During President Trump’s first term, the Tax Cuts and Jobs Act (TCJA) of 2017 made several major changes to tax laws. To limit the projected effect on the deficit at the time, those changes were temporary and would sunset at the end of 2025 unless extended by Congress. We have been awaiting details about which TCJA provisions would be extended and which will be modified. We have some indication now.
The One Big Beautiful Bill Act (OBBBA) was passed by the house on May 22. This bill is not yet law, and changes are possible (likely) as the Senate takes up the bill, but now we have some clues into what lawmakers are thinking as to future tax provisions. I will not try to address all the proposed changes here, but I will highlight the ones that mean the most to our clients.
A note about the word “permanent”
When we say “permanent” in this article, we mean indefinite. These laws and limits can change and will change in the future, but many of the provisions of the OBBBA will not change automatically in the future like the TCJA provisions were meant to. For these “permanent changes” to change again, all that is needed is an act of congress.
Tax Rates Made Permanent
The TCJA temporarily reduced the tax rate for each bracket above the 10% bracket and also increased the amount of income required to reach each bracket. The OBBBA extends these brackets and rates indefinitely.
Prior Law TCJA/OBBBA
10% 10%
15% 12%
25% 22%
28% 24%
33% 32%
35% 35%
39.6% 37%
Some Types of Income Would Not Be Taxable Through 2028
Tip income would be deductible for non-highly compensated workers in customarily tipped industries (such as cosmetology, hospitality, food service, and custodial workers) from 2025 to 2028. In addition, premium pay amounts for overtime work would also be deductible from 2025 to 2028.
Higher Standard Deduction Made Permanent with a Temporary Boost
The TCJA nearly doubled the standard deduction amount for each type of filer. The OBBBA extends those higher standard deductions indefinitely and adds an additional standard deduction of $2,000 for joint filers, $1,500 for head of household filers, and $1,000 for all other filers from 2025 through the end of 2028.
Seniors get more of a boost. The OBBBA temporarily increases the additional standard deduction for seniors by $4,000 for tax years 2025 through 2028. The new bill also extends this additional deduction to seniors who itemize deductions. The larger deduction phases out when modified adjusted gross income exceeds $75,000 for single filers and $150,000 for joint filers.
Child Tax Credit Made Permanent with a Temporary Boost
The expiring child tax credit is made permanent by the OBBBA, and the maximum credit is temporarily increased to $2,500 from 2025 through the end of 2028. After 2028, the limit reverts to $2,000 but is adjusted for inflation.
SALT Limits Don’t Go Away, but Are Modified
The TCJA limited the amount of State and Local Taxes (SALT) that could be deducted in itemized deductions to $10,000. The OBBBA makes the SALT deduction cap permanent, but at a higher threshold of $40,000. The higher limit phases down to $10,000 beginning at modified adjusted gross income of $250,000 for single filers and $500,000 for joint filers. So only filers below those income thresholds get to take the full $40,000 deduction for state and local taxes. The cap and income thresholds increase by 1 percent per year over the next 10 years.
With this increase, the OBBBA also eliminates one of the SALT cap workarounds that taxpayers have been using since the TCJA. Businesses operating as Pass-Through Entities can no longer pay the tax on owner’s behalf as a deductible expense.
Other Changes to Itemized Deductions
- The OBBBA extends the limit of $750,000 on mortgages for the purpose of deducting the interest cost (interest on loan amounts above $750,000 is not deductible). The new bill also continues excluding home equity loan interest for loans for purposes other than the acquisition of a new home (you can’t deduct interest on a home improvement loan).
- The OBBBA would make car loan interest deductible for some taxpayers from 2025-2028. The deduction is limited to $10,000 and reduces by $200 for every $1,000 of income above $100,000 for single filers and $200,000 for joint filers.
- The OBBBA makes permanent many TCJA limitations on itemized deductions.
- New in the OBBBA is a limit on the benefit of itemizing deductions for higher income taxpayers. Filers in the 37% bracket would have to reduce the benefit of itemizing to 35%.
Changes to the Qualified Business Income Deduction (Sec. 199A Deduction)
The OBBBA makes the Sec. 199A deduction permanent and increases it from 20% to 23%, and it also makes the phaseout of this deduction less extreme for Specified Service Trade or Businesses (SSTBs). Previously the deduction completely phased out to $0 for SSTB owners with taxable income above $494,600. The new proposal reduces the deduction by 75% of taxable income above the threshold instead of automatically reducing it to zero when income exceeds the threshold by $100,000.
Estate Tax Threshold Increased Permanently
The TCJA doubled the previous threshold for taxable estates temporarily through 2025. The OBBBA increases the threshold even more to $15 million per individual ($30 million for a married couple) and makes it permanent.
Clean Energy Credits Sunset Seven Years Early
These clean energy credits from the Inflation Reduction Act of 2022 will sunset at the end of 2025 instead of 2032:
Clean Vehicle Credit: up to $7,500 for new and $4,000 for used EV
Alternative Fuel Vehicle Refueling Property Credit: Up to $1,000 for EV charging equipment
Energy Efficient Home Improvement Credit: Up to $2,000 towards cost of home energy efficiency equipment (windows, doors, etc.)
Residential Clean Energy Credit: Up to 30% of cost of solar panels, geothermal, wind power, etc.
Changes to some tax-advantaged accounts
529s: For distributions taken after the bill’s passage, there is an expanded list of qualified K-12 education expenses to include such expenses as tutoring, books, testing, and therapies. There is still a limit of $10,000 per year for aggregate K-12 expenses. In addition to new K-12 uses, 529s could also be used for post-degree credentialing in certain industries that require it (you could use 529 money for continuing professional education).
HSAs: Individuals (not employers) could double HSA contributions. This phases out from $150,000-$250,000 of income for married filers and $75,000-$100,000 for all others.
Trump Accounts, previously called MAGA Accounts (Money Accounts for Growth and Advancement): The current draft of the OBBBA creates a new type of tax-advantaged account for children under age 8 who are U.S. Citizens and have at least one parent with a valid social security number. The government will even make a contribution of $1,000 to accounts for children born 2025-2028. Contributions to these accounts would not be tax deductible, but the account would grow tax-free and distributions would also be tax-advantaged under certain circumstances. These accounts would be as restrictive as 529s (or more) but only offer the tax advantages of an UTMA account, so aside from the free $1,000 for new babies, there may not be a strong case for most parents to use them. We will do a separate post comparing these new accounts to 529s and UTMAs once the details are firm.
Again, these changes are not yet set in stone. We will continue to monitor the proposed changes and alert you to anything that we think you will want to know. We hope that the law (whatever it ends up being) is finalized early enough in the year to give us time for updated tax planning with you.
Read more:
About the OBBA: https://taxfoundation.org/research/all/federal/big-beautiful-bill-house-gop-tax-plan/
About MAGA accounts: https://www.kiplinger.com/taxes/gop-proposes-maga-savings-accounts
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