A Taxpayer's Guide to the OBBBA

A Taxpayer's Guide to the OBBBA

By Deborah A. Baker, CFP

Vice President and Senior Financial Planner
 

On July 4th, President Trump signed into law the legislation known as the “One Big Beautiful Bill Act (OBBBA).”  This comprehensive Bill combines tax reform and spending provisions in over 1,000 pages of regulations. Given the enormity of the Bill, it is not possible to summarize all the content. The following, however, are highlights of some of the most relevant and notable aspects that affect most taxpayers.   

 Issues that are being extended and/or modified:    
  1. Current federal income tax brackets will remain unchanged with 37% as the highest bracket for individuals. 
  1. The higher standard deduction continues and will increase in 2025 to levels below, with ongoing adjustments for inflation: 
    • $31,500 for couples filing jointly 
    • $23,625 for head of household 
    • $15,750 for individuals  
  1. The estate tax exemption climbs to $15 million for individuals and $30 million for couples (married filing jointly) next year and will also be indexed for inflation. 
  1. The mortgage interest deduction limit of $750,000 remains in place.  Mortgage insurance premiums will become deductible in 2026, while home equity interest is permanently disallowed, except in certain situations for those who itemize. 
  1. The Section 199A pass-through deduction for qualified business income will become permanent, with a slight increase in some instances. 
  1. The Child Tax Credit increases to $2,200 per qualifying child, with annual inflation adjustments. The $500 credit for non-child dependents has been extended.  
  1. The SALT (state and local tax) deduction will increase to $40,000 for those earners with incomes up to $500,000 from 2025 to 2029, with an annual increase of 1% until 2029.  A phaseout range is included for those with incomes above $500,000 to about $600,000, while earners above the $600k limit will continue to receive the current $10,000 deduction.  The cap reverts to $10,000 for all taxpayers in 2030.   
The above provisions have been made “permanent,” requiring future congressional acts to repeal or modify.  
Changes introduced in the 2025 OBBBA, effective from 2025 through 2028, include:   
  1. Tax Exemptions for Tips:  

Tips of up to $25,000 will be exempt from taxes for certain occupations where tips are common; income-based phaseouts will extend to zero for individuals with an income of $150,000 ($300,000 on joint returns) or more.   

  1. Senior Citizen Deductions:  

Most citizens aged 65 or older with modified adjusted gross income of $75,000 or below (or $150,000 or below for couples) will receive a deduction of $6,000 per year, in addition to the standard deduction ($12,000 for couples).   

  1. Auto Loan Interest Deductions: 

Interest payments on auto loans will qualify for a deduction up to $10,000 for financing on cars with final assembly in the U.S. between 2025 and 2028, with a deduction phase-out when modified adjusted gross income surpasses $100,000 ($200,000 for filing jointly).  

  1. Overtime Wage Deductions:  

Workers earning overtime wages will be entitled to a deduction of up to $12,500 ($25,000 for couples) from 2025 - 2028. This deduction phases out for single filers at incomes of $150,000 and for couples earning $300,000.   

  1. The “Trump Account:” 

The Bill introduces a tax-advantaged account for children born between 2025-2028, providing government funding of $1,000; others may also contribute to the account, for a total of $5,000 annually. These minors must be U.S. citizens and have a Social Security number.  Withdrawals are not allowed until the age of 18, except for expenses such as education or a first-time home purchase. These accounts will not be available until mid-2026, and final tax treatment at withdrawal has not yet been determined.  

New Provisions Affecting Charitable Giving:  
  1. Charitable Deductions for Non-Itemizing Taxpayers: 

Starting in 2026, non-itemizers will be eligible for a charitable deduction of $1,000 for single filers and $2,000 for joint households. Donations to entities such as Donor Advised Funds and Private Foundations are not eligible, and donations must be in cash.  

  1. New “Floor:” 

A minimum threshold has been established for itemizers, which means that you can only deduct charitable contribution amounts that exceed 0.5% of adjusted gross income.   

  1. “Ceiling” on Itemized Deductions: 

For taxpayers in the highest marginal bracket of 37%, the value of itemized deductions is capped at 35% of the value.   

While not everyone will be affected by all the above-mentioned regulations, most individuals will be impacted by some of them. Many of these provisions offer planning opportunities over the next few years, so it is important to consider them when reviewing your financial goals and tax planning strategies. As always, consult with your investment advisor and financial planner to identify the most beneficial tactics for your specific situation.   

The experienced team at The National Bank of Indianapolis here to help. Learn more about our Wealth Management services to get started.