OBBBA New Significant Tax Legislation

We are writing to inform you about the significant new tax legislation (the Act) signed into law July 4, 2025 (formally known as One Big Beautiful Bill or, informally, the OBBB). The Act includes numerous changes affecting individual taxation.

Navigating these changes can be complex, and their impact on your specific tax situation will vary. We encourage you to review this list, which highlights some of the key provisions, and contact us at your earliest convenience to discuss the impact of these changes and develop a plan tailored to your situation.

Stayed tuned for Part 3 of this email.

Pease Limitation

Starting in 2026, the Pease limitation which reduced itemized deductions for high earners is permanently repealed. High-income taxpayers will see a much smaller 2/37 reduction apply to the lesser of their itemized deductions or the amount by which their taxable income exceeds the 37% tax bracket threshold.

OBSERVATION – With this change, bunching deductible expenses into a single year can be effective, since the reduction is generally less severe than under the old Pease rules. For those in the 37% tax bracket you may want to consider some tax planning here.

Individual Alternative Minimum Tax Exemption Amounts

The AMT exemption amounts are permanently increased for 2026 and beyond, but the phaseout rate for higher-income taxpayers doubles from 25% to 50%.

OBSERVATION – Taxpayers should review their AMT exposure and consider strategies such as timing income or exercising options in lower-income years to avoid unexpected AMT liability.

Deduction for Taxpayers Age 65 or Older

For tax years 2025-2028, individuals age 65 or older (and their spouses, if filing jointly) can claim a new $6,000 deduction per qualified person. To maximize this benefit, seniors should aim to keep their adjusted gross income (AGI) below $75,000 (single) or $150,000 (joint), as the deduction is reduced by 6% of any excess.

OBSERVATION – There is some confusion about this being tied to social security income. It’s not. Taxpayers qualify no matter how much social security income they receive. Be sure to include the correct Social Security Number for each qualifying individual to avoid disallowance of the deduction.

Car Loan Interest

For tax years 2025-2028, individuals can deduct up to $10,000 per year in interest paid on loans for new personal-use vehicles even if they don’t itemize deductions. The deduction phases out for single filers with MAGI over $100,000 and joint filers over $200,000. To qualify, the loan must be for a new, U.S.-assembled car, SUV, van, pickup, or motorcycle (under 14,000 pounds), secured by a first lien, with the taxpayer as the original owner, and the vehicle’s VIN reported on the tax return.

OBSERVATION – If you’re planning to buy a new vehicle, consider timing your purchase and loan to maximize deductible interest within the eligible years, and manage your income to stay below the phase-out thresholds for the largest benefit.

Child and Dependent Care Credit

Starting in 2026, the Child and Dependent Care Credit will be more valuable for many families. The maximum credit rate increases to 50% of eligible expenses, up to $3,000 for one qualifying individual or $6,000 for two or more. The full 50% rate applies to families with AGI up to $15,000 and gradually phases down to 35% for AGI up to $75,000 ($150,000 for joint filers).

OBSERVATION – To maximize your benefit, be sure to keep thorough records of all qualifying expenses and coordinate with any employer-provided dependent care benefits to avoid missing out on the full credit potential.

Contributions to Scholarship-Granting Organizations

New for tax years ending after Dec. 31, 2026, individual taxpayers can claim a federal income tax credit of up to $1,700 per year for cash contributions to qualifying scholarship-granting organizations (SGOs) in participating states.

OBSERVATION – To maximize this benefit, confirm your state’s participation and ensure the SGO is on the IRS-approved list before contributing.

Disaster-Related Personal Casualty Losses

If you suffered a loss due to a federally declared disaster, you can now claim a personal casualty loss deduction even if you don’t itemize. The standard deduction is increased by the amount of the net disaster loss.

OBSERVATION – Be sure to document your losses and insurance claims, and consider filing an amended return if you missed claiming a qualified loss in a prior year. This deduction has been changed to include state-declared disaster areas. In the past, the area had to be a federally declared disaster area.

American Opportunity and Lifetime Learning Credits

American Opportunity and Lifetime Learning Credits: Starting in 2026, you must include the Social Security Number (SSN) of the student (or yourself or your spouse, if applicable) and the Employer Identification Number (EIN) of each college or university when claiming the American Opportunity Tax Credit (AOTC).

OBSERVATION – To avoid losing this valuable credit due to a clerical error, make sure all SSNs are issued before the tax return deadline and that you have the EIN for each institution. Double-check that these numbers are entered correctly on your return, as missing or incorrect information will result in the IRS denying the credit.

Eligibility to Enroll in Qualified Health Plan

Starting in tax years after 2027, you can only claim the premium tax credit (PTC) for months when the health insurance Exchange has verified that you are eligible to enroll in a qualified health plan (QHP) and to receive advance PTC payments.

OBSERVATION – To avoid losing your credit, be sure to file your federal tax return on time each year. Promptly report any changes in income, family size, or other circumstances to the Marketplace within 30 days, and respond quickly to any requests for information.

Deduction for Qualified Residence Interest

The deduction for mortgage interest on home acquisition debt is now permanently capped at $750,000 ($375,000 if married filing separately), rather than increasing to $1 million in 2026 as previously scheduled.

OBSERVATION – If you are considering buying a home, refinancing, or taking out a new mortgage, be aware that interest on debt above $750,000 will not be deductible.

Miscellaneous Itemized Deductions

The Act permanently eliminates miscellaneous itemized deductions for individual taxpayers.

OBSERVATION – This doesn’t apply however to itemized deductions under Code Sec. 67(b). And the Act adds a new deduction thereunder for educators, allowing K-12 teachers, counselors, coaches, and aides working at least 900 hours per year to deduct unreimbursed classroom expenses (like books, supplies, and equipment) starting in 2026.

These are just some steps that can be taken to save taxes. By contacting us, we can tailor a plan that works best for you.

Stay tuned for Part 3 of these updates. Back to Part 1.