Breaking Down the One Big Beautiful Bill

On July 4th, President Trump signed the One Big Beautiful Bill Act (OBBBA).  Although beauty is in the eye of the beholder, it was certainly big.  The bill included provisions that included immigration and border security, Medicaid funding, energy policies, increasing the debt ceiling, military funding, and income taxes.  Part of our job is to keep you updated on changes to income taxes so we can manage that expense and keep more money in your pocket.  Let's review how this bill may affect your income taxes.

Tax Rates- In President Trump's first term, he signed the Tax Cuts and Jobs Act of 2017 (TCJA), which made many temporary changes to the tax code set to expire after the 2025 tax year. 

Many of the provisions in the recent legislation simply extend those changes instead of reverting back to the 2016 code.  The biggest of these extensions is keeping the current tax rates and brackets with the usual inflation adjustments to the various tax brackets.  To review, the current (and now future) tax rates are 10%, 12%, 22%, 24%, 35%, and 37%.  These rates have been made permanent, meaning they are not set to sunset or expire at a specific year in the future.  Of course, a future congress could change these rates in either direction if it chooses to.

📋 Tax Tactic – These rates are historically low and are more likely to move up rather than down by a future tax regime.  This can create opportunities like partial Roth conversions to accelerate income and strategically fill up the lower tax brackets.

Standard Deduction - In 2017, the TCJA doubled the standard deduction, and the higher standard deduction amounts have been increased slightly for 2025 and made permanent with inflation adjustments to be made each year.  This year's new standard deduction amounts are $15,750 for single, $23,625 for head of household, and $31,500 for married filing jointly.  In addition, taxpayers who are 65 or older receive an additional standard deduction of $1,600 per person.  So, a married couple 65 or older would have a standard deduction of $34,700.

The doubling of the standard deduction in 2017 led to many fewer taxpayers itemizing their deductions.  This will likely continue to be the case as these higher figures are not set to sunset.

Enhanced Senior Deduction - For tax years 2025 - 2028, taxpayers aged 65 and older may be eligible to take an additional deduction of up to $6,000 per person. This deduction begins to phase out at Modified Adjusted Gross Income (MAGI) of $75,000 ($150,000 for Joint Filers) and phases out entirely at $175,000 ($250,000 for Joint Filers).

This new deduction, combined with an increase to the standard deduction, is projected to result in 88% of Social Security recipients paying no federal tax on benefits, up from 64% now.

Charitable Deductions - Beginning in 2026, taxpayers who take the standard deduction will continue to be eligible to deduct $1,000 if single or $2,000 if married for their charitable contributions. This provision has been made permanent.On the other hand, those who claim their charitable contributions as itemized deductions will see their deduction reduced.  Starting in 2026, itemized charitable deductions will be reduced by 0.5% of the taxpayer's adjusted gross income (AGI).  For example, a taxpayer with income of $200,000 and charitable contributions of $10,000 will only be eligible to deduct $9,000 of their donations.

$10,000 – (200,000 x 0.5%) = $9,000.

📋 Tax Tactic – The combination of an increased standard deduction with the Enhanced Senior Deduction and the 0.5% income floor on charitable deductions only makes the Qualified Charitable Distribution (QCD) an even more tax-advantaged way to make charitable donations.  If you are at least 70 ½ years old with a Traditional IRA, this should be your first choice for your charitable giving, even if you haven't reached the RMD age of 73.

State and Local Tax Deduction - In 2017, the deduction for state and local taxes (SALT) was limited to $10,000.  The new bill will increase the limit to $40,000 for tax years 2025-2029. In 2030, the deduction is scheduled to revert back to the $10,000 limit. 

This deduction is subject to a phaseout in which the deduction is reduced for higher-income taxpayers.  The phaseout range is from $500k-$600k for all filers except married filing separately.  However, taxpayers who have been "phased out" will still be eligible for the $10,000 base deduction.

Child Tax Credit - This credit will be increased for the 2025 tax year to $2,200 per eligible child, up from $2,000.  This credit is subject to income phaseouts, which remain unchanged from previous years.

Estate and Gift Taxes - Under the TCJA of 2017, the estate tax exemption was increased to $11 million per person and increased with inflation to nearly $14 million this year.  This is the amount of assets that could be transferred to the heirs, estate-tax free, upon death.  Married couples could combine their two exemptions for a total of $22 million ($28 million in 2025).  However, this part of the tax code was scheduled to sunset after this year and be reduced to roughly $7 million per person.  OBBBA increases the exemption to $15 million ($30 million for a married couple) in 2026, includes an inflation adjustment in the following years, and makes the higher amount permanent.  The gift tax exemption remains tied to the estate tax exemption.  Ultimately, you can gift $15 million either in your life or upon death.  The bigger challenge at this point is to accumulate $15 million to give away! 

Clean Energy Credits - Although the OBBBA contains many extensions of tax-savings deductions and tax rates, a notable exception is the expiration of clean energy credits.  The Residential Clean Energy Credit for solar, geothermal, wind, and battery storage expires at the end of 2025, and the projects must be completed by that deadline.  The Energy Efficient Home Improvement Credit for heat pumps, windows, and insulation also expires at the end of the year. 

As for electric vehicles, the Clean Vehicle Credit for purchasing a new EV and the Previously Owned Clean Vehicle Credit expire on September 30, 2025.  The Alternative Fuel Refueling Property Credit for installing an EV charging station in your home expires on June 30, 2026.

📋 Tax Tactic – If any of these purchases are part of your long-term plan, they need to be moved into your short-term plan.  These credits are going away quickly, and some of the home improvements need to be completed by the end of the year.

Big Picture – As a financial advisor, I am always in favor of lower tax rates and more deductions and credits.  I am also in favor of clear expectations of what the tax code will be in the coming years.  From that perspective, the One Big Beautiful Bill Act keeps the consistency of the tax code we have worked with since 2018 by making many elements permanent.  On the other hand, continuing with lower rates will add to our deficit compared to letting the tax cuts of 2017 expire.  As our national debt continues to climb, not just in dollars but also as a percentage of our GDP, we will need to make adjustments at some point.  My best guess is that those adjustments will come as a combination of reducing spending and increasing tax revenue.  This tax bill allows us to take advantage of lower tax rates for a time.