OBBBA New Significant Tax Legislation
This will be a 3-part blog post highlighting the changes in the OBBBA, how they affect you, and our observations about them.
Reduce Income Tax Rates
The Act makes the lower individual income tax rates and wider tax brackets introduced by the Tax Cuts and Jobs Act “TCJA” permanent, preventing a scheduled tax rate increase after 2025. For example, the top individual rate will remain at 37% (instead of reverting to 39.6%), and the marriage penalty relief for most brackets continues.
OBSERVATION – Not much is changing here from the brackets we have been using. These brackets were scheduled to revert to pre-2018 brackets which were about 2-3% higher. This bill extends the bracket permanently. This also means that married couples filing jointly will typically not face higher taxes compared to filing as singles. Continue to take advantage of 0% capital gains rates for individuals in lower tax brackets.
Increased Standard Deduction
The standard deduction has been permanently increased and enhanced for 2025 and beyond: $30,000 for joint filers, $22,500 for heads of household, and $15,000 for singles in 2025, with further increases to $31,500, $23,625, and $15,750, respectively, for 2026 and after.
OBSERVATION – Not much is changing here from the standard deduction amounts we have been using. These amounts were scheduled to revert to pre-2018 brackets which were $6,000, $4,000 and $3,000. This bill extends the increase permanently. Because these higher amounts mean fewer taxpayers will benefit from itemizing, consider bunching itemized deductions into a single year to exceed the standard deduction, then take the standard deduction in alternate years.
Child Tax Credit
The Child Tax Credit (CTC) has been permanently increased to $2,200 per qualifying child for tax years after 2024 and will be indexed for inflation in future years. Omission of a correct SSN on a return under the Code Sec. 24 child and other dependent credit rules will be treated as a mathematical or clerical error that IRS can summarily assess.
OBSERVATION – This was scheduled to revert to $1,000 per child after 2025. To maximize these credits, ensure all dependents have the required identification numbers before year-end, and consider managing your income or accelerating deductions if your AGI is near the phase-out range.
SALT Cap
State and local tax cap (SALT CAP) has increased from $10,000 to $40,000.
OBSERVATION – This is not a permanent change. Beginning in 2030 the cap reverts to $10,000. High income taxpayers (those with over $500k of adjusted gross income) may see limited benefits. Consider bunching deductions and timing of payments. If you are a partner or a shareholder in a pass-through entity, you need to coordinate this increased deduction with your pass-through entity taxes paid at the business level.
Charitable Contributions
Starting in 2026, charitable contributions will only be allowed for donations that exceed 0.5% of AGI in total.
OBSERVATION – Consider front loading contributions in 2025. Donor advised funds can be a great tool for this. There is also a donation deduction for non-itemizers of $2,000 if MFJ and $1,000 for all others.
No Tax on Overtime.
Overtime pay of up to $12,500 ($25,000 MFJ) will be an additional deduction available form 2025 – 2028. This deduction will be phased out for income over $300,000 MFJ and over $150,000 for all others.
OBSERVATION – We are hearing that the deduction will not be for all the overtime pay. Only the increased hourly amount for the overtime hours. So roughly 1/3 of the total overtime pay. Be sure to have your overtime pay well documented.
No Tax on Tips
Temporary deduction limited to $25,000 and phases out at $300,000 for MFJ and $150,000 for all others.
OBSERVATION – This deduction will be only available for 2025-2028. Tips must be properly reported on the W2 to get the deduction. Sole proprietors that receive significant tips (i.e. hair stylists, uber drivers) may want to consider utilizing an s-corporation structure to qualify for this deduction. Only tips related to certain industries will apply. Future guidance is expected.
Estate & Gift Tax – Basic Exclusion Amount
The basic exclusion amount for federal estate and gift tax will increase to $15 million (indexed for inflation) for estates of decedents dying and gifts made after Dec. 31, 2025.
OBSERVATION – Review and update estate plans and consider making large lifetime gifts to tax advantage of this higher exclusion. The limit for Minnesota estate taxes is $3,000,000, which is much lower threshold. If your assets exceed $3,000,000 you should consider some estate planning to avoid or reduce the MN estate taxes.