07/07/2025

Key Tax Changes in the One Big Beautiful Bill Act

On July 3, 2025, Congress passed H.R. 1, more commonly known as the One Big Beautiful Bill Act (“Act”). The Act was signed by President Trump on July 4, 2025. The Act was structured as a budget reconciliation package to avoid the filibuster requirements in the Senate.

As reported by many sources, the Act makes numerous tax and non-tax changes to federal law.

In this Article, we’ll provide a brief review of some of the tax changes that we believe will impact the most taxpayers.

Individual Tax Changes

• Tax Rates. The Act maintains the seven federal income tax rates as defined by the original 2017 Tax Cuts and Jobs Act. Those include a top rate of 37% and a minimum rate of 10%. The Act freezes certain of the tax brackets applicable to the rates, so that not all tax brackets will be adjusted for inflation in future years.
• Mortgage Interest Deduction. The Act leaves the mortgage interest deduction at its current limit of $750,000 in mortgage debt, except for single filers ($375,000). The limit was previously reduced from a $1 million threshold by the 2017 Tax Cuts and Jobs Act.
• State and Local Tax Deduction. The Act increases the State and Local Tax deduction to $40,000 until 2029.  However, this higher deduction will begin to phase out for incomes above $500,000 ($250,000 for married taxpayers filing separately). In 2030, the State and Local Tax deduction reverts to $10,000, which will apply to all taxpayers regardless of income. The Act does not change the treatment of pass-through entity taxes.
• Standard Deduction. Under the 2017 Tax Cuts and Jobs Act, the standard deduction was doubled. The Act makes this deduction permanent and increases the deduction to $15,700 for single filers and $31,500 for joint filers. Deduction amounts are indexed for inflation for years after 2025.
• Personal Exemption Elimination. The Act makes the elimination of the personal exemption permanent. This exemption was first eliminated in the 2017 Tax Cuts and Jobs Act.
• No Tax on Tips Until 2028. The Act makes up to $25,000 of tip income deductible for workers in traditionally and customarily tipped businesses for 2025 through 2028.  This deduction phases out for married individuals whose adjusted gross income exceeds $300,000 ($150,000 for single filers).
• No Tax on Overtime Until 2028. The Act makes up to $25,000 for married taxpayers ($12,500 for single taxpayers) of overtime compensation deductible for 2025 through 2028.  This deduction again phases out for married filers whose adjusted gross income exceeds $300,000 ($150,000 for single filers). The deduction applies for “qualified overtime,” which is overtime compensation paid to an individual as required under federal labor law which is in excess of the individual’s regular pay rate.
• New Senior Tax Deduction. Senior citizens (age 65 and older) will receive an additional $6,000 income deduction, which starts to phase out at incomes of $75,000 for single taxpayers and $150,000 for married taxpayers. This deduction is in addition to the current deduction of $2,000 for single taxpayers and $3,200 for married taxpayers who are age 65 or older. Each spouse may claim this $6,000 deduction, so married couples may have a deduction of up to $12,000.  This deduction is intended to allow most social security recipients not to pay federal income tax on their benefits, although the deduction does not eliminate federal income tax on social security benefits.
• Enhanced Child Tax Credit. The Child Tax Credit is made permanent and is increased to $2,200 per child for 2025.  The credit will be indexed for inflation in future years. In addition, the refundable portion of the credit, $1,700 per child for 2025, is also made permanent and indexed for inflation. Income phase out thresholds, which are $400,000 for joint filers and $200,000 for all others, are made permanent.
• Deduction for Car Loan Interest. For tax years 2025 through 2028, the Act allows taxpayers to deduct up to $10,000 of interest on a loan for a vehicle that was assembled in the United States. The deduction begins to phase out for married filers whose income exceeds $200,000 ($100,000 for single filers). Taxpayers do not need to itemize to claim this deduction.
• Charitable Provisions. The Act creates an above-the-line deduction of $1,000, $2,000 for joint filers, for charitable donations. The Act also creates a 0.5% floor on itemized deductions for charitable donations.
• Estate, Gift and GST Tax Exclusions. Estate, Gift and Generation Shipping Transfer Tax lifetime exclusions will increase to $15 million per person (from $13.99 million per person) and will continue to be indexed for inflation in the future.
• Limitation on Itemized Deductions. The Act limits the benefit of itemized deductions for those taxpayers in the 37% tax bracket. The benefit of such deductions would be capped at 35%. The Act also permanently repeals the overall limitation on itemized deductions which was temporarily removed under the 2017 Tax Cuts and Jobs Act.
• AMT Exemption Made Permanent. The 2017 Tax Cuts and Jobs Act increased the Alternative Minimum Tax exemption and the level at which such exemption begins to phase out. The Act makes these changes permanent.
• Trump Accounts. The Act allows for tax-preferred savings accounts to be created which can be funded up to $5,000 per year for the benefit of individuals under age 18.  Contributions can be made by parents or others until age 18, at which point the account would convert to an account like a traditional IRA. Distributions from the account cannot be made until the beneficiary reaches age 18.  Parents of newborns born between 2025 and 2028 would qualify for $1,000 in federal money to begin the account.

Business Tax Changes

• Bonus Depreciation. The Act makes 100% bonus depreciation permanent for qualified property acquired after January 19, 2025. Businesses may also elect to claim a reduced amount of bonus depreciation (40 or 60%) in the first taxable year.
• Expensing of Research and Development Expenditures. The Act restores the ability of businesses to deduct research or experimental expenditures paid or incurred beginning in 2025, but only if such expenditures are domestic. Smaller businesses, with revenue of $30 million or less, may elect to apply this provision retroactively to expenditures after 2021. The deduction of all other domestic research and development expenditures between December 21, 2021 and December 31, 2024 can be accelerated over a one or two year period.
• Qualified Business Income. The Act makes the IRC 199A deduction for qualified business income permanent, with some changes to phase-in amounts.
• Opportunity Zones. The Act makes opportunity zones permanent, with rolling 10-year designations of opportunity zones. The Act permits deferral of gain that is invested in a Qualified Opportunity Fund in 2027 or later, with the deferred gain to be recognized upon the earlier of the date the investment is sold and the five-year anniversary after the investment is made. The Act also establishes a 10% basis step-up after five years (or 30% in the case of “qualified rural opportunity funds”). If a Qualified Opportunity Fund investment is held for at least 10 years (up to 30), no tax is imposed on the gain realized when such investment is sold
• Qualified Small Business Stock. The Act raises the per-company cap for Qualified Small Business Stock from $10 million to $15 million. In addition, the Act raises the corporate asset cap from $50 million to $75 million. Both limits are indexed to inflation. The required holding period for benefits is reduced from 5 years to 3 years, but taxpayers will only receive a percentage of benefits in years 3 and 4.
• New Markets Tax Credit. The Act makes the federal new markets tax credit permanent.
• Information Reporting. Beginning in 2026, the threshold for reporting income from services performed by an independent contractor, and certain other payments generally reflected on a Form 1099-MISC, will be increased from $600 to $2,000. That threshold will be indexed for inflation beginning in 2027.
• Clean Energy Credits and Incentives. The Act significantly amends the federal clean energy tax incentives and credits, as previously passed in the Inflation Reduction Act. Changes include the termination of the clean vehicle credit for vehicles acquired after September 30, 2025 and the termination of the new energy efficient home credit for qualifying homes acquired after June 30, 2026.
• International Tax Provisions. The Act makes a number of changes to international tax provisions, including changes to the existing provisions on GILTI income. The Act does not include the Section 899 “Revenge Tax” that had been discussed in the media.
• No Changes to P.L. 86-272. Public Law 86-272 provides protection from state income taxation for companies who only enter a state to sell tangible personal property there. The version of the Act initially passed by the House of Representatives included certain changes to P.L. 86-272 that would have significantly expanded the scope of its protection. Unfortunately, these changes were removed from the Act by the Senate Parliamentarian, who ruled that these changes were beyond the scope of budgetary provisions.

If you have questions regarding any changes passed in the Act, please contact a member of the McGrath North Tax Group.