Keith Mack
The One Big Beautiful Bill Act, also known as the OBBB, is a piece of legislation that could save you up to $38,000 in taxes. Signed into law by President Trump on July 4, 2025, the Act modifies and makes permanent individual income and estate tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA). The new tax law includes a variety of provisions that could affect how much money you owe, including deductions for tip income, car loan interest, and seniors, as well as changes to the Child and Dependent Care Credit. With these tax changes, it's important to plan ahead to take advantage of opportunities to save money and lower your tax bill.
| Characteristics | Values |
|---|---|
| Name of the tax law | One Big Beautiful Bill Act (OBBB) |
| Date of signing into law | July 4, 2025 |
| Signed into law by | President Trump |
| Tax changes | No tax on tips, no tax on overtime, no tax on car loan interest, additional deduction for seniors |
| Estimated federal deficit increase | $3.5 trillion over the next 10 years |
| Tax breaks | On tip income for jobs where tipping is customary |
| Deductions | $6,000 for seniors, $1,000 for single filers, $2,000 for joint filers, $10,000 for car loan interest, $40,000 for married couples earning up to $500,000 in SALT deductions |
| Tax credits | Child and Dependent Care Credit, Child Tax Credit |
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What You'll Learn
No taxes on tips or overtime pay
The One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, includes two significant tax changes: no taxes on tips and no taxes on overtime pay. These provisions were prominent campaign promises by former President Trump and were included in the Tax Cuts and Jobs Act (TCJA) extensions. While these changes may provide tax relief to eligible workers, they have also sparked concerns about their potential impact on tax rate dispersion and horizontal equity.
Under the OBBBA, eligible workers can benefit from a temporary above-the-line tax deduction on their overtime pay. This deduction allows individuals to deduct up to $12,500 in qualified overtime pay, or $25,000 for joint filers, from their taxable income. It is important to note that this is not a full exemption from federal income tax, as payroll, state, and local taxes still apply. Additionally, the deduction phases out for taxpayers with incomes exceeding certain thresholds.
The "no tax on tips" provision provides an above-the-line deduction of up to $25,000 for tipped workers. While this change can benefit employees in certain industries, it is important to remember that tipped wages remain subject to payroll taxes, including Social Security and Medicare.
The impact of these tax changes on tax rate dispersion has been a topic of discussion. Critics argue that exempting tips and overtime pay from taxes could worsen horizontal inequity, as two individuals earning the same income but with different sources, such as tips or overtime, would face varying tax burdens. This could lead to a situation where taxpayers with similar incomes pay different tax rates, potentially affecting horizontal equity.
While the "no taxes on tips and overtime pay" provisions may provide some financial relief to eligible workers, it is important for individuals to stay informed about the specific conditions and limitations of these tax changes. Consulting with tax professionals or seeking personalized advice based on one's unique circumstances is always recommended to ensure accurate understanding and compliance with tax laws.
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Deduction for seniors
The One Big Beautiful Bill Act (OBBB), signed into law by President Trump on July 4, 2025, includes an additional deduction for seniors. This deduction is available to individuals aged 65 and older, who may claim an additional $6,000 deduction per eligible individual ($12,000 total for a married couple where both spouses qualify). This is in addition to the existing standard deduction for seniors. The deduction phases out for taxpayers with a modified adjusted gross income over $75,000 ($150,000 for joint filers) and is available to both itemizing and non-itemizing taxpayers.
The OBBB also extends expiring provisions of the Tax Cuts and Jobs Act (TCJA) and enacts several new tax cuts, including:
- No tax on tips
- No tax on overtime
- No tax on car loan interest
These changes are designed to reduce taxes on earned income and provide an incentive for some older Americans to work or increase their working hours. The OBBB also includes adjustments to the standard deduction for single taxpayers and married couples, with an extra $750 for single taxpayers and $1,500 for married couples in 2025, with annual adjustments for inflation from 2026 onwards.
It is important to note that the additional deduction for seniors may not benefit households with very low taxable income, as Social Security benefits, a major source of income for older Americans, are not usually counted as taxable income. Additionally, individuals should be cautious when preparing their tax returns to avoid errors, especially when calculating the taxable amount of Social Security benefits.
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Child and Dependent Care Credit
The Child and Dependent Care Credit is a tax credit for expenses incurred for the care of a qualifying child or dependent. This includes payments made to daycare centers, babysitters, summer camps, and other care providers. A qualifying child is typically under the age of 13 or a spouse or dependent of any age who is incapable of self-care. For 2024 and 2025 tax years, up to 35% of qualified care expenses, up to $3,000 for one qualifying dependent and up to $6,000 for more than one dependent, are available as a non-refundable tax credit. From 2026 onwards, the maximum percentage increases to 50% of qualified care expenses.
To claim the Child and Dependent Care Credit, you must identify all persons or organizations that provided care for your child or dependent. You must report the name, address, and TIN (Social Security number or employer identification number) of the care provider on your tax return. If you are unable to provide this information, you may still be eligible for the credit if you can demonstrate that you made a reasonable effort to obtain it. If the care provider is a tax-exempt organization, only their name and address are required.
It is important to note that the care provider cannot be your spouse, the parent of your qualifying child, or a dependent you or your spouse may claim on your tax return. Additionally, the child and dependent care credit is calculated based on your income and a percentage of expenses incurred for their care. The credit can be claimed by taxpayers who were working, full-time students, or unemployed for part of the year.
The Child and Dependent Care Credit has undergone significant changes in recent years, particularly with the passing of the American Rescue Plan in 2021, which increased the credit percentage to 50% and the maximum qualifying expenses to $8,000 for one qualifying person and $16,000 for two or more qualifying individuals. Furthermore, the One Big Beautiful Bill, enacted in 2025, extended these changes and made them permanent.
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No tax on car loan interest
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBB) into law, which includes a provision for no tax on car loan interest. This law extends expiring Tax Cuts and Jobs Act (TCJA) provisions and enacts several new tax cuts.
The OBBB's no-tax-on-car-loan-interest provision is a significant change, offering a tax deduction for auto loan interest. This means that car buyers can deduct up to $10,000 per year in interest paid on qualifying auto loans from their taxes. This tax break is intended to provide financial relief to car buyers, especially considering the high vehicle prices and interest rates.
To qualify for the deduction, the interest must be paid on a loan for a qualified vehicle, which includes cars, minivans, SUVs, and motorcycles with a gross vehicle weight rating of less than 14,000 pounds. The vehicle must also have undergone final assembly in the United States, as listed on the vehicle's information label or determined by its Vehicle Identification Number (VIN).
It's important to note that not every car or buyer will qualify for this tax benefit. The deduction is available for both itemizing and non-itemizing taxpayers, but it phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers). Additionally, lease payments do not qualify for the deduction, and the vehicle must be purchased for personal use, not for business or commercial use.
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Deduct charitable contributions
The U.S. tax code provides a variety of tax incentives for charitable contributions. The federal government has provided taxpayers with a deduction for making charitable donations since 1917. This deduction allows individuals who itemize, as opposed to those taking the standard deduction, to deduct contributions up to a certain percentage of their adjusted gross income (AGI). In 2017, the Tax Cuts and Jobs Act (TCJA) increased the AGI limit for deductions of cash contributions from 50% to 60%.
To receive a charitable donation tax deduction, donations and other itemized deductions must exceed the standard deduction. The standard deduction is adjusted each year for inflation. To help ensure that your contribution will be deductible, consider researching the organization's tax-exempt status on the IRS website. Qualified charities are nonprofits working in causes that are religious, educational, scientific, literary, charitable, or based on preventing cruelty to children or animals. They are nonprofit, tax-exempt organizations.
Charitable contributions can reduce three kinds of federal taxes: income, capital gains, and estate taxes. For income tax, donations to 501(c)(3) public charities qualify for an itemized deduction from income. By donating long-term appreciated assets like bonds, stocks, or real estate to charity, you can also take an income tax deduction and avoid paying capital gains taxes. Finally, by naming a charitable organization in your will or as a beneficiary of a qualified insurance policy, retirement plan, or trust, you can reduce or even eliminate the burden of estate tax for your heirs.
There are strategies to maximize the tax benefits of charitable contributions. For example, you can “bunch” multiple years' worth of charitable giving into one year to surpass the itemization threshold. You can also make a combined gift of appreciated assets and cash to maximize your benefits. Additionally, if you give more than the annual limit, that charitable donation tax deduction isn't lost. Instead, you can claim the unused deduction on your future tax returns for up to five years.
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Frequently asked questions
The One Big Beautiful Bill Act (OBBB) is a spending and tax bill signed into law by President Trump on July 4, 2025. It extends expiring provisions of the Tax Cuts and Jobs Act (TCJA) and enacts new tax cuts.
Key provisions of the OBBB include no tax on tips, overtime, or car loan interest, and an additional deduction for seniors. The state and local tax (SALT) deduction cap increases to $40,000 for certain taxpayers but will return to $10,000 in 2030.
The OBBB permanently reinstates charitable deductions for non-itemizers, allowing a new deduction of $1,000 for single filers and $2,000 for joint filers in cash contributions. The deduction is capped at 35% of the dollars donated for those in the highest 37% tax bracket.
Yes, the OBBB made significant changes to the Child and Dependent Care Credit for the 2021 tax year. It increased the credit percentage from 35% to 50% of qualifying expenses and raised the maximum qualifying expenses from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying individuals.
