On July 4, President Donald Trump signed the One Big Beautiful Bill Act (“OBBB”) into law after the Senate and House passed the bill on July 1 and July 3, respectfully.
The OBBB includes numerous tax changes, including permanent and limited modification of many tax provisions under the Tax Cuts and Jobs Act of 2017 (“TCJA”) that were set to expire after 2025, new provisions promised by President Trump during his 2024 campaign, elimination or modification of most green energy provisions, and dozens of other changes affecting individuals and businesses.
This is the second in a three-part blog series on how the bill will affect individual and business tax provisions.
Individual tax provisions
The OBBB essentially preserves the TCJA’s tax structure relating to individual taxpayers on a permanent basis.
New Provisions (Individuals)
- No tax on tips:The OBBB temporarily allows of a deduction of up to $25,000 for qualified tips. The deduction will phase out at a rate of 10 percent of the individual’s modified adjusted gross income (AGI) that exceeds $150,000 ($300,000 for married taxpayers filing jointly). Qualified tips must be received from a job “customarily and regularly” associated with tips. The deduction will be available to individual taxpayers regardless of whether they itemize and will be available to both employees and independent contractors. Married taxpayers will need to file jointly to take the deduction. The deduction will be available from 2025 through 2028.
- No tax on overtime pay: The OBBB temporarily allows for a maximum deduction of $12,500 ($25,000 for joint filers) for qualified overtime compensation per year. The deduction will phase out at a rate of 10 percent of the individual’s modified adjusted gross income (AGI) that exceeds $150,000 ($300,000 for married taxpayers filing jointly). Married taxpayers must file jointly to take the overtime pay deduction. The deduction will be available from 2025 through 2028.
- Temporary deduction for seniors: A taxpayer and/or spouse, age 65 or older, will be eligible for an additional deduction of up to $6,000. The deduction is reduced by 6 percent of modified AGI that exceeds $75,000 ($150,000 for a joint return). The deduction will first be allowed in 2025 and will sunset after 2028.
- Deduction of car loan interest: The OBBB allows a deduction of qualifying vehicle loan interest paid from 2025 through 2028. The deduction will be capped at $10,000 per year and will be phased out beginning at $100,000 of modified AGI ($200,000 for joint returns), with full phase-out at $150,000 ($250,000 for a joint return). The deduction will be available even if a taxpayer does not itemize deductions. The deduction will only be available with respect to a new personal vehicle purchased after 2024 that is a car, minivan, van, SUV, pickup truck, or motorcycle for which final assembly occurred in the United States.
- Expansion of Section 1202 qualified small business stock (QSBS) exclusion: Section 1202 permits gain from the sale of certain QSBS held in a C corporation to be excluded from income if held for at least five years. To be a qualifying small business, the corporation must have less than $50 million in tax basis in its assets when the stock is issued to a shareholder, in addition to other requirements. The maximum exclusion for each shareholder is the greater of $10 million or 10 times the shareholder’s basis in their stock. The OBBB significantly expands this provision by making three key changes.
- It phases in the exclusion so that: a 50 percent exclusion will be available for stock held at least three years; a 75 percent exclusion will be available for stock held at least four years; and the full 100 percent exclusion will still exist at five years.
- The $10 million minimum exclusion is increased to $15 million.
- The $50 million asset threshold is increased to $75 million.
- Adoption credit: Beginning in 2025, the OBBB will allow up to $5,000 of the adoption credit to be refundable. Under prior tax law, the credit was not refundable.
- Dependent care assistance: An employee is currently permitted to exclude from taxable income up to $5,000 ($2,500 in the case of separate returns) of dependent care assistance provided by an employer. The OBBB will increase this amount to $7,500 ($3,750 in the case of separate returns) beginning in 2026.
- Child and dependent care credit: Individuals may claim a credit for childcare incurred for dependents that allows them to seek or maintain employment. The OBBB increases the maximum credit rate from 35 percent to 50 percent of qualifying expenses (a maximum of $3,000 for one qualifying individual and up to $6,000 for multiple qualifying individuals) and also increases the phase-outs based on AGI, which will enhance the benefit for those making less than $105,000 ($210,000 for married filers). These changes are effective in 2026.
- Charitable contributions for non-itemizers: The OBBB allows for a charitable contribution deduction for non-itemizers beginning in 2026 of up to $2,000 for joint filers ($1,000 for all others). This is a permanent provision.
- Charitable contribution for itemizers: The OBBB imposes a 0.5 percent floor on deductions to charitable contributions for those who choose to itemize. This change, effective beginning with the 2026 tax year, will limit the deduction by allowing it only to the extent the aggregate value of charitable contribution exceeds 0.5 percent of that individual’s AGI.
- Credit for contributions to scholarship granting organizations: The OBBB provides a tax credit for charitable contributions to scholarship granting organizations (“SGO”), which are typically affiliated with private elementary and secondary schools. The credit is limited to $1,700, and any unused credit can be carried forward for five years. If the taxpayer receives a state tax credit for a donation to an SGO, the Federal credit is reduced to the extent of the state credit. These provisions will apply beginning in 2027.
- Expansion of 529 plans: Prior to the OBBB, 529 plan funds could only be used for higher education expenses and up to $10,000 of K–12 tuition. The OBBB expands the rules to allow 529 funds to be used for higher education expenses, K - 12 tuition, expenses for curriculum and curricular materials, books or other instructional materials, online educational materials, tutoring or educational classes outside the home, certain testing fees, fees for dual enrollment in an institution of higher education, certain educational therapies for students with disabilities, and qualified postsecondary credentialing expenses. These changes take effect for 529 plan distributions occurring after the enactment date of the OBBB. Additionally, beginning in 2026, the OBBB will increase the annual limitation of K-12 expenses eligible for payments from the 529 plan from $10,000 to $20,000.
- Trump accounts: The OBBB creates a new kind of tax-preferred savings account for beneficiaries under the age of 18. The accounts operate in a similar manner to individual retirement accounts except that contributions are not deductible, investments must meet specific criteria, contributions are capped at $5,000 per year (adjusted for inflation), and distributions are only allowed after the beneficiary turns 18. In addition, the OBBB creates a pilot program, upon election, that provides a $1,000 contribution into an account for a U.S. citizen born between 2025 and 2029.
Please check out our other OBBB blogs to learn more about business taxes and new provisions for individual taxes.
If you have any questions about how the OBBB may affect your individual or business taxes, please reach out to your Zinner & Co. Tax Team representative.
