On July 4, 2025, President Trump signed into law the legislation commonly referred to as the One Big Beautiful Bill or OBBBA, which includes many tax law changes impacting individuals. The changes cover a broad range of taxpayer behavior. This alert provides a brief overview of some of the more material income tax provisions of general applicability to individuals (and to some extent trusts and estates, which generally calculate their taxable income in the same manner as individuals). This alert does not address tax provisions targeted at trade or business activities, which are covered by a separate alert.
- Tax Rates on Ordinary Income. The temporary income tax rates for individuals, trusts, and estates—as added by the Tax Cuts and Jobs Act (“TCJA”) for the years 2018–2025—have been made permanent. As a result, the highest marginal rate on ordinary income, including income recognized indirectly through “flow-through” entities such as partnerships and S corporations, will remain at 37% (and not revert to the pre-2018 top rate of 39.6%).
- Other Tax Rates Not Changed. No changes have been made to the preferential tax rates applicable to long-term capital gain or “qualified dividend income” recognized by individuals, trusts, or estates, with the result that the top rate will remain at 20% for taxpayers in the highest bracket. In addition, there has been no change to the 3.8% tax on “net investment income,” which remains potentially applicable to the investment income of individuals, trusts, and estates.
- Alternative Minimum Tax. Temporary changes made by the TCJA to the alternative minimum tax (AMT) on individuals, trusts, and estates for the years 2018–2025 have now been made permanent, effective for taxable years beginning after December 31, 2025. Adjustments have been made to (i) the rate at which the AMT exemption amount “phases out” for all affected taxpayers and (ii) the AMT exemption amount for taxpayers filing joint returns and surviving spouses.
- Pease Limitation Repealed. Under the so-called Pease limitation, as in effect before 2018, an individual’s allowable itemized deductions (subject to certain exceptions) were reduced by the lesser of (i) 3% of the amount by which the individual’s adjusted gross income (AGI) exceeded a “threshold amount” or (ii) 80% of such itemized deductions. This limitation was temporarily suspended by the TCJA for the years 2018–2025 and has now been permanently repealed by OBBBA, effective for taxable years beginning after December 31, 2025.
- Cutback on Tax Benefit of Itemized Deductions. As a partial replacement for the Pease limitation, also effective for taxable years beginning after December 31, 2025, OBBBA has added a new limitation apparently intended to cause taxpayers in the 37% bracket to receive only a 35% tax benefit from their itemized deductions to the extent that such deductions otherwise would have offset income subject to tax in the 37% bracket. Mechanically, this cutback is accomplished by reducing the taxpayer’s itemized deductions by 2/37 of the lesser of (i) the taxpayer’s itemized deductions or (ii) the amount by which the taxpayer’s taxable income (determined without regard to the new limitation) exceeds the dollar amount at which the 37% bracket kicks in. Interestingly, even though the Pease limitation did not apply to trusts or estates, it appears that OBBBA’s new limitation on itemized deductions applies to trusts and estates as well as individuals.
- Miscellaneous Itemized Deductions. Prior to 2018, “miscellaneous itemized deductions” were deductible by individuals, trusts, and estates to the extent that such deductions exceeded 2% of the taxpayer’s AGI (and were not deductible at all for AMT purposes). This deductibility was suspended by the TCJA for the years 2018–2025. Now, as a result of OBBBA, the deduction for miscellaneous itemized deductions has been permanently repealed, effective for taxable years beginning after December 31, 2025.
- Child Tax Credit. The maximum child tax credit—as temporarily increased by the TCJA for the years 2018–2025 from $1,000 to $2,000—increases to $2,200 and becomes permanent beginning in 2025 (not 2026). It is adjusted for inflation for future years.
- Standard Deduction. The temporary increase in the standard deduction enacted by the TCJA for the years 2018–2025 is made permanent beginning in 2025 (not 2026). In addition, the basic standard deduction amounts are increased based on the individual’s filing status. As a result, the standard deduction increases for 2025 to the following amounts: (i) $15,750 for married individuals filing separately (MFS) and unmarried individuals (other than a head of household or surviving spouse); (ii) $23,625 for a head of household; and (iii) $31,500 for married individuals filing jointly (MFJ) and surviving spouses. It is adjusted for inflation for future years.
- Personal Exemptions. The TCJA’s temporary suspension of personal and dependency exemptions for the years 2018–2025 is made permanent beginning in 2026 (subject to the new senior deduction addressed below).
- Senior Deduction. Seniors (65 and older by the end of the taxable year) may take an additional $6,000 deduction per qualifying person from 2025 to 2028. This new deduction apparently is available to both itemizing and non-itemizing taxpayers. However, married individuals would be entitled to claim the deduction only if they file a joint return. Although this deduction has been described in some sources as a reduction in (or partial offset to) the income tax imposed on Social Security benefits, there is no such correlation in the statutory language. The new deduction is phased out starting at modified adjusted gross income (MAGI) of $75,000 ($150,000 MFJ).
- Qualified Small Business Stock. OBBBA significantly broadens the circumstances in which a noncorporate taxpayer may be entitled to exclude some portion (or all) of the capital gain otherwise recognized upon a sale of “qualified small business stock” (QSBS).
- Instead of a mandatory more-than-five-year holding period, shares originally issued after July 4, 2025 (post-OBBBA shares) will now be eligible for a tiered exclusion schedule under which the percentage of gain eligible for exclusion will be (i) 50% for shares held for at least three years but less than four years, (ii) 75% for shares held for at least four years but less than five years, and (iii) 100% for shares held for at least five years. No change has been made to the exclusion percentage and five-year holding period for QSBS originally issued before July 5, 2025 (pre-OBBBA shares).
- The formula cap on a shareholder’s excludible gain for QSBS in any issuer (i.e., the greater of $10 million on a cumulative basis or a 10 times basis of shares sold in any year) has been modified—solely for post-OBBBA shares—so that the $10 million component of the formula is increased to $15 million ($7.5 million MFS) and indexed for inflation beginning in 2027. No change has been made to the $10 million amount applicable to pre-OBBBA shares (which is not indexed for inflation). However, for purposes of determining whether the cumulative $10 million or $15 million component of the cap has been reached in any year, it appears that eligible gains taken into account in prior years from both categories of shares would be aggregated.
- The $50 million cap on a corporation’s gross asset value (which is applied separately for each tranche of shares issued to a particular shareholder and measured by reference to gross asset value at all times prior to the issuance and immediately thereafter) has been increased to $75 million, solely with respect to post-OBBBA shares, to be indexed for inflation beginning in 2027.
- The portion of gain not eligible for exclusion upon a sale of post-OBBBA shares solely by reason of the new 50% and 75% exclusion percentages would be treated as “section 1202 gain” generally taxable at a 28% rate rather than the regular preferential rate for long-term capital gain (zero, 15%, or 20%, depending on the taxpayer’s bracket). However, the portion of capital gain not eligible for exclusion by reason of exceeding the formula cap—whether for pre-OBBBA or post-OBBBA shares—would be eligible for the preferential rate.
- Qualified Residence Interest. OBBBA permanently extends special rules enacted by the TCJA for the years 2018–2025 by which, among other things, (i) the home mortgage interest deduction was limited to interest on no more than $750,000 of “acquisition indebtedness” (not $1 million as under pre-2018 law) and (ii) interest on “home equity indebtedness” was not deductible as such.
- As a result of OBBBA’s extension of these rules, (i) the maximum amount of acquisition indebtedness will remain at $750,000 (and not revert to the pre-2018 $1 million amount) and (ii) interest on home equity indebtedness will not be deductible as such unless it independently qualifies as acquisition indebtedness (i.e., the related interest expense will be potentially deductible only to the extent that the loan proceeds are used to make substantial improvements to the residence).
- In addition, generally effective beginning in 2026, OBBBA reinstates the deduction for premiums paid to acquire “qualified mortgage insurance” on acquisition indebtedness (which deduction had previously terminated as of January 1, 2022).
- State and Local Tax Deduction. The maximum deduction for personal state and local taxes—previously capped at $10,000 per year by the TCJA for the years 2018–2025—increases on a temporary basis to $40,000 for taxable years beginning in 2025 ($20,000 MFS). The annual cap then increases at the rate of 1% per year from 2026 to 2029, before reverting permanently to $10,000 in 2030. The annual cap for each year from 2025 to 2029 is subject to a phaseout for MAGI starting at a threshold amount of $500,000 ($250,000 MFS), with such threshold increasing at the rate of 1% per year from 2026 to 2029, but the phaseout cannot reduce the cap below $10,000. It is worth noting that the final version of the legislation does not contain any limitation on the ability of flow-through entities, such as partnerships and S corporations, to opt in to pass-through entity tax regimes, commonly known as PTETs or workarounds, by which the state or local income tax liability otherwise payable by a partner or an S corporation shareholder is paid at the entity level and recharacterized as a fully deductible business expense not subject to the $10,000 (now $40,000) per-year cap.
- Tips. For the years 2025–2028, “qualified tips” voluntarily given to individuals working in traditional service industries are deductible by the service provider up to $25,000 per year, subject to various limitations and recordkeeping requirements (and assuming of course that the service provider has reported the tips as gross income). The deduction is available to both itemizing and non-itemizing taxpayers and is phased out starting at MAGI of $150,000 ($300,000 MFJ).
- Overtime Pay. Also for the years 2025–2028, individuals may deduct “qualified overtime compensation” subject to an annual cap of $12,500 ($25,000 MFJ). This new deduction is limited to overtime compensation required under section 7 of the Fair Labor Standards Act of 1938 in excess of the “regular rate” at which the individual is paid and excludes amounts otherwise treated as qualified tips. The deduction is available to both itemizing and non-itemizing taxpayers and is phased out starting at MAGI of $150,000 ($300,000 MFJ).
- Personal Motor Vehicle Interest. Interest expense on indebtedness incurred by an individual after December 31, 2024, for the purchase of a personal use automobile is deductible for the years 2025–2028, subject to an annual cap of $10,000, provided that the indebtedness is secured by a first lien on the vehicle and the original use of the vehicle starts with the taxpayer (i.e., used cars do not qualify). The deduction is available to both itemizing and non-itemizing taxpayers and is subject to phaseout starting at MAGI of $100,000 ($200,000 MFJ). One key requirement is that the “final assembly” of the vehicle must occur within the US. No deduction is available for lease financings.
- Qualified Opportunity Zones. The qualified opportunity zone (QOZ) incentive program—originally enacted as part of the TCJA and intended to spur investment in economically distressed communities on a temporary basis—has been permanently extended and significantly modified.
- Instead of simply extending the existing program for census tracts that were designated as QOZs shortly after enactment of the TCJA, OBBBA provides for the designation of new zones every 10 years beginning on July 1, 2026 (to be effective on the immediately following January 1). The low income and poverty requirements for census tracts to qualify as QOZs under the new regime have been made much stricter, with the result that some of the originally designated zones will not necessarily requalify.
- Under the QOZ program generally—both as originally enacted and as amended—any taxpayer who recognizes capital gain upon a sale or exchange of property and makes an equity investment up to the gain amount (sometimes referred to as a “rollover” of capital gain) into a qualified opportunity fund (QOF)—generally within 180 days after the date of the sale or exchange—is entitled to several potential tax benefits that have been amended by OBBBA, as summarized below (although these tax-related amendments generally are effective only for investments made under the new QOZ regime).
- Recognition of the rollover capital gain under the original QOZ program continues to be deferred until December 31, 2026 (or, if earlier, the disposition of the QOF investment), meaning that the deferral could be for more or less than five years. Under the new QOZ program, the deferral is allowed for a fixed five-year period from the date of investment (even if that period ends after the expiration of the new 10-year designation period), subject to acceleration upon an earlier disposition of the investment. Under both programs, the gain subject to tax at the expiration of the deferral period is capped at the fair market value of the taxpayer’s interest in the QOF at that time (net of any basis step-up, as described below).
- Under the original QOZ program, 10% of the deferred gain is permanently eliminated (in the form of a basis step-up) if the taxpayer holds its interest in the QOF for at least five years before December 31, 2026 (meaning that the 10% step-up was available only for QOF investments made no later than December 31, 2021). The fixed-date component of this holding period requirement has been eliminated for investments under the new QOZ program, increasing the likelihood that a taxpayer will receive a 10% basis step-up to offset the deferred gain under the new program (relative to the original program), since the deferral period will expire concurrently with the taxpayer’s entitlement to the step-up.
- The original QOZ program had allowed an additional 5% of the deferred gain to be eliminated (also in the form of a basis step-up) for those taxpayers who hold their interests in the QOF for at least seven years before December 31, 2026 (meaning that the additional 5% step-up was available only for QOF investments made no later than December 31, 2019). This tax benefit is not available for any investments under the new QOZ program.
- Perhaps most significantly, investors who hold their QOF investments for at least 10 years—under both the original and new regimes—are entitled to exclude (by election) 100% of the appreciation in value of their investment from capital gain recognition (generally in the form of a basis step-up). However, for investments made under the original QOZ program, this exclusion continues to be available only if the investment is sold by December 31, 2047, thereby not addressing the concern that investors might be pressured into making forced sales by the end of 2047 in order to avail themselves of the exclusion. To alleviate this concern, the new QOZ program takes a more taxpayer-friendly approach under which, if the investment has not actually been sold by the 30-year anniversary of the investment, the investor is entitled to a basis step-up to fair market value at that time, such that only subsequent appreciation in value would be subject to capital gains tax. However, it must be emphasized that this basis step-up is not available for investments made under the original QOZ program (unless the investment is actually sold by the end of 2047).
- Even more favorable tax benefits have been enacted for investments in newly designated qualified rural opportunity funds (QROFs). Generally speaking, to encourage investments in economically distressed rural areas, the basis step-up available to offset gain deferred under the capital gain rollover into a QROF is boosted from 10% to 30% if the taxpayer meets the required five-year holding period (i.e., the taxpayer is entitled to eliminate 30% of the deferred gain rather than just 10% if the five-year holding period requirement is met). In addition, for purposes of the “substantial improvement” requirement applicable to the improvement of existing structures in a zone, a QROF may satisfy this requirement through investment of just 50% of its basis in the structure—rather than 100% under the rules applicable to non-QROFs.
- In response to criticism that the program lacked transparency, significant new reporting requirements and penalties have been enacted (applicable to both the original and new QOZ regimes).
- Casualty Loss Deductions. Temporary changes made by the TCJA to the deductibility of “personal casualty losses” by individuals for the years 2018–2025 have now been made permanent, effective for taxable years beginning after December 31, 2025. As a result, deductions will continue to be limited to the extent that such losses are attributable to qualified disasters declared by the federal government. In addition, OBBBA has expanded the definition of eligible personal casualty losses to include losses arising from certain state-declared disasters.
- Moving Expense Deductions. The TCJA’s temporary nondeductibility of most moving expense deductions for the years 2018–2025 has now been made permanent, effective for taxable years beginning after December 31, 2025. In addition, the exception to nondeductibility for members of the armed forces has been broadened to include members of the intelligence community (as defined in section 3 of the National Security Act of 1947).
Please see What One Big Beautiful Bill Means for Your Industry to explore all of the firm’s OBBBA alerts to understand the key risks, emerging opportunities, and strategic considerations shaping each industry.
For questions regarding the income tax impact of OBBBA on individuals, please contact Alan Kornstein (akornstein@mccarter.com), Michael Puzyk (mpuzyk@mccarter.com), Michael Guariglia (mguariglia@mccarter.com), Jeffrey Muller (jmuller@mccarter.com), Paul Buonaguro (pbuonaguro@mccarter.com), and Daniela Calabro Gallagher (dcalabro@mccarter.com) in the Tax, Employee Benefits & Private Clients group.