Congress has passed the One Big Beautiful Bill Act (OBBBA)—a sweeping tax reform that brings permanent and impactful changes to the individual income tax system starting in 2025.
Whether you’re employed, retired, self-employed, or raising a family, these updates may significantly affect your tax return. Below is a clear breakdown of the key changes and practical examples to help you understand how they may apply to your situation.
1. Lower Tax Rates – Now Permanent
What Changed:
The lower income tax rates that began in 2018 are now permanent. The scheduled 2026 increase will no longer take place.
Example:
A married couple filing jointly with $100,000 in taxable income will continue to benefit from the lower tax rates, avoiding the higher pre-2018 brackets.
2. Higher Standard Deduction
What Changed:
The standard deduction is permanently increased:
- $15,750 for single filers
- $23,625 for heads of household
(These amounts will adjust annually for inflation starting in 2026.)
Example:
A single filer earning $50,000 will now subtract $15,750 as a standard deduction, reducing taxable income and total tax owed.
3. New Senior Deduction
What Changed:
Although personal exemptions remain suspended, individuals age 65 or older can claim a $6,000 deduction through 2028 (phased out at higher incomes).
Example:
A married couple, both over 65, may qualify for a $12,000 deduction on top of the standard deduction.
4. Expanded Child Tax Credit
What Changed:
The child tax credit is now $2,200 per qualifying child, with annual inflation adjustments. Both the taxpayer and child must have valid Social Security Numbers (SSNs).
Example:
A family with two qualifying children will receive $4,400 in tax credits, reducing the amount of tax owed dollar-for-dollar.
5. Enhanced QBI Deduction for Business Owners
What Changed:
The Qualified Business Income (QBI) deduction has a higher income threshold:
- $75,000 for single filers
- $150,000 for joint filers
A new $400 minimum deduction also applies to active business income.
Example:
A single taxpayer with $80,000 in self-employment income may still qualify for a substantial QBI deduction, and even if income is modest, a minimum $400 deduction is available.
6. Higher Estate and Gift Tax Exemption
What Changed:
The exemption for estate and gift taxes increases to $15 million per person, effective after 2025. This amount will also be adjusted for inflation.
Example:
An individual can now transfer up to $15 million tax-free during life or at death—up from approximately $13 million.
7. Other Important Provisions
- SALT Deduction Cap: Raised to $40,000 for joint filers ($20,000 if married filing separately) in 2025, but reduced back to $10,000 after 2029 for most.
- Mortgage Interest Deduction: Cap of $750,000 made permanent. Mortgage insurance premiums now count as deductible interest.
- Casualty Losses: Now deductible for state-declared disasters, not just federally declared ones.
- Miscellaneous Itemized Deductions: Still suspended, with the exception of expanded educator expenses.
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Charitable Contributions:
- Non-itemizers can deduct up to $1,000 ($2,000 for joint filers) above-the-line.
- Itemizers must meet a new 0.5% adjusted gross income (AGI) floor.
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Temporary Exclusion for Tips and Overtime (2025–2028):
- Up to $25,000 in tips and $12,500 ($25,000 for joint filers) in overtime may be excluded from taxable income, subject to income limits.
8. Real-Life Examples
Example 1: Single Worker with Tips and Overtime
Maria earns $30,000 in wages, $10,000 in tips, and $5,000 in overtime.
She deducts $10,000 (tips), $5,000 (overtime), and $15,750 (standard deduction).
This reduces her taxable income to just $14,250—and possibly eliminates her tax liability altogether.
Example 2: Married Couple with Children
John and Lisa earn $120,000 jointly and have two children.
They claim a $31,500 standard deduction, $4,400 in child tax credits, and a $12,000 senior deduction if both are over 65.
Their taxable income and tax owed are significantly lower than under prior law.
9. What You Should Do
- Review your withholding or estimated payments to reflect the new credits and deductions.
- Plan accordingly if you pay state or local taxes and itemize.
- Keep documentation for tips, overtime, and qualified business income.
- Ensure you claim all applicable credits and deductions if you are a senior or have dependent children.
We’re Here to Help
The OBBBA presents many planning opportunities—and some new complexities. If you have questions or want a personalized review of your tax outlook for 2025, we invite you to contact us.
Let’s make sure you’re taking full advantage of these changes.
