Cameron Miranda
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, marking a significant development in tax legislation. The new law includes an array of tax changes that will come into effect in 2025 and beyond, impacting taxpayers and businesses alike. With extensions of previous tax cuts, boosts to standard deductions and child tax credits, and new temporary deductions, the Act aims to reduce taxes for Americans. However, it's important to note that not all provisions will take effect simultaneously, and some are designed to be permanent while others are temporary. This complex legislation has sparked varying reactions, with experts still evaluating its potential implications for individuals and the economy.
| Characteristics | Values |
|---|---|
| Name of the Bill | One Big Beautiful Bill Act (OBBBA) |
| Date of Signing | July 4, 2025 |
| Tax Provisions | Permanence for major individual and corporate provisions of the TCJA, additional temporary tax cuts for individuals and businesses |
| GDP Increase | 1.2% |
| Increase in Jobs | 938,000 |
| Wage Increase | 0.4% |
| Capital Stock Increase | 0.7% |
| Federal Tax Revenue Reduction | $5 trillion from 2025-2034 |
| Federal Income Tax Rates | Extending existing federal income tax rates |
| State and Local Taxes (SALT) Deduction | Increase to the existing $10,000 cap to $40,000 from 2025-2030 |
| Child Tax Credit | Permanent increase to $2,200 from its current $2,000, starting in 2025 |
| Overtime Pay | No taxes on some overtime pay, starting in 2025 and going through 2028 |
| Tip Income | Tax breaks for qualified tip income |
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What You'll Learn
The One Big Beautiful Bill Act
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. The Act notably includes permanence for major individual and corporate provisions of the TCJA, along with additional temporary tax cuts for individuals and businesses.
The OBBBA is expected to increase long-run GDP by 1.2%, hours worked by 938,000 jobs, wages by 0.4%, and the capital stock by 0.7%. The Joint Committee on Taxation estimates that the bill will most benefit workers and families making less than $50,000 per year, resulting in bigger paychecks and increased annual take-home pay.
- No tax on tips, overtime pay, or Social Security benefits for retirees.
- A permanent increase in the Child Tax Credit to $2,000 per child, with a temporary $500 boost from 2025-2028, and adjustments for inflation from 2029 onwards.
- A temporary boost to the current $10,000 cap on the state and local taxes (SALT) deduction, raising it to $40,000 starting in 2025. This benefit will phase out for taxpayers with a modified adjusted gross income of $500,000 or more.
- A temporary "bonus" standard deduction of $6,000 for Americans aged 65 and older, applicable from 2025 to 2028.
- A new tax-deferred savings account for children, known as "Trump accounts." These accounts can be opened for children aged 8 or under, with contributions of up to $5,000 per year, and offer favourable tax rates for qualified distributions.
- Permanently extending the 20% deduction for pass-through business income from TCJA and expanding it to 23%.
The OBBBA also includes a $12.5 billion modernization of the air traffic control system, a massive expansion of domestic oil and gas production capacity, and funding for border security measures. While the Act provides significant tax breaks and benefits, some of these provisions are temporary, and state policymakers are still working out the specific implications for state returns.
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Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) was passed in 2017 by President Donald Trump. The Act made changes to deductions, depreciation, expensing, tax credits, and other tax items affecting businesses. It also included a variety of miscellaneous tax provisions, many of which advantaged special interests. For example, the Act maintained a provision allowing the deferment of capital gains taxes on "like-kind exchanges" of real property, while repealing it for other types of property. It also introduced a tax break for citrus growers and extended "full expensing" for film and television production companies until 2022.
According to a 2017 report by the Tax Policy Center, the TCJA was expected to lower taxes by an average of $1,600 in 2018 and 2025. The report projected that the top 20% of Americans by income would receive around 65% of the tax savings, while the bottom 80% of taxpayers would receive 35% of the benefit in 2018, 34% in 2025, and none of the benefit in 2027. Additionally, it was estimated that 72% of taxpayers would be adversely affected in 2019 and beyond if the tax cuts were offset by separate spending cuts.
The TCJA simplified the tax code for some taxpayers, lowered corporate debt, and increased investment temporarily. It also resulted in many Fortune 500 companies paying little to no federal taxes. In 2018, companies spent a record-setting $1.1 trillion on stock buybacks, and most major firms did not alter their hiring practices or business investments significantly in response to the tax cuts. Bloomberg Economics found that relatively little of the increased investment activity could be attributed to lower taxes.
In 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, which included permanence for major individual and corporate provisions of the TCJA, along with additional temporary tax cuts. The OBBBA is expected to increase long-run GDP, hours worked, wages, and the capital stock. However, it will also reduce federal tax revenue by an estimated $4.1-$5.0 trillion from 2025 to 2034.
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Child Tax Credit
President Trump's "One Big Beautiful Bill" includes key tax changes that came into effect in 2025. The bill was signed into law on July 4, 2025, and includes permanent extensions of Trump's 2017 tax cuts, along with boosts for the standard deduction and child tax credit.
The child tax credit has been increased from $2,000 to $2,200 per child, with the refundable portion of the credit, or the additional child tax credit, worth up to $1,700 in 2025. From 2026, the credit will be indexed to inflation. While the dollar amount is higher, the number of American families benefiting may not grow, as the new legislation does not expand eligibility rules.
The child tax credit was previously available to any child living in the United States. However, Trump's 2017 tax cuts package changed this, requiring the child to have a Social Security number to qualify. Now, at least one of their parents or guardians must also have a Social Security number. This means that an estimated 2.7 million American children will no longer be eligible for the credit.
The child tax credit is part of a broader set of tax changes, which include no taxes on tips, overtime pay, and Social Security benefits for retirees, as well as higher taxes on US imports through new tariffs.
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No tax on tips, overtime pay, and Social Security
On July 4, 2025, President Trump signed the One Big Beautiful Bill into law, which includes provisions for no taxes on tips, overtime pay, and Social Security benefits for retirees. This law will remain effective through December 31, 2028.
Under the new law, employees who regularly receive tips can deduct up to $25,000 in tips from their income subject to federal income tax, while businesses must report these tips on Form W-2 for employees and Form 1099 for non-employees. The act also allows workers to deduct up to $12,500 in overtime pay from their income subject to federal income tax, which businesses must report on the same forms as mentioned earlier.
It's important to note that these changes do not apply to overtime premiums required under state laws or collective bargaining agreements. Additionally, the deduction for tips and overtime pay has no effect on Social Security and Medicare taxes. Employers will need to report the total amount of cash and non-cash tips, as well as the employee's occupation, on the employee's Form W-2.
While the new law eliminates taxes on tips, overtime pay, and Social Security benefits, it's important to remember that these changes may have different effects on different groups of people. Some economists worry that eliminating taxes on overtime pay may primarily benefit high earners and employers rather than regular tipped workers. Similarly, while eliminating taxes on tips may boost take-home pay for employees in the service industry in the short run, it could result in reduced Social Security and Medicare benefits in the long term.
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Tax breaks for qualified tip income
On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. The Act includes a provision for "no tax on tips", which has sparked questions among workers about how the tax break works and who qualifies for it.
According to the provision, "qualified tips" include cash tips or gratuities paid by credit card, as well as earnings from a tip-sharing arrangement. However, the tip must be paid voluntarily by the customer, which puts automatic service charges—like mandatory gratuity charges imposed by restaurants on larger parties—in question.
To qualify for the deduction, tips must be "properly reported". This means employers must report the worker's tips on information returns, such as Form W-2 or 1099, with a copy going to the employee and the IRS. The IRS is expected to clarify which occupations qualify for the tax break in early October.
The tax break is available from 2025 through 2028. It phases out, or gets reduced, once modified adjusted gross income exceeds $150,000. However, it's important to note that this is a federal law, and state taxes may still apply to tip income. Additionally, payroll levies for Medicare and Social Security will still be owed.
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Frequently asked questions
The One Big Beautiful Bill Act was passed into law on July 4, 2025.
The Act includes permanence for major individual and corporate provisions of the TCJA, along with additional temporary tax cuts for individuals and businesses. It also eliminates income tax on some overtime pay, provides a new tax-deferred savings account for children, and increases the Child Tax Credit.
The impact of the One Big Beautiful Bill Act on state returns is still being determined by state policymakers. The inclusion of “no tax on tips” and other US tax code sweeteners will likely have varying effects depending on the locale, with some states concerned about the budgetary fallout.
The One Big Beautiful Bill Act is expected to increase long-run GDP by 1.2 percent, hours worked by 938,000 jobs, wages by 0.4 percent, and the capital stock by 0.7 percent. However, it is also projected to reduce federal tax revenue by $4.1-$5.0 trillion from 2025 to 2034.
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