How Does the One Big Beautiful Bill Affect You!

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 to 2028

Eligibility: Available regardless of whether you itemize. Taxpayers such as waitstaff and baristas with income below $150,000 are eligible. Specified service trade businesses (SSTBs) such as law and 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 (for example, 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 to 2028

Eligibility: Phases out at $150,000 income. Benefits certain workers such as police officers, firefighters, nurses, and retail workers. Specified service trade businesses (SSTBs) such as law and 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 individual over 65.

Effective: Tax Years 2025 to 2028

Eligibility: Phases out at $75,000 for single filers and $150,000 for married filing jointly. Married couples must file jointly.

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 Section 163(h)(4). This is an above the line deduction, available to both itemizers and non itemizers.

Effective: Tax Years 2025 to 2028

Eligibility: The loan must be incurred after December 31, 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, up to 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. Loans from related parties are excluded.
• Deduction limit and phase out: Capped at $10,000 of interest per taxable year. Phase out begins when modified AGI exceeds $100,000 for single filers and $200,000 for joint filers, reduced by $200 for every $1,000 (or part thereof) above the threshold.
• Qualified vehicle definition: Must be for original use, primarily manufactured for public roads (cars, minivans, SUVs, pickup trucks, and two wheel motorcycles under 14,000 lbs), classified under the Clean Air Act, and assembled in the United States.

5. Child Tax Credit expansion

Provision: Originally $1,000 and increased to $2,000 under the TCJA, the maximum credit per child under 17 is now permanently increased to $2,200 effective Tax Year 2025.

Effective: Starting Tax Year 2025

• Adjustments: Beginning in 2026, this amount will be subject to annual inflation adjustments.
• Refundable portion: The refundable portion of the credit remains at $1,400.
• Requirement: Valid Social Security numbers are required for both the parent and the child to claim this credit. If a Social Security number is missing, the IRS will treat it as a math error and adjust the return.

6. Homeowners (SALT deduction)

Provision: The State and Local Tax (SALT) deduction cap is increased from $10,000 to $40,000.

Effective: Tax Years 2025 to 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: Significantly benefits filers in states such as Virginia with state income and property taxes, allowing a much higher itemized deduction.

7. Child and Dependent Care Credit and DCAP

Provision: The maximum applicable credit percentage increases from 35% to 50% for lower income taxpayers with qualifying child and dependent care expenses (up to $3,000 for one child or dependent, and up to $6,000 for two or more).

Effective: Tax Years after Dec 31, 2025

• Eligible expenses: Includes daycare, preschool, before and after care programs, summer camps, and adult care.
• Dependent Care Assistance Program (DCAP) enhancement: Annual contribution limits for employer Dependent Care FSAs increase to $7,500 per year (up from $5,000) and $3,750 for married filing separately (up from $2,500).
• Pre tax benefit: Contributions are excluded from gross income, reducing federal income, Social Security, and Medicare taxes (subject to use it or lose it rules).

8. Mortgage interest deduction limit

Provision: The mortgage interest deduction limit is permanently set at $750,000.

Effective: Starting Tax Year 2026

• Private Mortgage Insurance (PMI): PMI will be treated as mortgage interest for deduction purposes, starting in Tax Year 2026.

9. Charitable contributions

Provision: Reinstates a permanent above the line deduction for taxpayers who do not itemize: up to $1,000 for single filers and $2,000 for married individuals filing jointly.

Effective: After Dec 31, 2025

• Itemized deduction floor: For taxpayers who itemize, a 0.5% floor against Adjusted Gross Income (AGI) applies to total charitable contributions.
• Example: A taxpayer with an AGI of $100,000 must contribute more than $500 (0.5% of $100,000) before itemized charitable deductions apply.
• Carry forward: Disallowed contributions due to this floor can be carried forward if total contributions exceed the applicable limit.

10. Educator expenses

Provision: The above the line deduction for unreimbursed educator expenses is set at $300.

Effective: Starting Tax Year 2026

• Additional expenses: Any additional unreimbursed classroom or supply expenses incurred by teachers can be claimed on Schedule A if they itemize, without being subject to the 2% AGI floor.

11. Trump Savings Accounts

Provision: Establishes "Trump Accounts," a new class of long term savings vehicles structured as modified traditional IRAs for individuals under 18.

Effective: 2025 to 2028 births

• One time deposit: A $1,000 deposit will be made into accounts opened for qualified children born after December 31, 2024, and before January 1, 2029.
• Contributions and waiting period: Annual contributions are capped at $5,000 per beneficiary (indexed for inflation starting in 2028). A mandatory 12 month waiting period applies before contributions begin.
• Distributions and employers: Distributions are prohibited until age 18. Employers may make non taxable contributions on behalf of minor employees under Section 128.

12. Adoption credit

Provision: Beginning with tax years after December 31, 2024, up to $5,000 of the adoption credit is now refundable, making it payable even if the taxpayer has no tax liability.

Effective: After Dec 31, 2024

• Carry forward: Any credit amount above the $5,000 refundable portion remains non refundable and may be carried forward up to 5 years.
• Special needs expansion: Allows Indian tribal governments to determine whether a child has special needs for adoption credit purposes.

13. 529 education plans expansion

Provision: Increases the K through 12 tuition distribution limit from $10,000 to $20,000 per student and expands eligible K through 12 and post secondary credential expenses.

Effective: After Dec 31, 2024

• Newly eligible K through 12 expenses: Tuition at public or private religious schools, curriculum, books, online materials, qualified tutoring, standardized testing fees (AP, SAT, ACT), dual enrollment college courses in high school, and educational therapies for children with disabilities.
• Post secondary credentials: Covers tuition, fees, materials, license exams, and continuing education for Workforce Innovation and Opportunity Act state approved programs, Veterans WIN directory programs, apprenticeship certificates, and occupational licenses.

14. Health Savings Accounts (HSAs)

Provision: Amends Section 223(c)(2) so individuals enrolled in ACA Bronze or Catastrophic health plans are now eligible to contribute to an HSA.

Effective: After Dec 31, 2024

• Impact: Benefits younger individuals or lower income enrollees in Bronze and Catastrophic plans who previously could not contribute to an HSA.

15. Alternative Minimum Tax (AMT)

Provision: The Alternative Minimum Tax continues with the family exemption amount set at $109,400.

Effective: Starting Tax Year 2026

16. Estate and gift tax exemption

Provision: The federal exemption amount for estate and gift tax is increased to $15 million.

Effective: Starting Tax Year 2026

• State note: Be aware of state level estate or inheritance taxes, as each state sets its own limits that may differ from federal provisions.

17. Casualty losses

Provision: The deduction for casualty losses is made permanent for losses incurred in federally declared or state declared disaster areas only (personal incidents such as a burst home pipe do not qualify).

Effective: Starting Tax Year 2026

18. Moving expenses

Provision: Moving expenses remain deductible only for active duty military members and are now also deductible for CIA personnel.

Effective: Starting Tax Year 2026

19. Gambling losses

Provision: The deduction limit for gambling losses is now capped at 90% of your losses (previously deductible up to 100% of winnings).

Effective: Starting Tax Year 2026

20. ABLE accounts and Savers Credit

Provision: Makes permanent the increased TCJA ABLE contribution limits for employed beneficiaries ($19,000 additional in 2025) and permanently extends the Savers Credit to ABLE contributions.

Effective: 2025 to 2027

• Inflation base year: Uses 1996 as the base year after December 31, 2025.
• Savers Credit maximum: Increases from $2,000 to $2,100 beginning in 2027.

21. Deployed Armed Forces income exemption

Provision: Permanently qualifies military personnel stationed in the Sinai Peninsula for combat zone tax benefits and expands combat zone benefits to service in Kenya, Mali, Burkina Faso, and Chad.

Effective: From Jan 1, 2026

22. Student loan discharge exclusion

Provision: Permanently excludes from gross income federal and private student loan discharges resulting from the borrower's death or total and permanent disability.

Effective: After Dec 31, 2025

23. Employer payments toward student loans

Provision: Permanently extends the Section 127 exclusion allowing employees to exclude up to $5,250 per year in employer student loan repayment assistance from taxable income, indexed for inflation starting in 2027.

Effective: After Dec 31, 2025

24. Energy efficient home credits repealed

Provision: Energy efficient credits for home improvements under the Inflation Reduction Act (such as residential solar panels and efficiency upgrades) end for property placed in service after Tax Year 2025.

Effective: After Tax Year 2025

• Action item: Clients can still claim credits for qualifying improvements placed in service during Tax Year 2025.

25. Electric vehicle (EV) credits eliminated

Provision: The clean energy credit for electric vehicle purchases (up to $7,500 for new EVs and $4,000 for used EVs) is eliminated for vehicles purchased after September 30, 2025.

Effective: After Sept 30, 2025

26. Tax credit for scholarship contributions and student loan reforms

Provision: Establishes a new tax credit for contributions made to qualified Scholarship Granting Organizations (SGOs) alongside federal Pell Grant and student loan repayment reforms.

Effective: Starting Tax Year 2026

27. Self employed Qualified Business Income (QBI) and 100% bonus depreciation

Provision: The 20% qualified business income (QBI) deduction is permanently extended so self employed individuals, LLCs, partnerships, and S corporations can continue to deduct 20% of qualified net profit, alongside permanent 100% bonus depreciation for qualified business property.

Effective: Permanent extension