The Tax Cuts and Jobs Act (TCJA) of December 2017 reshaped the federal tax code, but many of its features were set to expire on December 31st, 2025. As that sunset approached, taxpayers and advisors braced for a return to pre-2018 rules. During the 2024 campaign, President Trump pledged to preserve low tax rates and expand key deductions. Six months into his term, Congress acted: the House Ways and Means Committee released a draft bill in May 2025, and, after weeks of negotiation, lawmakers passed the One Big Beautiful Bill Act (OBBBA), which the President signed on July 4th.

The sections below summarize the new law’s most important changes for individuals and families.

Income Tax Brackets

The TCJA lowered individual income-tax rates starting in 2018, but those cuts were scheduled to expire after 2025. OBBBA removes that sunset by permanently locking in the current seven-bracket structure: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Beginning in 2026, the 10% and 12% brackets also receive an extra inflation adjustment, allowing a slightly larger slice of income to be taxed at those lowest rates before it moves up to 22%.

Standard Deduction Increases and New Bonus Standard Deduction

The Tax Cuts and Jobs Act (TCJA) doubled the standard deduction, but its higher amounts were set to expire after 2025. OBBBA makes those higher levels permanent and adds a modest increase for 2025:

• Single filers: $15,750 (up from the scheduled $15,000)
• Married filing jointly: $31,500 (up from $30,000)
  Both figures will be adjusted for inflation each year.

Extra help for taxpayers age 65 and older (2025 – 2028)

OBBBA layers a new $6,000 “Senior Bonus” deduction per eligible taxpayer on top of the long-standing age-65 add-on ($2,000 for single filers and $1,600 per spouse for joint filers).

• A married couple where both spouses are 65 or older in 2025 could claim:
  • Base standard deduction $31,500
  • Senior Bonus $12,000
  • Traditional age-65 add-on $3,200
  • Total: $46,700

Phaseout rules

The bonus begins to phase out once Modified Adjusted Gross Income (MAGI) exceeds $75,000 for single filers or $150,000 for joint filers. The reduction equals 6% of the income above the threshold. Notably, for married couples who are both over age 65, the phaseout simultaneously reduces both of their deductions. This means the deduction is completely phased out for taxpayers with MAGI over $175,000 for single filers and $250,000 for those filing jointly. For example, a joint MAGI of $170,000 is $20,000 over the limit, so the $12,000 bonus would be reduced by $2,400 ($1,200 per person), leaving $9,600.

Planning Opportunities

Many retirees experience an income gap between their retirement date and the start of Social Security and Required Minimum Distributions (RMDs). Given the larger standard deduction and the four-year Senior Bonus deduction, clients in this income gap should be mindful of generating capital gains from brokerage accounts and/or consider accelerating ordinary income through Roth IRA conversions.

For a married couple in the 22% marginal tax bracket, Roth IRA conversions may still make sense to hedge against the potential for higher future income and/or tax rates. To illustrate, suppose a couple at age 67 has a projected 2025 MAGI of $150,000 and did a $40,000 Roth IRA conversion to raise MAGI to $190,000. The Senior Bonus deduction would drop from $12,000 to $7,200, yet the effective tax on the converted dollars would still remain below 25%. Always weigh the potential benefits against Medicare IRMAA surcharges, the Net Investment Income Tax, and other income-based thresholds before acting. Lutz Financial can model these trade-offs and help decide whether harvesting gains or converting to Roth makes sense in your situation.

Social Security Still Taxed at the Federal Level

One misconception surrounding OBBBA pertained to Social Security taxation. Even though seniors age 65 and older will get substantial additional relief with the bonus deduction for the next four years, it doesn’t directly tie into Social Security in any way, and Social Security benefits will still be taxed on the Federal side, assuming a household’s provisional income is high enough. The bonus deduction will help those in middle-income ranges, but the income will still show up on 1040 filings. Nebraska, like many states over the last decade or so, repealed taxation on Social Security effective January 2024.

Itemized Deduction Updates

The TJCA reduced the amount of itemized deductions on Schedule A of the tax return. OBBBA has changed how these itemized deductions will look moving forward.

1. State and Local Taxes (SALT) Cap Changes

Few TCJA provisions drew more ire than the $10,000 cap on state and local tax (SALT) deductions. Homeowners in high-tax states lost thousands of dollars in write-offs for property and income taxes. OBBBA eases that constraint by lifting the cap to $40,000 for 2025. Both the cap and the income threshold described below rise 1% annually from 2026 to 2029, then the cap reverts to the original $10,000 in 2030 unless Congress takes further action.

Phase-down for higher incomes

• Where it starts: The larger cap begins to shrink when MAGI exceeds $500,000.
• How it works: Above that level, the allowable SALT deduction is reduced by 30% of every dollar of MAGI over the threshold.
  • Example: $100,000 of income above the limit cuts the cap by $30,000.
• Floor: No matter how high income climbs, the deduction can never fall below $10,000.

Planning implications

Households in the $500k-$600k MAGI zone effectively face a higher marginal rate because each extra dollar both increases tax and erodes the SALT deduction. Tactics that lower AGI, such as maxing out pre-tax retirement plan and HSA contributions, can preserve more of the deduction.

Pass-through workaround still alive

Lawmakers considered, but ultimately dropped, rules that would have curbed the Pass-Through Entity Tax (PTET) workaround. Partnerships and S-Corps can therefore continue paying state tax at the entity level, securing a full federal deduction that bypasses the SALT cap. For many high-earning owners, PTET may still beat the new $40,000 limit (especially once the phase-down or 2030 reversion to $10k applies).

2. Mortgage Indebtedness

OBBBA maintains the TCJA’s $750,000 limit on mortgage debt eligible for the mortgage interest itemized deduction. Additionally, beginning in 2026, it will reintroduce the ability to deduct PMI for those who owe more than 80% of their home’s value.

3. Charitable Contributions’ New 0.5% AGI Floor

Charitable contributions have been subject to AGI limitations for a long time. These current caps will remain unchanged:

Beginning in 2026, OBBBA layers on a 0.5% AGI floor: the first one-half percent of AGI you give is not deductible. Only the portion above that floor may be claimed, subject to the existing 60% / 30% / 20% limits.

Example – A couple with $1 million of AGI in 2026 must ignore the first $5,000 of gifts (0.5% × $1 million). If they donate $25,000 in cash to a public charity, only $20,000 is deductible.

Ordering rules

When multiple types of gifts are made, the floor applies in this order:

1. Appreciated property given to non-public charities
2. Appreciated property (FMV) given to public charities
3. Cash gifts to public charities

This prioritization means the least-favored gifts lose their deductibility first.

Carry-forward unchanged

Any amount disallowed, whether by the 0.5% floor or the traditional AGI caps, can still be carried forward for up to five additional tax years.

Planning takeaway

Because the floor begins January 1st, 2026, donors who plan sizable gifts of appreciated securities (or cash) may want to accelerate them into 2025 to secure a full deduction before the new hurdle takes effect. Donor-advised funds may provide a good vehicle for accomplishing this.

4. Itemized Deduction Limitations for 37% Bracket

Prior to TCJA, high-income earners were subject to the Pease limitations, which reduced taxpayers’ itemized deductions by 3% of their AGI above a certain threshold. TCJA repealed this limitation temporarily, and OBBBA permanently repeals this limitation.

Starting in 2026, taxpayers in the 37% bracket must shave 2/37 of the lesser of (a) their itemized deductions or (b) their taxable income above the 37% breakpoint. The cap effectively limits the value of deductions to the 35% rate.

Section 199A Deduction Extended

Qualified Business Income (QBI) that became available with TCJA for pass-through business owners of sole proprietorships, partnerships, or S Corporations was extended with OBBBA. The deduction remains at up to 20% of QBI for pass-through entities or total taxable income after subtracting net capital gains, whichever is less. Income phaseout ranges above a certain level were increased, but this was generally a win for small business owners, although not as generous as the House’s original bill, which proposed an increase to 23%.

New Below-The-Line Deductions

Above-the-line deductions are taken before calculating your adjusted gross income (AGI). They reduce AGI itself, which can help you qualify for other tax benefits or avoid income-based phaseouts, such as the taxation of Social Security benefits, Medicare premium surcharges, and the child tax credit phaseout. Common examples include pre-tax 401(k) contributions, HSA contributions, and the self-employment tax deduction.

Below-the-line deductions are taken after AGI is calculated. They don’t lower AGI, but they can still reduce taxable income. The new deductions in the tax bill, such as the “senior bonus” deduction for those age 65 and older, are below-the-line deductions, and they can be claimed whether you itemize or take the standard deduction. The others are below:

1. Charitable Contribution for Non-Itemizers

With the increased standard deduction amount, especially for seniors, many people may still file the standard deduction even with the $40,000 SALT cap. OBBBA will bring back for the first time since the COVID-19 pandemic the ability for people who don’t itemize to take a deduction on some charitable contributions. Starting in 2026, single filers can claim a $1,000 charitable deduction and MFJ filers $2,000 for cash donations to qualifying charitable organizations.

2. Qualified Tip Deduction

Tips will be able to be deducted for up to $25,000. This needs to be occupations that normally receive tips and were receiving tips prior to 2025. The deduction is phased out for single filers at $150,000 of AGI and $300,000 AGI for joint filers.

3. Overtime Deduction

Beginning in 2026, individuals who work overtime will be allowed to deduct up to $12,500 for single filers and $25,000 for joint filers, subject to the same income phaseout ranges as the tip deduction. Only the portion of the income associated with the overtime pay or above the base rate is eligible for this deduction.

4. New Auto Loan Interest Deduction

New auto loans entered into after December 31st, 2024, are now available for an interest deduction. This would include cars, SUVs, vans, and trucks that are assembled in the United States. The amount of interest is capped at $10,000 per year and is phased out between $100,000-$149,000 of AGI for single filers and $200,000-$249,000 of AGI for joint filers.

These new below-the-line tax deductions would probably stand to benefit younger individuals, middle-class individuals, or even those in retirement who are able to manage income. Building a taxable brokerage account and creating a tax-efficient withdrawal strategy for those first several years of retirement would allow individuals to keep MAGI lower to potentially qualify for some of these new deductions.

Lifetime Gift/Estate Exemption Increased

OBBBA makes a key change to the lifetime gift and estate tax exemption. Without the new law, the exemption would have fallen by half when the TCJA sunsets at the end of 2025. Instead, OBBBA sets the 2026 exemption at $15 million per person (up from $13.99 million currently) and indexes that figure for inflation each year. For perspective, the exemption was only $1.5 million two decades ago, and estate-tax minimization dominated many wealth-transfer plans.

The higher exemption gives ultra-high-net-worth families more breathing room to implement sophisticated strategies, but it is no guarantee of permanent relief. A future Congress could sharply reduce the threshold, generating significant new tax revenue. Households with potential taxable estates of roughly $15 million to $30 million or more should work with their estate planner and advisor now to explore ways to move assets out of the estate while retaining flexibility during their lifetime.

Higher Child Tax Credit Here to Stay

The Child Tax Credit would have dropped to $1,000 per qualifying child when the TCJA sunsets after 2025. OBBBA reverses that cut by:

1. Raising the credit to $2,200 per child for 2025, and
2. Indexing it for inflation starting in 2026.

Eligibility remains the same: a qualifying child must be under age 17 at year-end, and the credit still phases out once modified AGI exceeds $200,000 for single filers or $400,000 for joint filers.

Expanded Expense Eligibility for 529s

We will write an updated blog on 529 plans in the coming months. They are incredible vehicles for parents and grandparents to save for their children’s future education costs.

OBBBA expanded the list of expenses for children K-12 that qualify for tax-free distributions. Previously, only tuition of up to $10,000 was allowed for K-12 students. Now, expenses including textbooks, laptops, iPads, online materials, tutors, standardized tests, AP classes, and dual enrollment classes will qualify. This effectively brings qualified use to children in public grade school through public high school. OBBBA also increases the maximum limit for these expenses from $10,000 to $20,000 per year, which tends to cover a private high school in the Omaha area.

Interestingly, Nebraska has not followed Federal law on the K-12 qualified expense definition. Legislation may be in the works to update this so that by 2029, these expenses for K-12 will match the Federal law and be allowed tax-free and without penalty.

Children’s “Trump Accounts”: open questions and practical limits

These new accounts can be opened for a child any time before the calendar year they turn 18. A key benefit is that there are no “earned income” requirements, unlike other account options, such as custodial Roth IRAs. Contributions for these accounts may begin once Treasury finalizes the rules, projected for July 2026.

Key constraints to keep in mind:

• Lock-up period. No distributions are allowed until the beneficiary turns 18. After that, the account works much like a traditional IRA: withdrawals before age 59½ are subject to ordinary income tax and a 10 percent early-distribution penalty.
• Investment menu. Assets must stay in broadly diversified U.S. equity index funds, as individual stocks are not allowed.
• Government seed money. The bill authorizes a $1,000 federal credit for children born between 2025 and 2027; however, the mechanics of how the funds are deposited and which custodians will support the product are still unclear.

Because brokerage firms (Schwab, Fidelity, and others) have not yet announced platforms for these accounts, their real-world availability and administration remain uncertain. While parents and grandparents looking to give their children a head start on retirement may find them attractive once details are settled, there are still quite a few questions and potential drawbacks associated with the narrow scope of the accounts.

Clean Energy Credits Going Away

The Inflation Reduction Act of 2022 introduced generous federal tax credits for clean energy purchases, including electric vehicles, home charging equipment, energy-efficient upgrades, solar panels, small-scale wind systems, and more. OBBBA will be eliminating these credits within the next year.

Timeline for the End of Different Credits:

• 09/30/2025: Electric-vehicle credit
• 12/31/2025: Most residential clean-energy credits (solar, heat pumps, insulation, windows, etc.)
• 06/30/2026: EV charger credit

With these cut-offs on the horizon, demand for EVs and rooftop solar could spike, creating order backlogs. If you’re planning to purchase an electric vehicle or install solar panels, acting sooner rather than later can help you secure the credit and avoid year-end bottlenecks.

Bonus Depreciation of Business Property

OBBBA permanently reinstates 100 percent bonus depreciation for most qualified property acquired and placed in service after January 19th, 2025. That means a business can expense the full cost of new machinery, technology, vehicles, furniture, and other assets with a 20-year (or shorter) recovery period in the year the asset goes into service—an immediate cash-flow boost for capital-intensive companies and smaller firms alike.

In Summary

OBBBA, like the TCJA before it, touches almost every corner of the tax code. Many of its provisions are designed to last, though any future Congress could choose to revise them. Because the law passed mid-year, you still have time to meet with your CPA and advisory team, identify the rules that affect you, and build a clear plan for 2025 and beyond. Lutz Financial stands ready to walk through the details and help you make the most of these new opportunities in an always-changing tax landscape.