Pennsylvania CPA Journal
This feature looks at many of the federal personal income tax changes created by 2025’s One Big Beautiful Bill Act. Many of the alterations will impact tax filings now and down the road.
In the previous issue of the Pennsylvania CPA Journal, we looked at the One Big Beautiful Bill Act (OBBBA) through the lens of what the mass of tax changes means for the national debt and the long-term economic health of the country. But you, as tax practitioners, still have to get the forms filed and answer your clients’ questions. This feature looks at the taxpayer-friendly, stimulus-effect side of the OBBBA, or where the rubber meets the road.
It is a big bill, with lots of tax changes. This feature focuses on several, but not all, changes to personal income tax filing for families that take effect this year and some that will kick in next year. The summary below is primarily sourced from Public Law 119-21,1 related IRS notices and fact sheets,2 and reflects our best interpretations as of the date of this feature, subject to additional guidance. Although it may be needless to remind everyone, all references to provisions being made “permanent” are subject to possible changes.
Rates
When it comes to federal taxes, the first thought many clients have is, “Did my tax rate go up?” The OBBBA did not change the individual tax rate structure that was established with the Tax Cuts and Jobs Act (TCJA) in 2017. However, the 2025 bracket thresholds increased from 2024 largely due to inflation indexing. Beginning in 2026, the TCJA rate-and-bracket framework has been locked in, preventing a scheduled reversion. The brackets will continue to be inflation-indexed. The OBBBA also modifies the inflation-adjustment baseline for the 12% and 22% bracket thresholds, which generally results in slightly higher thresholds.
Expanded Standard Deduction
The TCJA’s standard deductions were made permanent with an additional temporary enhancement. For 2025, it is $31,500 for married filing jointly (MFJ) and $15,750 for single and married filing single (MFS). The head of household (HOH) deduction is $23,625. For 2026, deduction amounts will climb to $32,200 for MFJ, $16,100 for single and MFS, and $24,150 for HOH.
Between the enhanced standard deductions and limitations of certain itemized deductions, more taxpayers may stop itemizing and gravitate to the simpler standard deduction – especially wage earners without large mortgage interest, state and local tax (SALT), or charitable deductions. This will especially be true for senior taxpayers, who enjoy even more generous additional standard deductions – $3,200 more to the standard deduction for a married couple ($1,600 for each taxpayer who qualifies). This added benefit is separate from the OBBBA’s “senior deduction”.
Child and Dependent Care Credit
The child tax credit has been set at $2,200 per qualifying child for 2025 (it was $2,000 prior to OBBBA) and will be indexed for inflation after that. It retains the higher-income phaseout of $50 for each $1,000 or portion thereof above the thresholds of $400,000 MFJ and $200,000 for all others. It has a Social Security number requirement for both the qualifying child and at least one parent. The credit is generally nonrefundable, and there is no earned income requirement. There is, however, a refundable portion of the credit – up to $1,700 for 2025 and inflation adjusted thereafter – if the income tax liability is too low to absorb the basic credit, provided the earned income test is met (generally having at least $2,500 of earned income, and the refundable portion is 15% of earned income above $2,500). There is also a nonrefundable “credit for other dependents” of up to $500 per qualifying dependent.
Regarding the dependent care credit, the OBBBA retains the maximum of $3,000 for one qualifying person (i.e., a dependent under age 13 or disabled), with a maximum $6,000 of expenditures for two or more qualifying persons. The new law did create a slightly more beneficial credit schedule for low- and middle-income taxpayers beginning in 2026. Prior to the OBBBA, the maximum credit was capped at 35% and started at the $0 to $15,000 of adjusted-gross-income (AGI) range, and was still a 20% credit for AGIs above $43,000. After the OBBBA, the max percentage is 50%, starting at $0 to $15,000 of AGI, and down to 20% if AGI is above $210,000 MFJ or $105,000 for all others.
Education Incentives
The OBBBA made 529 plans substantially more usable for elementary and high school (K–12) and certain nontraditional education spending. It expanded certain “qualified education expenses,” effective after July 4, 2025, to allow more categories of expenses to be paid with tax-free 529 withdrawals. In addition, beginning in 2026 the act raises the annual K–12 distribution cap from $10,000 to $20,000 per beneficiary.
The law broadens qualified expenses to items such as curriculum materials, books, online educational materials, certain curriculum-based tutoring and instructional resources, standardized test fees, dual-enrollment costs, career credentialing programs, testing and continuing education tied to those credentials, and certain disability-related educational services and therapies.
The OBBBA also permanently extended the enhanced contribution rules for ABLE accounts, which are tax-favored disability savings accounts.
State conformity is important: not all states automatically adopt federal 529 expansions. So, a 529 withdrawal that is federally tax-free may still trigger state tax recapture or penalties, depending on the rules of the applicable state 529 plan.
New Section 530A Accounts
The OBBBA created a new class of tax‑advantaged savings accounts for eligible minors. These accounts will be available for contributions on July 4, 2026, and supplement existing 529 plans and other savings vehicles for education. These new Section 530A accounts may be funded with after-tax deposits up to $5,000 per year per child, indexed for inflation, contributed by parents, guardians, Section 128 tax-free employer contributions to the extent allowed, and other authorized individuals and public sources. Eligible minors include those who have not turned 18 before the end of the calendar year in which the account election is made and those who have a valid Social Security number. These accounts will grow tax-deferred, and distributions will be allowed after age 18 for qualifying purposes, such as education, home purchase, and retirement. Qualifying distributions will be taxable similar to IRA rules, and subject to penalty if not qualifying. The OBBBA provides a pilot program contribution of $1,000 for eligible children born between Jan. 1, 2025, and Dec. 31, 2028.
Taxpayers should visit the IRS’s OBBBA website for continuing guidance on the following issues: definitions of eligible investments, prevention of ineligible distributions prior to age 18, income tax and the penalty consequences of disqualifying distributions, rollovers, reporting requirements, how traditional IRA rules for early distribution penalties may apply, how much is included in basis with respect to the source of contributions, how custodians are permitted or prohibited to handle distributions, and several FAQs.2
Senior Bonus Deduction
The OBBBA has created a senior bonus deduction, a below-the-line nonitemized deduction available through new Schedule 1-A, whether the taxpayer itemizes or not. It is up to $6,000 for each qualifying taxpayer age 65 or older for tax years 2025 through 2028. Married seniors may claim up to $12,000 if both spouses qualify, but they must file jointly to claim the deduction (even if only one spouse qualifies), and the return must include the qualifying individual(s)’ Social Security number(s). The deduction begins to phase out when modified AGI (MAGI) exceeds $75,000 ($150,000 for joint filers), reduced by 6% of MAGI above the threshold. When both spouses qualify, the combined deduction effectively declines by 12 cents per $1 of MAGI above $150,000. The deduction is fully phased out at $175,000 MAGI ($250,000 for joint filers). For this provision, MAGI is generally AGI plus amounts excluded under Sections 911, 931, or 933.
For moderate-income retirees below the phaseout range, it can materially reduce taxable income. In combination with other deductions, it may reduce or even eliminate federal income tax liability. However, it does not change the underlying rules that determine when Social Security benefits become taxable. Any reduction in tax on benefits is indirect, through lower taxable income and lower overall tax. High-income seniors may see little or no benefit due to the phaseout.
There are common misconceptions your clients may hold of which you should be aware. Many assume the deduction is available only to seniors who take the standard deduction. It is not. Some think age 65 alone guarantees the benefit, but it is also limited by income, Social Security, and joint-filing rules for married taxpayers. Some will assume the provision is permanent, but for planning purposes they should be aware of its 2025–2028 sunset. Because the deduction is keyed to MAGI, the timing of virtually any discretionary income or deduction items (such as bonus income, portfolio rebalancing, and charitable giving strategies) can affect eligibility and the amount of the benefit.
The OBBBA does not alter the formula governing the taxation of Social Security benefits, but it may reduce the effective taxation of those benefits for some. This does not arise from any “repeal” of Social Security taxation, but rather from new deductions that can reduce AGI. Because the taxation of Social Security is based on “combined income,” a reduction in AGI may lower the portion of benefits subject to tax. Accordingly, taxpayers and advisers should revisit prior assumptions and projections involving Social Security.
Tip Income
For the years 2025 through 2028, OBBBA creates another below-the-line nonitemized deduction (available through new Schedule 1-A, whether the taxpayer itemizes or not) of up to $25,000 per tax return (or actual tips if lower) for “qualified tips” for employees and self-employed individuals in certain occupations where workers regularly receive tips.
Qualified tips are defined as cash and cash-equivalent tips (including credit- and debit-card tips, but not cryptocurrency or other nontraditional payment forms unless specifically approved by IRS guidance) received by an individual in an occupation where tipping was customary before Jan. 1, 2025, paid voluntarily and determined by the payor, not negotiated, and not received as an employee or owner of a specified service trade or business (SSTB) as defined by QBI rules. Married taxpayers must file jointly to claim this deduction, even if only one spouse qualifies. For self-employed individuals, the deduction generally cannot exceed the individual’s net income (before this deduction) from the trade or business in which the tips were earned. The deduction begins to phase out above $300,000 for MFJ ($150,000 for all others) by $100 for every $1,000 over the MAGI threshold, rounded down. The deduction is therefore completely phased out for taxpayers making $550,000 MFJ and phased out at $400,000 for all others. However, the max AGI that could wipe out the deduction could be lower if the actual tip income is lower.
However, note that an MFJ return is only entitled to one maximum of $25,000, even if both spouses have tip income. Also note that tips must still be reported on W-2s or 1099s or reported by the taxpayer on Form 4137. They remain subject to federal payroll taxes and will probably still be subject to state and local income taxes unless they adopt federal rules.
A few of the questions arising from this deduction include how does an employee actually know whether their employer is an SSTB; whether there is transition relief for owners of SSTBs who traditionally receive tips; what if the employer has multiple lines of business, some being SSTBs while others are not; how are mandatory or automatic tips treated; and how should tip-receivers report properly for 2025?2
Overtime Pay
For the years 2025 through 2028, OBBBA added a below-the-line nonitemized deduction (available through new Schedule 1-A, whether the taxpayer itemizes or not) for qualified overtime pay. The deduction lets workers deduct the “premium” portion of overtime pay that is required by the Fair Labor Standards Act (FLSA) – the extra “half” in “time-and-a-half” above their regular rate – based on the amount beyond 40 hours in a typical workweek. The maximum deduction is the lesser of actual qualifying overtime pay, or $25,000 for MFJ ($12,500 for all others). Married taxpayers must file jointly to claim this deduction, even if only one spouse has overtime premium pay. The deduction begins to phase out above $300,000 for joint filers ($150,000 for all others) by $100 for every $1,000 over the MAGI threshold, rounded down. The deduction is therefore completely phased out for taxpayers making $550,000 MFJ and $275,000 for all others. However, the max AGI that could wipe out the deduction could be lower if the actual overtime premium pay is lower.
Note that an MFJ return is only entitled to one maximum of $25,000, even if both spouses have overtime income. Qualifying overtime pay must be reported on W-2s or 1099s or other allowed document, and it remains subject to federal payroll taxes. They will probably still be subject to state and local income taxes unless states adopt federal rules.
A few unanswered questions as of the date of this article include how to determine if an employee is covered by FLSA; how to report for 2025; and how to report overtime pay if the worker is an independent contractor, assuming that pay is qualifying.2
Interest Expense on Car Loans
The OBBBA created a temporary below-the-line nonitemized deduction (available through new Schedule 1-A, whether the taxpayer itemizes or not) for qualified passenger vehicle loan interest for tax years 2025 through 2028. Eligible taxpayers may deduct up to the lesser of $10,000 per return regardless of the number of cars or loans (including MFJ), or the actual qualified interest paid on a vehicle loan, with such loan being incurred on or after Jan. 1, 2025.
To qualify the loan must be secured by a lien on the vehicle (not an unsecured personal loan, and lease payments don’t qualify); the vehicle must be new (original use) to the taxpayer, for personal use, and be a car/minivan/van/SUV/pickup/motorcycle; and it must have had its final assembly in the United States. The IRS states that the location of the final assembly can be found on the vehicle’s window sticker or by using the National Highway Safety Administration’s VIN Decoder tool.2
The taxpayer must report the vehicle’s VIN on the return for any year the deduction is claimed.
The deduction phases out by reducing the allowable amount of $200 for each $1,000 (or portion thereof) that MAGI exceeds $100,000 ($200,000 for MFJ). As a practical matter, that fully eliminates the deduction at $250,000 MFJ and $150,000 for all non-MFJ statuses. Though the max AGI that could wipe out the deduction could be lower if the actual interest expense paid is lower.
For mixed-use vehicles, the deduction is generally available only if the vehicle is expected to be used more than 50% for personal use, and the interest may need to be allocated between personal and business use to avoid double counting. The personal-use portion may qualify for this deduction, while business-use interest may be deductible under the usual business rules on Schedule C, Schedule E, or the appropriate business return, subject to applicable limitations and the business interest limitation rules.
A few of the questions still to be resolved as of this writing are how the maximum deduction is allocated if there are co-borrowers or joint ownership; what if the loan is a cash-out loan or a refinancing; and what is the documentation and allocation of interest payments and phase-out when both spouses have a car loan.2
SALT Deduction
The cap on the SALT itemized deduction has been $10,000 for all taxpayers except for MFS, which was $5,000. The OBBBA did not completely eliminate the TCJA-instituted cap, but it did generally increase the caps, applicable in 2025 through 2029 – $40,000 MFJ and $20,000 MFS. There is, however, an income-based reduction of the caps by 30% of the amount that MAGI exceeds $500,000 ($250,000 for MFS), but not below what those caps had been under the TCJA ($10,000 MFJ or $5,000 for MFS).
From 2025 through 2029, the annual cap and the beginning MAGI thresholds for reductions will increase 1% a year. After 2029, the SALT cap will go back to TCJA baseline levels.
Although the increased cap will benefit many itemizers, there will be some with high state and local taxes who will experience an unwelcome reduction in their planned deduction. This may influence some of these taxpayers to consider ways to minimize the SALT cap and reduction rules, such as through AGI reduction techniques or one of the SALT workaround strategies if still available, among other remedies. You may want to advise clients to consider the timing of their SALT payments so as not to waste any portion of the new cap – compare the impact of paying some SALT early by year-end or alternatively pay some SALT after year-end.
Mortgage Interest
The OBBBA makes permanent the cap on the mortgage interest deduction, allowing interest expense deductibility on qualifying mortgages incurred after Dec. 15, 2017, on up to $750,000 of acquisition indebtedness for all filing statuses except MFS, which is capped at $375,000. There is still a higher cap of $1 million ($500,000 for MFS) on the acquisition of indebtedness for mortgages incurred before or on Dec. 15, 2017. The qualifying indebtedness is for a principal residence and one additional residence. Note, there are complex rules related to refinancing original indebtedness and what portion of the interest will be deductible.
The interest on home equity loans have not been deductible since the TCJA in 2017, but the TCJA and OBBBA do allow acquisition indebtedness to include loans for home improvements, not just on the original acquisition but also to build or substantially improve a qualified home as long as the loan is secured by the home. Also, beginning in 2026, subject to income phaseouts, qualifying annual mortgage insurance premiums (PMI) will be an allowed, deductible mortgage interest expense, on top of the allowable acquisition indebtedness mortgage interest pursuant to the above caps. This new 2026 deduction applies even if the PMI was related to a prior loan, as long as the mortgage was incurred after Dec. 31, 2006. The rules for prepaid PMI are very different, and will demand further scrutiny on your part. For one, it is not 100% deductible up front, but on an amortizable basis. Lastly, the annual PMI deduction will be reduced by 10% for each $1,000 of AGI above $100,000 ($50,000 for MFS), completely phasing out at $110,000 AGI ($60,000 for MFS).
Charitable Contributions
Effective in 2026, taxpayers who claim the standard deduction may also deduct up to $1,000 of qualifying charitable cash contributions ($2,000 for MFJ) made directly to qualified public charities. Taxpayers who itemize may deduct charitable contributions only to the extent that their aggregate qualifying contributions exceed 0.5% of AGI, and the deductible portion is determined after applying the usual Section 170 limitations (computed without regard to the 0.5% floor) and ordering rules. See the Personal Financial Planning column in the winter 2026 issue.
Limitation on Itemized Deductions
After 2025, there will be a new Section 68 limitation on deductible itemized deductions, similar to the “Pease” limitation prior to the TCJA. For taxpayers in the top 37% bracket, there will be a 2/37 reduction of the lesser of either total itemized deductions or the amount by which taxable income computed without itemized deductions exceeds the taxable income at the beginning of the 37% bracket. Effectively, this limits the tax rate subsidy on the excess itemized deductions to only 35%. This is on top of the special limitations on most itemized deductions, especially the new SALT deduction on high-income taxpayers.
Miscellaneous Deductions Subject to 2% Floor
The OBBBA makes permanent the TCJA’s suspension of all “miscellaneous itemized deductions subject to the 2% of AGI floor.” Therefore, the following expenses continue to be nondeductible: tax preparation and tax adviser fees, CPA Exam fees, unreimbursed employee expenses, union dues, professional association fees, job search expenses, and investment expenses for individuals.
Elimination of Energy Credits
In this area, the OBBBA moves in the opposite direction and accelerates the sunset of credits. The Section 25C Energy Efficient Home Improvement Credit ends for property placed in service after Dec. 31, 2025, and the Section 25D Residential Clean Energy Credit for solar and energy storage (including batteries) ends for expenditures made after Dec. 31, 2025, subject to transition rules.
Taxpayers will need to find and carefully retain all evidence that the projects claimed for 2025 credits were in fact placed in service, or expenditures were incurred, by the end of 2025. This may create compliance questions and potential disputes if projects straddle year-end 2025. Accordingly, taxpayers need to be mindful of additional IRS guidance on transition rules.2
Estate and Gift Tax Exemptions
The OBBBA permanently increased the unified estate, gift, and generation‑skipping transfer (GST) tax exemption to $15 million per individual ($30 million per married couple with planning) starting in 2026, indexed for inflation thereafter. This means previously scheduled post‑2025 reductions to half of 2025 levels will not occur. For 2025, the pre-OBBBA unified exemption is $13,990,000 per person, or $27,980,000 for a married couple with portability planning, and the top transfer‑tax rate remains at 40% on amounts above the exemption, and “portability” continues for married couples. The annual gift tax exclusion for 2025 is $19,000 per donee per donor, and will stay the same for 2026.
With so much press on this topic, one would think this source of tax revenue must be enormous. In reality, it only generates about $30 billion a year, or less than 1% of all federal tax revenue, and only a few thousand federal estate tax returns (and far fewer gift tax returns) report any transfer-tax liability in a typical year. Keep in mind that this is federal level only; there may still be state-level estate or inheritance taxes to deal with.3
Conclusion
This summary only touches on some of the changes to personal income tax filing, and there is ongoing guidance from the IRS. There are also many business tax provisions, some of which apply to individuals owning businesses in pass-through form (e.g., expanded provisions affecting bonus depreciation, immediate expensing, QBI, etc.). Hopefully this feature will spur you into recognizing that many things have changed and will encourage you to dig deeper into the revisions for tax year 2025 and beyond.
1 One Big Beautiful Bill Act, Pub. L. No. 119-21 (2025).
2 Internal Revenue Service, One Big Beautiful Bill Provisions (2025).
3 Congressional Research Service, The Federal Estate, Gift, and Generation-Skipping Transfer Taxes (R48183), U.S. Congress (2024).
Robert Duquette, CPA, is teaching full professor in the College of Business at Lehigh University, and a retired EY senior tax partner. He serves on PICPA’s Federal Tax Thought Leadership Committee and is a member of the Pennsylvania CPA Journal Editorial Board.
Mike Pinette is a teaching assistant at Lehigh University’s College of Business and an accounting student pursuing CPA licensure. He has collaborated with Professor Duquette on research related to federal tax reform and will join KPMG’s commercial audit practice after graduating this spring.
The views and interpretations of law expressed herein are of the authors’ only and not those of Lehigh University, EY, or KPMG. The information in this article is general in nature. Seek professional tax and legal advisers for specific advice.