2025 Tax Law Changes: The One Big Beautiful Bill Act: Tax Reforms Explained
2025 Tax Rates Table:
Source: Internal Revenue Service, "Revenue Procedure 2024-40."
2025 Standard Deduction:
The Standard Deduction will increase by $400 for single filers & by $800 for joint filers (Table). Seniors over age 65 may claim an additional standard deduction of $2,000 for single filers & $1,600 for joint filers. The personal exemption for 2025 remains at $0 (eliminating the personal exemption was part of the Tax Cuts & Jobs Act of 2017 (TCJA).
Source: Internal Revenue Service, "Revenue Procedure 2024-40."
2025 Earned Income Tax Credit Parameters:
Source: Internal Revenue Service, "Revenue Procedure 2024-40."2025 Child Tax Credit:
The maximum child tax credit is $2,000 per qualifying child & is not adjusted for inflation. The refundable portion of the child tax credit is adjusted for inflation & will remain at $1,700 for 2025.
2025 Capital Gains Tax Rates & Brackets (Long-Term Capital Gains):
Long-term capital gains face different brackets and rates than ordinary income.
Source: Internal Revenue Service, "Revenue Procedure 2024-40."2025 Mileage Rates:
*Business: 70 cents per mile. This is an increase of 3 cents from the 2024 rate of 67 cents per mile.
*Medical & Moving: 21 cents per mile. This rate is available for qualified active duty members of the Armed Forces & remains the same as 2024. Available for medical mileage driven to see doctors or specialist.
*Charitable: 14 cents per mile. This rate is set by statute and is unchanged from 2024.
One Big Beautiful Bill Act (OBBBA):
1.
What is the One Big Beautiful Bill Act (OBBBA) and its primary
purpose?
The One Big Beautiful Bill Act (OBBBA) was enacted on July 4, 2025, as part of the budget reconciliation process for fiscal year 2025. Its primary purpose is to make permanent many of the individual tax provisions from the 2017 Tax Cuts and Jobs Act (TCJA) that were scheduled to expire at the end of 2025, thereby preventing a significant tax increase for a majority of Americans. Additionally, the OBBBA introduces new, often temporary, tax deductions and credits, and makes changes to business tax policies and certain green energy incentives. While it aims to provide taxpayer certainty and promote economic growth through provisions like full expensing, it also adds complexity to the tax code and is projected to increase the federal deficit.
2. How does the OBBBA impact individual income tax rates and the standard deduction?
The OBBBA
permanently preserves the reduced individual income tax rates and
adjusted bracket widths established by the TCJA, maintaining seven
tax brackets ranging from 10% to 37%. It also makes the expanded
standard deduction amounts permanent, with slight increases for 2025:
$15,750 for single filers, $23,625 for head of household, and $31,500
for married individuals filing jointly. These amounts will continue
to be indexed for inflation annually. Concurrently, the permanent
elimination of personal exemptions (which were suspended by the TCJA)
remains in effect, largely offsetting the tax value of the increased
standard deduction and child tax credit.
3. What new, temporary deductions and credits are available for individuals under the OBBBA, and for how long?
The OBBBA introduces several temporary deductions and credits for individuals, generally effective from 2025 through 2028:
Enhanced Deduction for Seniors: A new $6,000 deduction for taxpayers aged 65 or older, which phases out at Modified Adjusted Gross Incomes (MAGI) above $75,000 (single) or $150,000 (joint). This deduction is available even if individuals itemize.
No Tax on Tips: A federal income tax deduction of up to $25,000 for "qualified tips," subject to a phaseout beginning at MAGI of $150,000 (single) or $300,000 (joint).
No Tax on Overtime: A federal income tax deduction of up to $12,500 per individual ($25,000 for joint filers) for "qualified overtime" compensation, also phasing out at MAGI of $150,000 (single) or $300,000 (joint).
No Tax on Car Loan Interest: A non-itemized deduction of up to $10,000 for qualified vehicle loan interest on new U.S.-assembled cars, with a phaseout starting at MAGI of $100,000 (single) or $200,000 (joint).
These temporary
provisions are intended to provide targeted tax relief but are
subject to expiration, creating uncertainty for taxpayers.
4. How does the OBBBA address the Child Tax Credit (CTC) and create "Trump Accounts" for children?
The OBBBA makes the expanded Child Tax Credit (CTC) permanent, increasing it from $2,000 to $2,200 per qualifying child starting in tax year 2025, with annual inflation indexing. The refundable portion also becomes permanent at $1,700 in 2025, adjusted for inflation. Income phaseout thresholds of $400,000 for joint filers and $200,000 for all others are also made permanent.
Additionally, the act establishes "Trump Accounts," which are tax-preferred savings accounts for individuals under 18. After-tax contributions up to $5,000 per year (inflation-indexed after 2027) can be made starting July 4, 2026. Distributions are generally not allowed until the beneficiary turns 18 and are treated similarly to Individual Retirement Accounts (IRAs). Notably, U.S. citizen children born between 2025 and 2028 will be automatically enrolled (if elected by parents) and receive a one-time federal government deposit of $1,000.
5. What are the key changes related to itemized deductions, particularly the State and Local Tax (SALT) deduction?
The OBBBA introduces several changes to itemized deductions:
SALT Deduction Cap: The act temporarily raises the State and Local Tax (SALT) deduction cap to $40,000 for most taxpayers in 2025. This cap then increases by 1% annually from 2026 through 2029 before reverting to $10,000 in 2030 and thereafter. A phaseout applies for those with MAGI above $500,000 (with a $10,000 floor). For owners of pass-through entities, the ability to pay SALT at the entity level in certain states to bypass federal deduction limits remains unaffected.
Miscellaneous Itemized Deductions: Most miscellaneous itemized deductions are permanently repealed, with the exception of educator expenses, which will no longer be considered miscellaneous and will be eligible as an itemized deduction starting in 2026, with an expanded scope.
Limitation on Tax Benefit of Itemized Deductions: For taxpayers in the 37% rate bracket, the benefit of itemized deductions will be capped at 35% starting after the 2025 tax year.
Charitable Contributions: A new 0.5% income floor for itemized charitable contributions is introduced starting in 2026. However, for non-itemizers, a permanent above-the-line deduction for charitable contributions is reinstated, capped at $1,000 ($2,000 for joint returns).
6. How does the OBBBA impact businesses, particularly regarding depreciation and R&D costs?
The OBBBA makes several significant pro-growth changes for businesses:
Bonus Depreciation: 100% bonus depreciation for short-lived asset investments is made permanent, allowing businesses to immediately deduct the full cost of many investments. It also allows an election for a reduced bonus depreciation rate (40% or 60%) for certain property types in the first taxable year ending after January 19, 2025.
Section 179 Property: The maximum amount a taxpayer can expense under Section 179 is increased from $1.25 million to $2.5 million, with the phase-out threshold rising from $3.13 million to $4 million (indexed for inflation after 2025).
Research and Development (R&D) Costs: Full and immediate deductibility of domestic R&D expenses is restored, reversing the TCJA's requirement to amortize these costs over five years. The 15-year amortization for foreign R&D remains.
Business Interest Deductions: The limitation on interest deductibility reverts to the more generous EBITDA-based standard (30% of earnings before interest, taxes, depreciation, and amortization), which was previously tightened to EBIT.
Expensing for Structures: A new, temporary 100% deduction for investments in certain manufacturing structures is created for those beginning construction after January 19, 2025, and placed in service before January 1, 2031.
7. What are the changes related to the federal estate and gift tax under the OBBBA?
Starting in 2026, the OBBBA permanently extends and enhances the increased unified estate and gift tax exemption amounts. The exemption is set at $15 million per decedent (inflation-indexed), up from the roughly $14 million in 2024, and significantly higher than the $7.1 million it was scheduled to revert to. This change reduces the number of estates subject to the federal estate tax, providing greater certainty and relief for many households. The generation-skipping transfer tax exemption is also made permanent and inflation-indexed.
8. What is the projected economic and fiscal impact of the OBBBA?
The Tax Foundation estimates that the OBBBA will increase long-run GDP by 1.2% and increase the capital stock by 0.7%, leading to a 0.4% increase in pre-tax wages and the equivalent of 938,000 full-time jobs. However, these economic benefits come with a significant fiscal cost. The major tax provisions are projected to reduce federal revenues by $5.0 trillion between 2025 and 2034. After accounting for economic growth and spending cuts, the law is estimated to increase the federal deficit by $3.0 trillion over the next decade, before considering added interest costs. Including interest costs, the total deficit increase is projected to be $3.8 trillion on a dynamic basis. The benefits are broadly distributed, with middle-income quintiles seeing the largest after-tax income increases in 2026 due to the combination of TCJA extensions and targeted temporary tax breaks. However, the report also notes that potential tariffs imposed by the Trump administration could offset much of the OBBBA's economic benefits and fail to fully cover its costs.
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