What's the Tax Impact to You From the One Big Beautiful Bill Act?

Is the One Big Beautiful Bill Act (OBBBA) beautiful for you? Let’s find out. This comprehensive tax legislation primarily makes permanent the provisions in Tax Cuts and Jobs Act (TCJA) with a few nuances. It includes the more favorable tax rates and tax brackets, higher standard deductions, and updated credits, among other items. Of course, when we say these provisions are permanent, they are permanent until a future Congress makes legislative changes.

Key Changes You Need to Know:

Permanent extension of current individual tax rates
Increased State and Local Tax (SALT) deduction caps
Adjustments to standard deductions
Reformed child tax credit structure
New provisions for car loan interest deductions

The OBBBA's impact reaches deep into personal finances, touching everything from your regular paycheck to major financial decisions like home purchases and vehicle financing. These changes create both opportunities and challenges for taxpayers across different income brackets and situations.

Understanding how these modifications affect your specific situation is crucial for making informed financial choices. The new tax landscape requires a fresh look at your tax planning strategies, potentially adjusting your approach to deductions, credits, and overall financial planning. In future articles, we will expand upon these new rules and review planning strategies related to this piece of tax legislation.

Why This Matters to You:

Your tax obligations could shift under OBBBA, depending on factors like:

Your income level
Family size
State of residence
Property ownership status
Vehicle financing arrangements

These changes will influence your tax planning decisions for years to come, making it essential to understand and adapt to the new rules. As we say at Oasis Wealth, this requires one to take a multi-year approach to your overall situation. You cannot merely plan to minimize income taxes at tax filing time.

Key Tax Provisions Under the One Big Beautiful Bill That Affect You

The OBBBA introduces significant changes to individual tax provisions that directly impact your financial planning and tax obligations.

Permanent Extension of TCJA Provisions

The bill makes several key provisions permanent from the TCJA:

Individual Tax Rates: The current seven tax brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%). So, instead of the 12% becoming 15% or 24% becoming 28% in 2026, for example, those more favorable lower rates will continue beyond 2025.
Standard Deduction Amounts: The enhanced standard deduction levels continue. TJCA basically doubled the standard deduction in 2018. For many taxpayers, that impacts the analysis around whether to itemize deductions or take the standard deduction. Somewhat related to this, the personal exemption is also eliminated on a permanent basis.
Pease Limitation on Itemized Deductions: The Pease limitation on itemized deductions for high income taxpayers has been permanently repealed; however, a new limitation has been put in place. For taxpayers in the top 37% bracket, itemized deductions are reduced by the following formula: 2/37 of the lesser of the total itemized deductions or the excess of taxable income beyond the 37% bracket threshold. Effectively, high income taxpayers will get a tax benefit of 35% on their itemized deductions rather than the 37% marginal rate.
Qualified Business Income Deduction: The 20% deduction for pass-through business income stays in place. The income limits increased slightly, and the impact on deciding the type of entity and even how to save to retirement plans are all impacted by this tax rule.
Estate Tax Exemption: The doubled estate tax exemption becomes permanent, protecting more family wealth from taxation. Estate taxes did not apply to many if this prior legislation was not extended, but now estate taxes apply to even less estates. For many taxpayers, then, this makes capital gains planning more in the forefront when compared to trying to minimize estate taxes.

These extensions provide a little more certainty for tax planning in the short-term future and help prevent potential tax increases that would have occurred when the TCJA provisions expired. Nevertheless, taxpayers across the income and net worth spectrum should stay alert for future Congressional changes. We will review some of these and other strategies in more detail below.

Mortgage Interest Deduction Caps

The bill maintains specific limits on itemized deductions as legislated under TJCA:

Interest deduction limited to mortgages up to $750,000.
Home equity loan interest is only deductible when used for home improvements.
Investment property mortgage interest remains fully deductible.

SALT Deduction Changes

One of the biggest changes to the tax laws was the increase of the State and Local Tax (SALT) deduction:

Temporary Cap Increase: The SALT deduction limit rises to $40,000 for tax years 2025 to 2029, representing a substantial increase from the current $10,000 cap. This reverts to $10,000 in 2029.
Regional Impact: This legislation will be particularly beneficial for residents in higher tax states such as California, New York, and New Jersey. Residents in two of the primary states that Oasis Wealth serves – Tennessee and Florida – will unfortunately not significantly benefit from this legislation due to the lack of income taxes in those states.
Income Phaseouts: Income limitations apply based on filing status ($500,000 for joint filers and single filers).

This change creates new opportunities for taxpayers in high-tax jurisdictions to maximize their itemized deductions. Property owners in these states can now deduct a larger portion of their state income taxes and local property taxes, potentially reducing their federal tax liability.

The increased SALT cap combines with other provisions to create strategic planning opportunities. Homeowners might consider accelerating property tax payments or adjusting state tax withholding to optimize their deductions under the new limits. Again, taking a multi-year approach to your tax planning will be important.

Other Noteworthy Tax Changes You Should Be Aware of Under OBBBA

The OBBBA introduces significant adjustments to standard deductions, creating new opportunities for tax savings. Senior taxpayers under a certain income threshold may receive an extra standard deduction boost, the child tax credit and the dependent care credit were increased slightly, car loan interest may now be deductible, charitable contributions are now available to more taxpayers, among other items listed below.

Child Tax Credit Enhancements

The bill restructures the Child Tax Credit with these key changes:

Credit amount increases to $2,200 per qualifying child starting in 2026 (and indexed for inflation).
Income phase-out thresholds adjust to $200,000 for single filers.
Joint filers phase-out begins at $400,000 similar to under TJCA.
Refundable portion expands to $1,600 per qualifying child.

Dependent Care Credit Enhancements

A nice boost to assist parents in caring for their children include the following:

An increase of the maximum credit percentage for the lowest-income families to 50%.
An increase in the annual Dependent Care FSA (Flexible Spending Account) limit from $5,000 to $7,500.

New (Slightly) Tax-Advantageous Trump Accounts

After-tax contributions can be made to those accounts that provide for tax deferred treatment while the funds are in the accounts.
Contributions can be made until the child turns 18.
The year the child turns 18, the funds become available to them.
The annual contribution limit is $5,000 (and up to $2500 tax free by one’s employer).
There is a $1,000 government contribution for newborns born in 2025 to 2028.
The tax treatment is oddly complex: capital gains treatment if used for “qualified” purposes (e.g., college, first home, starting a business) and ordinary income treatment if used for non-qualified purposes.

New Car Loan Interest Deduction

A provision that arguably won’t have a major impact allows taxpayers to deduct interest paid on auto loans within certain parameters:

Maximum deduction of $10,000 annually.
Applies to new vehicle purchases where the vehicle had its final assembly within the U.S.
Income limitations apply based on filing status.
Available in the years 2025 to 2028.
Above-the-line deduction (so you don’t have to itemize to get this benefit).

Estate Tax Modifications

The OBBBA adjusts estate tax provisions:

Basic exclusion amount increases to $15 million per individual, or $30 million for couples starting in 2026.
Like the previous law, these amounts are indexed for inflation.
Generation-skipping transfer tax exemption continues to align with estate tax threshold.
There is no sunset with this provision, i.e., it is permanent until Congress makes another change.

Additional Standard Deduction for Seniors

The new legislation creates targeted benefits for older taxpayers:

Extra $6,000 for income-eligible taxpayers aged 65 and over.
Senior deduction is phased out at income limits of $75,000 for single filers, $150,000 for joint filers.
Combines with existing standard deduction amounts.
Available for the years 2025 to 2028.

Taxes on TIPS and Overtime

No Tax on Tips: Up to $25,000 in tip income can be deducted annually for workers in jobs that traditionally have been paid on tips.
The tips deduction is above the line and phases out when modified AGI exceeds $150,000 (or $300,000 for joint filers).
No Tax on Overtime: Up to $12,500 ($25,000 for joint filers) of overtime premium pay can be deducted.
Similar to the no tax on tips break, this no tax on overtime deduction is above the line and the same income phaseout thresholds as noted above.
Both of these provisions sunset after 2028.

Charitable Deduction Changes

Above-the-Line Deduction for Non-Itemizers: A new deduction allows taxpayers who claim the standard deduction (and not itemize) to deduct up a certain amount each year “above the line” each year (single filers - $1,000, joint filers - $2,000).
This deduction is not indexed for inflation.
.5% Floor on charitable contribution for itemizers. Taxpayers that itemize their deductions can now only deduct charitable contributions that exceed .5% of their Adjusted Gross Income.

Conclusion

The One Big Beautiful Bill brings significant changes to the tax landscape, offering both opportunities and challenges for taxpayers. The permanent extension of TCJA provisions, increased SALT deduction caps, increased standard deduction for some seniors, and enhanced credits for children suggest one should revisit their tax planning strategies.

The complexity of these tax changes demands careful consideration of your unique financial situation. While the new provisions offer various tax advantages, they also introduce intricate rules and calculations that can affect your tax liability in unexpected ways. You should work with your tax-focused financial planner to determine what steps you need to take to minimize your income taxes for both the short-term and long-term.