Understanding the New Individual Tax Rates and Brackets

The foundational element of the tax bill is the preservation of the individual tax rates set in recent years. Notably, the top tax bracket remains capped at 37%, avoiding a scheduled increase to 39.6% that was set to take effect. Additionally, all tax brackets are now indexed for inflation, protecting taxpayers from "bracket creep"—a situation where inflation pushes income into higher tax brackets even though purchasing power hasn’t increased. 

• The seven tax brackets remain: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

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• Indexing for inflation means that thresholds will adjust annually, helping taxpayers avoid unexpected tax increases due solely to inflation.

This permanence offers taxpayers much-needed certainty and prevents the tax rates from reverting to pre-2017 levels.

Standard Deduction and Itemized Deductions: What’s Changed?

Standard Deduction Permanency and Increased Amounts

The standard deduction, which about 90% of Americans claim, has been doubled compared to pre-2018 levels and is now permanent through 2025 and beyond. For single filers, it stands at $15,750, and for married couples filing jointly, it doubles to $31,500.

This change protects most taxpayers from having to itemize deductions unless their qualifying expenses exceed these amounts, simplifying tax filing for the vast majority.

State and Local Tax (SALT) Deduction Cap Increased

One of the most discussed provisions in the bill concerns the SALT deduction. Previously capped at $10,000, this limit has been raised to $40,000, allowing taxpayers to deduct up to that amount in combined state and local income, property, and vehicle taxes if they itemize.

However, the increased cap includes a phase-out for high earners, beginning at $500,000 modified adjusted gross income for married joint filers, which gradually reduces the deduction until it reaches the original $10,000 limit at higher income levels.

For pass-through businesses, a major breakthrough allows these entities to elect to pay state and local taxes at the business level, enabling a full deduction on the business return rather than limiting the deduction on the individual return. This is a game-changer for owners of S-Corps, partnerships, and LLCs in high-tax states.

Elimination of Miscellaneous Itemized Deductions

The bill permanently eliminates miscellaneous itemized deductions, including those for legal and professional fees, financial planning, and tax preparation at the individual level. However, if these expenses are business-related or tied to rental properties, they might still be deductible on the business or rental income schedules.

Special Deductions and Tax Breaks for Seniors

Taxpayers aged 65 and older receive a new permanent benefit: an additional $6,000 deduction per qualified individual. For married couples both over 65, this amounts to a $12,000 deduction, which reduces taxable income. This deduction phases out gradually starting at $75,000 modified adjusted gross income for singles and $150,000 for married filing jointly.

It’s important to note that while this deduction starts immediately in 2025, it is currently scheduled to expire at the end of 2028, making it a temporary but valuable tax break for seniors.

Tax Relief on Tips and Overtime Income

The bill introduces temporary tax relief for workers in tipped industries and those earning overtime pay, effective from 2025 through 2028. 

• Tips: Employees in industries that customarily receive tips (such as bartenders and servers) can deduct up to $25,000 of tips per individual annually on their federal income tax return.

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• Overtime: Similarly, up to $12,500 for singles and $25,000 for married couples filing jointly in overtime pay can be deducted.

Both deductions phase out at higher income levels—starting at $150,000 for singles and $300,000 for married filing jointly—and do not apply to employment taxes, which must still be paid on the full amount.

States may or may not conform to these federal deductions, so taxpayers should consult local tax rules as some states might continue to tax tips and overtime income fully.

Child Tax Credit and Trump Accounts: Supporting Families

Child Tax Credit Permanence and Refundability

The child tax credit has been made permanent at $2,200 per qualifying child, indexed for inflation. Importantly, the credit is partially refundable, meaning taxpayers with little or no tax liability can receive a refund of up to $1,700 per child, providing substantial support to families.

Trump Accounts: New Child Savings Tax Credit

A new tax credit provides a $1,000 "seed" contribution for children born from January 1, 2025, through December 31, 2028. This credit is tied to a new type of savings account often referred to as "Trump accounts."

Parents can contribute up to $5,000 annually to these accounts, which invest in broad market index funds such as the S&P 500. While contributions are not deductible, the initial $1,000 seed credit is a direct tax credit, making this a lucrative option for long-term savings.

Withdrawals are taxed as ordinary income, unlike 529 plans or HSAs, so families should weigh this option against other savings vehicles with tax advantages.

Other Important Personal Tax Provisions

Moving Expenses Deduction Remains Eliminated

Except for active-duty military personnel, the moving expenses deduction continues to be disallowed, so taxpayers cannot deduct relocation costs.

Charitable Contributions: New Deduction for Non-Itemizers and Limits for Itemizers

Non-itemizers can now claim an “above-the-line” deduction of $1,000 for singles and $2,000 for married couples filing jointly for charitable donations, encouraging more giving even among those who take the standard deduction.

For itemizers, a new floor has been introduced: charitable contributions exceeding 0.5% of adjusted gross income (AGI) are deductible, meaning very large donations by high-income donors face a threshold before tax benefits kick in. Additionally, itemized deductions for charitable gifts are limited to 30-35% of AGI, tightening previous caps.

Taxpayers who use donor-advised funds should be aware of these new limits and plan accordingly before the 2026 implementation.

Mortgage Interest Deduction and Mortgage Insurance Premiums

The mortgage interest deduction remains permanent but is capped at acquisition indebtedness of $750,000. Notably, mortgage insurance premiums are now deductible again, a provision that had lapsed in recent years.

This deduction applies only to loans used to buy or improve your main residence—interest on home equity loans used for other purposes like vacations or education is not deductible.

Car Loan Interest Deduction

A new, temporary deduction allows taxpayers to deduct up to $10,000 of interest on loans for new vehicles assembled in the United States, effective from 2025 through 2028. This deduction phases out for singles with incomes over $100,000 and married couples over $200,000.

Important points include:

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• The vehicle must be newly purchased and assembled in the U.S.

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• The deduction applies only to interest paid, not principal payments.

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• You do not need to itemize deductions to claim this.

Given the complexity and eligibility criteria, taxpayers should consult their accountants before planning purchases around this deduction.

Casualty Loss Deductions

The bill permanently limits casualty loss deductions to federally declared disaster areas, and now includes state-declared disaster areas as well, offering some relief to taxpayers affected by localized disasters.

Expanded 529 Plan Uses

529 plans, a popular tax-efficient vehicle for education savings, have been expanded to cover workforce training and credentialing programs, broadening the scope of qualifying expenses beyond traditional college costs.

Alternative Minimum Tax (AMT) Made Permanent

The Alternative Minimum Tax, designed to ensure high earners pay a minimum level of tax, has been made permanent with updated exemption thresholds. Importantly, these thresholds protect many middle-income taxpayers, but the AMT can still apply to individuals making as little as $88,000 (single) or $137,000 (married filing jointly).

The AMT limits the use of certain deductions and credits, so taxpayers should be aware of potential exposure when planning their taxes.

Estate and Gift Tax Exemptions: Permanency and Increased Limits

Estate tax provisions have been made permanent, with the lifetime exemption increased to $15 million per individual (approximately $30 million for married couples), indexed for inflation. This provides significant relief for wealthy individuals and families by shielding large estates from federal estate taxes.

The annual gift tax exclusion remains at $19,000 per recipient and is also indexed for inflation. While this offers planning opportunities, taxpayers should remain vigilant as Congress may revisit these thresholds in future legislative sessions.

Health Savings Accounts (HSAs): Expanded Eligibility and Benefits

HSAs continue to be one of the most powerful tax-advantaged tools available, offering triple tax benefits:

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• Contributions are tax-deductible.

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• Funds grow tax-free.

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• Withdrawals for qualified medical expenses are tax-free.

The bill expands eligibility for HSAs by allowing more health plans, including some that previously disqualified individuals, to contribute. Additionally, telehealth expenses are now eligible for payment from HSAs, reflecting the modern healthcare landscape post-COVID.

Contribution limits are indexed for inflation, and the bill encourages taxpayers to maximize these accounts as part of their tax and health planning strategies. Unlike some other savings vehicles, HSAs allow funds to accumulate indefinitely and reimburse medical expenses years later without penalty, making them a potent long-term planning tool.

Conclusion: Plan Ahead and Consult Professionals

The “One Big Beautiful Bill Act” brings sweeping, complex changes to individual tax provisions that will affect nearly every taxpayer in some way. From preserving the 2017 tax cuts and indexing brackets for inflation to expanding deductions for seniors, charitable giving, and new tax breaks on tips and overtime, the landscape of personal taxation is evolving.

Key takeaways include:

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• Permanent lower tax rates and inflation indexing provide stability.

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• Standard deduction remains high and permanent, but itemizing still matters for many.

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• New and expanded deductions and credits offer opportunities—but often with income phase-outs and limitations.

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• Temporary provisions, such as the senior deduction, tip and overtime tax relief, and car loan interest deduction, require timely action.

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• Estate and gift tax exemptions are generous but should be monitored for future legislative changes.

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• Health Savings Accounts remain a top-tier tax planning tool with expanded eligibility.

Given the complexity and piecemeal nature of these changes, consulting a knowledgeable tax professional is essential to optimize your tax strategy under the new law. Planning now can help you leverage credits, avoid pitfalls, and ensure compliance with evolving rules. Stay informed, stay proactive, and make the new tax landscape work for you.