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The appropriately titled “One Big Beautiful Bill Act” became law on July 4, 2025, bringing forth a series of changes to federal tax and spending laws. This short article discusses the major tax highlights in the bill.
Income Tax Changes, Extending TCJA Benefits
The biggest point of uncertainty for taxpayers going into the 2025 calendar year was whether the most-popular provisions of the 2017 Tax Cuts and Jobs Act – which generally lowered tax rates and increased the standard deduction for individuals – would be extended. A number of these benefits were set to expire automatically at the end of 2025. The bill renews a majority of the TCJA provisions that are applicable to individuals and businesses.
The following TCJA benefits have been permanently extended:
- Reduced federal tax rate brackets for individuals;
- Enhanced standard deduction (and corresponding repeal of individual exemptions);
- Extension of increases to the federal child tax credit (and index credit benefits to inflation);
- Renewal and expansion of qualified business income deduction (aka the pass-through deduction);
- Enhancement of various depreciation deductions for various types of business property, and especially property used in manufacturing; and
- The cap on deductibility of state and local taxes for individuals, but it has been increased from the TCJA amount of $10,000 per year to $40,000.
- NOTE: This increase is temporary, as the deduction is scheduled to revert to $10,000 beginning in tax year 2030. The deduction will also be reduced for taxpayers making in excess of $500,000 per year.
Other limitations originally put in place as part of the TCJA, such as the elimination of the deduction for miscellaneous itemized deductions and the restrictions put in place on casualty losses, have also been permanently extended. The bill also eliminates many incentives that were available for electric cars or green energy home improvements.
New Tax Benefits for Individuals
Congress has created a deduction for certain tip income that will benefit workers in certain service sectors. Which service sectors those are has not been defined, however. Congress indicated that the intent is for the deduction to apply to occupations where workers “customarily” receive tips. The Treasury Department has been delegated the task of clarifying which occupations will qualify before the end of the year. The bill clarifies “tips” must come from customers; an employer cannot give an employee a bonus and call it a tip to avoid taxes. Lastly, the deduction for tip income will be subject to a maximum limit of $25,000 per year and begins to phase out for individuals with incomes in excess of $150,000 or $300,000 in the case of joint filers.
The bill creates an exclusion for overtime pay of up to $12,500 per year for individuals, or $25,000 for joint filers. Medicare and Social Security taxes will still be applied to overtime income; the exclusion only applies to income tax. Income tax on overtime pay will still be subject to employer withholdings for income tax. The exclusion is subject to phaseout on incomes in excess of $150,000 or $300,000 in the case of joint filers.
For tax years 2025 through 2028, individuals will be able to deduct up to $10,000 per year of interest payable as a result of purchasing a new passenger vehicle, provide the vehicle’s final assembly occurs within the United States. The deduction is only available with respect to financed purchases and not to leases. Eligible vehicles must be for personal, i.e., nonbusiness, use. The deduction is available to individuals whether they claim the standard deduction or itemize, but will begin to phase out if a taxpayer’s income exceeds $100,000 per year, or $200,000 in the case of joint filers.
Finally, Congress has provided a significant benefit to businesses incurring research and development expenses. Under the bill, domestic research costs will be fully deductible. For small businesses with capitalized R&D costs from expenses incurred in the 2022 through 2024 tax years, a catch-up deduction will be available.
Gift and Estate Tax
The TCJA doubled the federal gift and estate tax exemption for individuals, but the expansion was set to expire at the end of 2025. The bill permanently increases the federal exemption amount to $15 million per individual. The $15 million exemption amount is a slight increase over the current 2025 exemption. Continuing in 2026 and beyond, the exemption will continue to be indexed for inflation.
The increase in the exemption will mean that only high-net-worth individuals will be subject to the federal gift and estate tax, as has been the case since 2018.
Qualified Opportunity Zones Are Back
The bill makes permanent tax benefits available to investors of projects located in Qualified Opportunity Zones. Under prior law, the QOZ tax benefits were set to expire for new investments made on or after January 1, 2027. The benefits have also been enhanced; investors in eligible projects may receive a permanent step-up in basis of 10% if QOZ investments are held long enough, and can receive other incentives for investments made in specified rural areas. In increasing the potential opportunity for QOZ investments, Congress additionally tightened reporting requirements and somewhat restricted how QOZ-eligible census tracts are determined.