Newsletter

Client Alert: Navigating Your Taxes After the "One Big Beautiful Bill Act" (OBBBA) - 1040/1041

As we move through 2025, it's crucial to understand the significant tax changes brought about by the recently enacted "One Big Beautiful Bill Act" (OBBBA). This landmark legislation, signed into law on July 4, 2025, introduces a host of provisions that will directly impact your individual (Form 1040) and, if applicable, trust (Form 1041) tax filings.

Many of these changes are effective for the 2025 tax year (returns filed in early 2026), making proactive planning essential. Here's a breakdown of the key areas that may affect you:

For Individual Filers (Form 1040):

The OBBBA makes several impactful changes for individual taxpayers, largely extending and enhancing provisions from the 2017 Tax Cuts and Jobs Act (TCJA), while also introducing new deductions.

• Permanent Income Tax Rates and Brackets: Good news! The current individual income tax rates (10%, 12%, 22%, 24%, 32%, 35%, 37%) and their corresponding income brackets have been made permanent. This provides much-needed stability and predictability for your future tax planning.


• Increased Standard Deduction: The standard deduction amounts have been permanently increased and adjusted for inflation. For 2025, the standard deduction is $15,750 for single filers, $31,500 for married couples filing jointly, and $23,625 for heads of household. This generally means more individuals can benefit from taking the standard deduction rather than itemizing.


• Boosted Standard Deduction for Seniors: If you are age 65 or older, you may benefit from an additional $6,000 deduction for 2025 (subject to income limitations: phased out for single filers with income over $75,000 and married couples over $150,000). This is in addition to the regular age-based additional standard deduction.
  
  
  
  • Example: A single filer age 65+ could potentially deduct a total of $23,750 ($15,750 standard + $2,000 normal age-based + $6,000 bonus).
  
  
  
  


• State and Local Tax (SALT) Deduction Cap Increase (Temporary): For tax years 2025 through 2029, the cap on your itemized deduction for state and local taxes (SALT) has been increased to $40,000 (with annual inflation adjustments). This cap will phase out for taxpayers with Adjusted Gross Income (AGI) exceeding $500,000. While temporary, this provides significant relief for taxpayers in high-tax states.


• "No-Tax-On-Tips" Deduction: For those in industries with tip income, a new above-the-line deduction for qualified tip income (up to $25,000) has been introduced. This is subject to income phase-outs for higher earners.


• Overtime Pay Deduction: A new above-the-line deduction for qualified overtime income (up to $12,500 for single filers, $25,000 for joint filers) is available through 2028. This deduction also phases out for higher income levels.


• Auto Loan Interest Deduction: You may now deduct up to $10,000 in car loan interest per year for qualified personal-use vehicles assembled in the United States. This is a temporary provision, effective through 2028.


• Child Tax Credit Enhancement: The Child Tax Credit has been increased to $2,200 per qualifying child and will be indexed for inflation going forward. This provides additional support for families.


• "Trump Accounts" Introduced: A new savings vehicle, "Trump Accounts," provides a $1,000 government-provided baby bonus for children born in the next four years. Contributions up to $5,000 annually can grow tax-free until withdrawal at age 18 or older, at which point withdrawals are subject to capital gains tax.


• Repeal of Energy Efficient Credits: Many green energy tax credits that were part of the Inflation Reduction Act, including those for electric vehicles, hybrids, charging, and certain energy-efficient home improvements, are being eliminated or significantly curtailed. This generally applies to property placed in service after September 30, 2025, or December 31, 2025, depending on the specific credit.


• Permanent Repeal of Personal Exemptions: The TCJA's repeal of personal and dependent exemptions remains permanent.

For Estates and Trusts (Form 1041):

While many OBBBA provisions primarily affect individuals and businesses, there are direct and indirect impacts on estates and trusts filing Form 1041.

• Estate and Gift Tax Exemption: The federal estate and gift tax exemption amount has been permanently increased to $15 million per individual (or $30 million per married couple) for 2026 and subsequent years, indexed for inflation. This prevents the scheduled sunset of the TCJA's higher exemption, providing significant relief for estate planning.


• Impact of Individual Tax Changes on Beneficiaries: Since trusts often distribute income to beneficiaries who then report it on their individual Form 1040 (via Schedule K-1 from Form 1041), many of the individual tax changes (like permanent tax rates, SALT cap changes, etc.) will indirectly affect the ultimate tax liability of trust beneficiaries.


• No Direct Changes to Trust Income Tax Rates: The OBBBA does not directly change the income tax rates for trusts themselves. Trusts continue to reach the top marginal tax bracket much faster than individuals.


• Potential for Business Income Flow-Through: If a trust holds interests in pass-through businesses (like S-corporations or partnerships), changes related to the Qualified Business Income (QBI) deduction (which is made permanent and more broadly available) could indirectly affect the trust's overall income calculations and the income passed through to beneficiaries.


• Investment Income and Capital Gains: While the OBBBA doesn't directly alter the tax rates on investment income or capital gains for trusts, any changes to the underlying tax treatment of investments (e.g., potential future capital gains rate changes, though none are in this bill) would impact trust taxation.

What This Means for You:

The OBBBA is a complex piece of legislation with various effective dates. We understand that navigating these changes can be challenging, but our team is here to help.

We encourage you to:

• Review Your Withholding: With changes to deductions and credits, it's wise to review your payroll withholding or estimated tax payments to avoid surprises at tax time.


• Assess Your Itemizing vs. Standard Deduction: The increased standard deduction and the temporary SALT cap increase may shift whether itemizing deductions is still beneficial for you.


• Re-evaluate Estate Plans: The permanent increase in the estate tax exemption offers a fresh opportunity to review and potentially revise your estate plan.


• Plan for Business Income: If you receive income from pass-through entities, understanding the QBI deduction changes is crucial.

We are here to provide personalized guidance. Please do not hesitate to contact our office to discuss how these changes specifically impact your financial situation and tax planning for 2025 and beyond.

Sincerely,

Ruchi Gupta CPA LLC

Important Disclaimer: The information contained in this newsletter is provided for general informational purposes only and is not intended to be, and should not be construed as, tax, legal, or accounting advice. While we have made every effort to ensure the accuracy and completeness of the information, tax laws are complex and constantly evolving. The "One Big Beautiful Bill Act" (OBBBA) introduces significant changes, and its full implications may require further guidance or interpretation.