Understanding the One Big Beautiful Bill Act, Part II: Key Income Tax Changes for 2025
Part 2 of Our Two-Part Series on What the New One Big Beautiful Bill Act Legislation Means for Your Finances
The One Big Beautiful Bill Act represents one of the most significant overhauls of the U.S. tax code in decades. Officially signed into law on July 4, 2025, this bill touches many aspects of government spending and tax policy. While much of the legislation extends existing provisions and makes some permanent, it also introduces meaningful changes that will impact individuals and families beginning with the 2025 and 2026 tax years and beyond. If you missed Part I of our breakdown, you can find it linked here for reference and context (button):
https://pwallc.net/blog/taxes/understanding-one-big-beautiful-bill-income-tax-changes/.
In Part I of our discussion, we focused mostly on provisions that remain unchanged or were extended from the 2017 Tax Cuts and Jobs Act. In Part II, we turn our attention to new or modified rules that will affect everyday taxpayers, and that may also present planning opportunities if understood ahead of time.
Permanent Charitable Deduction for Non-Itemizers
One of the most widely discussed provisions of the One Big Beautiful Bill Act applies to charitable giving. Before this law, taxpayers who took the standard deduction could not claim a deduction for charitable contributions. Both itemizers and non-itemizers benefited differently under the 2017 tax rules, but many lower- and middle-income taxpayers lost a direct tax benefit from giving because they rarely itemized. Beginning in tax year 2026, the Act reintroduces a charitable deduction for non-itemizers.
Taxpayers who take the standard deduction will be able to deduct up to $1,000 in cash contributions if filing as a single individual or up to $2,000 if married filing jointly, even if they do not itemize their other deductions. This provision makes charitable giving more accessible from a tax perspective to a larger portion of the population and may encourage more gifts to qualified charities.
In addition to the above-the-line deduction for non-itemizers, the Act modifies how itemized deductions for charitable contributions will work. Under the new rules effective in 2026, itemizers can only deduct charitable gifts that exceed 0.5 percent of their adjusted gross income. Amounts below that threshold are not deductible in the current year. This is a significant change for higher-income taxpayers who previously deducted all qualifying charitable gifts without a minimum floor. The change aims to balance the benefit of extending the above-the-line deduction to non-itemizers while constraining some itemized deductions for larger donors.
For families that give regularly to charity but do not plan to itemize, this new deduction means it may be worth tracking receipts, maintaining good records, and planning the timing of gifts more deliberately. Taxpayers may choose to make larger charitable gifts in years when their income is lower or when the tax benefit is greatest. For higher-income individuals who anticipate itemizing, the new 0.5 percent threshold will affect how much of their contributions are actually deductible.
Changes to the State and Local Tax Deduction (SALT)
Another significant provision in the One Big Beautiful Bill Act relates to the state and local tax (SALT) deduction. Under prior law enacted in 2017, the SALT deduction was capped at $10,000 for all taxpayers. This cap disproportionately affected taxpayers in high-tax states like California, New Jersey, and New York because they were limited in the amount of property, income, and sales taxes they could deduct against federal taxable income.
The new legislation temporarily increases the SALT deduction cap to $40,000 in 2025, then adjusts that cap slightly for inflation in 2026 and subsequent years through 2029. After 2029, the limit is set to revert to $10,000. There is an income phase-out associated with this expanded cap that begins at $500,000 of modified adjusted gross income, meaning taxpayers above that level will gradually lose some of the benefit.
This temporary increase can provide meaningful tax relief to those who pay significant state and local taxes, particularly property taxes on multiple properties or high state income taxes. Planning for how and when to manage income in relation to this cap may present opportunities for some taxpayers to capture additional SALT deductions during this window.
Affordable Care Act Marketplace Premium Credits
The Act also impacts health insurance markets for individuals who purchase coverage through the Affordable Care Act exchanges. Currently, premium tax credits are calculated based on a percentage of income relative to the federal poverty level, allowing many households to qualify even if they earn more than the 400 percent threshold. Under the new law beginning in 2026, that 400 percent limit becomes a hard cutoff. Households with incomes above that level will no longer qualify for premium credits. This change will likely lead to higher premiums for middle-income households that previously received partial credits. The impact is expected to be most pronounced for households in the $80,000 to $100,000 income range, where even small changes in income could result in the loss of credits and substantially higher insurance costs.
For households currently relying on ACA marketplace coverage, careful income planning may help avoid falling just above the credit threshold. Adjustments to business income, Roth conversions, or other timing strategies could help reduce adjusted gross income to remain within the credit-eligible range.
Temporary Deductions for Tips, Overtime, and Auto Loan Interest
The Act introduces a series of temporary deductions that will apply from 2025 through 2028. First, up to $25,000 of income from tips can be excluded from federal income tax for qualifying workers. The law defines these as tips from occupations where tipping is customary, although further IRS guidance will be needed to clarify enforcement and definition. A similar provision excludes up to $12,500 of overtime pay from taxable income under the same timeline. These provisions apply whether a taxpayer itemizes deductions or takes the standard deduction.
Second, the Act introduces a new deduction for interest on auto loans. Through 2028, taxpayers may deduct up to $10,000 in auto loan interest for vehicles whose final assembly occurred in the United States, subject to income phase-outs. This deduction is separate from the standard or itemized deduction and can be claimed in addition to either. This change is intended to reduce the cost of vehicle ownership and provide targeted relief to middle-income households.
Both the tip/overtime exclusions and the auto loan interest deduction are temporary measures, meaning they are scheduled to end after tax year 2028 unless further extended or made permanent by future legislation.
Practical Steps for Tax Planning
Given the variety and timing of these changes, taxpayers should take several practical steps now to prepare. First, taxpayers who historically took the standard deduction and made charitable gifts should start tracking receipts in 2025 in anticipation of the 2026 changes, when even non-itemizers can benefit from a deduction up to $1,000 or $2,000. Second, taxpayers in high-tax states should run scenarios with their tax professionals to determine how best to use the temporary SALT cap increase, including managing income to avoid phase-outs.
Households that purchase health insurance through the ACA marketplace should monitor income closely and consider how other changes to retirement distributions, business income, or investment sales may affect eligibility for premium credits. Finally, workers who earn significant tips or overtime income, as well as buyers planning vehicle purchases, should factor in the temporary tax incentives available through 2028.
Final Thoughts
The One Big Beautiful Bill Act includes a mix of permanent and temporary changes that will shape tax planning for years to come. By understanding the key provisions related to charitable giving, SALT deductions, health insurance premiums, and temporary exclusions for certain types of income, taxpayers can better plan and optimize their strategies to minimize taxes and maximize benefits.
If you’d like a personalized review of how these changes may affect your tax or retirement strategy, contact Personal Wealth Advisory to schedule a conversation with our team. Thank you for reading Part II of our breakdown!
Sources:
¹ One Big Beautiful Bill Provisions (Irs.gov, 2025)
² One Big Beautiful Bill: Impact on Philanthropy (Council on Foundations, 2025)