The One Big Beautiful Bill Act (“OBBBA”) passed in July made a number of changes to the tax laws for individual taxpayers. Some of those laws go into effect immediately and should be taken into account for 2025 planning, while others have a delayed start date and are not effective until 2026 or even later. We will focus here on some provisions that could affect your planning this year.
One preliminary note – in this article, we will use the term AGI (adjusted gross income) in place of MAGI (modified adjusted gross income) for the sake of simplicity and readability. Although not the same, they are similar enough for our purposes here.
Charitable planning – Taxpayers who itemize deductions may want to consider making planned charitable gifts in 2025 rather than waiting. This could be a particularly good year to bunch charitable contributions or contribute to a Donor Advised Fund (DAF). Beginning in 2026, the deduction for charitable gifts will be subject to a 0.5% floor, meaning that a charitable gift can only be deducted to the extent it exceeds 0.5% of the taxpayer’s adjusted gross income (“AGI”). As a result, a taxpayer with an AGI of $200,000 who makes a $20,000 charitable contribution that is otherwise deductible would only be able to deduct $19,000. While there is a provision permitting that 0.5% to be carried over as a future deduction, its eventual deductibility would depend on the circumstances of the future donation.
In addition, beginning in 2026, taxpayers in the highest tax bracket (those with taxable incomes over $626,350 (single) or $751,600 (joint) will have their itemized deductions reduced by 2/37, effectively treating deductions of a 37% marginal taxpayer as if they had been made by a 35% taxpayer. For these reasons, it may make sense for those who are charitably inclined to make larger planned gifts in 2025 when neither of these limitations apply. Of course, it’s still crucial to consider the existing limitations on charitable deductions based on your own expected AGI, the nature of the donation, and the intended donee.
For taxpayers who don’t itemize and don’t usually get a deduction for charitable donations, 2026 will bring a new opportunity, with the ability to take a deduction of up to $1,000 ($2,000 for MFJ) on top of the standard deduction for gifts of cash to qualified charities.
SALT deduction – The deduction for state and local taxes (SALT), capped at $10,000 per person for the past several years, will rise to $40,000 for the years 2025-2029. This deduction phases down for taxpayers with AGI between $500,000 and $600,000 and settles at the current $10,000 for higher incomes. This is a steep drop-off and those who expect to have AGI within the phasedown range may want to talk to your accountant about possible ways to manage your income. The OBBBA did not disrupt the Pass-Through Entity Tax provisions (PTE taxes) that some states have instituted, so this method should continue to be available to taxpayers who have the ability to pay state taxes legally through a small business or partnership.
Expansion of 529 plan expenses – OBBBA significantly expanded the expenses that can be covered by 529 plan funds. In addition to tuition, these funds can now be used for many K-12 expenses for students in public, private or religious schools, including textbooks, instructional materials, online materials, tutoring outside the home, standardized tests, and educational therapies for students with disabilities. It also includes certain post-secondary credentialing programs, apprenticeships, and the like. For 2025, these expenses are limited to $10,000, increasing to $20,000 in 2026. Because much of the benefit of a 529 plan comes from long-term tax-free appreciation, using these funds for expenses of early education should be done only after careful consideration.
Repeal of Clean Energy Credits – OBBBA rolls back several tax credits aimed at encouraging “clean energy” investments. The credit for electric vehicles has ended but taxpayers may still be able to benefit from tax credits up to $1,000 for electric vehicle charging equipment installed at their personal residence before June 30, 2026; up to $2,500 for energy-efficient home improvements installed by Dec. 31, 2025; and up to 30% of the cost of solar panels, wind power, geothermal heat pumps, or fuel cell equipment paid for by Dec. 31, 2025.
Several new deductions aimed at fulfilling campaign promises are effective this year. These provisions are available regardless of whether you itemize and are generally effective for tax years 2025-2028. Because of income-related phaseouts, these deductions are likely to be of limited use to high income taxpayers.
- Deduction of $6,000 for taxpayers 65 and older ($12,000 for a couple if both are 65+). This deduction is fully phased out for taxpayers with AGI of $175,000 (single) and $250,000 (joint). Although not exempting Social Security payments from tax, this provision provides a significant tax benefit for taxpayers 65 and older.
- Deduction for up to $25,000 of qualified tip income. The tips must be from a type of job that has typically and customarily received tips and must be voluntary and determined by the customer. The IRS has recently put out a detailed list of jobs eligible for this treatment. The deduction has a gradual phase-out, beginning at $150,000 AGI (single) and $300,000 (joint).
- Deduction for qualified overtime compensation. This deduction of up to $12,500 for single filers, $25,000 for joint filers phases out at the same income levels as the tip deduction. It applies only to the marginal payment that exceeds an employee’s ordinary pay rate, not the entire payment for overtime work.
- Deduction for interest on new auto loans. This provision provides a deduction for interest on qualified loans taken after Dec. 31, 2024, for the purchase of new passenger vehicles for personal use, including new cars, vans, SUVs, pickup trucks, and motorcycles, assembled in the US. An existing loan refinanced after 2024 can qualify if it does not increase the loan balance. The deduction, which is limited to $10,000 in interest, begins to phase out at $100,000 AGI for single filers, $200,000 for joint filers, and is phased out completely for those with incomes above $149,000 single, $249,000 joint.
Estate and gift tax rules – The current historically high estate and gift tax exemption of $13,990,000 per person was scheduled to be cut in half with the expiration of the prior tax law at the end of 2025 but the OBBBA instead raised the exemption to $15,000,000 per person starting in 2026 and made it permanent (i.e., without an official sunset) going forward. This reduces some uncertainty in planning for estates and gifts in the near future and people with potentially large estates may want to revisit estate planning with their lawyers. In addition to this lifetime exemption, don’t forget about making annual exclusion gifts, which currently permit you to make gifts of up to $19,000 per donee to as many people as you choose without gift tax consequences.
These tax issues are complex, and this summary gives only a brief outline of each. Also, this is only a selection from the many provisions of this new law. If you have questions, we are happy to talk with you. Be sure also to talk with your accountant if you want to do tax planning before the end of the year in light of any of these changes or others brought on by OBBBA.
Elizabeth Hefferon
