The One Big Beautiful Bill: Major Tax Changes for 2025 and Beyond

On July 4, 2025, Congress enacted H.R. 1, commonly known as the “One Big Beautiful Bill Act” (OBBB). This landmark legislation represents one of the most significant tax overhauls in recent years, building on and extending provisions from the 2017 Tax Cuts and Jobs Act (TCJA) while introducing several new tax benefits. Here’s what you need to know about how these changes will affect your taxes.

What is the One Big Beautiful Bill?

The One Big Beautiful Bill Act is a comprehensive tax reform package that permanently extends many provisions from the TCJA that were set to expire and introduces new tax breaks for individuals and businesses. Most individual provisions took effect for tax year 2025 (the returns filed in 2026), and several more took effect for the first time in tax year 2026. This post was updated in October 2026 to reflect final IRS guidance and the 2026 inflation-adjusted figures in Rev. Proc. 2025-32.

Major Changes for Individual Taxpayers

1. Increased Standard Deduction

Effective: Tax Year 2025

The standard deduction has been increased for all filers:

Single filers: $15,750 (increased by $750)
Married filing jointly: $31,500 (increased by $1,500)

For 2026 the amounts are $16,100 (single) and $32,200 (married filing jointly). The standard deduction will continue to be adjusted for inflation in future years.

What this means for you: For most people who don’t itemize, the higher standard deduction may lower taxable income.

2. New Senior Deduction - $6,000 Extra!

Effective: Tax Years 2025-2028 (Temporary)

This is one of the most exciting provisions for older Americans:

Additional deduction of $6,000 for taxpayers age 65 and older
Available whether you take the standard deduction OR itemize
Phases out for higher earners (IRC 151(d)(5)):
- Single taxpayers: reduced by 6% of modified AGI over $75,000, fully gone at $175,000
- Married filing jointly: reduced by 6% of modified AGI over $150,000, fully gone at $250,000
- Example: a single filer with $100,000 of modified AGI loses $1,500 (6% of the $25,000 excess) and keeps $4,500
You must include your Social Security number, and married taxpayers must file jointly to claim it
Available for tax years 2025 through 2028 only; the same $6,000 applies for 2026

Example: For 2025, a married couple filing jointly, both over 65, with modified AGI under $150,000 could deduct a total of $46,700: the $31,500 standard deduction, plus the $3,200 additional standard deduction for age 65 and older ($1,600 each), plus the $12,000 senior deduction ($6,000 each). The senior deduction is claimed on Schedule 1-A; it is not part of the standard deduction itself.

Important: This deduction is temporary and currently expires after 2028.

3. Enhanced Child Tax Credit

Effective: Tax Year 2025 and Beyond

The Child Tax Credit has been enhanced:

$2,200 per child for 2025 (increased from $2,000), and $2,200 again for 2026
Adjusted for inflation after 2025, rounded to the nearest $100
Refundable portion permanently extended
Made permanent (no expiration date)
The child must have a Social Security number, and at least one parent (either spouse on a joint return) must also have a Social Security number

What this means for families: A family with two children could receive up to $4,400 in tax credits, with the amount increasing in future years based on inflation.

4. Higher SALT Deduction Cap

Effective: Tax Years 2025-2029

The state and local tax (SALT) deduction cap has been significantly increased:

$40,000 cap for 2025 (up from the previous $10,000), rising to $40,400 for 2026 and 1% per year through 2029
$20,000 cap for married filing separately ($20,200 for 2026)
The cap phases down at higher incomes (IRC 164(b)(6) and (7)): it is reduced by 30% of modified AGI over $500,000 for 2025 ($505,000 for 2026), but never below $10,000. A married couple with $550,000 of modified AGI in 2025 has a cap of $25,000 ($40,000 minus 30% of the $50,000 excess). The cap bottoms out at $10,000 around $600,000 of modified AGI ($606,000 for 2026). For married filing separately, the threshold and the floor are both halved.
Returns to a flat $10,000 cap in 2030

Who benefits: Homeowners in high-tax states like California, New York, New Jersey, and Illinois will see the most benefit from this change.

5. Lower Individual Tax Rates - Now Permanent

The lower individual income tax rates from the TCJA have been made permanent. These include the 10%, 12%, 22%, 24%, 32%, 35%, and 37% brackets that were set to expire after 2025.

New Tax Deductions for Workers

Tax Deduction for Tips

Effective: Tax Years 2025-2028 (Temporary)

Workers in qualifying tipped occupations can now claim a tax deduction for their tips:

How it works:

Deduction up to $25,000 per year on qualified tips
This is a tax deduction, not an exemption from withholding
You’ll still have federal income tax withheld during the year
Claim the deduction when you file your tax return
Social Security and Medicare taxes still apply to all tip income

Who qualifies (IRC 224):

Workers in an occupation on Treasury’s list of jobs that customarily and regularly received tips before 2025. The list was finalized on April 10, 2026 (IR-2026-49) and covers more than 70 occupations in eight groups: beverage and food service, entertainment and events, hospitality and guest services, home services, personal services, personal appearance and wellness, recreation and instruction, and transportation and delivery
Includes restaurant servers, bartenders, hairstylists, barbers, delivery drivers, and hotel workers
Only voluntary tips count; mandatory service charges do not
Excludes specified service trades or businesses under IRC 199A(d)(2), such as health, law, accounting, consulting, financial services, athletics, and performing arts
Must provide a Social Security number on the tax return, and married taxpayers must file jointly

Income limitations:

Phase-out begins at $150,000 income (single) or $300,000 (married filing jointly)
Reduced by $100 for every $1,000 over the threshold

Important: This is a temporary provision that expires after 2028.

Tax Deduction for Overtime Pay

Effective: Tax Years 2025-2028 (Temporary)

Workers receiving overtime can claim a deduction for qualified overtime compensation:

How it works:

Deduction up to $12,500 ($25,000 for married filing jointly)
Applies only to overtime premium pay required under the Fair Labor Standards Act (FLSA)
Only the extra half-time portion qualifies for the deduction
This is a tax deduction, not an exemption from withholding
You’ll still have federal income tax withheld during the year
Claim the deduction when you file your tax return
Social Security and Medicare taxes still apply to all overtime pay

Example: If you earn $20 per hour regularly and $30 per hour for overtime work, only the $10 premium (the extra half-time pay) is eligible for the deduction. The regular $20 per hour does not qualify, even though it was earned during overtime hours.

Who qualifies:

Non-exempt workers under FLSA
Must work more than 40 hours per week
Overtime must be required under federal FLSA (not just state law or contract)
Must provide a Social Security number on the tax return, and married taxpayers must file jointly
W-2 reporting by year: for 2025, the IRS gave employers penalty relief (Notice 2025-62), so many 2025 W-2s do not show qualified overtime separately and the amount may need to come from pay stubs or an employer statement. For 2026, employers are expected to report qualified overtime separately on Form W-2

Income limitations:

Phase-out begins at $150,000 of modified AGI (single) or $300,000 (married filing jointly), the same thresholds as the tips deduction
Reduced by $100 for every $1,000 over the threshold

Important: This is a temporary provision that expires after 2028. Overtime paid voluntarily by employers or required only by state law does not qualify.

Tax Deduction for Car Loan Interest

Effective: Tax Years 2025-2028 (Temporary)

A new deduction is available for auto loan interest, with specific requirements:

How it works:

Deduction up to $10,000 per year in auto loan interest
The loan must have originated after December 31, 2024, and be secured by a first lien on the vehicle
Vehicle must be new and have final assembly in the United States
Must be for personal use (not business use)
Includes cars, minivans, vans, SUVs, pickup trucks, and motorcycles with a gross vehicle weight rating under 14,000 pounds
You must report the vehicle’s VIN on your return
Leases do not qualify

Income limitations:

Phase-out begins at $100,000 of modified AGI (single) or $200,000 (married filing jointly)
Reduced by $200 for every $1,000 over the threshold

Important: This is a temporary provision that expires after 2028. Used vehicles and foreign-assembled vehicles do not qualify, even if from American brands.

Major Changes for Business Owners

1. 100% Bonus Depreciation - Now Permanent

Effective: Property acquired after January 19, 2025 (IRC 168(k))

Businesses can immediately deduct 100% of the cost of qualifying property in the year it’s purchased, rather than depreciating it over several years.

What this means: If you buy equipment, machinery, vehicles, or computers for your business, you may be able to deduct the full cost right away instead of over several years.

2. Immediate R&D Expense Deduction

Effective: Tax Year 2025

Domestic research and experimental expenses can now be deducted in the year they’re incurred under new IRC 174A, rather than being capitalized and amortized over 5 years. Foreign research costs still must be amortized over 15 years.

Eligible small businesses also had an election to apply the new rules retroactively to earlier years, but the deadline for that election (July 6, 2026) has passed.

Who benefits: Tech companies, manufacturers, and any business investing in innovation and product development.

3. Enhanced Pass-Through Deduction (Section 199A)

Effective: Made Permanent

The 20% deduction for qualified business income from pass-through entities (LLCs, S-Corps, partnerships, sole proprietorships) has been:

Made permanent (no expiration)
Enhanced with a minimum $400 deduction (IRC 199A(i)), effective for 2026, for taxpayers with at least $1,000 of qualified business income from a trade or business in which they materially participate
Both figures adjusted for inflation after 2026; see our post on the provisions new for 2026

Example: If your LLC generates $100,000 in qualified business income, the deduction could be up to $20,000. The actual amount is limited to 20% of your taxable income (before the deduction, less net capital gain), and at higher incomes it may also be limited by W-2 wages and the basis of business property.

4. Permanently Higher Estate Tax Exemption

Effective: 2026 and Beyond

The estate tax exemption has been permanently set at:

$15 million per individual ($30 million for married couples)
Adjusted for inflation in future years

Who benefits: Business owners and families with significant assets can now pass more wealth to heirs without estate tax concerns.

Charitable Giving Enhancement

Effective: Tax Years Beginning After December 31, 2025

A new deduction for taxpayers who don’t itemize:

$1,000 deduction for single filers ($2,000 for joint filers) under IRC 170(p)
Available to those who take the standard deduction
Cash contributions only, and not to donor-advised funds or supporting organizations
Separately, itemizers face a new floor of 0.5% of AGI on charitable deductions starting in 2026 (IRC 170(b)(1)(I)), which changes year-end giving strategy; see our post on the provisions new for 2026

What this means: Even if you take the standard deduction, you can still get a tax benefit for charitable giving.

What This Means for Your Tax Planning

For Most Taxpayers:

✓ Larger standard deduction may lower taxable income ✓ Enhanced child tax credits for families ✓ New deductions available for tips, overtime, and car loans (if you qualify) ✓ Charitable deduction even if you don’t itemize (starting 2026)

For Tipped and Hourly Workers:

✓ Tax deduction for tips (up to $25,000 annually) ✓ Tax deduction for overtime premium pay (up to $12,500/$25,000) ✓ Important: These are deductions claimed on your tax return, not exemptions from withholding ✓ Plan ahead: Set aside money throughout the year as taxes are still withheld from your paychecks

For Seniors (65+):

✓ Extra $6,000 deduction (per person!) through 2028 ✓ Simplified tax filing with higher standard deduction ✓ Possible lower tax in retirement years, depending on income ✓ Time-limited benefit - expires after 2028

For Business Owners:

✓ Immediate write-offs for equipment and property ✓ R&D expense deductions in the year incurred ✓ Permanent 20% pass-through deduction ✓ Higher estate tax exemption for succession planning

For Homeowners in High-Tax States:

✓ $40,000 SALT cap for 2025 and $40,400 for 2026 (vs. previous $10,000), phasing down above $500,000 / $505,000 of modified AGI ✓ May produce savings if you itemize, depending on your situation ✓ Annual increases through 2029 ✓ Plan ahead: Cap returns to $10,000 in 2030

Important Considerations

Understanding Deductions vs. Exemptions

Critical distinction: The new provisions for tips, overtime, and car loans are tax deductions, not exemptions:

Federal income tax will still be withheld from your paychecks
Social Security and Medicare taxes still apply to all income
You claim these deductions when filing your tax return
You may receive a larger refund or owe less, but the benefit comes at tax time

Temporary vs. Permanent Provisions

Many provisions have expiration dates:

Temporary (Expire 2028):

Senior deduction ($6,000)
Tips deduction
Overtime deduction
Car loan interest deduction

Temporary (Expire 2029):

Higher SALT cap ($40,000 for 2025, indexed 1% per year, subject to the income phase-down)

Permanent:

Individual tax rates
Enhanced child tax credit
Pass-through deduction (Section 199A)
Estate tax exemption
100% bonus depreciation
R&D expense deduction

Record Keeping Requirements

With new deductions, maintaining excellent records is more important than ever:

For tipped workers:

Daily tip logs for cash tips
Keep all tip reports and statements
Verify tips are properly reported on Form W-2

For overtime workers:

Track overtime hours worked
Check whether your W-2 shows qualified overtime separately (expected for 2026; many 2025 W-2s do not)
Ensure overtime qualifies under FLSA requirements

For car loan deduction:

Keep loan documents and interest statements
Verify vehicle assembly location (must be U.S.)
Maintain proof of the loan origination date and the vehicle’s VIN

For all taxpayers:

Maintain detailed business expense records
Document charitable contributions
Keep receipts for all deductible expenses

State Taxes May Differ

Remember that these are federal tax changes. Your state may have different rules:

Tips and overtime deductions may not apply at the state level
State tax may still be owed on these items
State SALT deduction rules may differ
Consult with a tax professional about your specific state

Withholding Adjustments

Important: Form W-4 and the withholding tables were not changed for these deductions during 2025, so 2025 withholding did not reflect them:

Your employer still withholds federal income tax from tips and overtime
The benefit shows up when you file and claim the deduction
If you expect a large tips or overtime deduction for 2026, run the IRS Tax Withholding Estimator and adjust your Form W-4 rather than waiting for a refund

The Bottom Line

The One Big Beautiful Bill provides significant tax benefits, but it’s more complex than headlines suggest. Many provisions are temporary, have income limitations, and require careful documentation. Understanding the difference between tax deductions and tax exemptions is crucial to avoid surprises.

How We Can Help

At R Tax Services, we’re staying on top of all these changes to help you:

✓ Understand which provisions apply to you and which don’t

✓ Claim the deductions you qualify for under the new law

✓ Properly track and report tips, overtime, and other qualifying income ✓ Take advantage of business provisions if you’re self-employed

✓ Plan for temporary provisions that will expire

✓ Navigate the interaction between federal and state taxes

✓ Avoid common mistakes in claiming new deductions

Our Services Include:

Complete tax preparation incorporating all new provisions
Tax planning under the new law
Guidance on documentation requirements for new deductions
Business advisory for depreciation and deduction strategies
Retirement and estate planning with new exemption amounts
Year-round support as IRS regulations are clarified

Take Action Now

The 2025 tax year is closed, and 2025 returns on extension are due October 15, 2026. The 2026 tax year is well underway, and several provisions (the charitable floor, the cap on itemized deduction benefits, the non-itemizer charitable deduction, and the Section 199A minimum) apply for the first time this year. Don’t wait until tax season to understand how these provisions affect you.

Schedule a consultation today to discuss:

How these changes specifically impact your situation
Whether you qualify for the new deductions
Planning strategies that fit your situation
Documentation you need to maintain
Planning for provisions that will expire
Adjusting your withholding appropriately

Note: This blog post provides general information about federal tax law changes and should not be considered personalized tax advice. Tax situations vary, and we recommend consulting with a qualified tax professional to understand how these changes apply to your specific circumstances. Information is current as of October 2026 and is subject to further IRS guidance and interpretation. The tips, overtime, and car loan provisions are tax deductions, not exemptions from withholding or payroll taxes.