through some of the tax law changes that broadly affect taxpayers
Federal Income Tax Rates (Brackets)
- The bill makes the current federal tax rates permanent unless changed by future legislation
State and Local Tax Deductions
- The $10K limit for state and local tax expenses as Itemized Deductions has been increased to $40K per household through 2029.
- Households with Incomes over $500K will face a gradual reduction of the limit down to $10K, which everyone is allowed regardless of income.
- The Passthrough Entity Tax (PTET) workaround for the SALT cap is preserved even for Specified Service Trade/Businesses.
Child Tax Credit
- Increased to $2,200 per child (from $2,000) through 2028
Tip and Overtime Wages
- Tip Income
- A deduction of up to $25,000 for qualified tips received by an individual in an occupation that customarily and regularly receives tips through 2028.
- The deduction begins to phase out when the taxpayer’s Income exceeds $150,000 ($300,000 in the case of a joint return)
- Tax will still be withheld on tip income for W2 employees until the IRS creates new options to modify withholdings (the deduction applies when your individual tax return is filed)
- A transition rule will allow employers required to furnish statements enumerating an individual’s tips for tax year 2025 to use “any reasonable method” to estimate designated tip amounts.
- Overtime Income
- A deduction of up to $12,500 ($25,000 in the case of a joint return) for qualified overtime compensation received by an individual through 2028
- The deduction begins to phase out when the taxpayer’s income exceeds $150,000 ($300,000 in the case of a joint return)
- Tax will still be withheld on tip income for W2 employees until the IRS creates new options to modify withholdings (the deduction applies when your individual tax return is filed)
- Overtime deductions would only be allowed for qualified overtime compensation if the total amount of qualified overtime compensation is reported separately on Form W-2 (or Form 1099, if the worker is not an employee)
Vehicle Loan Interest Deduction
- Provides a Deduction of up to $10,000 of auto loan interest paid on the purchase of a new vehicle on or after 01/01/2025 (not an itemized deduction, can be taken as long as all qualifications are met)
- Exclusions – Used Vehicles, Fleet vehicles, commercial-only vehicles, personal loans using a car as collateral, lease financing, salvaged vehicles, loans from related parties, and vehicles not assembled in the U.S.
- The deduction gradually phases out at certain income limits. Starts at $100,000 (single)/$200,000 (married filing jointly); fully phased out at $150,000 (single)/$250,000 (married).
- Lenders must issue a new IRS form (like a mortgage Form 1098) if interest exceeds $600/year.
Qualified Business Income Deduction (QBI)
- This deduction has been retained and made permanent unless future legislation modifies it.
- The Income phase-out threshold for Specified Service Trade/Businesses has been increased.
“Trump Accounts”
- Beginning in 2026, the OBBBA creates new tax-preferred accounts for children, referred to as a “Trump Account,” that can be established for children under the age of 18 with contributions of up to $5,000 per year (subject to adjustment). The accounts are generally treated as traditional individual retirement accounts (“IRAs”), which provide tax-deferred investment growth (but not a tax deduction for the contribution itself)
- Employers may contribute up to $2,500 annually (adjusted for inflation) to “Trump Accounts” of an employee or any dependent of an employee.
- The Treasury will pay a one-time seed grant of $1,000 to the “Trump Account” of United States citizen children born after 2024 and before 2029 (accounts can’t be opened until 2026, but children born in 2025 are still eligible for the one-time seed grant)
- Funds cannot be taken out of the account until the child turns 18, unless in the case of death or a qualified hardship, which has not yet been defined by the Treasury.
- Once the child turns 18, the account turns into a traditional IRA
Bonus Depreciation
- Bonus depreciation is reinstated to a 100% allowance for business-use assets placed in service on or after January 19, 2025.
- The 100% allowance is now permanent until further legislation changes it.
Charitable Contributions
- The bill creates a charitable contribution deduction for taxpayers who do not itemize, allowing nonitemizers to claim a deduction of up to $1,000 for single filers or $2,000 for married taxpayers filing jointly for certain charitable contributions.
- For itemizers, the bill imposes a 0.5% floor on the charitable contribution deduction: The amount of an individual’s charitable contributions for a tax year is reduced by 0.5% of the taxpayer’s contribution base for the tax year.
Senior Deduction
- A $6,000 deduction will be allowed for all taxpayers who are 65 or older and have income under $75,000 (single) or $150,000 (joint)
Health Savings Accounts
- All Bronze ACA marketplace insurance policies are now HSA-eligible.
Gambling Losses
- Gambling losses have historically been limited to the extent of your gambling winnings (included in Itemized Deductions). Now, your includable gambling losses are limited to 90% of your total annual gambling losses. This further makes gambling a tax-penalized activity in some cases.
- For example, if the sum of your annual winning bets is $1,000 and the sum of your annual losing bets is $1,000. The maximum gambling losses you can include in itemized deductions is $900, which effectively taxes you on $100 of your gambling winnings, even though you realized $0 in net winnings from your gambling activity.
Clean Energy Incentives Removed
- Tax credits for purchasing EVs and energy-efficient home improvements are going away at different dates in 2025.
- There are numerous rules and exclusions in this topic, so please reach out if you have any questions.
Capital Gain Deferral with Qualified Opportunity Zones
- The expiration of the ability to invest in QOZs for capital gain deferment has been extended.
- There are numerous rules and possibilities for various outcomes with QOZs, so please don’t hesitate to reach out if you have any questions.
Estate Tax Exemption
- Permanently increase the estate tax exemption and lifetime gift tax exemption amounts to $15 million for single filers ($30 million for married filing jointly) in 2026 and index the exemption amount for inflation after that.
Research and Development Capitalization
- Domestic R&D expenses are no longer required to be capitalized and amortized over a 5-year period.
