📉 Tax brackets and standard deduction amounts have been made permanent and are getting an inflation bump.
🧾 SALT deduction cap temporarily increased, which is great news for high-tax states.
🚗 New auto loan interest deduction applies but not everything qualifies.
👶 A new “Trump Account” lets parents invest for kids’ retirement before they even have earned income.
Executive Summary:
The recently enacted One Big Beautiful Bill Act (OBBBA) has introduced a number of key tax changes that will impact individuals and businesses for years to come. Signed into law on July 4, 2025, OBBBA extends and modifies many of the provisions from the Tax Cuts and Jobs Act of 2017 (TCJA), which were set to expire at the end of 2025.
This blog will cover what we believe are the most important changes that our clients should be aware of, their impact, and some potential planning opportunities.
Core Tax Adjustments
Standard Deduction & Itemizing
The OBBBA permanently extends the increased standard deduction amounts from the TCJA. Starting in 2025, these amounts will see a slight increase:
- Single filers: The standard deduction will increase from $15,000 to $15,750.
- Heads of household: The amount increases from $22,500 to $23,625.
- Joint filers: The deduction will rise from $30,000 to $31,500.
These amounts will be adjusted for inflation annually. Additionally, for seniors 65 or older, there is a new temporary deduction of $6,000 for single filers or $12,000 for joint filers (if both are 65+) for the years 2025 through 2028. For the vast majority of taxpayers who take the standard deduction, this means a minor reduction in their taxable income.
Tax Bracket Adjustments
The existing tax brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%) have been made permanent. The primary change affects the 10% and 12% brackets, where the base year for inflation adjustments will be reset to 2016. Normally, tax brackets are adjusted for inflation every year. This is done to prevent people from being pushed into higher tax brackets just because of inflation, a concept known as “bracket creep.” The reset to 2016 for the 10% and 12% brackets means that instead of using the most recent year’s inflation data, the government is recalculating the size of those brackets as if the Tax Cuts and Jobs Act (TCJA) of 2017 never happened.
Think of it this way:
- Before the TCJA, tax brackets were being adjusted for inflation every year.
- The TCJA changed how these brackets were calculated.
- By resetting the base year to 2016, the new law applies inflation adjustments as if the TCJA never occurred.
This “extra” calculation from 2016 to the present results in the 10% and 12% tax brackets being larger than they would have been under the previous rules. This means more of a taxpayer’s income will fall into these lower-taxed brackets, resulting in a small tax reduction for most people.
Social Security Taxation
Despite some initial confusion, the OBBBA does not change how Social Security benefits are taxed. The existing “provisional income” rules still apply. Provisional income is your Adjusted Gross Income (AGI) plus any tax-exempt interest and 50% of your Social Security benefits. If this amount exceeds certain thresholds, up to 85% of your benefits can become taxable.
Targeted Deductions & Credits
State and Local Tax (SALT) Deduction
The OBBBA temporarily increases the $10,000 limitation on the SALT deduction to $40,000, effective starting in 2025. The limit will then increase by 1% annually from 2026-2029 and will revert to $10,000 in 2030. This change provides significant relief for many taxpayers in high-tax states.
Charitable Contributions
Starting in 2026, a new floor equal to 0.5% of your Adjusted Gross Income (AGI) is being introduced for charitable contributions for those who itemize. This means you can only deduct the amount of your contributions that exceeds this floor.
The OBBBA also permanently restores a charitable deduction for taxpayers who take the standard deduction. Beginning in 2026, you can deduct cash contributions up to $1,000 for single filers and $2,000 for joint filers. This deduction is not subject to the 0.5% AGI floor.
AGI floor example:
Scenario:
- Taxpayer: A married couple filing jointly.
- AGI (Adjusted Gross Income): $300,000.
- Total charitable contributions for the year: $5,000.
- Other Itemized Deductions: $20,000 (e.g., state and local taxes, mortgage interest, etc.).
Calculation with the New AGI Floor:
- Calculate the AGI floor: The new law sets the floor at 0.5% of AGI.
- $300,000 (AGI) x 0.005 = $1,500
- Determine the deductible amount: The taxpayer can only deduct the portion of their charitable contributions that exceeds this floor.
- $5,000 (contributions) – $1,500 (AGI floor) = $3,500
- Calculate total itemized deductions: The deductible charitable contributions are then added to the taxpayer’s other itemized deductions.
- $3,500 (deductible contributions) + $20,000 (other deductions) = $23,500
- Compare to the standard deduction: The taxpayer will then compare their total itemized deductions ($23,500) to the standard deduction for joint filers, which is $31,500 in 2025 and will be adjusted for inflation in 2026. Assuming a modest inflation increase, their itemized deductions would still be less than the standard deduction, so they would take the standard deduction.
Impact of the AGI Floor:
- Without the AGI floor, the taxpayer would have been able to deduct their full $5,000 in charitable contributions, bringing their total itemized deductions to $25,000 ($5,000 + $20,000).
- With the AGI floor, their deductible charitable contributions are reduced to $3,500. This makes it less likely that their total itemized deductions will exceed the increased standard deduction, meaning the tax benefit of their charitable giving could be completely lost.
Auto Loan Interest Deduction
A new, temporary deduction for “qualified passenger vehicle loan interest” will be available from 2025 through 2028. You can deduct interest on new loans for new, U.S.-assembled cars, vans, SUVs, pickup trucks, and motorcycles purchased after December 31, 2024. The deduction is capped at $10,000 per year and has a modified AGI phase-out starting at $200,000 for joint filers.
Here is a table outlining which changes apply to itemizers, those who take the standard deduction, or both.
Impact of The One Big Beautiful Bill Act by Deduction Type
| Applies to… | Provision | Details |
| People who itemize deductions | SALT Deduction Increase | The $10,000 SALT deduction limit is temporarily increased to $40,000. |
| AGI Floor for Charitable Contributions | A new floor of 0.5% of AGI is introduced for charitable contribution deductions, meaning only contributions above this threshold can be deducted. | |
| People who take the standard deduction | Charitable Contributions Deduction | A new deduction for cash contributions is permanently restored, allowing up to $1,000 for single filers and $2,000 for joint filers. |
| Both itemizers and people who take the standard deduction | Standard Deduction Increase | The increased standard deduction amounts are made permanent and will be adjusted for inflation. Even if you itemize, you will take the standard deduction if it is higher than your total itemized deductions. |
| Tax Bracket Adjustments | The reset of the inflation base year for the 10% and 12% tax brackets will affect all taxpayers with income in those brackets, regardless of their deduction choice. | |
| Child Tax Credit | The Child Tax Credit is permanently increased for all qualifying taxpayers. | |
| Auto Loan Interest Deduction | This new deduction is available to all taxpayers who meet the qualifications, regardless of whether they itemize or take the standard deduction. |
Family & Future Planning
Child Tax Credit
The Child Tax Credit is permanently increased from $2,000 to $2,200 per qualifying child starting in 2025. The credit will also be indexed to inflation for the first time beginning in 2026.
Estate Tax Exemption
The gift and estate tax exclusion, which was scheduled to be cut in half, is instead being increased to $15 million per person (or $30 million per couple) starting in 2026. This new, higher amount will also be adjusted annually for inflation.
The estate tax exemption works as a threshold. The government only applies the estate tax to the value of an estate that is above the exemption amount.
In simple terms, this means:
- If a single person passes away and their total estate is valued at $15 million or less, no federal estate tax will be owed. The entire estate can be transferred to their heirs without any tax consequences.
- If a married couple passes away and their combined estate is valued at $30 million or less, no federal estate tax will be owed.
The tax is only applied to the amount that exceeds these thresholds. For example, if a single person has an estate valued at $16 million, the estate tax would only be applied to the $1 million that is above the $15 million exemption. The first $15 million would be passed on tax-free.
It is important to note that state inheritance tax laws need to be taken into consideration separately.
529 Plans
The new law expands what qualifies for tax-free distributions from 529 plans. The annual limit for K-12 expenses increases to $20,000 starting in 2026, and funds can now be used for a wider range of K-12 expenses, including textbooks, tutoring, and test fees. Additionally, funds can be used for tuition, fees, and exams for industry-recognized postsecondary credentials.
“Trump Accounts”
A new type of IRA, referred to as a “Trump account” or a “Money Account for Growth and Advancement” (MAGA) account, is being created to jumpstart retirement savings for children. For children under 18, contributions up to $5,000 per year can be made without an earned income requirement. A pilot program will also provide a $1,000 credit from the government into a MAGA account for eligible children born in 2025, 2026, or 2027.
Investment options for “Trump Accounts”:
- Limited Investment Choices: The account has very specific investment requirements. The funds can only be invested in low-cost, unleveraged stock mutual funds or exchange-traded funds (ETFs) that track a broad U.S. stock index, such as the S&P 500.
- No Leverage or High Fees: The funds must not use leverage and must have a very low annual expense ratio (not to exceed 0.1%).
- No Other Options: More stable investment options like bonds or cash are not allowed.
In essence, the account is designed to be a simple, “set-it-and-forget-it” investment that tracks the overall U.S. stock market.
Comparing Investment Accounts for Children
| Feature | Trump Account | 529 Plan | UTMA Account |
| Purpose | Primarily long-term retirement savings for children. | Education savings (post-secondary, K-12, apprenticeships). | Any purpose that benefits the minor child. |
| Contribution Limits | $5,000 per year (indexed), plus a one-time $1,000 government credit for certain children. | No federal annual contribution limit, but state plans have lifetime caps (can be over $600,000). Contributions are subject to gift tax rules. | No contribution limits, but annual contributions over the gift tax exclusion ($19,000 in 2025) may be subject to gift tax. |
| Tax Treatment of Contributions | After-tax contributions. | After-tax contributions (many states offer a tax deduction for residents). | After-tax contributions. |
| Tax Treatment of Distributions for Qualified Education Expenses | Earnings are taxed as ordinary income, but the 10% early withdrawal penalty is waived. | Both principal and earnings are tax-free when used for qualified education expenses. | Distributions are not specifically for education and any gains are subject to the “Kiddie Tax,” which can be the parent’s tax rate. Distributions may also count as student income and negatively impact financial aid. |
| Use of Funds | Flexible use after age 18, but withdrawals are subject to income tax. Not ideal for education as a 529 is better. | Funds must be used for qualified education expenses (e.g., tuition, fees, books, and computers) or can be rolled into a Roth IRA. | Flexible, as long as it is for the child’s benefit. |
| Ownership | The child is the owner of the account once they turn 18. | The parent or donor is the account owner, and the child is the beneficiary. | The minor is the owner of the assets, but a custodian (e.g., a parent) manages the account. |
| Control | The account is owned by the child but managed by a custodian until age 18, when full control transfers to the child. | The parent or donor retains control over the account and can change the beneficiary. | The custodian manages the account until the child reaches the age of majority (18 or 21, depending on the state). The child gains full control at that point. |
Clean Energy Credits
Several popular clean energy tax credits will have their sunset dates accelerated under the OBBBA. This creates a shorter window to claim these valuable credits.
- Clean Vehicle Credits: Terminate for vehicles acquired after September 30, 2025.
- Energy Efficient Home Improvement Credit: Terminates for property placed in service after December 31, 2025.
- Residential Clean Energy Credit (e.g., solar panels): Terminates for expenditures made after December 31, 2025.
Author: Ryan Wyatt, CFP®, CIMA®
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