The passage of the One Big Beautiful Bill (OBBB) Act alters the tax compliance and planning landscape, leading to new opportunities and potential hurdles for all types of taxpayers. The Tax Cuts and Jobs Act (TCJA) of 2017 adjusted federal income tax rates, the estate tax exemption, the state and local tax (SALT) deduction, and more; the OBBB extends many of the TCJA’s changes while modifying others. 

Here, we will focus on OBBB’s impact on individuals. (Find insights for businesses, renewable energy, and international taxation in our broader OBBB overview(Opens a new window)(Opens a new window).)

Extensions of sunsetting TCJA provisions

Tax rates: Under the TCJA, the top marginal tax rate for individuals was decreased from 39.6% to 37% through tax year 2025, after which the top rate would return to 39.6%. OBBB permanently extends the lower 37% rate as the top federal tax bracket.

Qualified Business Income: The Qualified Business Income (QBI) deduction was also set to sunset after 2025. OBBB makes this permanent, providing a lasting benefit to many business owners.

Lifetime gift/estate tax exemption: TCJA roughly doubled the amount that an individual can gift to an individual or a trust or pass through their estate without tax. However, this increase was set to sunset after 2025, leading to the lower lifetime exemption returning. OBBB sets the exemption to $15 million per individual beginning in tax year 2026, adjusted annually for inflation, and makes this change permanent. In other words, there is no longer a significant decrease in the lifetime exemption after 2025. While this change is ostensibly permanent, there’s no guarantee that a future law will not reduce the lifetime estate tax exemption. With that in mind, taxpayers would be wise to still consider their estate plan in light of state law and potential future appreciation of their estate.

Changes to itemized deductions

SALT cap: Under TCJA, the state and local tax (SALT) deduction was limited to $10,000 ($5,000 for married taxpayers filing separately). 

• OBBB increases this to $40,000 effective for tax year 2025, a $30,000 increase. 
• However, OBBB also introduces a phase-out of the $30,000 increase of 30% of the excess of modified adjusted gross income over $500,000, resulting in the full increase being phased out over $100,000 of additional income. 
• Both the increase in the SALT cap and the phase-out threshold are halved for taxpayers using the married filing separate filing status. 
• Both the SALT cap and the MAGI phase-out threshold will increase by 1% through 2029, after which the cap is scheduled to revert to $10,000.
• Read more about the changes to the SALT cap.(Opens a new window)(Opens a new window)

Mortgage interest: TCJA reduced the mortgage interest deduction to only apply to $750,000 of principal. OBBB extends this permanently.

Charitable donations: The 60% adjusted gross income (AGI) threshold for cash charitable donations was extended permanently, allowing the charitably-minded a greater portion of their income that can be donated while still receiving a tax benefit. Additionally, a $1,000 ($2,000 if married filing jointly) above-the-line deduction for charity was created, allowing even those who take the standard deduction a tax benefit for donating to charity. For those who itemize, a 0.5% of AGI floor was put in place for charity, meaning that a taxpayer must donate more than 0.5% of their AGI before they will be able to itemize any additional charitable giving beyond the above-the-line deduction. The limitation on charity is set to come into place in tax year 2026, providing a window for taxpayers to get a greater benefit for donations in 2025.

Overall deduction limitation: OBBB also enacts a limitation on itemized deductions to a 35% marginal rate, meaning that the marginal benefit of additional itemized deductions for high-income taxpayers may be lower than in the past.

New deductions available to non-itemizers

OBBB created two new deductions that can be taken advantage of even by those who do not itemize: 

Tip income: This deduction is limited to $25,000 of tip income, must be reported on the tax documents provided to the taxpayer by their employer, and is reduced by $100 for each $1,000 the taxpayer’s AGI exceeds $150,000 ($300,000 if married filing jointly). This also only applies to tips “received by an individual in an occupation which customarily and regularly received tips on or before Dec. 31, 2024,” limiting the range of industries to which this provision applies.

Overtime pay: This deduction applies to the portion of pay for overtime hours that is above the taxpayer’s standard earned rate. This is limited to $12,500 and is subject to the same AGI phase-out as the deduction for tip income.

Tax-advantaged investing

TCJA created “qualified opportunity zones” (QOZs) and allowed gains incurred on other investments to be deferred when investments were made into these QOZs. The deferred gains are scheduled to be realized in 2026, assuming the investment was held that long, and provided for basis step-ups after stated holding periods.

OBBB creates a rolling 10-year period for new QOZ investments beginning in 2027. New investments would be subject to a 10% step-up in basis (30% for QOZ investments in certain qualifying rural areas) after a 5-year holding period. However, it is worth noting that the new QOZ investment period begins after the prior QOZ gain deferral ends. Taxpayers are not able to directly roll prior QOZ investments into new investments without recognizing gain.

OBBB also creates “Trump accounts,” essentially a special category of IRA for minors. Up to $5,000 (linked to inflation) can be contributed to this account annually for years before the child turns 18. Up to $2,500 can be contributed by an employer, and this amount would not be treated as income to the employee. There does not appear to be an earned income requirement for Trump account contributions. Perhaps the most taxpayer-friendly provision of these accounts is the so-called “pilot program” under which eligible children born in 2025-2028 would have $1,000 put into this account for them by the government.

Additional benefits to Qualified Small Business Stock (QSBS)

While QSBS (under IRC section 1202) is not new, OBBB expands the benefits available to QSBS shareholders. Under prior law, QSBS sold before a five-year holding period was completed was not eligible for exclusion from income. Under OBBB, QSBS issued after the law’s passage can be sold after three years for a 50% exclusion, after four years for a 75% exclusion, or after five or more years for a full exclusion. Additionally, the lifetime exclusion for a given security is increased from $10 million to $15 million for securities acquired for tax years beginning after July 4, 2025. These changes make QSBS even more attractive, allowing for earlier exits while still retaining a tax advantage and for a greater lifetime benefit.

What does CohnReznick think?

The changes under OBBB are not as dramatic as those under TCJA. However, that does not make the changes under OBBB unimportant. As a whole, OBBB’s changes are taxpayer-friendly relative to the changes in TCJA scheduled to begin in 2026. 

Taxpayers should work with their advisors to understand the impact these changes have on them and identify opportunities where income or estate tax planning may be valuable. For example: 

• Business owners may want to reconsider business structure in light of changes to the QSBS regime. 
• Investors may want to evaluate the new options for tax-advantaged investing to confirm they are effectively mitigating any tax drag on their returns. 
• Employees may also want to consider whether these new deductions would apply to them to better understand their personal finances.

In all cases, multiyear tax projections may be helpful. Contact your tax advisor for assistance.