Breaking Down the OBBB: 11 Must-Know Provisions for Individuals
On July 4th, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, the most momentous tax legislation since the Tax Cuts and Jobs Act (TCJA) was passed during his first term in 2017. As with any 1000+ page piece of legislation, members of both parties have plenty to say about the OBBBA, but we’re focused on the practical application of the new law to Harmony clients.
To that end, here’s a first take on eleven of the personal income tax changes that we find most relevant to Harmony tax clients (of course, if you’re not a tax client, we’d love to suggest you join us for total peace of mind regarding all of the changes!):
1. Reduced Income Tax Rates Extended Permanently
The reduced income tax rates on Americans introduced by the TCJA in 2017 are now extended permanently by Section 70101 of the OBBBA, and the Act adds an annual inflation adjustment to the income thresholds for all tax brackets higher than 12%.
What It Means for You: The newly extended reduced tax rates will automatically apply to all taxpayers, and this is a significant tax cut versus the rates that were scheduled to be in effect in 2026. It’s not going to result in extra tax savings in 2025, but it will continue the lower tax rates permanently and the bracket inflation adjustments will reduce ‘tax creep’ (the phenomenon where increased nominal wages push taxpayers into higher brackets without any inflation-adjusted real income gains).
2. Increased Standard Deduction
Starting in 2025, the standard deduction is permanently increased to the following levels:
$15,750 for individuals
$23,625 for head of household filers
$31,500 for married filing joint taxpayers
What It Means for You: This provision extends and enhances the standard deduction and will reduce non-itemizing taxpayers’ income taxes starting in the 2025 tax year. If you do not itemize deductions on your personal tax return, this will lower your taxes.
3. State And Local Tax (SALT) Tax Cap Increase
Beginning in 2025, the deduction for State and Local Taxes (SALT) is increased to $40,000 from the current $10,000 limit. It subsequently increases by 1% per year.
What It Means for You: Big tax savings, and big tax planning opportunities - especially for 2026 planning.
If you are paying a significant amount of state taxes or currently elect to pay pass-through entity (PTET) taxes at your business to work around the prior $10,000 limit, schedule a consultation with your Harmony CPA to conduct tax planning for the appropriate plan to maximize your deductions moving forward. This is one of the changes in the OBBBA with the most impact on tax planning opportunities.
If you’re in Maryland you can brush up on the state’s new legislation in our May writeup.
4. Charitable Deduction Changes
Starting in 2026, non-itemizers can deduct up to $1,000 of cash charity per year.
Itemizers can only deduct contributions in excess of 0.5% of adjusted gross income (but the disallowed amounts will carry forward into future years).
What It Means for You: Even if you take the standard deduction, keeping close track of your monetary donations can lead to a writeoff starting in 2026. For itemizers, consolidating charitable contributions into specific tax years can have a big impact on writeoffs.
5. 529 Plan Expansion
Beginning in 2026, 529 Plans are now expanded to include covering non-tuition categories like books, testing fees, tutoring, and online educational materials. The annual limit on the amount used for elementary and secondary education expenses is doubled from $10,000 to $20,000.
What It Means for You: This provision substantially expands taxpayers’ ability to use 529 plans to fund elementary and secondary educational expenses. This isn’t limited to just private school tuition - the expansion of 529 Plans to cover out of pocket expenses for educational costs enhances the usefulness of the plans to pay for books, school supplies, laptops, tutoring, testing, etc.
Strongly consider whether regularly funding and utilizing a 529 Plan should be part of your personal financial plan. There are state level tax breaks available for funding the plans, and students can now benefit from funds in these plans as early as Kindergarten. For more on 529 plans, we covered the basics last year with our 529 FAQ (though the numbers are now out of date!).
6. Enhanced Child Tax Credit
The Child Tax Credit is increased to $2,200 with a $1,700 maximum refundable credit. These credits begin to phaseout beginning at $400,000 for joint filers and $200,000 for others.
7. Temporary Senior Deduction
From 2025 through 2028, seniors will get a temporary $6,000 deduction, with phaseouts beginning at $75,000 for a single return and $150,000 for MFJ returns.
What You Should Know: Married taxpayers must file a joint return in order to claim the temporary senior deduction.
8. No Tax on Tips
From 2025 through 2028, up to $25,000 per year per taxpayer of tips will be deductible for taxpayers. Phaseouts begin when AGI exceeds $150,000 for a single return and $300,000 for MFJ. The tip deduction applies to restaurant workers as well as the beauty service industry, and may be expanded further when the IRS publishes a list of customarily tipped workers within the next 90 days, per law.
What You Should Know: Married taxpayers must file a joint return in order to deduct the $25,000 of tips per year. The law directs the IRS to change the withholding tables and W-2 to reduce tax withholding along the way and reflect the overtime pay on your W-2. There will be rules and processes promulgated by the IRS for how to deal with the 2025 transition year, since this change is retroactive to the beginning of 2025.
9. No Tax on Overtime
From 2025 through 2028, up to $12,500 per taxpayer per year of overtime pay will be deductible for taxpayers. Up to $25,000 per year will be deductible per joint return, with phaseouts for AGI of $150,000 for a single return and $300,000 for MFJ.
What You Should Know: Married taxpayers must file a joint return in order to claim the overtime deduction. The law directs the IRS to change the withholding tables and W-2 to reduce tax withholding along the way and reflect the overtime pay on your W-2. It is expected that your take home pay will increase due to the changes in the withholding tables.
10. Personal Vehicle Loan Interest Deduction
A new deduction for interest paid on personal vehicles is introduced, retroactive to January 1, 2025. The deduction is up to $10,000 per year, with phaseouts beginning at $200,000 for joint filers and $100,000 for others.
What You Should Know: The deduction is only available for personal use vehicles that are manufactured in America and were purchased by the taxpayer. It is available to taxpayers regardless of whether or not they itemize their taxes.
Interest built into car leases is not deductible, so under the new law it could be more advantageous to buy rather than lease a vehicle.
Consult with your Harmony CPA prior to purchasing a vehicle. To get the deduction you’ll need to buy a vehicle that receives final assembly in the United States, and the vehicle will need to be new. For business owners, this could change the calculus for purchasing a vehicle in a business or personally. Claiming the tax deduction will also require better recordkeeping: your tax preparer will need the VIN of the vehicle and auto lenders will be required to issue new tax documents to you (the final form will be determined in the future) showing the details of the vehicle and the interest paid on the loan.
Read more about properly reporting the personal use of company vehicles for S-Corp owners or employees in our writeup a few months ago.
11. Enhanced Child and Dependent Care Tax Credit
Beginning in 2025, the Child and Dependent Care Tax Credit (CDCTC) is enhanced to make it more generous and accessible to low and middle-income families. The credit is available on up to $7,500 of child and dependent care expenses and the credit starts at 50% of the cost of child care and decreases as income increases. It cannot fall below 20%.
What You Should Know: Working families should get a significant benefit from the expanded credit, depending on income levels. The phaseouts are more gradual than prior versions of this credit, as the intent is to drive the most assistance to lower income taxpayers, but have income tiers that go into effect at $75,000 of income for a single filer and $150,000 for MFJ, so if you find yourself around these income thresholds, some tax planning could be in order to make sure your income stays in the right bracket.
As with any major tax law, the text will be interpreted by the Treasury and other relevant government agencies, and implementation may vary. Your team at Harmony will be available to help you optimize your tax outcomes under the new tax code as you see fit - just reach out anytime to your tax team member, our admin@harmonycpa.com email, or via phone at 844-937-2433 and we’ll be here to help!
12. Bonus Tip: Work With Us!
Not technically a Need To Know tidbit from the bill, but one we consider pretty valuable - work with Harmony and gain total confidence about all your tax needs as legislation changes. Just click below if you’re not already a valued tax client.