On July 4, 2025, the President signed the "One Big Beautiful Bill Act," which has sweeping tax changes that will affect individuals and businesses. A previous alert reported on a prior version of the law passed by the House in May. Many changes in the bill are effective beginning this year. Contact a Taft attorney to discuss.
Individual Tax Provisions
Qualified Business Income (QBI) Deduction. The bill permanently extends the §199A deduction for pass-through owners. The initial house bill increased the deduction rate from 20% to 23%, but the final bill keeps the rate the same at 20%. The deduction's income limit phase-in ranges were modified.
Estate and Gift Tax Exemption. The exemption amount is permanently increased to $15 million beginning in 2026, indexed for inflation.
State and Local Tax (SALT) Deduction. The SALT cap is increased to $40,000 ($20,000 for married filing separately) for 2025 with an income-based phaseout. For tax years 2026 through 2029, the deduction cap and income phaseouts increase by 1% per year. The law's prior version had rules targeting state-level SALT cap workaround strategies, but these rules are not in the final bill. Starting in 2030, the deduction reverts to the current $10,000 limit.
Deduction for Tips and Overtime Income. Creates a deduction for qualifying tips and overtime pay for 2025 to 2028. Excludes highly compensated employees and is available to itemizers and non-itemizers.
Auto Loan Interest Deduction. Auto-loan interest is deductible for taxpayers purchasing certain automobiles, subject to income-based phaseouts. Applies to auto loans beginning in 2025 and ending in 2028.
AMT Exemption. The increased individual alternative minimum tax (AMT) exemption amounts from the 2017 tax changes are permanently extended. Additionally, certain modifications for the exemption phaseout threshold and the phaseout exemption amount were made.
Business Tax Provisions
Bonus Depreciation. The Tax Cuts and Jobs Act (TCJA) 100% bonus depreciation is permanently reinstated for property acquired after Jan. 19, 2025.
Section 179 Expensing. Limits are increased to $2.5 million (from $1 million) and phase-out thresholds are increased to $4 million (from $2.5 million) for property placed in service after Dec. 31, 2024.
Carried Interest. No provision affects carried interest.
IRS Form 1099 Reporting Threshold. The information reporting threshold for certain payments reported on IRS Form 1099 is increased from $600 to $2,000 for payments made after Dec. 31, 2025.
R&D Deduction. Immediate deduction of domestic research expenditures is reinstated. Limitations apply to expenditures attributable to research that is conducted outside the U.S.
Qualified Opportunity Zones. A second round of Opportunity Zones (initially provided by the TCJA) are created beginning in 2027. This second round has many changes from the first.
International Provisions. Three international tax provisions added by the TCJA are modified:
- The BEAT standard rate increased to 10.5%.
- The FDII effective tax rate is now 14%. Additional changes were made related to its calculation.
- GILTI now has an effective tax rate of 12.6% and additional changes were made related to its calculation. Finally, GILTI is now called net CFC tested income.
Repeal or Phase out of Several Energy Credits
The repeal of energy credits in the original House bill discussed in the previous alert were mostly unchanged. Find them here.
Employee Benefits
High Deductible Health Plans (HDHPs). May permanently provide first-dollar coverage for telehealth and other remote health care services. Effective for plan years beginning after Dec. 31, 2024.
Health Savings Accounts (HSAs). Participation in a direct primary care service arrangement will not be considered other coverage that prohibits an individual from contributing to an HSA. The direct primary care service arrangement must be for a fixed fee. It cannot exceed $150 per month for individual coverage or $300 per month for any coverage option that expands beyond individual coverage. The limitation on the monthly fixed fee will be adjusted for inflation. The direct primary care service fee can be paid tax-free from HSAs. Effective for months beginning after Dec. 31, 2025.
Education Assistance Programs. The annual limitation of $5,250 is increased for inflation. Effective for payments made after Dec. 31, 2025.
Exclusion for Employer Payments of Students Loans. Employer payments of student loans under educational assistance programs are now permanently excluded, subject to previous limitations.
Dependent Care Assistance Programs. Annual limitation is increased to $7,500 ($3,750 each if married and filing separately). The annual limitation was not adjusted for inflation. Effective for tax years beginning after Dec. 31, 2025.
Trump Accounts. For children, under age 18, with an annual contribution of up to $5,000, as adjusted for inflation. Employers may contribute up to $2,500 annually to Trump Accounts of an employee or employee dependent. Employers who wish to contribute to Trump Accounts must adopt a separate written plan document and comply with nondiscrimination rules. Effective for tax years beginning after Dec. 31, 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
