OBBBA's Deductions, And Who Gets Them
The tax bill signed into law on July 4th (One Big Beautiful Bill Act, or OBBBA, or OB3, just to name a few) has followed through on some of the headlines we had been hearing about for months, mainly around the new deductions it includes. We will walk through the important deductions that have been added or tweaked, and review what they are (and aren’t).
Enhanced Senior Deduction
The additional senior deduction was initially described as “no tax on Social Security”. It isn’t. Instead, we have a temporary $6,000 per taxpayer deduction that is phased out over a certain level of Adjusted Gross Income (AGI).
This deduction is only available for four years, from 2025-2028, and only for taxpayers age 65 and up (even if they aren’t claiming Social Security yet!). The full $6,000 deduction can be claimed below $150,000 of AGI for Married Filing Jointly taxpayers ($75,000 for all others, including Heads of household), and then is phased out until (or $175,000 for all others) the deduction is lowered to $0 at an AGI of $250,000.
This can, in effect, lower taxable income to the extent Social Security is taxable, but for many taxpayers claiming Social Security who have sizeable Required Minimum Distributions from IRAs or large investment portfolios, there might be no change to their taxable income.
Overtime Deduction
The “No Tax on Overtime” looks like a deduction for most taxpayers who have overtime pay, but it is limited. This is another deduction available for just four years, between 2025-2028. The overtime deduction is $25,000 for Married Filing Jointly returns ($12,500 for all others) and ONLY applies to the “above regular pay” portion of overtime.
As an example, if an hourly worker hits their overtime threshold and begins receiving “time and a half” pay, the “half” would be eligible for the deduction, but the regular hourly pay would not. The phaseouts for this deduction are large, at $300,000-$550,000 for Married Filing Jointly and $150,000-$400,000 for all others.
Tips Deduction
Much of the tips deduction is like the overtime deduction; only available for four years, from 2025-2028. The phaseouts are the same ($300,000-$550,000 MFJ or $150,000-$400,000 for all others), and $25,000 is the maximum deduction.
This deduction is allowed for occupations that “traditionally and customarily” receive tips as of December 31st, 2024. In other words, business owners cannot change their pricing to now receive “tips” from customers to attempt to take advantage of the $25,000 deduction.
Auto Loan Deduction
Since the Tax Reform Act of 1986, auto loan interest hasn’t been deductible, but with OB3, limited auto loan interest is deductible again.
For tax years 2025-2028 (another four year period), up to $10,000 of interest can be deducted for NEW cars that are assembled in the USA. This doesn’t apply to used car purchases, new foreign-assembled cars, or car loans that were refinanced in 2025.
The phaseouts for this deduction are $200,000-$490,000 for MFJ and $100,000-$149,000 for all others. These are relatively low phaseouts, so there might need to be some planning around taxable income to be able to claim.
Mortgage Insurance Premiums Deduction
Beginning in 2026, mortgage insurance premiums will be eligible for deductions as part of itemized deductions. As of now, there is no expiration for this deduction, but it will fall under the itemized deduction category.
While mortgage insurance premiums are generally not significant items, it can result in some hundreds of dollars more of deductions.
Standard and Itemized Deduction Changes
The new larger Standard Deduction was made permanent ($31,500 MFJ, $23,625 HOH, $15,750 for Single/Married Filing Separately in 2025), and in 2026, Standard Deduction claimers can also take up to $1,000 of charitable deductions made in cash (or $2,000 for MFJ).
For Itemized Deduction claimers, the State and Local Tax (SALT) deduction that has been limited to $10,000 since 2018 has increased to $40,000. This increase is also temporary (2025-2029), and is subject to Modified Adjusted Gross Income (MAGI) phaseouts of $500,000-$600,000 of income (or $250,000-$300,000 for Married Filing Separately filers).
Also on the Itemized side, there will be a new “0.5% AGI floor” for charitable deductions, starting in 2026. For example, if a taxpayer made $200,000 in Adjusted Gross Income, then they would be able to deduct charitable contributions above $1,000. The first $1,000 of charitable giving would NOT be deductible.
Finally, beginning in 2026, itemized deductions will be capped at 35 cents per dollar, meaning that those in the top tax bracket (37%) will lose some of the deductibility of their itemized deductions.
For charitable taxpayers or those in the 37% tax bracket, it could be prudent to bring some deductions forward into 2025 where they will not be subject to these new limitations.
Qualified Business Income Deduction
The qualified business income (QBI) deduction was made permanent, which means eligible business owners and real estate investors will be able to remove 20% of their business or real estate income from taxable income.
The full deduction is available below $394,600 for MFJ and $197,300 for S/HOH. The deduction is then phased out over the next $150,000 of income (MFJ) or $75,000 of income (S/HOH).
These deductions can greatly impact a taxpayer in some instances. If you are wondering how to make sense of the new tax bill, or how you can best position yourself to qualify for these deductions, let us know!