How Does the One Big Beautiful Bill Affect You!
All the speculation is finally over! You can stop sifting through endless articles and social media posts, because the "One Big Beautiful Bill" has officially been signed into law on July 4th. This new legislation brings significant changes to the tax landscape, primarily by extending and modifying key provisions from the previous Tax Cuts and Jobs Act (TCJA 2017) that were set to expire. We're here to give you the real deal on what this means for you. This will be a long one.
Key takeaway: While signed now, most of these changes will take effect for Tax Year 2025, meaning they will impact the taxes you file in 2026.
Here are the key points and how they might affect you:
Key Highlights of the Bill:
Increased SALT Cap: The State and Local Tax (SALT) deduction cap is increased to $40,000 (up from $10,000) for those earning up to $500,000.
Above-the-Line Deductions: New deductions for tip income and overtime payments for certain workers.
Auto Loan Interest Deduction: An above-the-line deduction for interest on qualified auto loans for certain vehicles, with updated details.
Child Tax Credit Expansion: Permanently increased to $2,200 per child under 17, with inflation adjustments.
Enhanced Deduction for Seniors: Up to $6,000 for individuals over 65.
Child and Dependent Care Credit: Enhanced provisions for daycare and dependent care expenses.
Permanent Mortgage Interest Limit: The mortgage interest deduction limit is permanently set at $750,000.
Charitable Contribution Deduction: Revisions to both itemized and non-itemized deductions.
Educator Expense Deduction: Enhanced deduction for teachers' unreimbursed expenses.
Trump Savings Account: A new class of long-term savings vehicles for children, with updated details.
Adoption Credit: Updated provisions for adoption expenses, including a refundable portion.
529 Plans: Expanded eligible expenses for K-12 education and post-secondary credentials.
Health Savings Accounts (HSAs): Bronze and catastrophic health plans now qualify as high-deductible health plans.
Alternative Minimum Tax (AMT): Continued with updated exemption amounts.
Estate and Gift Tax: Increased exemption amounts.
Casualty Losses: Made permanent for federal disaster and state declared areas only.
Moving Expenses: Limited to military members and CIA.
Gambling Losses: New deduction limit.
ABLE Account & Savers Credit: Permanent increase in contribution limits and Savers Credit enhancement.
Deployed Armed Forces Income Exemption: Permanent combat zone tax benefits and expanded eligible areas.
Student Loan Discharge Exclusion: Permanent exclusion from gross income for certain student loan discharges.
Employer Student Loan Payments: Permanent exclusion from gross income for employer payments, with inflation adjustments.
Tax Credit for Scholarship Contributions: A new refundable tax credit for contributions to Scholarship Granting Organizations.
Repeal of Energy Efficient Credits: Credits for EV, hybrids, charging, and energy-efficient home improvements will end after 2025.
Permanent Qualified Business Deduction: The 20% qualified business income (QBI) deduction is permanently extended.
Medicare & Pell Grants/Student Loans: Reforms are included for both.
Detailed Breakdown of Changes:
Permanent Extensions from TCJA (Effective Tax Year 2018, remain unchanged): The bill permanently extends individual tax rate reductions and the doubled standard deduction that were part of the 2017 TCJA. This means the tax brackets remain: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The elimination of personal dependent exemptions and itemized deductions for miscellaneous unreimbursed expenses (like work-from-home expenses) also remain permanent.
1. No Tax on Tip Income:
Provision: A new above-the-line deduction of up to $25,000 for tip income.
Effective: Tax Years 2025 through 2028.
Eligibility: Available regardless of whether you itemize. Taxpayers like waitresses and baristas with income below $150,000 are eligible. Note: Specified service trade businesses (SSTBs) such as law, consulting, are generally excluded from this deduction.
Impact: This is a deduction, not a dollar-for-dollar credit. Your tax savings will depend on your tax bracket (e.g., a $1,000 tip deduction in the 10% bracket saves $100).
2. Overtime Deduction:
Provision: An above-the-line deduction of up to $12,000 for overtime payments.
Effective: Tax Years 2025 through 2028.
Eligibility: Phases out at $150,000 income. Benefits certain workers such as police officers, firefighters, nurses, and retail workers. Note: Specified service trade businesses (SSTBs) such as law, consulting, are generally excluded from this deduction.
Impact: Similar to tip income, this is a deduction, and savings are based on your tax bracket.
3. Enhanced Deduction for Seniors:
Provision: An enhanced deduction of up to $6,000 per individuals over 65.
Effective: Tax Years 2025 through 2028.
Eligibility: Phases out at $75,000 for single filers and $150,000 for married filing jointly. Married couples must file joint.
Impact: This is a deduction, not a credit. It reduces your total income before taxes are calculated. If your income (including Social Security and other sources) exceeds the thresholds, a portion of your Social Security income may still be taxable.
4. Interest on Car Loans:
Provision: For Tax Years 2025 through 2028, interest paid on a loan to purchase a qualifying passenger vehicle for personal use may be deducted under a temporary provision (Section 163(h)(4)). This is an above-the-line deduction, available to both itemizers and non-itemizers.
Eligibility:
The loan must be incurred after December 31st, 2024, and secured by a first lien on the vehicle.
The taxpayer must include the Vehicle Identification Number (VIN) on their tax return.
Refinancing of such a loan is also eligible, but only to the extent that the refinanced amount does not exceed the original loan amount.
Excluded Loans: Interest on loans for fleet sales, commercial vehicles, leased vehicles, salvage title vehicles, or vehicles intended for scrap or parts is not deductible. Additionally, loans from related parties are excluded.
Deduction Limit & Phase-Out: The deduction is capped at $10,000 of interest per taxable year. It also phases out for higher-income taxpayers:
The phase-out begins when the taxpayer's modified Adjusted Gross Income (AGI) exceeds $100,000 for single filers and $200,000 for joint filers.
The eligible deduction is reduced by $200 for every $1,000 (or part thereof) of modified AGI above the applicable threshold.
Qualified Vehicle Definition: To qualify, the vehicle must be intended for the taxpayer's original use and primarily manufactured for use on public roads. Eligible vehicles include cars, minivans, SUVs, pickup trucks, and motorcycles (as long as they have two wheels and a gross weight rating of under 14,000 lbs). The vehicle must also be classified as a motor vehicle under the Clean Air Act and assembled in the United States.
Effective: Applies to tax years beginning after December 31st, 2024, and before January 1st, 2029.
5. Child Tax Credit:
Provision: The Child Tax Credit has seen significant changes. Originally $1,000, it was increased to $2,000 under the TCJA, which was set to expire in 2025. Effective Tax Year 2025, the maximum credit per child under 17 is now increased to $2,200.
Effective: Starting in Tax Year 2025.
Adjustments: Beginning in 2026, this amount will be subject to annual inflation adjustments.
Refundable Portion: The refundable portion of the credit still remains at $1,400.
Requirement: All the previous requirements and valid Social Security number is required for both the parent and the child to claim this credit. If a Social Security number is missing, the IRS will consider this a math error and adjust your tax return accordingly.
6. Homeowners (SALT Deduction):
Provision: The State and Local Tax (SALT) deduction cap is increased to $40,000.
Effective: Tax Years 2025 through 2029.
Eligibility: The deduction begins to phase out if your income is more than $500,000 (joint or single filer) or $250,000 (married filing separately).
Impact: This significantly benefits filers in states with high state income and property taxes, allowing them to deduct more.
7. Child and Dependent Care Credit & Dependent Care Assistance Program (DCAP):
Child and Dependent Care Credit Enhancement:
Provision: The maximum applicable credit percentage is increased from 35% to 50% for lower-income taxpayers with qualifying child and dependent care expenses.
Credit Amounts: Up to $3,000 for one child/dependent, and up to $6,000 for two or more.
Eligible Expenses: Includes daycare, preschool, before and after care programs, summer camps, and adult care.
Effective: For tax years ending after December 31st, 2025.
Dependent Care Assistance Program (DCAP) Enhancement:
Provision: The annual contribution limits for employer-provided Dependent Care Assistance Programs (DCAP), often referred to as Dependent Care Flexible Spending Arrangements (FSAs), are increased.
New Limits: The new limits are $7,500 per year (up from $5,000) and $3,750 for married individuals filing separately (up from $2,500).
Benefit: This allows employees to set aside pre-tax income for qualifying dependent care expenses (such as daycare, preschool, and certain adult care). Contributions are excluded from gross income, which reduces your federal income, Social Security, and Medicare taxes. This is a "use it or lose it" benefit; if not used for qualifying daycare expenses, it will be included as taxable income.
Effective: For tax years beginning after December 31st, 2025.
8. Mortgage Interest Deduction Limit:
Provision: The mortgage interest deduction limit is permanently set at $750,000.
Effective: Starting in Tax Year 2026.
PMI: Private Mortgage Insurance (PMI) will be treated as mortgage interest for deduction purposes, starting in Tax Year 2026.
9. Charitable Contributions:
Non-Itemized Deduction Reinstated:
Provision: A permanent above-the-line deduction for charitable contributions is available for taxpayers who do not itemize.
Maximum Deduction: The maximum deduction is $1,000 for single filers and $2,000 for married individuals filing jointly.
Effective: For tax years beginning after December 31st, 2025.
Itemized Deduction Floor:
Provision: For taxpayers who itemize, a 0.5% floor against their Adjusted Gross Income (AGI) is applied to the sum of their charitable contributions. This means only the amount of charitable contributions exceeding 0.5% of their AGI (contribution base) can be deducted.
Example: A taxpayer with an AGI of $100,000 must contribute more than $500 (0.5% of $100,000) before any charitable contribution deduction is allowed.
Carry Forward: Disallowed contributions due to this new floor limit can still be carried forward if the total contribution exceeds only the applicable deduction limit, preserving the tax benefit in future years.
Effective: For tax years beginning after December 31st, 2025.
10. Educator Expenses:
Provision: The above-the-line deduction for unreimbursed educator expenses is set at $300.
Additional Expenses: Any additional unreimbursed expenses incurred by teachers (e.g., for supplies) can be claimed on Schedule A if they itemize, and these amounts will not be subject to the 2% AGI floor for miscellaneous itemized deductions.
Effective: Starting in Tax Year 2026.
11. Trump Savings Account:
Provision: A new class of long-term savings vehicles, referred to as "Trump Accounts," has been established to promote financial education, retirement readiness, and asset accumulation for individuals under 18. These accounts are structured as modified traditional IRAs.
One-Time Deposit & Eligibility:
A one-time $1,000 deposit will be made into accounts opened for qualified children born after December 31st, 2024, and before January 1st, 2029.
General eligibility for opening an account is restricted to individuals under 18, but only those born within the specified years will receive the $1,000 credit.
Contributions & Waiting Period:
Annual contributions are capped at $5,000 per beneficiary, exclusive of rollovers, and will be indexed for inflation starting in 2028.
Contributions may be made by parents, employers, charitable organizations, and governmental bodies, subject to the annual cap.
A mandatory 12-month waiting period applies before contributions may begin, following the account creation and legislation enactment.
Additional contributions must be explicitly designated as "Trump Account contributions" at the time of account creation.
Distributions: Distributions are prohibited until the beneficiary reaches the age of 18.
Employer Contributions: Employers are permitted to make non-taxable contributions on behalf of minor employees under the newly added Section 128.
Effective: For tax years beginning after December 31st, 2024, and before January 1st, 2029 (for the $1,000 credit eligibility).
12. Adoption Credit:
Prior Law: Under prior law, the adoption credit was non-refundable, meaning it could only reduce tax liability to zero, and any unused amount could be carried forward for up to 5 years.
New Provision (Refundable Portion): Beginning with tax years after December 31st, 2024, up to $5,000 of the adoption credit is now refundable. This portion will be treated as a credit making it payable even if the taxpayer has no tax liability.
Non-Refundable Portion & Carry Forward: Any credit amount above the $5,000 refundable portion remains non-refundable and is subject to being carried forward under existing rules.
Expansion for Special Needs Adoption: The new law allows Indian tribal governments to determine whether a child has special needs for the purpose of the adoption credit.
Effective: For tax years beginning after December 31st, 2024.
13. 529 Plans:
Increased K-12 Distribution Limit: The limit for distributions from 529 plans to pay tuition for kindergarten through 12th grade is increased from the previous $10,000 per student to $20,000 per student. This higher limit provides families with substantially more flexible funds for private or alternative schooling using their 529 plans.
Newly Eligible K-12 Expenses: Eligible K-12 expenses now include:
Tuition at public or private religious schools.
Curriculum, books, and online materials.
Tutoring or external educational classes (if the instructor is qualified and not related to the student).
Standardized testing fees (e.g., AP exam, SAT, ACT).
Dual enrollment fees for college courses taken in high school.
Educational therapies for children with disabilities (e.g., speech and physical therapy). All these can be paid from a 529 account up to the $20,000 limit.
New Coverage for Post-Secondary Credential Expenses: 529 plan coverage is expanded to include expenses related to industry-recognized post-secondary credentials. Such expenses include:
Tuition, fees, and materials for approved training programs.
Testing fees for credential or license exams.
Continuing education needed to maintain credentials.
Qualifying programs must be state-approved under the Workforce Innovation and Opportunity Act, listed in the Veterans Benefits Administration's WIN directory, prepare students for exams administered by credentialing organizations, or be certified by the Secretary of the Treasury or the Department of Labor.
Qualifying credentials include industrial-recognized certificates and licenses, apprenticeship completion certificates, occupational or professional licenses, and credentials recognized under the Workforce Innovation Act.
Effective: For tax years beginning after December 31st, 2024.
14. Health Savings Accounts (HSAs):
Provision: Section 223(c)(2) has been amended to expand the definition of a High Deductible Health Plan (HDHP) to include certain plans offered through the Affordable Care Act (ACA) exchanges. Specifically, individuals enrolled in a Bronze or Catastrophic health plan are now eligible to contribute to an HSA, provided other HSA eligibility requirements are met.
Impact: This change benefits younger individuals or low-income enrollees in Bronze and Catastrophic plans who previously could not contribute to an HSA.
Effective: For tax years beginning after December 31st, 2024.
15. Alternative Minimum Tax (AMT):
Provision: The AMT will continue.
Exemption: The exemption amount for families is set at $109,400.
Effective: Starting in Tax Year 2026.
16. Estate and Gift Tax:
Provision: The exemption amount for estate and gift tax is increased to $15 million.
Important Note: Be aware of state-level "death taxes," as each state sets its own limits, which may differ from federal provisions.
Effective: Starting in Tax Year 2026.
17. Casualty Losses:
Provision: Deduction for casualty losses is made permanent.
Eligibility: Applies only to losses incurred in federally declared disaster areas or state-declared disaster areas. Losses from personal incidents (e.g., a burst pipe in your home) will not qualify for this federal deduction.
Effective: Starting in Tax Year 2026.
18. Moving Expenses:
Provision: Moving expenses remain deductible only for military members and now also for CIA personnel.
Effective: Starting in Tax Year 2026.
19. Gambling Losses:
Provision: The deduction limit for gambling losses is now 90% of your losses.
Previous Rule: Previously, you could deduct losses up to the amount of your winnings.
Impact: This caps the deductible amount of gambling expenses at 90% of your losses.
Effective: Starting in Tax Year 2026.
20. ABLE Account (Achieving a Better Life Experience) - Extension and Enhancement:
Increased Contribution Limits: The increased contribution limits initially introduced by the TCJA are now made permanent. Beneficiaries who are employed may continue to contribute an additional amount to their ABLE account, equal to the lesser of the federal poverty line or their compensation, beyond the standard annual contribution limit tied to the gift tax. For 2025, this additional amount is $19,000.
Inflation Adjustments: Beginning for tax years after December 31st, 2025, the annual inflation adjustments for ABLE account contribution caps will now use 1996 as the base year, modifying how future limits are calculated.
Savers Credit Enhancement: The Saver's Credit, a refundable credit designed to encourage retirement savings among low and moderate-income individuals, is permanently extended to include ABLE account contributions. This provides parity with IRA and 401(k) contributions, increasing the attractiveness of ABLE savings for individuals with disabilities. The credit maximum increases from $2,000 to $2,100 beginning in 2027.
Takeaway: These changes support higher savings for disability-related expenses and enhance the tax benefits for ABLE account holders.
Effective: For contribution limit changes, effective December 31st, 2025. For Savers Credit enhancement, effective for tax years beginning after December 31st, 2026.
21. Deployed Armed Forces Income Exemption - Extension and Enhancement:
Permanent Combat Zone Benefits: Effective January 1st, 2026, military personnel stationed in the Sinai Peninsula will permanently qualify for combat zone tax benefits. This treatment was previously temporary under the TCJA, and the new provision removes the expiration clause, making it permanent.
Expanded Zones: The combat zone benefits are also expanded to include service in Kenya, Mali, Burkina Faso, and Chad.
Effective: For service from Tax Year 2026 onward.
22. Exclusion from Gross Income for Student Loan Discharges (Death and Disability):
Provision: This amendment permanently excludes from gross income certain student loan discharges that result from the borrower's death or total and permanent disability.
Prior Law: Under the American Rescue Plan Act, this exclusion was temporary and set to expire in 2025. The new provision removes this expiration date, making the exclusion permanent.
Expansion: The exclusion is expanded beyond federal loans to include private loans discharged due to death or disability.
Effective: For student loan discharges occurring after December 31st, 2025.
23. Employer Payments Towards Student Loans - Exclusion from Gross Income:
Provision: Employer-provided educational assistance under Section 127, which allowed employees to exclude up to $5,250 per year from their taxable income for education assistance, is made permanent. This amount was temporarily expanded to include student loan repayment through the end of 2025. The new provision (under Section 70412) removes the expiration date for the student loan repayment exclusion, effectively making it a permanent part of the tax code.
Inflation Adjustment: Beginning in 2027, the $5,250 annual exclusion limit will be adjusted for inflation. The adjustment will be based on the cost of living index, using 2025 as the base year, and any increases will be rounded to the nearest $50.
Effective: For tax years beginning after December 31st, 2025.
24. Energy Efficient Credits for Your Home (Repealed):
Provision: Energy-efficient credits for home improvements under the Inflation Reduction Act will end.
Effective: For property placed in service after Tax Year 2025.
Important: Clients can still claim credits for improvements made in Tax Year 2025, but this will be the last year they are available (e.g., solar panels will not be eligible for credits in the future).
25. Electric Vehicle (EV) Credits (Eliminated):
Provision: The clean energy credit for electric vehicle purchases is eliminated.
Effective: For vehicles purchased after September 30th, 2025.
Important: If you plan to buy an EV, you must do so before September 30th, 2025, to potentially be eligible for the clean credit (up to $7,500 for new EVs, $4,000 for used).
27. Self-Employed (Qualified Business Deduction):
Provision: The 20% qualified business income (QBI) deduction is permanently extended.
Impact: Self-employed individuals can continue to deduct 20% of their net profit.
We understand that tax law changes can be complex. We are here to help you navigate these updates and understand their specific impact on your financial situation. Please do not hesitate to reach out to us with any questions or to schedule a consultation.