Tag: one big beautiful bill

In the complex world of tax deductions, understanding the distinctions between above-the-line deductions, below-the-line deductions, and standard and itemized deductions is crucial for effective tax planning. Each category serves a distinct purpose within the tax code, impacting how taxable income is calculated and influencing the overall tax liability of individuals.

Above-the-line deductions, also known as “adjustments to income,” are beneficial as they can be deducted whether a taxpayer chooses to itemize their deductions or uses the standard deduction. The above-the-line deductions are a group of deductions not included as an itemized deduction. In addition, above-the-line deductions reduce a taxpayer’s gross income to produce the Adjusted Gross Income (AGI). A lowered AGI can be critical in determining your eligibility for additional tax credits and deductions, as many tax benefits are either limited or phased out based on AGI thresholds. Here is a more detailed explanation of many of the above-the-line deductions:

• Foreign Earned Income Exclusion: The Foreign Earned Income Exclusion allows eligible U.S. citizens and resident aliens living and working abroad to exclude a specified amount of foreign earned income from their U.S. federal taxable income. For 2025, the exclusion limit is $130,000 plus a housing exclusion which are taken below-the-line.
• Educator Expenses: This deduction allows eligible educators, including teachers, instructors, counselors, principals, and aides, to deduct up to $300 of unreimbursed expenses incurred for classroom supplies and professional development courses. This includes books, supplies, computer equipment, and other materials used in the classroom.
• Health Savings Account (HSA) Contributions: Taxpayers who participate in a high-deductible health plan (HDHP) can contribute to an HSA, which allows for tax-free savings designated for medical expenses. Contributions can be made by the individual or their employer, and the deducted amount helps lower the taxpayer’s AGI.
• Self-Employed Retirement Plan Contributions: Self-employed individuals can deduct contributions made to retirement plans such as SEP IRAs, SIMPLE IRAs, and qualified plans (like 401(k)s). These contributions reduce taxable income and help self-employed taxpayers save for retirement with potential tax-deferred growth. This deduction is for the retirement plan contributions made for the benefit of the self-employed individual and shouldn’t be confused with the contributions the self-employed individual makes as an employer toward a retirement plan for employees, which would be a business deduction.
• Self-Employed Health Insurance Premiums: This deduction allows self-employed individuals to deduct health insurance premiums paid for themselves, their spouses, dependents, and any children under age 27, even if the child is not considered a dependent. The deduction is particularly beneficial as it provides relief from high healthcare costs while lowering taxable income.
• Alimony Payments: For divorce agreements finalized before 2019, the payer can deduct alimony payments made to a former spouse. This deduction is intended to offer tax relief to the paying spouse by decreasing the taxable income. However, under the Tax Cuts and Jobs Act, this deduction is not applicable to divorces finalized after December 31, 2018.
• Student Loan Interest: This deduction allows borrowers to deduct up to $2,500 of interest paid on qualified student loans used for higher education expenses. The deduction is phased out at higher income levels but provides substantial relief by reducing taxable income for those eligible.
• IRA Contributions: Taxpayers who contribute to a traditional IRA are allowed a deduction of up to $7,000 ($8,000 if over age 50) per year provided they have earned income of at least as much as the amount contributed. The limit is periodically adjusted for inflation. Contributions to Roth IRAs are not deductible.
• Military Moving Expenses: Military moving expenses refer to the costs associated with relocating service members due to a permanent change of station (PCS). These expenses can include transportation, lodging, and shipment of personal goods. For active-duty members of the Armed Forces, the unreimbursed costs incurred during a PCS move are deductible. Beginning in 2026 members of the Intelligence Community will also qualify for this deduction.
• Early Withdrawal Penalty: Taxpayers who incur penalties for early withdrawal of savings, commonly from certificates of deposit (CDs) or similar savings instruments, can deduct these penalties. The deduction offsets the income generated from the withdrawal, reducing overall taxable income.
• Contributions to Archer MSAs: A Medical Savings Account (MSA) is a tax-advantaged account designed to help individuals save for future medical expenses. These accounts, which were created almost 30 years ago, were intended for self-employed individuals and employees of small businesses. They have generally been supplanted by HSAs, which have less restrictive contribution and broader eligibility rules.
• Jury Duty Pay Given to Employer: Jury duty pay is taxable, but when the employer continues an employee’s compensation when on jury duty, the employee generally will be required to turn over their jury duty pay to the employer. Without this deduction, the employee would be taxed twice on the jury duty compensation.

Below-the-line deduction is a term that has been slowly transformed by Congress. It used to predominantly refer to either the standard deduction or the itemized deduction. However, the term has taken on a new meaning as Congress has added deductions that reduce taxable income but not adjusted gross income and are available in addition to whether the taxpayer itemizes deductions or takes the standard deduction. The One Big Beautiful Bill act (OBBBA) has more doubled the number of deductions in this category. Here is a rundown of these deductions.

• Disaster related deductions: Disaster-related deductions generally refer to casualty loss deductions that taxpayers can claim for damages or losses caused by federally declared disasters. These deductions are designed to help individuals and businesses alleviate financial burdens resulting from events like hurricanes, earthquakes, or floods. Disaster-related losses from federally declared disasters can be claimed as qualified disaster losses, which offer unique tax advantages. These losses can be deducted in addition to your standard or itemized deductions, without having to itemize other deductions on your tax return.
• Senior Deduction: The OBBBA, has added a temporary senior deduction for years 2025 through 2028. This deduction is $6,000 for eligible single filers aged 65 and over and $12,000 for married couples filing jointly where both spouses are 65 or older. The deduction phases when AGI reaches $150,000 for married joint filers or $75,000 for others. It does not take the place of the additional standard deduction allowed to those age 65 and older.
• Non-itemizer charitable deduction: The non-itemizer charitable deduction created by the One Big Beautiful Bill (OBBB) is available for tax years beginning in 2026. This deduction is permitted for substantiated cash only donations with a maximum deduction of $1,000 for single filers and $2,000 for married couples filing jointly. Donations to donor-advised funds and non-operating private foundations do not qualify for this deduction.
• Car Loan Interest Deduction: The One Big Beautiful Bill Act (OBBBA) added a car loan interest deduction temporarily available for tax years 2025 through 2028. The vehicle must be new and for personal use. It must have a final assembly in the United States. The loan must be secured by the vehicle and originated after December 31, 2024. The maximum annual deduction is $10,000. The deduction begins to phase out for taxpayers with a Modified Adjusted Gross Income (MAGI) over $100,000 for single filers and $200,000 for joint filers.
• Tips Deduction: The OBBBA tips deduction is temporary and available for the tax years 2025 through 2028. The deductible tips are limited to $25,000 annually per tax return. To be eligible, tips must have been received in an occupation that customarily and regularly received tips before December 31, 2024. The IRS is scheduled to publish a list of qualifying occupations. The deduction reduces federal income tax, but tips are still subject to Social Security and Medicare taxes (FICA). In addition, the deduction is reduced for higher-income earners, starting at a Modified Adjusted Gross Income (MAGI) of $150,000 for single filers and $300,000 for those married filing jointly.
• Overtime Pay Deduction: Another provision in the OBBBA is an overtime pay deduction available for tax years 2025 through 2028. The maximum annual deduction is $12,500 for single filers and $25,000 for married couples filing jointly. Only the premium portion of overtime pay is deductible. For “time-and-a-half” pay, this is the “half” that exceeds your regular rate. To be eligible, the taxpayer must be a W-2 employee, and the overtime must be required by the Fair Labor Standards Act (FLSA). The deduction begins to phase out for taxpayers with a modified AGI over $150,000 for single filers or $300,000 for joint filers.
  

In conclusion, while itemizing deductions often garners much attention, it is essential to recognize that numerous deductions remain available even if you don’t itemize. These can significantly impact your taxable income, offering opportunities for tax savings across various situations. Whether it’s deductions for student loan interest, educator expenses, or certain retirement plan contributions, being informed about these avenues can make a substantial difference come tax season.

For taxpayers, the choice between taking the standard deduction or itemizing deductions is pivotal. The standard deduction for 2025, which was enhanced by the OBBBA, is set at $15,750 for single filers, $31,500 for married couples filing jointly, and $23,625 for heads of household. Meanwhile, itemized deductions cover areas such as medical expenses, property taxes, mortgage interest, and charitable donations. Choosing the optimal path—whether sticking with the simplicity of the standard deduction or delving into the details with itemized deductions—depends on your specific financial picture. Whichever route you take, maximizing your allowable deductions ensures that you keep more of what you earn.

Contact our Leesburg or Warrenton office with any questions. 703-771-1818 or 540-347-5681.

As we approach the closing chapters of the Tax Cuts and Jobs Act (TCJA), implemented during President Trump’s first term, taxpayers find themselves at a crossroads. With many of the TCJA’s provisions set to expire after 2025, the introduction of the One Big Beautiful Bill Act (OBBBA) offers timely extensions and nuanced modifications to these sunsetting policies. Acting as both a continuation and a re-envisioning of prior legislation, the OBBBA not only extends key tenets of the TCJA—such as individual tax rates and business deductions—but also introduces innovative changes that reflect the evolving economic landscape. By addressing emerging challenges while capitalizing on the TCJA’s foundational successes, the OBBBA aims to solidify a path toward a more sustainable and inclusive fiscal future, ensuring relief and opportunity across all levels of the American taxpayer spectrum.

On July 4th, President Trump signed OBBBA into law, introducing myriad changes to the tax landscape. Some of the changes will impact the current year, 2025, and other subsequent years.

This article focuses specifically on the provisions of the OBBBA that directly impact individual taxpayers, small businesses, and family-oriented tax benefits, deliberately omitting the changes and extensions that pertain solely to large corporations and big business. This approach ensures that the content remains highly relevant and applicable to the everyday decisions of individual taxpayers and small business owners, who often navigate their financial responsibilities without the same resources that large corporations possess.

By concentrating on these facets, this article provides a tailored snapshot of the OBBBA’s impact, ensuring that readers are equipped with information that is not only pertinent but also actionable within their tax planning and financial management strategies. This focus allows individual taxpayers to comprehend and leverage the changes that matter most to them, without being overwhelmed by the complexities inherent to provisions designed for big business.

These reforms are aimed at offering widespread relief and financial improvements to millions of taxpayers. Below, we provide an in-depth look at the various key elements of the Act, essential for understanding its impact and implications.

NOTE: MAGI (Modified Adjusted Gross Income) is referred to multiple times in this article. For most taxpayers it is the same as the AGI. MAGI is AGI with foreign and territory excluded income added to the AGI.

Individual Tax Rates – OBBBA prolongs and enhances reduced individual tax rates, which are now extended beyond January 1, 2026. The Act aims to continue the legacy of lower rates initially brought in with past resolutions, thereby mitigating tax burdens for middle-income families. Tax bracket adjustments linked to inflation will apply from taxable years after December 31, 2025. The extensions of the TCJA rates favors the wealthy by continuing the elimination of the 39.6% tax bracket.

Standard Deductions – OBBBA extends, increases and makes permanent the higher TCJA standard deductions. The 2025 standard deductions, the last year under TCJA, were originally scheduled to be $15,000 for single and married filing separate taxpayer, $22,500 for heads of household, and $30,000 for married taxpayers filing jointly. However, OBBBA also makes an inflation adjustment to the 2025 rate using a different prior-year base that will significantly increase in the standard deductions for 2025. We will have to wait for the IRS to make that calculation and release the updated amounts for 2025.

Senior Tax Deduction – A temporary additional deduction for seniors aged 65 and older has been introduced, allowing a $6,000 deduction per qualified individual. This is phased out with higher income levels, beginning for taxable years before January 1, 2029. However, it only applies to taxpayers with a MAGI less than $75,000 ($150,000 for married couples filing jointly) which limits applicability. This deduction is in place of Trump’s campaign promise to eliminate the tax on Social Security. This provision becomes effective in 2025.

Child Tax Credit – OBBBA enhances support for families by increasing Child Tax Credit from $2,000 to $2,200 per qualifying child, beginning in 2025 and inflation adjusting the credit in subsequent years. The modifications also include some strict Social Security number requirements for children and parents. The credit phases out for higher income taxpayers beginning at a MAGI of $400,000 married taxpayers jointly and surviving spouse and $200,000 for others.

Qualified Business Income (QBI) Deduction – The QBI deduction receives a boost, with increased phase-in amounts from $50,000 to $75,000 for individuals and $100,000 to $150,000 for joint filings ensuing after December 31, 2025.

Qualified Small Business Stock (QSBS) – C Corporation shareholders can exclude gains from the sale of QSBS, and for QSBS acquired after July 4, 2025, the exclusion rates are 50% after three years, 75% after four years, and 100% after five years of holding the stock. The exclusion cap is raised to $15 million, and the corporation’s asset limit is increased to $75 million, both of which will be adjusted for inflation after 2026. More restrictive exclusions apply to QSBS acquired before July 5, 2025, the most recent being for the period September 28, 2010, through July 4, 2025, providing 100% exclusion for stock held for more than 5 years.

Minimum QBI Deduction – OBBBA creates a new, inflation-adjusted, minimum deduction of $400 for taxpayers who have at least $1,000 of QBI from one or more active trades or businesses in which the taxpayer materially participates. This ensures small business owners with a certain QBI level are entitled to an enhanced baseline deduction. Both the $400 and $1,000 are inflation adjusted to the nearest $5.

Sec 529 Plans Qualified Funds Usage – Effective for distributions after July 4, 2025, OBBBA expands the use of Section 529 plans, allowing funds to cover expenses associated with elementary and secondary school and postsecondary credentialing programs. This includes costs related to tuition, fees, books, and other educational expenses for both school levels, as well as expenses for obtaining professional certificates and licenses at the postsecondary level. By broadening the scope of qualified expenses, the OBBBA enhances the flexibility and utility of 529 plans, making them a more versatile tool for families planning educational investments across various stages of learning.

Estate and Gift Tax Exemption – OBBBA permanently extends the estate and lifetime gift tax exemption, increases the exemption amount to $15 million for single filers ($30 million for married filing jointly) effective in 2026, and indexes the exemption amount for inflation going forward. That is up from $13.99 million in 2025. This change serves to preserve more wealth within families.

Alternative Minimum Tax (AMT) – Enhancements in AMT exemptions and phaseout thresholds continue, preventing middle-income taxpayers from undue burdens under the AMT system starting January 1, 2026.

Gambling Losses – The new law permanently continues the current provision that limits gambling loss to gambling income. In addition, beginning in 2026, the deduction for gambling losses is limited to 90% of the actual losses.

Mortgage Interest -OBBBA makes permanent the $750,000 ($375,000 in for married taxpayers filing separate). However, OBBBA also restores the deduction for certain mortgage insurance premiums that sunset back in 2021 on home acquisition indebtedness and treats the premiums as qualified residence interest but also included as part of the $750,000/$375,000 limits.

No Tax on Tips – OBBBA permits a deduction up $25,000 for tips received by an individual in an occupation, other than a “specified trade or business”, which customarily and regularly receives tips including tip sharing. The tips must be voluntary, not subject to any consequence for non-payment, not negotiable, and the amount determined by the payer.

No Tax on Overtime – There also is a new deduction for overtime. However, for this provision overtime pay is the difference between the workers regular pay rate and the overtime pay rate not the entire amount for working overtime. The maximum amount that can be deducted is $12,500 ($25,000 for a married couple).

The Following Applies to Both the Tips and Overtime Deductions
• The deduction begins to phase out for when the taxpayers MAGI exceed $150,000 ($300,000 for married couples filing jointly).
• The deduction is temporary and only allowed 2025 through 2028.
• Married Couples must file joint to claim the deduction.

Car Loan Interest – The new tax bill includes a temporary interest deduction, 2025 through 2028, for qualified passenger vehicles including cars, minivans, vans, SUV, pickup trucks, or motorcycles. Does not include campers or recreational vehicles. The $10,000 maximum deduction begins to phase out for when the taxpayer’s MAGI exceed $100,000 ($200,000 for married couples filing jointly) and is fully phased out at $150,000 ($250,000 for married couples filing jointly. The loan cannot be with a related party; the vehicle must be assembled in the U.S. and must weigh 14,000 pounds or less.

Trump Accounts – The legislation introduces “Trump accounts,” tax-advantaged savings accounts for children born between 2025 and 2028, with a $1,000 initial federal deposit. U.S. citizen children can receive up to $5,000 annually from parents and $2,500 from employers, invested in a diversified U.S. stock index fund. Earnings grow tax-deferred, with qualified withdrawals taxed as long-term capital gains. Some experts prefer 529 college plans due to their higher contribution limits and tax benefits. The individual must not have reached the age of 18 by the end of the calendar to establish a Trump account.

State and Local Tax (SALT) Deduction – OBBBA imposes new limits on the SALT deduction, initially capping it at $40,000 starting in 2025. The cap is increased a small amount for each subsequent year until it reaches $41,624 in 2029. Then in 2030 reverts to the $10,000. One-half of those amounts for married taxpayers filing separate. The deduction is also subject to a MAGI inflation adjusted phaseout threshold of $500,000 for 2025, at which point the annual SALT limit is reduced by 30% of the difference between the threshold and the actual AGI but not less than $10,000.

Casualty Loss Deduction – Under TCJA casualty loss deductions were suspended except for those encountered in federally declared disaster area. OBBBA continues and makes permanent that limitation with one exception. The scope of the casualty loss deduction is expanded to include both state-declared and federally declared disasters.

Pease Limitation – Prior to 2018 there was limitation on itemized deductions that impacted higher income taxpayers. TCJA suspended that limitation through 2025. Effective for tax years after 2025, OBBBA permanently repeals the Pease limitation and replaces it with a new overall limitation on itemized deductions that impacts taxpayers in the 37% (the highest) tax bracket.

Adoption Credit – OBBBA makes $5,000 of the adoption credit refundable effective for taxable years after 2025.

Dependent Care Assistance – OBBBA amends the existing limit for dependent care assistance, increasing it from $5,000 to $7,500. For taxpayers filing separately, it increases from $2,500 to $3,750.

Bonus Depreciation – Primarily applies to tangible property with a recovery period of 20 years or less. OBBBA restores 100% bonus depreciation after January 19, 2025.

Energy Credit Terminations – Under prior law, clean vehicle and associated tax credits didn’t sunset (terminate) until after 2032. OBBBA accelerates the sunsets.
• Previously Owned Clean Vehicle Credit: September 30, 2025
• Clean Vehicle Credit: September 30, 2025
• Qualified Commercial Clean Vehicle Credit: September 30, 2025
• Alternative Fuel Vehicle Refueling Property Credit: June 30, 2026
• Energy Efficient Home Improvement Credit: After December 31, 2025
• Residential Clean Energy (includes solar): After December 31, 2025

Contributions To Scholarship Granting Organizations – OBBBA creates a tax credit (dollar for dollar) up to a maximum $1,700 for contributions to qualified organizations granting scholarships to eligible students. Unused credit can be carried forward 5 years. Includes qualifications for scholarship recipients and organizations granting scholarships. Effective for tax years beginning after 2025.

Charitable Contribution Non-itemizers – The new law allows non-itemizers to claim cash contributions to qualifying charities of up to $1,000 ($2,000 for joint filers). Effective tax years beginning after 2025.

The One Big Beautiful Bill Act introduces a range of important provisions that can significantly impact individuals and small businesses. Understanding these changes is crucial to optimizing your tax strategy and ensuring compliance. As these provisions unfold, it’s important to stay informed about how they may specifically affect your financial situation.

We encourage you to contact our Leesburg or Warrenton office should you have any questions or wish to schedule a planning appointment, 703-771-1818 or 540-347-5681. Our team is here to guide you through this evolving landscape, helping you navigate the complexities of tax regulations with confidence and clarity.