The One Big Beautiful Bill Act (OBBBA)
The One Big Beautiful Bill Act (H.R. 1) was passed by the U.S. Congress on July 3, 2025 and signed into law by President Trump on July 4, 2025. The nearly 900-page reconciliation bill has a vast impact across various policy areas and industries, including taxes, healthcare, education, defense, energy, and the debt ceiling.
Sadly, there has been a lot of misinformation in the news media and on social media. The “No Tax on Social Security” was NOT part of the One Big Beautiful Bill Act, however, a new temporary "Senior Deduction" was created (discussed below). Congress used the reconciliation process to pass this bill, therefore, it was impossible to include no tax on Social Security benefits since making any changes that affect Social Security under this process would violate the Byrd Rule which restricts certain provisions that can be included in a reconciliation bill.
What is the “Reconciliation”
Process?
It is a special legislative procedure in the United States
Congress that is used to expedite the passage of tax, spending, and
debt limit legislation. It allows Congress to make changes to these
areas with a simple majority vote in the Senate, bypassing the usual
60-vote threshold needed to overcome a filibuster. Bills described
as reconciliation bills can pass the Senate by a simple majority of
51 votes or 50 votes plus the vice president's vote as the
tie-breaker. The One Big Beautiful Bill Act was passed with 50 votes
plus the vote of Vice President JD Vance.
Summary of Tax Changes
Senior Deduction (Work-Around Included in the One Big Beautiful Bill Act in Place of No Tax on Social Security)
Beginning with tax year 2025 through tax year 2028, there is a new temporary senior deduction for those who are age 65 or older by year-end and have a valid Social Security number. It can be claimed whether itemizing deductions or using the standard deduction.
The senior deduction amount is a MAXIMUM of:
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$6,000*
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$12,000** (if married filing jointly and BOTH spouses are 65 or older)
*For those who are single, the $6,000 maximum deduction is reduced once modified adjusted gross income (MAGI) exceeds $75,000. It is eliminated once MAGI reaches $175,000. The $6,000 deduction is reduced by 6 percent for each dollar above $75,000. For example, if MAGI is $100,000, the $6,000 deduction is reduced by $1,500 ($100,000 - $75,000 = $25,000 x 6% = $1,500). Therefore, the senior deduction will be $4,500 ($6,000 - $1,500).
**For those who are married filing jointly AND both spouses are 65 or older, the $12,000 maximum deduction is reduced once modified adjusted gross income (MAGI) exceeds $150,000. It is completely eliminated once MAGI reaches $250,000. The $12,000 deduction is reduced by 6 percent for each dollar above $150,000. For example, if MAGI is $190,000, the $12,000 deduction is reduced by $2,400 ($190,000 - $150,000 = $40,000 x 6% = $2,400). Therefore, the senior deduction will be $9,600 ($12,000 - $2,400).
NOTE: If an individual is using the "Married Filing Separately" filing status, this deduction CANNOT be claimed.
Standard Deduction Permanently Enhanced
For tax year 2025, besides the annual inflation-adjusted amount, the new Bill also increases the standard deduction by the following additional amounts:
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$750 if Single or Married Filing Separately
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$1,125 if Head of Household
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$1,500 if Married Filing Jointly
See the year 2025 full standard deduction amounts by clicking here.
Tax Rates and Brackets Made Permanent
The temporary tax rate cuts and bracket changes that were scheduled to expire at the end of year 2025 have been made permanent and will not return to tax rates and brackets prior to year 2018. The reduced marginal rates will remain at 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
If this Bill had NOT been passed, the tax rates would have reverted to the pre-2018 tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
Certain Tips Excluded from Income
Beginning with tax year 2025 through 2028, there is a new temporary deduction up to $25,000 for cash or charged tips paid voluntarily and non-negotiable by a customer to an individual in an occupation which customarily and regularly receives tips. The tips must be reported on Form W-2, Form 1099, and/or Form 4137. The IRS will provide transition relief for tax year 2025 for individuals claiming the deduction and for employers and payors subject to the new reporting requirements.
This deduction amount gets reduced once modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 if married filing jointly). The tip deduction will be reduced by $100 for each $1,000 MAGI exceeds the amounts shown above.
The IRS has provided a
preliminary list of
qualifying tipped
occupations
.
The tip income deduction can be claimed whether itemizing deductions or using the standard
deduction.
For tax year 2025, individuals cannot claim the tip deduction if they are considered highly compensated employees or have earned income exceeding $160,000.
A valid work-eligible Social Security number is required to claim this deduction. If married filing jointly, both spouses must have valid work-eligible Social Security numbers.
NOTE: If an individual is using the "Married Filing Separately" filing status, this deduction CANNOT be claimed.
Certain Overtime Premium Pay Excluded from Income
Beginning with tax year 2025 through 2028, there is a new temporary deduction up to $12,500 ($25,000 if married filing jointly) for "qualified overtime compensation" received during the year. It can be claimed whether itemizing deductions or using the standard deduction.
Qualified Overtime Compensation is defined as overtime compensation paid to an individual required under Section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed. For example, an hourly employee has a regular pay rate of $20.00. The overtime pay rate is $30.00. The maximum amount of qualified overtime compensation that can be deducted is $10.00 ($30.00 - $20.00).
This deduction gets reduced once modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 if married filing jointly). The qualified overtime compensation deduction will be reduced by $100 for each $1,000 MAGI exceeds the amounts shown above.
For tax year 2025, individuals cannot claim the overtime premium pay deduction if they are considered highly compensated employees or have earned income exceeding $160,000.
This deduction can only be claimed on the income tax return if the total amount of qualified overtime compensation is reported separately on Form W-2 or Form 1099. The IRS will provide transition relief for tax year 2025 for individuals claiming the deduction and for employers and payors subject to the new reporting requirements.
A valid work-eligible Social Security number is required to claim this deduction. If married filing jointly, both spouses must have valid work-eligible Social Security numbers.
NOTE: If an individual is using the "Married Filing Separately" filing status, this deduction CANNOT be claimed.
Certain Personal Auto Loan Interest Now Deductible
Beginning with tax year 2025 through 2028, there is a new temporary deduction up to $10,000 of interest paid on a loan that originated on or after January 1, 2025, to purchase a "qualifying passenger vehicle" for personal use. Lease payments do not qualify.
A qualifying passenger vehicle is a NEW car, minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating (GVWR) of less than 14,000 pounds. The vehicle must have also undergone final assembly in the United States. Used vehicles do not qualify.
The vehicle identification number (VIN) will be required to be reported on the income tax return. The IRS will provide transition relief for tax year 2025 for interest recipients subject to the new reporting requirements. A new Form 1099 will be created that will show the amount of qualified vehicle loan interest paid during the year.
This interest deduction gets reduced once modified adjusted gross income (MAGI) exceeds $100,000 ($200,000 if married filing jointly). The personal auto loan interest deduction will be reduced by $200 for each $1,000 MAGI exceeds the amounts shown above.
Refinanced loans do qualify, but only up to the amount of the original qualifying loan. Loans from related parties do not qualify.
This interest deduction can be claimed whether itemizing deductions or using the standard deduction.
Health Insurance Marketplace Advance Premium Tax Credit Repayment Limitation Eliminated
Beginning with tax year 2026, any excess advance premium tax credit that is paid for health insurance coverage will need to be paid back in full. There is no longer a "repayment limitation" based on your household income for the year. It is extremely important to accurately report your actual household income to the Marketplace to avoid a potential huge tax liability!
Child Tax Credit Made Permanent and Increased
Beginning with tax year 2025, the child tax credit has been increased from a maximum of $2,000 per child to a maximum of $2,200 per child. The child must have a valid Social Security number and be under age 17 on the last day of the year. After year 2025, the credit will be adjusted based on inflation.
Child and Dependent Care Credit
Beginning with tax year 2026, the child and dependent care maximum applicable credit rate will increase from 35 percent to 50 percent. This change will provide a larger credit to lower-income taxpayers with qualifying children and dependent care expenses. Also, the adjusted gross income (AGI) phase-out structure has been revised into a new two tier system. This will allow taxpayers with moderate income to receive the credit while limiting the credit for those with higher income.
Dependent Care Benefits Enhanced
Beginning with tax year 2026, the exclusion from income for dependent care assistance benefits will increase to $7,500 per year ($3,750 if married filing separately).
Certain Charitable Contributions Deductible Without Itemizing
Beginning with tax year 2026, there is a new permanent deduction allowed for certain charitable contributions for those who do not itemize deductions. If the standard deduction is claimed, then up to $1,000 ($2,000 if married filing jointly) may be deducted for certain charitable contributions.
SALT (State and Local Tax) Deduction Temporarily Increased
Beginning with tax
year 2025 through 2029, the maximum state and local tax (SALT)
deduction on "Schedule A - Itemized Deductions" is being increased
to $40,000 ($20,000 if married filing separately). These amounts
increase 1 percent each year though year 2029. In year 2030, the deduction goes
back to $10,000 ($5,000 if married filing separately).
The
SALT deduction is reduced once modified adjusted gross income (MAGI)
exceeds $500,000 ($250,000 if married filing separately). The SALT
deduction will be reduced by 30 percent of MAGI exceeding the amounts shown
above until it reaches a minimum of $10,000 ($5,000 if married filing
separately).
Home Mortgage Interest Deduction Amount and PMI Deduction Made Permanent
The new tax bill permanently lowers the deduction for qualified residence interest to the first $750,000 in home mortgage acquisition debt. Home equity loan interest is excluded.
Beginning with tax year 2026, mortgage insurance premiums (PMI, FHA MIP, VA funding fees, and USDA guarantee fees), which are treated as qualified residence interest, will be permanently deductible.
Gambling Losses Reduced
Beginning with tax year 2026, gambling losses claimed as an itemized deduction will be limited to 90 percent of gambling winnings.
Example, if $10,000 of gambling winnings are reported as income, then only up to $9,000 ($10,000 x 90%) can be claimed in gambling losses as an itemized deduction.
Adoption Credit Partially Refundable
Beginning with tax year 2025, up to a maximum $5,000 of adoption credit may be refundable, even if there is no tax liability. If you adopt more than one child in the same year, the overall maximum refundable credit is still limited to $5,000. The refundable portion of the credit cannot be carried forward to future years.
Any remaining credit above $5,000 remains nonrefundable and subject to the existing carryforward rules which allows the unused credit to be carried forward up to five years.
The maximum adoption credit for year 2025 is $17,280 per child. The credit begins to phase-out when modified adjusted gross income (MAGI) reaches $259,190 and the credit is eliminated once MAGI is reaches $299,190.
Tip Tax Credit for Beauty Service Businesses
Beginning with tax year 2025, the Federal Insurance Contributions Act (FICA) Tip Credit of has been extended to the beauty industry. This tip credit applies to the "employer's" share of the Social Security and Medicare taxes paid on an employee's cash and charged tips which is 7.65%. Besides certain food and beverage businesses, "beauty services" which include barbering and hair care, nail care, esthetics, body and spa treatments are now eligible for the tax credit.
Qualified Business Income (QBI) Deduction Under Section 199A Made Permanent
The maximum 20 percent qualified business income (QBI) deduction has been made permanent. The minimum QBI deduction will be $400 as long on the total QBI is at least $1,000. After year 2026, these amounts will be increased based on an inflation adjustment. The 20 percent amount will not be increased.
100 Percent Bonus Depreciation
If you own a business and purchase new equipment, furniture, or other qualifying property, you can claim a 100 percent special depreciation allowance which allows you to deduct the full cost of the item in the year or purchase rather than spreading the cost (depreciating) the item over years. This applies to equipment, furniture, and other qualifying property purchased on or after January 20, 2025 but no later than December 31, 2029.
Increase in AMT (Alternative Minimum Tax) Exemption Made Permanent
The new tax bill extends the increased individual alternative minimum tax exemption amounts and will be adjusted for inflation each year.
Termination of Clean Vehicle Credit Under the Inflation Reduction Act
The credit of up to $7,500 for new clean energy vehicles ends on September 30, 2025.
Termination of Previously-Owned Clean Vehicle Credit Under the Inflation Reduction Act
The credit of up to $4,000 for used clean energy vehicles ends on September 30, 2025.
Termination of Qualified Commercial Clean Vehicles Credit Under the Inflation Reduction Act
The credit of up to $40,000 for qualified commercial clean energy vehicles ends on September 30, 2025.
Termination of Energy Efficient Home Improvement Credit Under the Inflation Reduction Act
The credit up to $1,200 for household energy efficient improvements such as windows, doors, insulation, skylights ($2,000 for heat pumps and biomass stoves) ends on December 31, 2025.
Termination of Residential Clean Energy Credit Under the Inflation Reduction Act
The 30 percent credit for solar electric property, solar water heating property, fuel cell property, small wind energy property, geothermal heat pump property and battery storage property ends on December 31, 2025.
Reporting Amount Modified for Certain Form 1099 Information Reporting
Beginning with tax year 2026, certain Forms 1099, such as Form 1099-MISC and Form 1099-NEC, will not be required to be issued unless the amount is greater than $2,000. This amount will be adjusted for inflation each year after 2026.
Reporting Modifications for Form 1099-K Third-Party Network Transactions
Beginning with tax year 2025, Form 1099-K for Third-Party Network Transactions such as merchant accounts, PayPal, eBay, Venmo, CashApp, Etsy, Poshmark, Uber, Lyft, etc., will not be required to be issued unless the gross amount of total reportable payment transactions are greater than $20,000 AND the number of such transactions are greater than 200.
Social Security Number Requirement for Education Credits
Beginning with tax year 2026, a valid Social Security number will be required to claim the American Opportunity Credit or Lifetime Learning Credit.
Estate and Gift Tax Exemptions Increased
Beginning with tax year 2026, the estate and gift tax exemption amount will be increased to $15,000,000 for an individual ($30,000,000 for a married couple). This amount will receive an inflation adjustment each year.
Trump Accounts for Children Under Age 18
A new type of long-term savings account, referred to as a "Trump Account" has been created under this new Bill for children under age 18. It has been established to promote financial education, retirement readiness and asset accumulation for children.
A one-time $1,000 deposit will be made by the U.S. Government into accounts opened for qualifying children born between years 2025 through 2028. Eligibility to setup a Trump Account is restricted to children under age 18 who have a valid Social Security number, however, only children born between the years mentioned above will receive the $1,000 deposit from the government.
Contributions may only be made during the calendar years before the child reaches age 18. Withdrawals are prohibited until the calendar year in which the child turns age 18. Additionally, contributions must be explicitly designated as Trump Account contributions at account creation.
There is a mandatory 12-month waiting period that applies after the date the Bill is signed into law before contributions may begin. Therefore, contributions cannot begin until July 5, 2026.
Annual contributions are capped at $5,000 per child, exclusive of rollovers, and are indexed for inflation starting in year 2028. Contributions may be made by parents, employers, charitable organizations and governmental bodies, subject to the annual cap.
Investment earnings within Trump Accounts grow tax-deferred. While the accounts are similar to traditional IRA treatment, the IRS will provide additional guidance in the future to clarify taxation upon withdrawal.
Only certain investments are permitted which are limited to mutual funds and indexed ETFs, reinforcing the program’s long-term, education-focused savings objectives.
What's NEW for Tax Year 2025 (2026 Tax Season)?
