The One Big Beautiful Bill Act (OBBBA) Explained
The OBBBA was signed into law on July 4, 2025. Here's what it means for your taxes, broken down provision by provision, in plain English.
What Is the OBBBA?
The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, as Public Law 119-21. It builds on and makes permanent many provisions from the 2017 Tax Cuts and Jobs Act (TCJA) that were set to expire at the end of 2025.
The law contains hundreds of provisions affecting individuals, businesses, and government programs. It’s a mix of permanent changes and temporary provisions — many of the new deductions expire after 2028.
It introduced a new Schedule 1-A form for reporting four new above-the-line deductions, created Trump Accounts for newborns, raised the SALT cap from $10,000 to $40,000, increased the Child Tax Credit, and phased out many clean energy credits from the Inflation Reduction Act.
Key Takeaway
The OBBBA introduced a brand-new Schedule 1-A form for reporting four new deductions: tips, overtime, car loan interest, and the senior bonus. If any of those apply to you, you’ll file this form starting with your 2025 return.
No Tax on Tips
A new above-the-line deduction for qualified tip income, effective 2025 through 2028. The maximum annual deduction is $25,000.
It applies to occupations the IRS lists as “customarily and regularly” receiving tips as of December 31, 2024. Tips must be voluntary cash or charged tips from customers — not service charges set by the employer.
Who Qualifies?
- Workers in occupations the IRS recognizes as customarily tipped (as of Dec 31, 2024)
- Tips must be reported on W-2, 1099, or Form 4137
- Self-employed workers can claim it, but the deduction can’t exceed net income from the tipped business
- Phaseout begins at $150,000 MAGI ($300,000 for joint filers)
2025 Transition Relief
Since W-2 reporting codes weren’t fully updated for 2025, the IRS is providing transition relief. For the 2025 tax year, employees can use W-2 Box 7 (social security tips) as the qualified tips amount.
TL;DR
If you earn tips in a qualifying job, you can deduct up to $25K from your federal income tax. Phaseout starts at $150K MAGI ($300K joint). This is a deduction, not an exclusion — your state may still tax tips. Report it on the new Schedule 1-A.
Learn more about Schedule 1-A, the new form where this deduction is reported.
No Tax on Overtime
A new above-the-line deduction for qualified overtime compensation, effective 2025 through 2028. This covers the premium portion of overtime pay — the “half” of time-and-a-half — not the base pay for those hours.
Must be overtime required by the Fair Labor Standards Act (FLSA). Contractual overtime where weekly hours are still 40 or fewer does not qualify.
Key Details
- Maximum deduction: $12,500 for single filers ($25,000 for joint filers)
- Phaseout begins at $150,000 MAGI ($300,000 for joint filers)
- Must be reported on W-2, 1099, or other specified statement
- Reported on the new Schedule 1-A
2025 Transition Relief
For the 2025 transition year, if your pay stub doesn’t break out the premium specifically, the IRS allows treating one-third of total overtime pay as the deductible amount.
TL;DR
Maximum deduction: $12,500 single / $25,000 joint. Phaseout begins at $150K MAGI ($300K joint). For 2025, if your pay stub doesn’t break out the premium specifically, the IRS allows treating one-third of total overtime pay as the deductible amount.
Car Loan Interest Deduction
For the first time in decades, interest paid on a qualifying vehicle loan is deductible. Effective 2025 through 2028, with a maximum deduction of $10,000 per year.
Vehicle Requirements
- New vehicle only — original use must start with the taxpayer (no used cars)
- For personal use, not business or commercial
- Final assembly in the United States (use the VIN Decoder to verify)
- Gross vehicle weight under 14,000 lbs
- Car, minivan, van, SUV, pickup truck, or motorcycle
- Loan must have originated in 2025
Phaseout
Phaseout begins at $100,000 MAGI ($200,000 joint) — reduced by $200 for every $1,000 above the limit. The IRS issued transitional relief (Notice 2025-57) for lenders on 2025 reporting requirements.
Good to Know
Lease payments do NOT qualify — only loan interest. Also, this deduction IS available to married filing separately (MFS) filers, while the tips, overtime, and senior deductions are NOT available for MFS.
Senior Bonus Deduction
An additional deduction of $6,000 per eligible individual, effective 2025 through 2028. That’s $12,000 total for a married couple where both spouses qualify.
This stacks on top of the existing standard deduction and the current additional standard deduction for seniors. Available whether you itemize or take the standard deduction.
Eligibility
- Must be age 65 or older by the last day of the tax year (born before January 2, 1961 for 2025)
- Must have a valid Social Security number
- Phaseout begins at $75,000 MAGI for single filers ($150,000 for joint filers)
- Reduced by 6% of the amount above the threshold
- Reported on Schedule 1-A
Examples
Single filer, age 65+, earning $95,000: Deduction reduced to $4,800 due to phaseout.
Married couple, both 71, $170,000 MAGI: $12,000 minus $1,200 = $10,800 total deduction.
Schedule 1-A: The New Form
A brand-new form created specifically for the four OBBBA deductions above. Filed alongside Form 1040, 1040-SR, or 1040-NR starting with the 2025 tax year (filed in 2026).
It’s a two-page form with six parts: MAGI calculation, tips, overtime, car loan interest, senior deduction, and total.
Key Facts
- Separate from the existing Schedule 1 (Additional Income and Adjustments), which continues to be used for things like student loan interest and self-employment tax
- The total from Schedule 1-A goes on Form 1040, Line 13b
- Only file it if you qualify for one or more of the four deductions
- Can be claimed whether you itemize or take the standard deduction
- Draft released September 2025, finalized for 2026 filing season
Important Distinction
These are “below the line” deductions — they reduce taxable income but do NOT affect your AGI. This means they won’t hurt your eligibility for AGI-based benefits like the Child Tax Credit.
TCJA Provisions Made Permanent
The TCJA’s individual provisions were set to expire December 31, 2025. The OBBBA makes them permanent, including:
- Individual income tax brackets (seven-bracket structure, 10% to 37%)
- Higher standard deduction ($15,750 single / $23,625 HOH / $31,500 MFJ for 2025)
- Repeal of personal and dependent exemptions (the old $4,050 per-person deduction is gone for good)
- Section 199A deduction for Qualified Business Income (QBI) — 20% pass-through deduction
- Higher gift and estate tax exemption
- $750,000 cap on mortgage interest deduction for new borrowing
- Elimination of miscellaneous itemized deductions
- 100% bonus depreciation / full expensing for qualifying business property
- Domestic R&D expensing
- More generous interest limitation for businesses
- AMT adjustments: exemption increased to $88,100 single / $137,300 MFJ, indexed for inflation
Standard Deduction Changes
The OBBBA increases and makes permanent the higher standard deduction from TCJA.
2025 Amounts
- Single: $15,750
- Head of Household: $23,625
- Married Filing Jointly: $31,500
These amounts are indexed for inflation going forward. Personal exemptions remain permanently repealed — before the TCJA, you could deduct $4,050 per person, but that’s gone for good.
Good to Know
Combined with the senior bonus deduction, a qualifying married couple could see total deductions over $45,000.
SALT Deduction Cap Increase
The state and local tax (SALT) itemized deduction cap has been raised from $10,000 to $40,000, effective for tax years 2025 through 2029. It reverts to $10,000 in 2030.
Key Details
- Cap grows by 1% annually through 2029
- MFS filers: cap is $20,000
- Retroactive to 2025 — will show up in refunds filed in early 2026
- Schedule A is being updated to include the SALT computation
- Check if you should now itemize instead of taking the standard deduction — this $40K cap makes itemizing worthwhile for many more people
Phaseout Details
Deduction reduced by 30% of MAGI above $500,000 ($250,000 MFS). Fully phases out at $600,000 MAGI. Even with phaseouts, minimum deduction is still $10,000. Biggest impact in high-tax states (NY, NJ, CA, CT).
Child Tax Credit
The Child Tax Credit has been increased from $2,000 to $2,200 per qualifying child, and it’s now permanent. Indexed for inflation starting in 2026.
Phase-out thresholds remain at $200,000 for individuals and $400,000 for joint filers. Made permanent under OBBBA — under the TCJA it was temporary.
Trump Accounts
A new type of tax-deferred savings account for children. The government deposits $1,000 for each eligible child born between January 1, 2025 and December 31, 2028.
How It Works
- Employers can contribute up to $2,500/year toward an employee’s or dependent’s Trump Account without it counting as taxable income
- Funds must be invested in certain mutual funds or ETFs tracking a U.S. stock index (e.g., S&P 500)
- Available for initial deposits starting July 4, 2026
- Form 4547 can be filed with your 2025 return to have the IRS create the account
- IRS issued proposed regulations for the contribution pilot program (IR-2026-31)
Adoption Credit Changes
Beginning tax years after December 31, 2024, up to $5,000 (indexed for inflation) of the adoption credit may be refundable.
Credit amounts carried forward from prior years cannot be used to calculate the refundable portion. The IRS issued FAQs about general refundability and recognizing Indian tribal governments for special needs determinations.
Charitable Contribution Changes
Several changes to charitable deduction rules, effective 2026:
Non-Itemizer Deduction Reinstated
Charitable deductions for non-itemizers permanently reinstated: $1,000 for single filers / $2,000 for joint filers.
New Limitations
- New floor: 0.5% of AGI on itemized charitable deductions (means a formerly fully deductible contribution is now reduced by 0.5% of your AGI)
- For taxpayers in the top 37% bracket: deduction capped at 35% of dollars donated
- Overall itemized deduction haircut (similar to the old Pease limitation pre-2018) that caps deduction value at 35 cents on the dollar for top-bracket taxpayers
Strategy Tip
Bunching contributions via donor-advised funds (DAFs) becomes a more important strategy under these new rules — especially for taxpayers in the top bracket who now face the 35% cap on deduction value.
Clean Energy Credit Phase-Outs
The OBBBA phases out many tax credits from the Biden-era Inflation Reduction Act (IRA):
- Electric vehicle tax credits: terminated for vehicles acquired after September 30, 2025
- EV charging credits: phased out by June 2026
- Home electrification credits: terminated by December 2025
- Green hydrogen production credits: terminated by December 2027 (was 2033)
- Wind/solar: safe harbor for projects starting construction by June 2026 or going online by December 2027
What Survived
Advanced manufacturing, carbon sequestration, biofuel, and nuclear power credits remain largely intact. Nuclear power gets a new 10% bonus credit.
Business Provisions
Major business tax provisions in the OBBBA:
- 100% bonus depreciation: businesses can deduct full cost of qualifying property in first year (for property bought and placed in use after Jan 19, 2025)
- Section 199A QBI deduction: made permanent with minor tweaks (increased phaseout ranges, minimum deduction for active QBI)
- Domestic R&D expensing: made permanent
- Business interest limitation: more generous, made permanent
- 1099-K reporting threshold: set at $20,000 and 200 transactions
- Rural Opportunity Zones: investment incentives enhanced (substantial improvement threshold reduced from 100% to 50% for rural QOZs)
Estate & Gift Tax
The higher estate and gift tax exemption from the TCJA has been made permanent and is indexed for inflation going forward.
This provides more flexibility for wealth transfer strategies without risk of reversion to pre-TCJA levels. The exemption had been set to drop roughly in half at the end of 2025 — that’s no longer happening.
What's Temporary vs. Permanent
The OBBBA is a mix of permanent changes and temporary provisions. Here's the cheat sheet.
| Provision | Status | Details |
|---|---|---|
| Individual tax brackets (10%–37%) | Permanent | Seven-bracket structure locked in |
| Higher standard deduction | Permanent | Indexed for inflation |
| Personal exemption repeal | Permanent | Old $4,050 deduction gone for good |
| Section 199A QBI deduction | Permanent | 20% pass-through deduction |
| Child Tax Credit ($2,200+) | Permanent | Indexed starting 2026 |
| 100% bonus depreciation | Permanent | Full first-year expensing |
| R&D expensing | Permanent | Domestic research costs |
| Estate/gift tax exemption | Permanent | Indexed for inflation |
| AMT adjustments | Permanent | Higher exemptions, indexed |
| $750K mortgage interest cap | Permanent | For new borrowing |
| Charitable deduction for non-itemizers | Permanent | $1K single / $2K joint |
| No Tax on Tips deduction | Expires 2028 | Up to $25,000/year |
| No Tax on Overtime deduction | Expires 2028 | Premium portion of OT pay |
| Car Loan Interest deduction | Expires 2028 | Up to $10,000/year |
| Senior Bonus Deduction | Expires 2028 | $6,000 per person (65+) |
| SALT cap at $40,000 | Reverts 2030 | Back to $10K after 2029 |
| Trump Account deposits | 2025–2028 | $1K govt deposit for eligible kids |
How to File / What You Need
If you’re claiming any of the four new deductions, you’ll need to file Schedule 1-A with your Form 1040.
Records to Keep
- Tip logs and reporting records
- Overtime pay stubs showing the premium breakdown
- Vehicle loan documents and VIN (for the car loan deduction)
- Proof of age for the senior bonus deduction
Action Items for 2026
- Updated W-2 for 2026 will include new Box 12 codes for qualified tips and overtime
- Consider submitting a new W-4 to adjust withholding for 2026 and beyond
- Use the IRS Tax Withholding Estimator (updated for OBBBA)
- Check if you should itemize vs. take the standard deduction — the SALT increase to $40K makes itemizing worthwhile for more people now
2025 Transition Year
The IRS is providing relief for 2025 since employer reporting wasn’t fully updated. Don’t panic if your W-2 doesn’t show the new fields yet — the IRS has workarounds in place.
Common Questions About the OBBBA
We get these questions constantly. Here are the straight answers.
No. Schedule 1-A is only required if you’re claiming the tips deduction, overtime deduction, car loan interest deduction, or the senior bonus deduction. If none of those apply to you, skip it entirely — your return is filed the same way it was before.
Yes, you can claim any combination of the four new deductions on Schedule 1-A as long as you meet the eligibility requirements for each one. They’re independent of each other. Just remember that each has its own phaseout threshold based on your MAGI.
No. The car loan interest deduction only applies to new vehicles where original use begins with the taxpayer. Used vehicles don’t qualify regardless of when the loan originated. The vehicle must also have been assembled in the United States and weigh under 14,000 lbs.
Not for 2025. You must be age 65 or older by December 31 of the tax year. That means you need to have been born before January 2, 1961 to qualify for the 2025 tax year. You’ll be eligible starting with your 2026 return.
No. The four Schedule 1-A deductions are “below the line” — they reduce your taxable income but do not reduce your Adjusted Gross Income (AGI). This is actually good news because it means claiming these deductions won’t affect your eligibility for AGI-based benefits like the Child Tax Credit, education credits, or IRA contribution deductibility.
Very likely yes. The SALT cap jumped from $10,000 to $40,000 for 2025–2029. If you’re in New York, New Jersey, California, Connecticut, or similar high-tax states, you may now benefit from itemizing instead of taking the standard deduction. Run the numbers — the extra $30,000 in potential SALT deductions could significantly reduce your federal tax bill.
The EV tax credit was terminated for vehicles acquired after September 30, 2025. If you bought or leased an EV before that date, you may still qualify under the old rules. EV charging credits are being phased out by June 2026. If you were planning to buy an EV for the credit, that window has closed.
Some are, some aren’t. The TCJA provisions (tax brackets, standard deduction, QBI deduction, bonus depreciation) are now permanent. But the four new deductions (tips, overtime, car loan interest, senior bonus) all expire after 2028. The SALT cap increase reverts to $10,000 in 2030. Trump Account government deposits apply only to children born 2025–2028.
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