On July 4, 2025, tax legislation known as the One Big Beautiful Bill Act (OBBBA) was signed into law. This roughly 900-page bill introduces sweeping tax policy changes, many of which will significantly impact individuals and businesses alike.
While some of the OBBBA provisions are entirely new, much of it builds upon or extends the rules established under the Tax Cuts and Jobs Act (TCJA) and are what we have been accustomed to since 2018, with various enhancements and modifications.
Highlighted below are some of the key provisions affecting individuals:
- Lower income tax rates originally scheduled to increase in 2026 are now permanent. For example, the top rate remains at 37%, rather than reverting to 39.6%.
- Qualified home mortgage interest remains permanently capped at $750,000, rather than increase to $1 million in 2026, and the deduction for home equity loan interest remains suspended.
- Itemized deductions reduced by 2/37th (i.e., “2/37 rule”) for high-income earners in the 37% tax bracket (i.e., for every dollar of itemized deductions, tax liability is reduced by 35 cents rather than 37 cents).
- State and local tax deduction (SALT) limitation increased to $40,000 in 2025 (subject to a 1% annual increase through 2029) but phases out for modified adjusted gross income (MAGI) over $500,000 (subject to a 1% annual increase through 2029) at a rate of 30% of the excess, not to fall below $10,000. The SALT benefit is further reduced by the aforementioned “2/37 rule” for high-income earners. The cap reverts to $10,000 in 2030.
- Charitable contributions are now subject to a 0.5% adjusted gross income (AGI) floor for itemizers and for high-income earners and are further reduced by the aforementioned “2/37 rule”. Non-itemizers may deduct up to $1,000 (single) or $2,000 (joint). Lastly, the 60% AGI limit on cash contributions is made permanent.
- Miscellaneous itemized deductions are permanently eliminated, with certain exceptions.
- Estate tax exemption increases to $15 million (single) or $30 million (joint) starting in 2026, indexed for inflation.
- No tax on qualified tips/overtime from 2025 to 2028, up to $12,500 (single) or $25,000 (joint), subject to phaseouts above $150,000 (single) or $300,000 (joint) of MAGI.
- Car loan interest up to $10,000 is deductible from 2025 to 2028 for qualified vehicles with MAGI-based phaseouts at $100,000 (single) and $200,000 (joint).
- Seniors aged 65 and older can claim a new deduction of $6,000 from 2025 to 2028, subject to AGI-based phaseouts starting at $75,000 (single) and $150,000 (joint).
- Section 529 plans have been enhanced to increase the annual withdrawal limit for K-12 tuition expenses to $20,000 (previously $10,000). Furthermore, funds can now be used for qualified post-secondary credentialing expenses that are not traditional degree programs (e.g., tuition, fees, books, supplies, and equipment for certification, licensing, and apprenticeship programs).
- Gambling losses limited to 90% of losses (not to exceed winnings), starting in 2026.
- A Trump account is a new tax-deferred investment account for children under 18. The federal government will make a one-time contribution of $1,000 for each child born between 2025 and 2028. Parents may also contribute up to $5,000 annually with after-tax dollars.
Key provisions affecting businesses are:
- 100% bonus depreciation is permanently restored for assets placed in service after January 19, 2025. Previously, it was limited to 40% in 2025 and slated to sunset in 2027.
- Section 179 deduction increases to $2.5 million in 2025 (up from $1.16 million), with phaseout now beginning at $4 million.
- Section 163(j) business interest subject to earnings before interest, taxes, depreciation, and amortization (EBITDA) limitation is made permanent, effective in 2025 (previously set to expire in 2029).
- Section 199A 20% pass-through deduction is permanently extended (previously set to expire in 2026).
- Pass-through entity tax (PTET) election is extended to allow businesses operating as S corporations and partnerships to continue electing to pay state income taxes at the entity level to circumvent the aforementioned SALT limitation.
- Section 461(l) excess business loss deduction limit is now permanent (previously set to expire after 2025).
- Qualified small business stock (QSBS) was enhanced for stocks acquired after July 4, 2025 to allow a gain exclusion of 50% after 3 years, 75% after 4 years, and 100% after 5 years. The per-issuer gain exclusion cap increases to $15 million (previously $10 million), and the corporate asset limit increases to $75 million (previously $50 million). The 10-times basis rule remains available, allowing an exclusion on the greater of $15 million or 10-times basis.
As with many things in life, it is essential to read the fine print, and the above rules similarly have additional conditions and restrictions that were beyond the scope of this writing. OBBBA also includes numerous other technical provisions and nuanced conditions not covered here.
Given the complexity of OBBBA, you should consult with your tax, legal, and financial advisors to fully understand how the law may affect your situation and to develop a tailored financial strategy.
Author:
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David Yoo Senior Vice President, Director of Tax and Financial Planning First American Trust |
David brings over 25 years of tax experience servicing wealthy individuals and their closely held businesses, with a strong emphasis in the taxation of estates and trusts. As the Director of Tax and Financial Planning, he is responsible for overseeing the Tax Department and advising clients on their tax planning needs vis-à-vis income, estate, gift, and charitable matters. David is a licensed Certified Public Accountant in California and a Certified Financial Planner TM. He earned his Master of Business Taxation degree from the University of Southern California and his undergraduate degree from University of California, Irvine.
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