The One Big Beautiful Bill: What It Really Means for Your Taxes and Savings

The Omnibus Budget and Balanced Budget Act of 2025 (OBBBA), also known as the “One Big Beautiful Bill,” became law on July 4, 2025, promising significant changes to the tax landscape. While headlines tout “great benefits” for taxpayers, the reality is more nuanced. Let’s break down what this comprehensive legislation actually means for your financial situation.

The Headline-Grabbing Tax Breaks: Less Than Meets the Eye

Tips, Overtime, and Car Loans: The Fine Print Matters

The OBBBA introduces three temporary tax deductions that sound appealing but come with significant limitations:

Tips Deduction (2025-2028): You can deduct up to $25,000 for singles ($50,000 for married couples) in qualified tips, but your actual savings depend on your tax bracket. A server in the 12% bracket earning $8,000 in tips saves only $960 in federal taxes. More importantly, you’ll still owe the full 7.65% in FICA taxes on those tips, and the deduction phases out for higher earners.

Overtime Deduction (2025-2028): Similar limitations apply to the overtime deduction, capped at $12,500 for singles ($25,000 for married couples). Only the premium portion of overtime pay qualifies, and like tips, you’ll still pay full payroll taxes while your federal tax savings remain tied to your bracket.

Car Loan Interest (2025-2028): The new deduction for car loan interest (up to $10,000 annually) only applies to new vehicles with final assembly in the United States. This excludes used cars entirely and many foreign-manufactured vehicles, significantly limiting its usefulness.

All three deductions phase out at income thresholds, meaning higher earners may see little to no benefit despite potentially paying the most in these categories.

Education Savings: Expanded Options But Complexity Remains

529 Plans Get a Boost

The legislation significantly expands 529 plan flexibility. Starting with distributions after July 4, 2025, families can use 529 funds for credentialing programs like welding and aviation mechanics, plus a broader range of K-12 expenses including tutoring, educational therapies, and standardized test fees.

The annual K-12 distribution cap doubles from $10,000 to $20,000 starting in 2026, providing much-needed relief for families using private education or specialized services.

Trump Accounts: A New but Limited Option

Perhaps the most talked-about addition is the new “Trump Account” – essentially a starter IRA for children. Key features include:

• $1,000 federal seed deposit for children born 2025-2028
• $5,000 annual contribution limit
• Funds locked until age 18
• Investment restricted to low-cost U.S. equity index funds until 18

While the free $1,000 is attractive, Trump Accounts aren’t ideal for education savings. Unlike 529 plans, withdrawals for education still incur income taxes on earnings and potentially a 10% penalty. They’re better suited for long-term retirement savings rather than education funding.

ABLE Accounts Gain Permanence

The legislation makes several ABLE (Achieving a Better Life Experience) account provisions permanent, including ABLE-to-Work contributions and 529-to-ABLE rollovers, providing stability for families supporting individuals with disabilities.

ABLE accounts provide valuable financial flexibility for individuals with a disability that began before age 26 while preserving eligibility for government benefits such as Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) benefits.

The Bigger Picture: Mixed Results

What Works Well

The law provides much-needed stability by making key Tax Cuts and Jobs Act provisions permanent, including individual tax rates, the larger standard deduction, and Section 199A pass-through deduction. It also makes equipment expensing and R&D expensing permanent – changes that should boost long-term economic growth.

The SALT deduction (short for State and Local Tax deduction) cap rises to $40,000 (from $10,000) for taxpayers earning under $500,000 through 2029, though it reverts to $10,000 afterward.

Specifically, the law changes include the following:
The cap is raised to $40,000 for incomes under $500,000 ($250,000 for Married Filing Separately).

• If your Modified Adjusted Gross Income (MAGI) is over $500,000, then the cap is gradually reduced by 30% (until it reaches $10,000).
• The cap and income threshold will increase 1% annually.

Annual Dependent Care FSA Limit Increased
The Act raises the limit for the pretax benefit account used to pay for eligible dependent care services to $7,500 for single individuals and married couples filing jointly, up from $5,000, and $3,750 for married couples filing separately, up from $2,500. The increase is effective beginning January 1, 2026. *(However, Highly Compensated Employee (HCE) testing is required under ERISA to ensure that benefit plans don’t disproportionately favor highly paid employees. HCE is defined as employees who earned more than $160,000 in the prior year (2025) or employees who owned more than 5% of the business at any time during the current or previous year.)

A Change to Residential Energy Credits
Homeowners who made energy-efficient home improvements, such as adding solar panels or energy-efficient windows or doors, should take note of credits that are expiring at the end of 2025.

This includes:

• Energy Efficiency Home Improvement Credit
• Residential Clean Energy Credit

The law states that any purchases made after Dec. 31, 2025, will no longer qualify for these credits.

Changes to Charitable Tax Deductions
Starting in 2026, new tax rules will affect how you can deduct charitable donations.

• New Above-the-Line Deduction: For taxpayers who take the standard deduction, you can now claim an additional deduction of up to $1,000 (individuals) or $2,000 (married filing jointly) for charitable gifts, even without itemizing.
• Changes for Itemized Deductions: For taxpayers who itemize, charitable deductions will only count for donations exceeding 0.5% of your Adjusted Gross Income (AGI). The first 0.5% of your AGI donated to charity cannot be deducted.

Example: If your AGI is $100,000, only charitable donations above $500 would be deductible.

• Cash Donation Limit Extended: The 60% AGI limit for cash donations to public charities has been made permanent, allowing you to deduct cash gifts up to 60% of your annual income.

Permanent Extension and Expansion of Pass-Through Deduction
The 20% Qualified Business Income deduction has been made permanent under the legislation. Although the House had proposed increasing this deduction to 23%, the final version maintained the current 20% rate. However, the legislation did make several important adjustments: it raised the income phase-in thresholds to $75,000 for single filers and $150,000 for joint filers, and established a new minimum $400 deduction for small businesses. These changes deliver significant tax relief to individuals operating through various pass-through business structures, including partnerships, S corporations, and qualifying trusts.

Expansion of Estate & Gift Tax Exemption
Starting in 2026, U.S. citizens and residents will benefit from a significantly expanded federal estate and gift tax exemption, which rises to $15 million per person ($30 million for married couples). This enhanced exemption amount, which also applies to the generation-skipping transfer tax, will be adjusted annually for inflation. The permanent nature of this expansion creates fresh opportunities for strategic lifetime gifting and comprehensive multi-generational wealth transfer planning for ultra-high-net-worth families and small business owners.

Areas of Concern

The Tax Foundation estimates the law will reduce revenue by $5.0 trillion over a decade, adding approximately $3 trillion to the deficit even after accounting for spending cuts and economic growth effects.

The legislation introduces significant complexity through new rules and eligibility requirements. The “no tax on tips, overtime, and car loans” provisions alone will likely require hundreds of pages of IRS guidance to implement correctly.

What This Means for You

For Working Families: The expanded 529 flexibility and higher K-12 caps provide real value, especially for those using private education or supporting children with special needs. The new deductions for tips and overtime offer some relief, but may not be as substantial as hoped.

For Savers: While Trump Accounts provide a modest head start with the $1,000 seed money, 529 plans remain superior for education savings due to their tax-free growth and withdrawal benefits for qualified expenses.

For Small Business Owners: Permanent equipment expensing and R&D deductions provide valuable certainty for investment planning.

The Bottom Line

The One Big Beautiful Bill delivers a mixed bag of tax changes. While it provides stability through permanent extensions of popular TCJA provisions and meaningful expansions to education savings options, the headline-grabbing new deductions come with more limitations than benefits for most taxpayers.

The legislation represents incremental improvement rather than transformative tax reform. As always, the impact on your specific situation will depend on your income, family circumstances, and financial goals. Consider consulting with a tax professional to understand how these changes affect your unique financial picture.

Rather than getting caught up in the marketing appeal of “tax-free” this or that, focus on the fundamental strategies that work: maximizing employer matches, taking advantage of proven tax-advantaged accounts like 401(k)s and 529s, and maintaining a diversified approach to both taxes and investments.

The complexity of modern tax law makes professional guidance more valuable than ever. Consider working with a qualified tax professional or financial advisor to navigate these changes effectively.