RD’s Notes: OBBB Breakdown

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Clients and friends,

As we addressed in the email announcing this blog post, this is to help make some sense out of the One Big Beautiful Bill (OBBB) that was signed into law in the beginning of July. The legislation passed largely on party lines, and includes numerous controversial provisions, including its significant price tag.

This post is designed to address some of the components related to tax law. We are currently combing through the bill and have already attended a handful of seminars given by leading tax research firms that we have been utilizing for the vast majority of our years in business. There is still much to be learned, but we will be covering the things that stood out during this initial phase of research.

This is therefore a good summary of what we felt were elements most likely to apply to our clients.

Primarily, the bill largely permanently extends the Tax Cuts and Jobs Act (TCJA), the bill signed in December 2017 which drastically changed income tax law beginning in 2018. Most of that bill’s tax changes had been scheduled to expire on December 31, 2025.

Importantly, when we refer to “permanent” in tax law, this is not a guarantee for all future years; rather, it will take a further act of Congress to change or eliminate the provisions in question. We’ll touch on some of those now-permanent elements in more detail below, as well as address brand new items added by the bill. Of note, many of the changes discussed below are impactful for tax year 2025 – in other words, they take effect immediately, rather than being delayed to 2026.

Personal Tax Changes:

Tax brackets/rates:

  • The changes to rates and tax brackets initiated in 2018 are made permanent.

Income related changes:

  • Tip income of up to $25,000 is not taxable from 2025 through 2028, phasing out for income over $150k ($300k married).
  • Overtime income of up to $12,500 ($25,000 married) is not taxable from 2025 through 2028, phasing out for income over $150k ($300k married).

Standard deduction:

  • The increased amount allowable for standard deductions under TCJA continues, and in fact is slightly increased for 2025 and beyond.

Senior tax deduction:

  • In lieu of making any direct change to taxability of Social Security benefits, seniors (age 65+) receive an additional deduction of up to $6,000 per person ($12,000 if both spouses are 65+) for years 2025 through 2028. This will phase out at higher income levels ($75k+ single / $150k+ married).

Auto interest:

  • A temporary deduction of up to $10,000 of interest paid on car loans is allowed for tax years 2025-2028. The deduction applies only to new vehicle loans, on cars purchased in 2025 or later. Vehicle will need to have been manufactured in the United States. The deduction will be above-the-line, so it will be available to both itemizers and non-itemizers.

Itemized deductions:

  • Changes to itemized personal deductions initiated in 2018 are made permanent.

State and local taxes:

  • The federal deduction for “SALT” continues to be limited. these deductions – which include real estate taxes, state income taxes paid, and DMV fees – had been fully deductible through 2017, but the deduction decreased to a maximum of $10,000 for most filing statuses in 2018. This is made permanent, but with a short-term expansion of the deduction from $10,000 to $40,000 for 2025 through 2029 (indexed for inflation for 2027-2029). Importantly, this expansion is subject to an income limitation, so many of the taxpayers this will impact will not be able to fully enjoy the benefits.

Mortgage Interest:

  • Continues to be subject to lower thresholds for allowable debt ($750,000 rather than $1 million), and the federal deduction for equity debt remains eliminated.

Miscellaneous deductions:

  • The elimination of deductions for several common expenditures remains in place. This includes investment management fees, tax advisor fees (sorry), and unreimbursed employment expenses (such as home offices). However, educator expenses exceeding the above-the-line deduction can now be claimed as an itemized deduction.

Contributions to charities:

  • The OBBB creates a permanent additional above-the-line deduction of up to $1,000 ($2,000 married) for taxpayers who claim the standard deduction, beginning in 2026.
  • However, for itemizers, smaller donations will be less likely to be deductible, as a new floor of 0.5% of gross income will apply (in other words, if your gross income is $100,000, the first $500 of donations will not be allowed if you itemize), also beginning in 2026.

Limitation on itemized deductions:

  • An overall limitation will apply such that taxpayers in the top bracket will only be able to claim deductions up to 35% against ordinary income (or 19% against capital gains).

Green Energy changes:

  • Hybrid/electric vehicles:
    • Vehicles acquired after September 2025 will no longer be able to claim tax credits.
  • Home energy credits:
    • Energy credits for home improvements (new windows, HVAC, insulation, solar equipment) are repealed as of the end of 2025.

Alternative Minimum Tax:

  • The increased AMT exemption is made permanent, but the phase out range is accelerated beginning in 2026. This will result in more high income taxpayers owing AMT tax.

Children:

  • The expanded child tax credit had been set to expire after 2025, but is now increased to $2,200 as of 2025 (and indexed for inflation thereafter) and made permanent.
  • 529 plans will be able to be used for more purposes, including an increase from $10,000 to $20,000 to the amount allowed for private primary and secondary school tuition.
  • Lower income taxpayers will be able to claim higher credits for child and dependent care, due to changes to the phase-out ranges.

Estate tax:

  • The increased thresholds allowed for estate and gift taxes are made permanent, and increased slightly to $15 million per person as of 2026.

Business Tax changes

Depreciation:

  • Numerous depreciation changes are made, which include:
  • Increase to the phase-out threshold for section 179 deductions
  • The creation of a short-term expensing deduction allowed for qualifying structures (specific to manufacturing/production)
  • Permanent restoration of the allowance for 100% bonus depreciation, which will probably be the most impactful. This is oddly only retroactive to assets placed into service on or after January 19, 2025.

Qualified Business Income:

  • The QBI deduction is made permanent. This allows an above-the-line deduction of up to 20% of profits from small business and some rental activities. The phase out range also increases to 2026.

Pass Through Entity elective taxes:

  • Many states, including California, had instituted special programs to allow business entities (specifically partnerships and S-corporations) to pay their owners personal state income taxes, thereby converting these to business deductions. This “PTE” deductions provide significant tax benefits to owners of these types of businesses. At one point the Senate had proposed to eliminate such state programs, but to our understanding, the final version of the bill does not modify these rules. However the version of the law in force for Californians does expire at the end of 2025, so the state legislature will need to pass legislation to extend this benefit for state taxpayers.

Forms 1099:

  • Forms 1099-MISC / -NEC: As of 2025, 1099 series returns go from a $600 filing threshold to $2,000.
  • Forms 1099-K, which had been scheduled to be subject to much lower limits, go back to much higher thresholds (over two hundred transactions and over $20,000); this will alleviate any reporting for nearly all users of payment processing applications like CashApp, Paypal, or Venmo.

Research & Development:

  • Changes are made to R&D provisions to allow small businesses to claim deductions more readily.

As you can clearly see, this was a far-reaching bill, and we have just scratched the surface, especially with regard to the business provisions. Due both to the fact that we are still reviewing these provisions, and an expectation of numerous questions, we regret that we will not be able to answer “simple questions” at this time. However we do encourage those interested to reach out to schedule tax consultations to discuss the applicable components of this bill. These meetings are available through August, and then again will resume in November, December and January of 2026.

We expect that we will be following up in the coming months with additional updates as we learn more about all of the components of the bill. As always, we appreciate your time and attention, and for trusting us with your business.

– The Staff of RD’s Tax Strategies, Inc.