Retirement and Tax Planning After the July 2025 “One Big Beautiful Bill Act” (OBBBA)

by Chris Brown, PhD, CFP® and Ron A. Rhoades, JD, CFP®

Executive Summary

The “One Big Beautiful Bill Act” (“OBBBA”) signed into law on July 4, 2025, brings sweeping changes to individual, estate, and small business taxation. This guide is tailored for Scholar Financial clients seeking personalized strategies for tax planning under the new law.

With the 2017 Tax Cut and Jobs Act (TCJA) provisions largely made permanent and several new above-the-line deductions and credits added or expanded, this guide emphasizes proactive tax planning – especially for higher-income taxpayers, retirees, families with children, business owners, and investors. This guide also addresses modifications to estate, charitable, and retirement planning strategies influenced by the updated provisions.

The guide spans key areas including:

Income tax bracket permanence

Standard deduction, itemized deduction, and Pease limitation changes

Charitable gifting techniques (for both individuals and businesses)

Child tax credit enhancements

Estate and gift tax exemption increases

Roth conversion strategies

Capital gains and loss harvesting

Business owner QBI

Examples and charts are provided to aid understanding of these updated law changes.

When a tax law change is said to be “permanent,” that means that – absent future changes by Congress to the tax law, the change is tax law will continue.

DISCLAIMERS. This guide is for general informational purposes only and does not constitute tax, legal, or financial advice. Please consult your financial or tax advisor or legal counsel before implementing any strategies described herein.

Scholar Financial, LLC is a practice within XY Investment Solutions, LLC, an SEC-registered investment adviser. Registration does not imply a certain level of skill or training.

FOR MORE INFORMATION: Please contact Scholar Financial at www.scholarfinancial.com or email cathy@scholarfinancial.com for additional information or to schedule a conference or call.

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Introduction and Overview of the 2025 Tax Reform

The “One Big Beautiful Bill Act” (“OBBBA”) signed into law on July 4, 2025, represents the most sweeping set of personal income tax reforms since the Tax Cuts and Jobs Act (TCJA) of 2017. In many respects, this legislation makes permanent many of the TCJA’s provisions – but it also introduces new financial, retirement and tax planning opportunities and complexities that demand attention by individuals and families. This introduction provides an overview of the major themes of the legislation and introduces many of the key tax planning concepts that are covered in more detail subsequently.

Permanence of TCJA Tax Brackets: The individual tax brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%) are made permanent, ending uncertainty over post-2025 rate reversion. New rules provide enhanced inflation indexing for lower tax brackets and credits, effective 2026.

Boosted Standard Deductions. The base standard deduction is increased permanently to $15,750 for single taxpayers in 2025, and to $31,500 for Married Filing Jointly (MFJ) in 2025, reducing the number of taxpayers who itemize deductions. The standard deduction remains indexed for inflation in future years.An additional standard deduction is temporarily adopted for seniors – even those that take the standard deduction. This deduction also potentially lessens the taxation of Social Security retirement benefits for a few seniors.
An additional standard deduction of up to $1,000 ($2,000 for MFJ) applies, commencing in 2025, for gifts to qualified charities.

Itemized Deduction Changes:

- SALT Cap Temporarily Raised: For tax years 2025–2029, the state and local tax (SALT) cap is increased to $40,000 (or $40,400 in 2026) with a phaseout for high-income taxpayers. PTET remains.

- Senior Deduction. The additional standard deduction is temporarily adopted and also applies to those using itemized deductions.

- A New Limit on Charitable Itemized Deductions. When itemizing charitable deductions, only gifts to qualified charities exceeding 0.5% of adjusted gross income may be deducted.

- Pease Limitation Repealed, Replaced with Cap: The traditional Pease limitation, that limits itemized deductions for many high-income individuals, is repealed and replaced with a flat limitation on tax benefit from itemized deductions for top-bracket taxpayers.

Elimination of Personal Exemptions: The suspended personal exemptions under the TCJA are now permanently eliminated.

Modified Child Tax Credit (CTC): The credit is increased to $2,200, partially refundable, with Social Security Number requirements to claim.

Taxation of Tips, Overtime are Limited. New exclusions from income tax, but not FICA taxes, now exist, subject to certain limits.

Above-the-Line Car Loan Interest Deduction: A new deduction allows up to $10,000 of interest paid on U.S.-assembled new car loans (2025–2028).

Estate and Gift Tax Exemption Increase: The lifetime exemption from federal estate and gift taxes is permanently set at $15 million for 2026 (and is indexed for inflation after 2026).

Summary Table of Some of the Major Tax Law Changes

Tax Provision	Current Law (2025)	Final Legislation (years effective)	Summary of Change
Standard Deduction	$15,000 single / $30,000 MFJ	$15,750 single / $31,500 MFJ (2025)	Raises standard deduction by 5% in 2025, indexing from TCJA-level – adding ~$750 (single) / $1,500 (married)
‘Bonus’ Deduction for Seniors	$1,600 (65+) / $2,000 (unmarried partner)	$7,600 / $8,000 (2025–2028)	Supercharges senior deduction via a flat $6,000 boost for singles ($4,000 extra for married), phased with income, temporary through 2028
SALT Deduction Limit	Capped at $10,000 through 2025	$40,000 cap in 2025, +1% annually to 2029, reverts to $10,000 in 2030	Temporarily quadruples the SALT cap beginning 2025 with gradual phase-down before returning to prior limit
Child Tax Credit	$2,000 max; $1,700 refundable for 2025	$2,200 max; $1,700 refundable (2025 indexed)	Boosts base credit by $200 and retroactively indexes it for inflation
Estate & Gift Tax Exemption	$13.99M single / $27.98M MFJ (2025)	$15M / $30M for married couples, for 2026 onward, inflation-indexed	Permanently raises exemption levels starting 2026, tying them to inflation
Tip Income Deduction	N/A	Deduct up to $25,000/yr (phased out above $150K income) from 2025–28	New federal deduction for tip income, limited by income, doesn’t exempt FICA or state tax
Overtime Pay Deduction	N/A	Deduct up to $12,500/yr (2025–28)	Workers can now deduct overtime income, maxed annually
Auto-Loan Interest Deduction	N/A	Deduct up to $10,000/yr interest on new auto loans (2025–28, income-phased)	Incentivizes domestic (new U.S.-assembled) auto purchases with a limited-year interest deduction
‘Trump Accounts’ for Children	N/A	One-time $1,000 credit per child born 2025–28; parents can invest in tax-advantaged account	Establishes baby savings account seeded with $1K from the federal government; growth is tax-deferred
Charitable Deduction (Non-itemizers)	Eliminated after 2021	Restores $1,000 (single) / $2,000 (MFJ) permanently post-2025	Re-introduces universal charitable write-off for non-itemizers

Snapshot of Impacts by Type of Taxpayer

Taxpayer Type	Key Opportunities
Retirees	Roth conversions, maximizing standard deduction, capital gains harvesting, small charitable contributions
High-Income (including some retirees)	Tax bracket planning, bunching of itemized deductions including charitable gifts, estate planning acceleration
Families with Children	Larger Child Tax Credit, 529 plan timing, education savings credits
Homeowners	No change to mortgage deduction cap, but permanent denial of home equity interest
Car Buyers (2025–2028)	Consider financing U.S.-assembled new vehicles to capture interest deduction

Significant Planning Implications

This legislation creates both certainty and added complexity. For many clients of Scholar Financial, LLC, the key takeaways include:

Prioritize bracket management: Avoid stepping into higher marginal rates due to AGI phaseouts.
Revisit Roth conversion strategies: Particularly in early retirement years or temporarily low-income years.
Re-evaluate itemized vs. standard deduction status annually and consider bunching itemized deductions into odd or even tax years.
For estate plans, consider the impact of the “permanent” $15 million federal estate and gift tax exemption.
Other tax and financial planning opportunities exist. Subsequent sections of this guide will delve deeper into these and other areas.

The permanence of the tax brackets originally adopted by the 2017 Tax Cut and Jobs Act (TCJA), and the increased standard deduction, reshape income tax planning starting in 2025. Taxpayers must adjust to new strategies that emphasize income smoothing, income tax bracket awareness, and the timing of deductions and income.

Understanding the New Bracket Structure

Effective January 1, 2026, the tax brackets adopted by the 2017 TCJA are made permanent.

These rates are adjusted for inflation. When the Tax Cuts & Jobs Act (TCJA) first lowered the brackets in 2018 it also switched the annual cost-of-living adjustment from the “headline” CPI-U to the slower-growing chained CPI-U. Under OBBBA, the tops of the 10 % & 12 % brackets and the floor & ceiling of the 22 % bracket will be roughly 3-6 % higher in 2026 than they would have been under a straight TCJA extension. Because the higher brackets do not get the extra bump, the “widening” is concentrated below about the 24% breakpoint. In other words, there is a bit “more space” in the 12% and 22% brackets in 2026 than in 2025.
Most taxpayers will benefit from more predictable marginal tax rates.

The modified 2025 income tax brackets above are applied to a person’s “taxable income” (i.e., gross Income less adjustments to income, and less either the standard deduction or itemized deductions). Tax brackets apply to “ordinary income” and not to qualified dividends nor long-term capital gains. Limits imposed on itemized deductions or other deductions/credits may impact the actual rate at which income taxes are imposed on each dollar of additional ordinary income. Only up to 85% of Social Security retirement benefits may be included as ordinary income. Other limitations, exemptions and exclusions may apply.

Changes to the Standard Deduction

The standard deduction is slightly boosted for 2025, providing a modest benefit for many taxpayers.

Single Taxpayers: $15,750

Married Filing Jointly: $31,500

Head of Household: $23,625

The standard deduction remains indexed for inflation in 2026 and subsequent years.

For Example:

Assume that a single taxpayer, age 30, has $100,000 of salary and taxable interest income in 2025; this is the person’s “gross income.”

The single person contributes $18,000 to a traditional 401(k) account; this is an “adjustment to income.” The single person therefore possesses $82,000 of “adjusted gross income.”

The single person chooses to take the “standard deduction” of $15,750, as her or his itemized deductions (discussed below) do not exceed the standard deduction amount in 2025. The single person therefore has ($82,000 – $15,750 =) $66,250 of “taxable income.”

Some of the person’s taxable income is taxed at 10%, some at 12%, and some at 22% (per the tax brackets set forth above) for federal income tax purposes. Note that FICA taxes apply to earned income (7.65% is withheld from the single person’s salary, as the employee portion of the contribution to the Social Security and Medicare trust funds). State and local income taxes may also apply.

The Additional Standard Deduction for Age and Blindness Remains

If you are 65 or older, and/or blind, extra standard deduction amounts apply. (These were already part of existing tax law, and the amounts have not changed under the new tax law.)

Single or Head of Household:

- + $2,000 for age

- Another + $2,000 if blind

Married filing jointly:

- + $1,600 each for age

- Another + $2,000 for each blind taxpayer

The New Additional “Senior Bonus” Deduction

The tax legislation introduces a temporary bonus deduction for seniors aged 65+:

This provides up to a $6,000 extra deduction per individual (for 2025 through 2028). After 2028, this new deduction disappears.
However, the deduction phases out for Modified Adjusted Gross Income (MAGI) exceeding $75,000 for single filers (or $150,000 if married filing jointly). This “Senior Bonus” deduction is fully gone at $175,000 (single) / $250,000 (joint). The phase out is linear, and is computed as follows:

Compute excess income over the phase-out threshold
Excess MAGI = MAGI – Phase-out Start

Determine the phase-out range

$100,000 for both single and joint filers

Calculate percentage reduction:
Phase-out % = Excess MAGI ÷ 100,000

Reduce the deduction accordingly:
Allowable Deduction = Full Deduction × (1 – Phase-out %)

The new Senior Bonus Deduction in the One Big Beautiful Bill Act (OBBBA) does not change the way Social Security (SS) benefits are calculated for tax purposes; the familiar “provisional-income” thresholds ($25k/$34k single, $32k/$44k joint) remain untouched.

Instead, the law gives seniors an extra deduction of up to $6,000 per person ($12,000 per married couple) that is taken after adjusted gross income (AGI) is determined. Because it is claimed even if you itemize, it directly shrinks taxable income.

An Example of One Senior Couple’s Deductions

Filing Status: Married Filing Jointly

Ages: Both spouses are 66 years old

Blind: Both spouses are legally blind

Adjusted Gross Income (AGI): $75,000

Charitable Contributions: $3,000 donated to qualified charities

Social Security Benefits: Neither spouse will claim benefits in 2025

Year: 2025 (post-July 2025 tax legislation — the “One Big Beautiful Bill”)

Deductions taken: Standard Deduction (itemizing not elected)

Notes:

Taxable Income = Adjusted Gross Income less the total of deductions
The couple does not itemize deductions, but they still receive an above-the-line charitable deduction of $2,000 (maximum, per year) under the new tax law.
The Senior Bonus Deduction is temporary (2025–2028) and phases out above $150,000 joint MAGI, but this couple qualifies in full.
Because of their age and blindness, they receive four additional amounts of $1,600 (totaling $6,400). If neither were blind, they would have received additional deductions for being over age 65 of $1,600 each (totaling $3,200).
In this example, this married couple’s taxable income is reduced to $23,100, which will likely place them in the 10% marginal tax bracket, significantly reducing their tax burden. Their federal income tax would be just $2,310.
This example does not include any discussion of the impact of state or local income taxes.

A New Charitable Deduction – If You Take the Standard Deduction

Taxpayers who take the standard deduction in 2025 or later may now separately deduct amounts donated to qualified charities. This new charitable deduction is a maximum of:

$1,000 for singles, or

$2,000 for married filing jointly,

in charitable donations, on top of the standard deduction.

If you itemize your deductions, you cannot take this charitable deduction. Instead, you take contributions to qualified charities as part of your itemized deductions, subject to a limitation that is discussed in the section on itemized deductions, discussed in a later section.

New 0.5% of AGI Limit if Charitable Deductions Are Itemized

As discussed previously, there is a new “above-the-line” charitable deduction of $1,000 (single taxpayers) or $2,000 (married filing jointly) that individuals can take. This does not apply if you itemize your deductions.

Beginning with 2026 returns, you only get a charitable-contribution deduction after the first one-half of one percent (0.5 %) of your adjusted gross income (AGI). Think of it as a “speed-bump.” If your AGI is $100 000, the first $500 of gifts is ignored; only amounts above $500 may be deducted.

Carry-forwards. Any excess gifts above the 0.5% floor that you cannot use this year still carry forward for five years, but future use is again subject to clearing that year’s floor.

A Review of the General Rules for Charitable Donations

The general rules for taking charitable deductions under current U.S. tax law (updated through July 2025) are outlined below. These rules apply to individuals who itemize deductions on their tax return.

Eligible Recipients. To qualify for a deduction, donations must be made to qualified organizations, including:

501(c)(3) nonprofit organizations

Religious organizations (churches, synagogues, mosques)

Government entities (if for public use)

Educational institutions

Charitable hospitals and research institutions

Tip: Use the IRS Tax Exempt Organization Search tool to verify the “qualified charity” status of an organization.

Documentation Requirements for Charitable Gifts, Generally:

Donation Type	Required Documentation
Less than $250	Bank record or receipt from the charity
$250 or more	Written acknowledgment from the charity
Non-cash ($500–$5,000)	Detailed description and Form 8283
Non-cash (over $5,000)	Qualified appraisal required
Vehicle donation	IRS Form 1098-C and written acknowledgment from the charity

Limitations on deductions remain, depending on the type of gift and to whom the gift is made.

Cap	Plain-English meaning	Typical gifts this applies to	Why the cap is lower
60% of AGI	You can write off cash gifts up to 60¢ for every $1 of Adjusted Gross Income (AGI).	Checks, credit-card gifts, or online donations to most public charities, churches, schools, hospitals, donor-advised funds.	Cash is easiest for you to give and for the charity to spend, so lawmakers allow the biggest deduction.
30% of AGI	You can deduct gifts of *property* (instead of cash) up to 30¢ per $1 of AGI.	Stock, mutual-fund shares, real estate or other assets you’ve held > 1 year, donated to a public charity; or any cash given to a private foundation.	Appreciated property already gets you a double tax break (no capital-gains tax plus a deduction), so the percentage ceiling is lower.
20% of AGI	You can deduct long-term appreciated property given to a private non-operating foundation up to 20 ¢ per $1 of AGI.	Gift of stock or real estate to a family-run foundation that mostly makes grants rather than runs its own programs.	Lawmakers worry about abuse when donors control the foundation, so they tighten the limit the most.

Some Charitable Gift Strategies for Individuals

Strategy	Why it still works under OBBBA
“Bunch” gifts into one year	Give two or three years’ planned donations in one year; the larger amount clears the 0.5% floor and may make itemizing worthwhile.
Donor-Advised Fund (DAF)	Front-load several years of gifts into a DAF in one year, claim the entire deduction above the floor now, and recommend grants to charities later.
Donate appreciated stock or mutual-fund shares	You avoid capital-gains tax and deduct the full fair-market value (subject to the floor and the 30%-of-AGI limit for long-term capital-gain property).
Qualified Charitable Distribution (QCD)	If you are 70½+, transfer up to $100 000 per year directly from your IRA to charity. The amount never hits AGI, so it is untouched by the 0.5% floor and reduces required minimum distributions. It also counts against RMDs, which may lower your income for IRMAA (Medicare premium) purposes.
Combine larger charitable gifts with high-income events	Years in which you realize a large bonus, Roth conversion, or business sale raise your AGI; the 0.5 % floor also rises, but the higher AGI gives head-room under the 60 % cash ceiling—pairing income with giving keeps tax owed steady.
Charitable remainder or lead trusts, gift annuities, naming a charity as IRA beneficiary, or leaving bequests by will	Planned-giving vehicles shift the deduction (or estate tax benefit) to the year that best fits your overall tax plan.

Charitable Contributions by Small and Large Business Entities

While this guide is designed for individuals, clients who own closely-held businesses should be aware of charitable gift limits and strategies.

For tax years beginning after December 31, 2025, OBBBA allows a deduction for C corporation charitable contributions only to the extent that the aggregate of corporate charitable contributions exceeds one percent of taxable income.

Entity type	New floor	Existing cap	Key planning notes
Pass-through (partnerships and S-corps)	None at the entity level; the gift flows to the owners, who face the 0.5% personal floor on their own returns.	Same 60% / 30% / 20% owner-level caps.	Owners may coordinate gifting to clear the floor at the individual level or make gifts personally.
C corporation	1% of taxable income—only amounts above that are deductible.	10% of taxable income; five-year carry-forward continues.	Large one-time gifts can still be deducted when paired with high-profit years; otherwise consider a corporate-sponsored foundation or DAF “bunching.”

If the business receives substantial advertising value – such as by means of a logo on event banners, mentions in paid media that advertises an event, etc. – the payment is treated as an ordinary advertising expense (fully deductible, no 1% or 10% limits) and the charity must treat it as unrelated-business income. Structuring support as a bona fide advertising expense can therefore yield a full tax deduction for the business.

Most medium-to-large companies already treat event support as a marketing expense. The $7–9 billion that flows to nonprofits through sponsorship deals each year easily rivals the cash that flows via old-fashioned “no-strings” donations.

Post-OBBBA limits (1% for individuals, 10% for C-corps) make the advertising route even more attractive, so practitioners expect the share of support structured as sponsorship to keep rising.

State & Local Tax (SALT) Deduction Increased Temporarily; PTET Systems

The State and Local Tax (SALT) Cap has been increased to $40,000 in 2025 (from the $10,000 cap under TCJA). For 2026 through 2029, the cap increases by 1% each year. The cap reverts back to the original $10,000 limit for all tax years after 2029.

Applies for taxpayers with Modified Adjusted Gross Income (MAGI) ≤ $500,000; phases out above that, but it never drops below the $10,000 level. Taxpayers must decrease their SALT deduction by 30% of every dollar exceeding the phaseout threshold (e.g., MAGI of $500,000).

This is a Limited Relief for Wealthy Taxpayers. Despite OBBBA’s temporary increase in the cap from $10,000 to $40,000 until 2030, high-income taxpayers may see limited benefits due to the phasedown for taxpayers with MAGI in excess of $500,000, as well as the additional limits imposed on itemized deductions for top bracket taxpayers (see discussion of limits on itemized deductions in Section G, below).

PTET Systems Remain and May Expand to Remaining States. Notably, the 2025 tax law preserves the ability to use state-level pass-through entity taxes (PTET) as a strategy to circumvent SALT limitations, despite earlier legislative proposals that would have restricted these approaches. Under PTET systems, pass-through businesses such as partnerships, limited liability companies, and S corporations can remit state income taxes at the business level rather than having individual owners pay directly. Because SALT deduction caps typically apply to individual taxpayers rather than business entities, the pass-through entity can claim the complete state tax payment as a deduction, thereby reducing the taxable income passed through to owners and effectively sidestepping the individual $10,000 SALT restriction. In return, the business owners receive state tax credits matching the entity-level tax payments. OBBBA’s framework may encourage additional states to adopt or maintain PTET systems.

Most States Now Possess the PTET Framework

With 36 states plus New York City already having PTET systems, and the OBBBA preserving these workarounds, we’re likely to see Pennsylvania, Maine, and Vermont introduce PTET legislation in 2025. Delaware and North Dakota remain the only states that haven’t even considered PTET legislation, but they may soon consider same given the likelihood that the PTET system will continue in future years.

There are nine states with no personal income tax (therefore, PTET is not applicable in these states): Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Understanding Pass-Through Entity Taxes (PTET) for High-Tax State Residents

The Problem PTET Solves

Imagine you’re a successful business owner in California who pays $80,000 per year in state and local taxes. Even with the new higher SALT cap of $40,000, you can still only deduct $40,000 of those taxes from your federal income—meaning you’re paying federal taxes on an extra $40,000 of income that actually went to state and local governments.

How PTET Works: A Higher-Income Example

Let’s say you own a 50% stake in a successful consulting LLC that makes $1,000,000 in profit. The LLC is taxed as either an S corporation or a partnership. Here’s how the math works:

Without PTET (Under New $40,000 SALT Cap):

The LLC passes $500,000 of profit to you (your 50% share)

You personally pay $65,000 in California state income tax on that $500,000

You also pay $15,000 in property taxes

On your federal return, you can deduct $40,000 total in state/local taxes (the new higher cap)

You still can’t deduct $40,000 of your actual state/local tax payments ($80,000 – $40,000)

You pay federal tax on income that effectively went to taxes

With PTET:

The LLC itself pays $65,000 in California state tax before distributing profits

The LLC deducts that $65,000 as a business expense, so it only passes $435,000 to you

You get a $65,000 credit on your California state return (so you don’t pay twice)

You still have $15,000 in property taxes, which you can deduct under the $40,000 SALT cap

You pay federal tax on only $435,000 instead of $500,000

The $65,000 state tax payment doesn’t count against your personal $40,000 SALT limit

The Financial Impact

For someone in the 37% federal tax bracket:

Federal tax savings: $65,000 × 37% = $24,050 per year

Additional state deduction capacity: You can now use $25,000 more of your $40,000 SALT cap for property taxes or other state/local taxes

Why This Strategy Becomes More Valuable at Higher Incomes

Even with the new $40,000 SALT cap (up from $10,000), high earners in states like California, New York, or New Jersey often pay much more than $40,000 in state income taxes alone. For these taxpayers:

Real-World Scenarios Where PTET Shines

High-earning professionals: A law firm partner earning $800,000 might pay $80,000+ in state taxes

Successful business owners: A tech consultant making $600,000 could face $60,000+ in state income taxes

Investment managers: A hedge fund manager with $1M+ income might pay $100,000+ to California

The 2025 Law’s Effect: The higher SALT cap helps, but doesn’t solve the problem

PTET becomes increasingly valuable as income rises

The combination of the higher SALT cap AND PTET provides maximum tax efficiency

The new tax law keeps this strategy intact while also raising the SALT cap, creating a “best of both worlds” scenario:

You get the benefit of the higher $40,000 SALT cap for property taxes and other state/local taxes

You can use PTET to handle state income taxes above what the SALT cap covers

High-income business owners can potentially deduct unlimited state income taxes through their business

Even with the new $40,000 SALT cap, PTET remains extremely valuable for high-income business owners in high-tax states. It’s essentially a way to deduct state income taxes without limit, while the higher SALT cap handles your property taxes and other state/local levies. For a business owner paying $80,000 in total state and local taxes, this combination could save over $20,000 in federal taxes annually

Mortgage Interest and Related Deductions

OBBBA Continues to allow deduction on acquisition indebtedness up to $750,000 and makes the deduction permanent.

- You can still deduct mortgage interest on:

- - Your primary residence

- - One designated second home

- As long as:

- - The mortgage is secured by the property

- - The debt is acquisition indebtedness (used to buy, build, or improve)

- - You itemize deductions on Schedule A

OBBBA permanently eliminates the deduction for interest on home equity debt unless the debt is incurred to buy, build or substantially improve the home.

- Imagine a homeowner, Jane, who took out a $50,000 home equity line of credit (HELOC) several years ago. She used $30,000 of the funds to pay off high-interest credit card debt and $20,000 to finance a vacation. Under the OBBBA’s permanent elimination of this deduction, Jane cannot deduct the interest she pays on her HELOC, regardless of whether the funds were used for the vacation or to pay off the credit card debt.

Beginning in 2026, OBBBA permanently restores the deduction for mortgage insurance premiums (previously available from 2018 through 2021) by treating such premiums as interest on acquisition indebtedness. As before, the deduction is phased out for taxpayers with adjusted gross income above $100,000 ($50,000 for married filing separately).

- Before OBBBA, when you paid mortgage insurance premiums (like private mortgage insurance, FHA insurance, VA funding fees, etc.), these were treated as a separate tax deduction with their own rules. Now, they’re lumped together with your regular mortgage interest for tax purposes.

- Example: The Johnson Family: They bought a $900,000 house with a $850,000 mortgage.

- In 2021, and before OBBBA: They could deduct mortgage interest on the first $750,000 of the loan, plus they could deduct their full mortgage insurance premiums separately (assuming their income qualified)

- In 2026 and thereafter, after OBBBA: They can still deduct mortgage interest on the first $750,000, but now their mortgage insurance premiums are also limited to just the portion relating to that first $750,000 of debt. The mortgage insurance on the remaining $100,000 of their loan is no longer deductible. Note, again, that the mortgage interest deduction is also phased out for taxpayers with adjusted gross income above $100,000 ($50,000 for married filing separately).

Auto Loan Interest Deduction

From 2025-2028, you can deduct up to $10,000 per year in interest paid on car loans, but only if the car was assembled in the United States. This is not an itemized deduction. It is treated as an adjustment to income (above-the-line) — similar in treatment to student loan interest or IRA contributions. This ensures broader eligibility even for those claiming the standard deduction.

This benefit phases out for higher earners – single filers earning over $100,000 or married couples filing jointly earning over $200,000.

Example: Sarah buys a Honda Accord assembled in Ohio with a $30,000 loan at 6% interest. She pays about $1,800 in interest the first year and can deduct the full amount, saving her roughly $432 in taxes (assuming a 24% tax bracket).

This creates a strong incentive to buy American-assembled vehicles rather than imported ones. For qualifying taxpayers, financing a car purchase rather than paying cash could provide some tax savings during these four years. Certain car purchasers presented with the option of either a cash rebate or a low-interest loan may be more inclined to choose the low-interest loan.

Deduction for Tip Income

Workers in tipping jobs can deduct up to $12,500 ($25,000 if MFJ) of their tip income from their taxes. This applies to both employees and independent contractors in jobs that traditionally receive tips. The benefit phases out for single filers earning over $150,000 or married couples over $300,000. The overtime deduction is temporary—tax years 2025 through 2028.

The deduction begins to phase out once a taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 for single filers and $300,000 for married couples filing jointly.

Phase-out rate: 10 percent of every dollar of MAGI above the threshold reduces the allowable deduction.

Complete loss of deduction

Single/HoH: when MAGI is $150,000 + ($12,500 ÷ 0.10) = $275,000

MFJ: when MAGI is $300,000 + ($25,000 ÷ 0.10) = $550,000

This is a massive benefit for service industry workers. Proper tip reporting becomes even more important, as documented tips now provide direct tax savings. Workers should maintain careful records of all tip income to maximize this deduction. Taxpayers near the thresholds can shelter income (traditional 401(k)/IRA, HSA, §125 cafeteria plans) or defer bonuses to preserve some of the deduction.

Deduction for Overtime

You can deduct up to $12,500 ($25,000 for married couples) of overtime pay from your taxes.

This only applies to overtime pay that’s properly reported separately on your W-2. Qualified overtime compensation = the premium portion (generally 50% extra) of overtime wages that are federally required under the Fair Labor Standards Act and separately reported on the Form W-2 (Treasury will create a new box).

It is an above-the-line deduction (you get it whether you itemize or not).

Applies to tax years 2025-2028 only.

Does not reduce Social Security/Medicare (FICA) taxes and is taken after payroll withholding is complete.

The benefit phases out for higher earners at the same income levels as the tip deduction.

Example: Jennifer, a manufacturing worker, earns $12,000 in overtime during 2025. She can deduct the full amount, saving approximately $1,200 in taxes (assuming a 10% tax bracket).

This creates an incentive to work overtime hours when available. Employees should ensure their employers properly separate overtime pay on W-2 forms.

Casualty Loss Deduction

For 2018-2025 a qualified disaster loss can be added to the standard deduction instead of being taken as an itemized deduction. The OBBBA strikes the sunset date altogether, so the ability continues after 2025 unless Congress changes it again.

70109 of the OBBBA expands the definition of “qualified disaster” to include a “State declared disaster” beginning in 2026.

Example: Tom’s home suffers $30,000 in flood damage during a federally declared disaster. Even though he normally takes the standard deduction, he can still claim this loss, potentially saving thousands in taxes.

This provides crucial tax relief for disaster victims. Taxpayers in disaster-prone areas should maintain detailed records of property values and consider adequate insurance coverage, as tax deductions only provide partial relief.

Miscellaneous Itemized Deductions

Many common deductions that people used to claim are now permanently eliminated, including unreimbursed employee expenses, tax preparation fees, and union dues.

However, teachers and other school employees can now deduct unreimbursed expenses for classroom supplies. Starting in 2026 they may claim all out-of-pocket classroom expenses as an itemized deduction, no dollar cap (unlike 2025, when the dollar cap is $300).

Most taxpayers will benefit more from the higher standard deduction than trying to itemize.

Teachers should carefully track all educational expenses. Bunching big supply purchases and other itemized deductions into one year may help a teacher clear the standard-deduction hurdle.

Other employees should negotiate with employers for expense reimbursement rather than paying out-of-pocket.

The Cap on Itemized Deductions

High earners in the top tax bracket (37%) now have their itemized deductions capped at providing only 35 cents of tax benefit per dollar deducted. This affects wealthy taxpayers who itemize large amounts.

Example: David, in the 37% bracket, makes a $10,000 charitable donation. Instead of saving $3,700 in taxes, he now saves only $3,500 due to the cap.

This primarily affects high-income taxpayers. It may influence the timing and structure of charitable giving and other deductible expenses.

The Strategy for Bunching Itemized Deductions into Alternate Years

Since the standard deduction is now higher, many taxpayers should consider “bunching” their deductible expenses into alternating years to exceed the standard deduction threshold.

Example: Instead of donating $8,000 to charity each year, Maria donates $16,000 every other year. In the donation year, she itemizes and gets a larger deduction. In the off year, she takes the standard deduction.

Example: Instead of donating $8,000 to charity each year, Maria donates $32,000 every four years to a donor-advised fund, from which annual distributions to her desired charities are then undertaken. In her state, she pays her prior year’s property tax liability in the year she makes the large contribution to the donor-advised fund, and she pays her current year property tax liability in the same year. She itemizes her deductions in that year, but takes the standard deduction in the other years.

This strategy works well with charitable giving using donor-advised funds, timing property tax payments, and making major purchases subject to sales tax (if elected in lieu of state income tax deductions). This requires careful planning and record-keeping but can significantly reduce overall tax liability.

However, those over age 70½ years of age should weigh the benefits of Qualified Charitable Distributions from IRA accounts, directly to qualified charities, as an alternative.

THE MAJOR ITEMIZED DEDUCTIONS:

Deductible Taxes	Description
State income taxes	Paid via withholding or estimated payments.
Local income taxes	City/county income taxes where applicable.
State and local real property taxes	On personal residence(s) or investment property.
State and local personal property taxes	Such as annual car registration taxes based on value.
Sales tax (optional)	Instead of deducting income tax, you may elect to deduct sales tax. The IRS provides optional sales tax tables by income and ZIP code. You may add sales tax from major purchases (car, boat, home renovation, etc.) to the table amount. If you keep actual receipts, you may deduct the full amount of sales tax you paid instead of using the IRS table.
Medical and dental expenses	Out-of-pocket unreimbursed expenses above 7.5% of AGI
Home mortgage interest	Interest on home acquisition debt (loan used to buy/build/improve home). Limit: Interest on up to $750,000 of qualified debt ($1M for pre-2018 loans).
Home Equity Loan Interest	If used to improve the home securing the loan; must meet “buy/build/improve” test to be deductible. Subject to limits set forth above.
Charitable contributions	Cash or property donated to qualified 501(c)(3) organizations. See other tables for limits, that depend on type of charity and/or AGI.
Casualty and Theft Losses	Losses from federally declared disasters (and, post-2026, state-declared disasters if itemized)
Unreimbursed Educator Expenses	Teachers can deduct up to $800 (OBBBA enhanced this deduction)

Note that the following are not deductible:

State gasoline taxes

Special assessments for local improvements (e.g., sidewalks, sewers)

Federal taxes

HOA fees

Consult your tax advisor for specific special rules or limitations that may apply.

Bracket Management and AGI Phaseouts; Roth Conversions

With tax rates now permanent, it’s crucial to manage your income levels to avoid losing credits and deductions. Converting traditional IRA funds to Roth IRAs during lower-income years can provide long-term tax benefits.

Example: Retired couple John and Mary have $80,000 in annual income. They convert $20,000 from their traditional IRA to a Roth IRA, staying in the 12% tax bracket and paying only $2,400 in taxes on the conversion while securing tax-free growth.

The 2025-2028 window is ideal for Roth conversions before potentially higher future tax rates (and/or lesser deductions). Careful planning can help retirees minimize taxes on Social Security benefits and avoid Medicare premium surcharges.

Credit for Contributions to Scholarship Granting Organizations

Starting in 2027, you can claim up to $1,700 in tax credits for donations to organizations that provide scholarships to elementary and high school students. However, this credit is reduced by any similar state tax credits you claim.

Example: Lisa donates $2,000 to a scholarship organization in 2027. She receives a $1,700 federal tax credit, reducing her tax bill dollar-for-dollar, making the actual cost of her donation only $300.

This provides a powerful incentive for educational giving. Taxpayers should research qualifying organizations and coordinate with any state programs to maximize benefits. Credits are more valuable than deductions as they directly reduce taxes owed.

Why was this credit enacted? Proponents state that the credit will expand educational access by increasing funding for scholarships that help families afford private or alternative schools. This tax credit will likely encourage the growth of school choice programs, charter schools, and private institutions.

Trump Accounts and Contribution Pilot Program

Starting in 2026, parents can open special savings accounts for children under 18. These accounts must be invested in U.S. stock index funds. Various parties can contribute, and the government will contribute $1,000 for children born between January 1, 2025 and December 31, 2028.

Example: Parents open a Trump account for their newborn in 2026 and receive the $1,000 government contribution. The parents contribute $2,000 annually, and grandparents contribute another $3,000 annually, until the child is age 10. By age 18, with market growth at 9% (average annualized return), the account could be worth over $167,000. If the funds are not utilized, and continue to grow, at age 65 the account could be worth over $9.7 million.

This creates a powerful wealth-building tool for families. Note, of course, that the required investment in U.S. stocks provides market exposure but also market risk.

The Trump Accounts (FSAs) under OBBBA are positioned as a broader-use alternative to 529s, intended to promote multi-purpose family savings for middle-income households – not just education. However, because the Trump Accounts lack state tax incentives and have tighter contribution limits, Trump accounts are likely to complement, not replace, 529 plans for college-focused families.

Feature	Freedom Savings Accounts (Trump Accounts)	529 College Savings Plans
Federal Tax Status	Contributions made with after-tax dollars; growth and qualified withdrawals are tax-free	Contributions made with after-tax dollars; growth and qualified withdrawals are tax-free
State Tax Benefits	No state tax deduction or credit	Many states that possess a state income tax offer state income tax deductions or credits for contributions
Contribution Limits	$10,000 per beneficiary per year; $150,000 lifetime cap	No federal annual cap; subject to gift tax limits ($19,000/year per donee in 2025); lifetime limits often exceed $300,000
Income Limits to Contribute	None	None
Qualified Uses	• K-12 and higher education tuition/fees • Home purchase (up to $50,000) • Health and medical expenses • Childcare expenses • Apprenticeship programs	• Higher education tuition/fees/books • K-12 tuition (up to $10,000/year) • Apprenticeship programs • Student loan repayment (up to $10,000 lifetime)
Control of Account	Account owner controls use; beneficiary can be changed	Account owner controls use; beneficiary can be changed
Tax on Nonqualified Withdrawals	Earnings taxed as income + 10% penalty	Earnings taxed as income + 10% penalty
Portability	Beneficiary can be changed without penalty	Beneficiary can be changed without penalty
Flexibility of Use	Broad—education, housing, health, childcare	Narrow—primarily education-related
Planning Tip	Useful for families wanting flexible, multi-purpose savings	Ideal for families focused on long-term education planning

Enhancements to Section 529 Plans

Starting in 2026, you can withdraw up to $20,000 annually (up from $10,000) from 529 plans for K-12 expenses. The list of qualifying expenses expands to include curriculum materials, tutoring, testing fees, and educational therapy.

Example: The Chen family withdraws $15,000 from their 529 plan to pay for their daughter’s private school tuition, tutoring, and educational materials. All withdrawals are tax-free for these qualified expenses.

This makes 529 plans more flexible for families using private K-12 education or supplemental educational services. Families should consider 529 plans even if college isn’t the primary goal.

Extension of Increased Child Tax Credit

The Child Tax Credit is permanently increased to $2,200 per child (up from $2,000) for 2025, with inflation adjustments starting in 2026. Up to $1,700 is refundable (meaning you can get it even if you don’t owe taxes). Both parents and children must have valid Social Security numbers.

Example: The Martinez family has two children and qualifies for the full credit. They receive $4,400 in Child Tax Credits in 2025, with up to $3,400 refundable if their tax liability is less than the credit amount.

This provides significant support for families with children. The SSN requirement may affect mixed-status families. Families should ensure all SSNs are properly documented and consider income timing to maximize the credit.

As before, the Child Tax Credit (CTC) begins to phase out by $50 for every $1,000 (or part thereof) of modified adjusted gross income (MAGI) above the following thresholds:

$400,000 for Married Filing Jointly

$200,000 for all other filers

This phase-out reduces the nonrefundable portion first, then the refundable portion.

Families may also qualify for the Child and Dependent Care Credit, Earned Income Tax Credit (EITC), or Education Credits — requiring holistic planning to optimize benefits.

Enhancement of Other Child-Related Credits and Exclusions

Several child-related benefits are improved:

adoption credits become partially refundable up to $5,000;

employer-provided childcare assistance increases from $5,000 to $7,500; and

the child and dependent care credit rates increase significantly.

Example: The Johnson family adopts a child and incurs $12,000 in expenses. They can claim the adoption credit and receive $5,000 as a refund even if they owe no taxes. Additionally, Mrs. Johnson’s employer provides $7,500 in childcare assistance tax-free.

These enhancements make adoption more affordable and increase support for working families. Parents should maximize employer-provided childcare benefits and carefully plan adoption timing to optimize tax benefits.

Health Savings Account (HSA) Enhancements

Beginning in 2026, individuals with high-deductible health plans (HDHPs) will be allowed to enroll in Direct Primary Care (DPC) arrangements and use HSA funds to pay for these services—up to $150 per month for individuals and $300 per month for families.

What is Direct Primary Care (DPC)? DPC is a healthcare model in which patients pay their primary care provider directly, typically through a monthly or annual membership fee, instead of using traditional insurance billing. In return, patients receive access to a broad range of primary care services, including office visits, routine lab work, and enhanced communication such as phone or text consultations. Some DPC providers also offer extended visits and even home visits.

Average Costs of DPC Arrangements. DPC practices usually charge between $60 and $150 per month for individuals, and $135 to $300 for families, depending on the practice and geographic location. Some rural or smaller practices may charge less, while concierge-style DPC models in urban areas may be more expensive. The $150/$300 HSA reimbursement cap aligns well with the national average DPC fee structure.

Example: Dr. Smith has a high-deductible health plan and pays $120 each month for his DPC membership. Beginning in 2026, he can use his HSA funds to cover this expense without losing eligibility to contribute to his HSA.

Starting in 2026, bronze and catastrophic plans from the ACA marketplace will also qualify for HSA contributions. This change significantly broadens HSA eligibility, offering more Americans the ability to pair low-cost health plans with tax-advantaged medical savings.

These changes give individuals greater flexibility in how they manage and pay for primary care. Before enrolling in a DPC arrangement, individuals should compare costs, services, and how the arrangement fits within the monthly reimbursement limits and their broader healthcare needs.

Wash Sale and Tax-Loss Harvesting Timing

You can still harvest tax losses year-round by selling investments at a loss to offset gains. However, you cannot buy the same or substantially identical security within 30 days before or after the sale.

Example: Maria owns a tech ETF with a $7,000 loss. She sells it to harvest the loss and immediately buys a different tech fund to maintain her market exposure, avoiding the wash sale rule.

This strategy remains valuable for managing tax liability. Investors should maintain diversified portfolios and work with advisors to implement systematic tax-loss harvesting while avoiding wash sale violations.

Extension and Modification of Exclusion for Student Loan Discharges

If your student loans are forgiven due to death or permanent disability, you won’t owe taxes on the forgiven amount. However, other types of loan forgiveness (like income-based repayment forgiveness) will be taxable starting in 2026.

Example: After 25 years of income-based payments, $40,000 of Robert’s student loans are forgiven in 2026. He will owe taxes on this $40,000 as if it were regular income, potentially creating a large tax bill.

Borrowers on income-driven repayment plans should prepare for potential tax liability when loans are forgiven. Setting aside funds or considering tax implications in repayment strategy decisions becomes crucial.

QBI Deduction

The 20% deduction for qualified business income is now permanent. Starting in 2026, the income limits where restrictions begin increase to $75,000 (single) and $150,000 (married filing jointly). A new minimum $400 deduction applies for active business owners with at least $1,000 in business income.

Example: Sarah, a freelance consultant, earns $60,000 in business income. She can deduct 20% ($12,000), reducing her taxable income to $48,000. Even if she only earned $2,000 in business income, she’d still get the $400 minimum deduction.

This provides significant tax relief for small business owners and independent contractors. Business owners should ensure proper documentation of business activities and consider the impact on retirement planning and other tax strategies.

Modification of Limit on Business Interest: Corporate Profitability

Starting in 2025, businesses can deduct more of their interest expenses because the calculation now includes depreciation, amortization, and depletion when determining the limit. This essentially allows businesses to deduct interest based on their cash flow rather than just taxable income.

Example: ABC Manufacturing has $1 million in earnings before interest, taxes, depreciation, and amortization (EBITDA). They can now deduct interest up to 30% of this amount ($300,000), rather than the lower amount they could deduct when depreciation was excluded.

This provides significant relief for capital-intensive businesses and those with substantial debt. Companies should review their financing strategies and consider whether additional debt financing becomes more attractive with the enhanced deduction. Companies with existing high amounts of debt, previously limited in deducting interest, will become more profitable (all other things staying the same) because of the increased deduction of interest. Small-cap and value companies, which typically possess more debt than large-cap and growth companies, may see a greater impact on their profitability, which could boost their share prices somewhat.

Clean Energy Provisions Repealed by Accelerated Sunsetting

OBBBA repealed most of the clean energy provisions enacted by the Inflation Reduction Act of 2022 by simply moving up their expiration dates (most were scheduled to expire at the end of 2032 or 2034) without making other changes. Here’s a list of the provisions repealed by accelerated sunsetting:

The Code Sec. 25E previously owned clean vehicle credit is terminated for vehicles acquired after September 30, 2025.

The Code Sec. 30D clean vehicle credit is terminated for vehicles acquired after September 30, 2025.

The Code Sec. 45W qualified commercial clean vehicle credit is terminated for vehicles acquired after September 30, 2025.

The Code Sec. 30C alternative fuel vehicle refueling property credit is terminated for property placed in service after June 30, 2026.

The Code Sec. 25C energy efficient home improvement credit is terminated for property placed in service after December 31, 2025.

The Code Sec. 25D residential clean energy credit is terminated with respect to any expenditures made after December 31, 2025.

The Code Sec. 179D energy efficient commercial buildings deduction is terminated for property the construction of which begins after June 30, 2026.

The Code Sec. 45L new energy efficient home credit is terminated for homes acquired after June 30, 2026.

The Code Sec. 168(e)(3)(B)(vi) special five-year cost recovery period for certain energy property (as defined in Code Sec. 48(e)) is terminated for property the construction of which begins after December 31, 2024.

The Code Sec. 45V clean hydrogen production credit is terminated for facilities the construction of which begins on or after January 1, 2028.

About the Authors

Ron A. Rhoades, JD, CFP^®

Ron Rhoades is an Associate Professor of Finance at the Gordon Ford College of Business, Western Kentucky University. He also serves as a financial advisor at Scholar Financial, a practice within XY Investment Solutions LLC. With a background as both an attorney and a CERTIFIED FINANCIAL PLANNER™ professional, Ron is a nationally recognized authority on the fiduciary duties of financial advisors.

Chris Brown, Ph.D., CFP^®

Chris Brown is a faculty member in the Department of Finance at the Gordon Ford College of Business, Western Kentucky University, and a financial advisor at Scholar Financial, a practice within XY Investment Solutions, LLC. He holds the CERTIFIED FINANCIAL PLANNER™ designation and a Ph.D. in Personal Financial Planning. His research and teaching focus is on behavioral finance, retirement planning, and evidence-based investment strategies.

Disclosure

This guide is for educational purposes only. It should not be construed as financial, legal, tax, or investment advice, nor as a recommendation to implement any specific strategy, product, or investment. Consult with a qualified financial professional before making investment decisions.