All law changes have winners and losers and, despite the stated goal of reducing taxes for most businesses and individuals, the One Big Beautiful Bill Act (“the Act”) is no exception. Much of the bill extends or makes permanent changes from the 2017 tax act that had, to meet budgetary concerns raised back in 2017, been scheduled to expire at the end of 2025. In this newsletter the focus is on changes you, our business and individual clients, are most likely to notice, or should consider for effective tax planning, and not the myriad of law extensions and minor tweaks that most taxpayers will not notice.
You can scan the bold headlines below for changes that interest you. Business related provisions are sorted in this newsletter after the individual related provisions.
Government guidance on the tax provisions is limited. In addition, a lot was changing even as the Act was beginning to be published, particularly with respect to effective dates and amounts. As a result, we suggest caution before relying on any news item about the bill’s contents. Smith and Company tax professionals continue to follow the evolving guidance with respect to the Act and are prepared to discuss the latest recommendations with you.
NOTE: All provisions discussed here apply for federal returns and may or may not be adopted by your state of residence.
EMPLOYEES WHO RECEIVE TIPS (2025-2028)
The Act adds a new but temporary deduction of up to $25,000 for “qualified tips,” subject to phase out for taxpayers with modified adjusted gross income (“MAGI”) exceeding $150,000 ($300,000 joint). To qualify, a taxpayer must have a social security number and work in a qualified industry. The deduction is set to expire after 2028. Additional IRS guidance is available at this link.
EMPLOYEES WHO ARE PAID OVERTIME (2025-2028)
The Act adds a new but temporary deduction of up to $12,500 ($25,000 joint) for “qualified overtime compensation,” subject to phase out for taxpayers with modified adjusted gross income exceeding $150,000 ($300,000 joint). The deduction is set to expire after 2028. Additional IRS guidance is available at this link.
EMPLOYEES WHO PARTICIPATE IN EMPLOYER DEPENDENT CARE PLANS
Beginning with tax years after 2025, taxpayers who have a dependent care assistance plan through their employer will have an increased maximum of $7,500 ($3,750 married filing separately).
INDIVIDUALS WHO PAY CAR LOAN INTEREST (2025-2028)
The Act adds a new but temporary deduction of up to $10,000 per year for interest paid on qualified new loans originated after December 31, 2024. The loan must be used to purchase, and be secured by, a new, U.S. assembled, personal vehicle with a gross vehicle weight rating below 14,000 pounds. The deduction is available without regard to if an individual itemizes deductions but is subject to a phaseout for individuals with modified adjusted gross income exceeding $100,000 ($200,000 joint). The deduction is set to expire after 2028. Additional IRS guidance is available at this link.
INDIVIDUALS WHO ARE 65 OR OLDER (2025-2028)
The Act provides a temporary $6,000 personal exemption deduction for each qualified individual, subject to a phase out for taxpayers with modified adjusted gross income exceeding $75,000 ($150,000 joint). The deduction is set to expire after 2028. Additional IRS guidance is available at this link.
INDIVIDUALS WHO PAY OVER $10,000 IN PERSONAL STATE AND LOCAL TAXES (2025-2029)
The Act increases the limit on the deductible amount from $10,000 to $40,000 ($20,000 married filing separately) for 2025. The limit then increases further by 1% each year through 2029 before reverting to $10,000 starting with 2030. The increased limit is phased out, however, for taxpayers with modified adjusted gross income over $500,0000 ($250,000 married filing separately).
INDIVIDUALS WITH DEPENDENT CHILDREN
The Act makes the child tax credit permanent and increases the per-child amount for qualified dependents under 17 years of age to $2,200. Dependents must have a social security number issued before the tax return due date. Consistent with existing law, credits phase out at higher income levels.
TO BENEFIT INDIVIDUALS UNDER 18 YEARS OF AGE
Starting with the 2026 tax year, the Act creates a retirement savings vehicle referred to as a Trump account, which can be contributed to on behalf of a child under age 18.
TO BENEFIT CHILDREN BORN 2025 THROUGH 2028
The Act creates a pilot program, which will not be available until the 2026 tax year, offering a one-time $1,000 credit per qualifying child that will be “refunded” directly to the child’s Trump savings account. Taxpayers will likely have to separately open the account and it is possible a tax return will need to be filed in the child’s name to claim the payment. Guidance on the mechanics of the program is pending.
INDIVIDUALS IN THE HIGHEST (37%) MARGINAL TAX BRACKET
For tax years after 2025, the Act limits the benefit of itemized deductions for individuals in the 37% tax bracket. The limitation effectively caps the tax benefit of itemized deductions to 35%.
INDIVIDUALS WHO DONATE TO CHARITY
For tax years beginning after 2025, the Act adds a half percent floor to the amount of charitable donations that can be deducted.
For tax years after 2025, the deduction available to individuals who do not itemize deductions is $1,000 ($2,000 joint) for cash contributions paid to certain qualified charities.
INDIVIDUALS WHO INCUR DISASTER-RELATED PERSONAL CASUALTY LOSSES
Beginning after December 31, 2025, the deduction is extended to losses from state declared disasters.
Note that losses not related to a declared disaster continue to be non-deductible.
ENERGY CREDITS FOR INDIVIDUALS
The Act terminates or curtails:
1 – credits for new and used clean vehicle acquisitions (terminated for vehicles acquired after September 30, 2025)
2 – the credit for “alternative fuel vehicle refueling property” e.g. an EV charger (terminates for property placed in service after June 30, 2026)
3 – both the energy efficient home improvement credit and the residential clean energy credit, e.g. credits for solar panels, heat pumps, insulated doors, etc. (terminated for improvements placed in service or expenditures made after December 31, 2025)
INDIVIDUALS WITH 529 EDUCATION SAVINGS PLANS
Starting with distributions made after July 4, 2025, the Act allows families to use tax-free distributions from 529 plans to pay for a much broader range of expenses.
The range of higher education expenses that qualify is expanded to include expenses related to enrollment in recognized certificate, licensing, or apprenticeship programs even if they are not traditional degree programs.
The range of K-12 education expenses that qualify is expanded to include books, tutoring, test fees, education therapies for students with disabilities, and more.
Starting with the 2026 tax year, the annual per beneficiary limit for K-12 distributions doubles from $10,000 to $20,000.
INDIVIDUALS WHO HAVE GAMBLING WINNINGS OR LOSSES
Starting in 2026, only 90% of wagering losses (gross, before netting to gains) can be deducted against winnings. This means an individual can owe tax even if they broke even or lost money.
ESTATE AND GIFT TAX EXEMPTION
The exemption amount increases from $13.99 million ($27.98 million joint) for 2025 to $15 million ($30 million joint) for decedents dying and gifts made after December 31, 2025.
NOTE: married individuals who have estates larger than the single exemption ($13.99M for 2025, $15M after 2025) should contact our firm about filing an estate tax return at the death of the first spouse to make sure the deceased spouse’s half of the joint exclusion is claimed. Obtaining the $27.98 /$30 million joint exclusion is not automatic.
BUSINESS ASSETS: BONUS DEPRECIATION
Effective for property acquired after January 19, 2025, the Act makes 100% additional first year bonus depreciation on qualified assets permanent.
The Act temporarily extends the 100% first-year depreciation benefit to “qualified production property;” i.e. certain non-residential real property used in the manufacturing, production or refining of certain tangible personal property. The benefit is available for property placed in service after July 4, 2025 and before January 1, 2031; the construction of which began after January 19, 2025 and before January 1, 2029.
BUSINESS ASSETS: SECTION 179 EXPENSE ELECTION LIMITS
For qualified business property placed in service after December 31, 2024, the Section 179 expensing limit is increased to $2,500,000 and the phasedown threshold is increased to $4,000,000. Both amounts are subject to inflation adjustments.
ENERGY PROPERTY CREDITS FOR BUSINESSES
The Act terminates or curtails:
1 – credits for clean vehicle acquisitions (terminated for vehicles acquired after September 30, 2025)
2 – the credit for “alternative fuel vehicle refueling property” e.g. an EV charger (terminates for property placed in service after June 30, 2026)
3 – the new energy efficient home credit for commercial builders (terminates for construction beginning after June 30, 2026)
4 – the efficient commercial buildings deduction (terminates for construction beginning after June 30, 2026)
QUALIFIED SMALL BUSINESS STOCK BENEFITS
The Act softens the 5-year holding period cliff by providing a phase-in for certain dispositions of stock held between 3 and 5 years, but only for stock issued on or after July 5, 2025. The Act also increases the exclusion maximum to $15 million for stock issued on or after July 5, 2025. Finally, the Act increases the income ceiling for corporations to be defined as small businesses, from $50 million to $75 million (subject to future inflation adjustments).
BUSINESSES THAT INCUR RESEARCH & DEVELOPMENT (R & D) EXPENSES
The act removes, for research based in the US, the requirement to capitalize then amortize research and development expenditures. Research performed outside the US still must be capitalized and amortized, and businesses can elect to capitalize then amortize the US based costs.
CORPORATIONS THAT MAKE CHARITABLE DONATIONS
For tax years beginning after December 31, 2025, the Act imposes a new 1% floor, in addition to the existing 10% ceiling, on charitable deductions.
ENHANCED MANUFACTURING INVESTMENT CREDIT
The advanced manufacturing credit (also known as the semiconductor credit or the CHIPS credit) on qualified investments in advanced manufacturing is increased to 35% (up from 25%) for property placed in service after 2025. The credit continues to only be available for property on which construction will have begun before January 1, 2027.
BUSINESSES THAT FILE OR RECEIVE FORMS 1099-NEC & 1099-MISC
After 2025, the reporting thresholds increase from $600 to $2,000 (subject to future inflation adjustments).
BUSINESSES THAT FILE OR RECEIVE FORM 1099-K
The Act retroactively reverts Form 1099-K reporting thresholds to $20,000 and 200 transactions.