The One Big Beautiful Bill Act of 2025 (OBBBA 2025) has passed. It affects several key areas of the tax code, especially provisions set to expire at the end of 2025 under the previous tax law. We’re preparing software updates and expect those to be finalized in all versions of both Tax Clarity® and Income InSight® by July 18.  You will be notified both by email and by in-app messaging of the updates. Here’s our preliminary analysis of the 870 page bill as it relates to Tax Clarity and Income Insight:

Tax Brackets and Rates Become Permanent

First, the individual income tax brackets established by the 2017 tax cuts will continue permanently, which is a bit of a misnomer because permanently only means they don’t automatically sunset. They are in no way “permanent” as congressional action could change them again in the future. All brackets but the highest bracket at 37% will adjust for inflation. This means that over time, as incomes grow with inflation, more people could find themselves bumped into the top tax rate, especially in years with major events, such as large Roth conversions, the sale of property with depreciation recapture, or substantial additional income, such as bonus or severance payments. 

New “Temporary Senior Deduction”

One new provision is an additional deduction of $6,000 per person aged 65 or older starting in tax year 2025. This amount is separate from the standard deduction and does not affect the existing additional standard deduction available to those 65 or older or blind. This new deduction begins to phase out by 6% of income over $75,000 for single filers or $150,000 for married couples filing jointly. The income used for the phase-out is defined as adjusted gross income (AGI) plus foreign earned income and certain territorial income, a calculation that differs from common definitions of MAGI, like the one for Medicare Premiums or the MAGI for ACA premium subsidies. These phase-out thresholds do not adjust for inflation, and the deduction is only available for tax years 2025 through 2028, although Congress could extend it later. This provision will have a substantial impact on Roth conversion planning and the determination of which accounts to withdraw from at which points in retirement. Fortunately, the method for abstracting tax provisions into tax maps and using the Effective Marginal Rate method to determine withdrawal and conversion amounts will continue to be an effective way of considering these changes.    

State and Local Tax Deduction (SALT) Cap Changes

The deduction cap for state and local taxes (the SALT deduction) also changes. For those who itemize deductions, the cap on SALT deductions will increase to $40,000 in 2025, and $40,400 in 2026. This cap grows by one percent each year regardless of actual inflation, which means the cap’s growth is slower than real inflation in high-inflation years. This cap applies to all filers except married filing separately, which has a $20,000 cap. There is also a phase-down mechanism: for those with income above $500,000 in 2025 (with that threshold growing 1% annually), the SALT cap reduces by 30 cents for every dollar of income above the threshold. The lowest the cap can drop through the phase-down is $10,000. This new SALT cap structure expires after 2030 unless Congress acts again.

Qualified Business Income (QBI) Deduction Changes

For business owners and self-employed individuals, the 20% qualified business income (QBI) deduction under section 199A is made permanent. In addition, the phase-out thresholds for specified service businesses increase starting in 2026: the calculation uses a base amount plus $75,000 for single filers or $150,000 for joint filers, which increased from $50,000/$100,000. This change raises the income level at which the deduction begins to phase out, allowing more high-earning business owners to qualify. Importantly, even if a taxpayer’s income would phase out the deduction completely, a new minimum QBI deduction of $400 will apply as long as they have at least $1,000 of qualified business income. This minimum is indexed for inflation starting in 2026.

Child Tax Credit Changes

The child tax credit also sees an important update. The amount increases to $2,200 per child under age 17 starting with the 2025 tax year, and it will be indexed to inflation for future years. The maximum refundable portion of the credit is set at $1,600 per child, which is also indexed for inflation starting in 2026. The income phase-out thresholds for the credit remain unchanged at $400,000 for married couples filing jointly and $200,000 for single or head of household filers.

Alternative Minimum Tax (AMT) Changes

Regarding the alternative minimum tax (AMT), all of the relief provisions from the 2017 tax cuts are made permanent. This includes higher exemption amounts and phase-out thresholds, which will continue to adjust annually for inflation. Keeping these changes in place means many middle-income taxpayers will avoid AMT liability in the coming years.

There are a variety of other changes both in the bill, and some left out of the bill, which creates change based on the expiration of items from the Tax Cuts and Jobs Act.  All of these changes add new opportunities and potential pitfalls to retirement and tax planning.  Rest assured, we will be incorporating the OBBBA changes into all versions of the Tax Clarity and Income InSight software tools, our PowerPoint seminar materials, and conducting webinars, with our first webinar on July 16, for advisors on how to clearly demonstrate and communicate the impact of the new law for your clients and prospects.

 

OBBBA Webinar On-Demand

 

Correction:  On July 9th, the following paragraph was removed from the article.  Miscellaneous itemized deductions were in fact eliminated, and the mortgage interest cap was made permanent at $750,000.  We will continue to update this article as any other modifications are deemed necessary.    

Changes due to the Expiration of TCJA

Finally, it’s important to know which provisions from the 2017 tax law were allowed to expire. OBBBA did not extend several temporary TCJA provisions. Miscellaneous itemized deductions, including investment expenses, unreimbursed employee costs, and other expenses subject to the 2% of AGI floor, will return in 2026. The mortgage interest deduction cap will revert to $1,000,000, up from the TCJA’s $750,000 cap. The threshold for deducting medical expenses will return to 10% of AGI in 2026, making it harder to qualify for a medical deduction compared to the 7.5% threshold currently in place.