Individuals
The bill primarily focuses on extending individual tax benefits that are set to sunset after 2025. Individual tax benefits made permanent by the OBBBA include:
- Income Tax Rates and Brackets: The current seven-bracket system becomes permanent.
- Standard Deduction: The doubled standard deduction amounts are now permanent.
- Alternative Minimum Tax (AMT): The TCJA increases AMT exemptions, which are made permanent with inflation adjustments.
- Mortgage Interest: The lower mortgage interest deduction cap of $750,000 (down from the previous $1 million) is made permanent.
The bill also made changes to several key deductions available to taxpayers, including:
- State and Local Tax (SALT) Deductions: The current $10,000 cap on state and local tax deductions is raised temporarily to $40,000 with 1% annual increases through 2029. After that, it reverts to $10,000 in 2030.
- Charitable Deductions: Starting in 2026, taxpayers who don’t itemize can claim an “above-the-line” deduction for charitable contributions up to $1,000 ($2,000 for married filing jointly).
- Child Tax Credit: The credit increases from $2,000 to $2,200 per child, with future inflation adjustments.
Several deductions are permanently eliminated, including personal exemptions (which remain at zero), miscellaneous itemized deductions subject to the 2% floor (unreimbursed employee expenses, tax preparation fees), and casualty and theft loss deductions except for federal disasters.
Finally, for individuals, there are several completely new provisions, including:
- Senior Deduction: Taxpayers over 65 can claim an additional $6,000 deduction, available whether they itemize or take the standard deduction.
- No Tax on Tips: Workers in traditionally tipped industries who don’t itemize can deduct up to $25,000 of reported tips.
- No Tax on Overtime: A deduction for qualified overtime pay up to $12,500 ($25,000 for married filing jointly) is available for non-itemizers.
- Auto Loan Interest: Interest on loans for U.S.-assembled cars becomes deductible up to $10,000, but only for vehicles assembled domestically.
Business Impact
Businesses are also impacted, but to a lesser extent than individuals. Several key business tax provisions that were set to expire are made permanent, ensuring continued tax relief for various business structures.
- Pass-Through Entities benefit significantly from the permanent extension of the Section 199A deduction, allowing LLCs, S corporations, and sole proprietorships to deduct 20% of business income.
- Depreciation – 100% bonus depreciation provision is now permanent.
- Research and Development expenses can now be fully expensed for domestic R&D activities, replacing the previous requirement to amortize costs.
Conclusion
For businesses and individuals, the OBBBA provides long-term tax planning certainty by making temporary provisions permanent. Many of the provisions highlighted above are subject to phase-outs and other income-based limitations, so make sure to read the complete articles and consult your tax advisor.