One Big Beautiful Bill Act (OBBBA) Effects for Tax Year 2025 and Beyond: Part 1
2025 brought many changes to the United States, and among the biggest was legislation known as the One Big Beautiful Bill Act, or OBBBA for short. The One Big Beautiful Bill Act was signed into law on July 4, 2025, by President Donald Trump. The OBBBA legislation incorporated tax code changes on a more short-term basis for individual taxpayers and implemented longer-lasting changes for business owners. The impact of these changes will be felt when the 2025 tax returns are filed, and it’s important to understand their implications.
Individuals
For individual taxpayers, OBBBA made permanent the lower ordinary income tax rates and bracket ranges initially established as part of the 2017 Tax Cuts and Jobs Act (TCJA), which were set to expire at the end of 2025. These rates also kept the top tax rate at 37%, which ordinarily would have risen to 39.6% with the TCJA expiration.
The standard deduction, which is taken by approximately 90% of US taxpayers, was also maintained at the higher level originally set by the TCJA and will be increased to reflect annual inflation. In using the standard deduction, many taxpayers can avoid the need to itemize and still minimize their tax liability.
Another rule implemented as part of OBBBA now requires that for those itemizing, charitable contributions must be greater than 0.5% of a taxpayer’s Adjusted Gross Income (AGI) – line 11 on your individual tax return before they can be deducted. This creates a minimum before taxpayers receive any benefit from their charitable gifts, and the impact is felt most strongly for those in higher-income brackets. If you are considering charitable giving, please consult your CPA for the best tax strategy.
The 2017 TCJA had previously limited the deductibility of State and Local Taxes (also known as SALT) - typically included for those itemizing on Schedule A- to $10,000, regardless of total taxes paid. In the adoption of OBBBA, taxpayers are temporarily allowed (from 2025 to 2029) to deduct up to $40,000 of State and Local Taxes paid.
The biggest item impacting many families is the No Tax on Tips and Overtime portion of the legislation. While the reduction of taxes on tips and overtime is an incredibly helpful concept, the title is a little misleading, as there are limitations on this reduction, and it’s limited to $12,500 for taxpayers filing single and $ 25,000 for those married filing jointly. There is a phase-out threshold in place for higher-income families, and employers will have to separately state the eligible overtime portion on the employee’s W-2 (this will only apply to years 2026-2028). For tip amounts, employers must report the tip amount and the employee's occupation to remain compliant. In either case, the employee is not exempt from paying federal payroll taxes (such as Medicare and Social Security) on the relevant tips or overtime, only the income tax. States are not required to recognize this reduction in income tax, and any state and local taxation laws still apply, including any overtime laws at the state and local level.
Stay tuned for the next part of this series on the One Big Beautiful Bill Act.
SOURCES:
https://kahnlitwin.com/blogs/tax-blog/what-the-obbba-means-for-your-business-in-2026
https://www.criadv.com/insight/obbba-small-business-tax-relief-2026/
https://taxfoundation.org/blog/what-obbba-tax-changes-mean-for-you/
https://taxpolicycenter.org/briefing-book/what-standard-deduction