H.R.1, The One Big Beautiful Bill Act (OBBBA), was passed by the House on July 3rd and signed into law by President Trump on July 4, 2025. The final signed bill was 870 pages long and created sweeping changes across the tax code and both social and governmental policies. This paper focuses on the tax law changes that affect individuals and small businesses.
Income Taxation
The lower income tax rates created under the Tax Cuts and Jobs Act (TCJA) of 2017 that were set to expire in 2026 will continue beyond this year and become permanent (as adjusted for inflation).
The law increases the current standard deduction by $750 for Single filers and $1,500 for those Married Filing Jointly (as adjusted for inflation) and makes higher amounts permanent.
Historically, charitable deductions have only been available for those taxpayers who itemize. However, starting in 2026, taxpayers who do not itemize can take a charitable deduction of $1,000 for Single filers and $2,000 for those who are Married Filing Jointly. The donation must be made in cash and is not available for gifts to donor advised funds or private foundations. This new provision is a permanent change.
For taxpayers that itemize, cash contributions will continue to be deductible up to 60% of their Adjusted Gross Income (AGI), but starting in 2026 only contributions that exceed 0.5% of AGI will qualify for a deduction.
Starting in 2027, a tax credit of up to $1,700 is now available for cash donations to approved scholarship-granting organizations. Of course, any donation that generates a credit cannot also be claimed as a charitable deduction.
The child tax credit will permanently increase from $2,000 to $2,200 per child (as adjusted for inflation) but will require both the child and at least one parent to have a Social Security Number.
New “Trump Accounts” will provide automatic enrollment with a government funded $1,000 for each baby born in the U.S. before Jan 1, 2029. The funds must be invested in a qualified index fund. Parents can contribute up to $5,000 per year into the account (as adjusted for inflation). Employers of parents can contribute a tax-free amount of up to $2,500 towards the annual limit. Excess contributions over the $5,000 annual limit must be removed and the earnings on those excess contributions are taxed at 100%. The accounts cannot be accessed until the child reaches age 18, then the accounts are taxed similar to IRAs.
For taxpayers age 65 and older there is a new $6,000 “bonus” deduction that is in addition to the current 65 and over deduction of $1,500 for Single filers or $2,000 for those Married, Filing Jointly. This deduction is meant to reduce the effects of Social Security Benefit taxation. The deduction is phased out at Modified Adjusted Gross Income (MAGI) of $75,000 - $175,000 for Single filers and $150,000 - $250,000 for those Married Filing Jointly. Normally, deductions are considered “Above-the Line”, meaning you do not need to itemize deductions to receive it (like the student loan interest) or “Below-the-Line” deductions that can only be utilized if you itemize deductions (like home mortgage interest). However, this new bonus deduction is like other newer deductions that can be claimed as either an increase to the taxpayers’ itemized deductions or on top of the standard deduction. This provision will continue through 2028.
A new above-the-line deduction of up to $25,000 for tips and up to $12,500 for overtime pay will become available through 2028. Both deductions will be subject to phaseouts. For Single filers, the MAGI phaseout begins at $150,000 Married Filing Jointly, the phaseout is $300,000. The value of the deduction is reduced by $100 for every $1,000 of MAGI above these thresholds. State, local and FICA taxes would still apply.
The law created a new tax deduction of up to $10,000 for interest on a loan to that was used to purchase an “American Made” automobile (one whose final assembly is in the United States). The deduction applies to automobiles that were made between 2025 and 2028 and are subject to phaseouts. For Single filers, the phaseout begins at $100,000 of AGI and for Married filers, the phaseout begins at $200,000 of AGI. For every $1,000 of AGI above the phaseout, the deductible loan interest would be reduced by $200.
The State and Local Tax (SALT) deduction will increase from $10,000 to $40,000, beginning in 2025 and will increase by 1% annually through 2029. For taxpayers whose MAGI exceeds $500,000, the deduction will be reduced by 30% of the excess MAGI over the threshold (but not below $10,000). The cap will revert to $10,000 in 2030. Interestingly, the workaround to the SALT limitation that many states adopted, called the Pass-Through Entity Tax (PTET), which shifts state tax liability from the individual owner to a business entity, thereby avoiding the individual deduction limitations, was not affected by OBBBA. However, some states’ PTET provisions are scheduled to sunset on Dec 31, 2025, so the state would have to extend it to still be viable for high earners.
The Affordable Care Act (ACA) provides premium tax credits for lower income individuals. OBBBA limits ACA tax credits for certain non-citizens.
Opportunity Zones are economically distressed communities in the U.S. Qualified Opportunity Funds invest in Opportunity Zones so that investors can receive certain tax benefits including avoiding capital gains tax on the eventual sale of the property if held for minimum number of years. The law creates a new Opportunity Zone program starting in 2027with investments with other enhancements. Opportunity Zones will then be created every ten years indefinitely. Previous Opportunity Zone investments will not be able to be rolled over to the new program.
OBBBA eliminates tax credits for Electric Vehicles (EVs), EV charging equipment and energy efficient Heating Ventilation and Cooling (HVAC) Systems.
College Education
The new law lowers limits on the amount of some government student loans available to graduate students, professional students, part time students and parents (PLUS loans). It also places restrictions on student loan deferments and forbearances. Student aid eligibility, however, is adjusted so that it does not include certain family-owned farms and businesses, making aid more likely for these families.
Student Loan income-driven repayment plans are eliminated, leaving the Standard Repayment Plan and a new Repayment Assistance Plan that allows for loan forgiveness after 360 qualifying payments for low-income borrowers.
Health Savings Accounts
Health Savings Accounts (HSAs) can only be funded if the taxpayer has a “High-Deductible Health Plan (HDHP), which has specific minimum deductibles and out of pocket maximums. The law expands the definition of HDHPs to include ACA Bronze and Catastrophic plans, even if they would not otherwise qualify as a HDHP.
Fitness expenses, including gym memberships, will now be considered qualified HSA expenses, eligible for reimbursement.
Estate & Gift Taxation
Each U.S. Citizen can pass up to $13,990,000 ($27,980,000 for a married couple) to their heirs estate or gift tax free. This amount was scheduled to drop to approximately $7 million ($14 million for a married couple) after December 2025. This amount is increased to $15 million ($30 million for a married couple) starting January 2026 (as indexed).
Business Owners
- 179 of the Internal Revenue Code allows a business owner to immediately expense qualifying equipment and property in the year of purchase rather than depreciating them over several years. The §179 limits are increased to $2.5 million and phaseouts are increased to $4.0 million as adjusted for inflation.
100% Bonus Depreciation is Restored until 2030. This provision allows the immediate expensing of qualifying depreciable property like machinery rather than having to depreciate it over several years.
- 199A Qualified Business Income (QBI) is a 20% business deduction for qualifying pass-through entities (Sole Proprietors, LLCs, S-Corporations, and Partnerships) that is in addition to all other expenses the business incurs. It was meant to “level the playing field” with large Corporations that are taxed at a maximum of 21%. The deduction was scheduled to be eliminated in 2026 but has now become permanent.
The new law lessens restrictions on the tax-free gain from the sale of §1202 Qualified Small Business Stock and increases the maximum tax-free gain on the transaction.
The One Big Beautiful Bill Act (OBBBA) marks the most significant tax law change since the 2017 Tax Cuts and Jobs Act (TCJA). It makes several TCJA provisions permanent and enhances others. Many aspects of tax legislation can be interpreted in various ways and might have unforeseen consequences, necessitating further clarification from the IRS.
Resources:
https://www.congress.gov/bill/119th-congress/house-bill/1/text
