The H.R. 1: One Big Beautiful Bill was signed into law by President Trump on July 4, 2025. This bill brings long-awaited clarity and permanence to key provisions of the Tax Cuts and Jobs Act (TCJA), while introducing new measures aimed at middle-class working families. Here are the highlights of how the bill impacts your household.

The OBBBA raises the maximum credit per qualifying child from $2,200 starting in 2025. This credit was previously $1,000 and was doubled to $2,000 under the Tax Jobs and Cuts Act of 2017. The $2,200 credit per child is now permanent and will be adjusted for inflation annually going forward. 

The refundable portion of the credit remains capped at $1,400 per child which will also be indexed for inflation. 

A qualifying child must have a valid SSN issued to a U.S. citizen or certain legal residents. SSNs must be issued before the return due date (April 15th) or the credit claimed with be disallowed by the IRS. 

The One Big Beautiful Bill Act of 2025 introduced two key changes to the Child Dependent Care Tax Credit that take effect in 2026.

The tax credit calculation increased from 35% to 50% of qualifying dependent care expenses.

Additionally, there is a new phase-out structure with two tiers based on adjusted gross income (AGI).

• • Tier 1: the credit percentage is reduced by 1% for each $2,000 of AGI over $15,000. The percentage cannot be reduced below 35% in this phase
  • Tier 2: for AGIs above $75,000 ($150,000 for joint filers), the percentage is further reduced by 1% for each $2,000 ($4,000 for joint filers) over that threshold. The floor remains at 20%.

The qualifying dependent care expense cap remains $3,000 for one child and $6,000 for two or more dependents.

Beginning in 2026, the One Big Beautiful Bill Act of 2025 increases the annual contribution limits for employer-provided dependent care flexible spending accounts. 

The new limits increase from $5,000 to $7,500 per year ($3,750 for MFS). 

This increased limit will help families with higher annual child care costs, allowing for great tax-advantage deferral. Additionally, this increase in Dependent FSA contributions may result in a better tax outcome than the dependent care tax credit, summarized above.

New enhancements apply to the Adoption Credit as a result of the One Big Beautiful Bill Act of 2025.

Starting in 2025, up to $5,000 of the adoption credit is refundable. A refundable credit means that the credit can be refunded to the taxpayer even if the tax credit exceeds the taxpayer’s liability. 

Any adoption credit above $5,000 remains nonrefundable and subject to the same carry forward rules under the existing law. Finally, the refundable portion of the credit will be indexed for inflation going forward. 

The OBBBA introduces a new long-term savings vehicle known as a Trump Account. These accounts are intended to promote financial education, retirement readiness and asset creation for children. 

Only children under age 18 are eligible to set up Trump Accounts. Annual contributions of $5,000 per child can be made to the account annually. This contribution can be made by parents, employers, charitable organizations and government bodies. The $5,000 cap applies to all contributions made into the account.

Trump Accounts grow on a tax-deferred basis, similar to an IRA or 401(k). The account can be invested based in a limited selection of mutual funds and indexed ETFs. Early withdrawals are disallowed and if the distributions withdrawn are for qualifying expenses (after age 18), they remain tax-free.

Further guidance will be needed to clarify how qualified distributions will be determined. 

To kickoff account adoption, a one-time $1,000 deposit will be made into accounts opened for qualifying children born between 2025 and 2029. 

The OBBBA makes permanent the individual income tax rates introduced by the Tax Cuts and Jobs Act that were previously set to expire at the end of 2025. The federal income tax rates remain at the same levels as the 2024 tax year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top marginal tax rate of 37% applies to single filers with taxable income of $626,350 or more ($751,600 or more for married couples filing jointly).

A top talking point of the One Big Beautiful Bill Act of 2025 included no taxes on tips. The OBBBA introduces a new deduction available to certain taxpayers related to cash tips.

This new deduction applies to tax years 2025-2028. Individuals who receive cash tips in qualified occupations (those that customarily receive tips). Both employees and self-employed individuals may be eligible.

The deduction is capped at $25,000 per year and phases out if the taxpayer’s MAGI exceeds:

• • $150,000 for individuals
  • $300,000 for joint filers

The deduction is phased out by $100 for every $1,000 over the threshold. Married taxpayers must file jointly to claim the deduction. Further guidance is expected to be issued regarding the reporting requirements for W-2s, 1099-NECs, etc. to reflect tips and to define qualifying occupations.

The deduction is considered an “above-the-line” deduction which means taxpayers are not required to itemize deductions to claim the Tips deduction. 

The OBBBA also introduces a new deduction available to certain taxpayers that earn overtime pay. Overtime is defined as pay for hours worked in excess of the standard workweek and calculated at a rate above the individual’s regular hourly rate.

This new deduction applies to tax years 2025-2028. Both employees and self-employed individuals may be eligible.

The deduction is capped at $12,500 for single filers and $25,000 for joint filers per year and phases out if the taxpayer’s MAGI exceeds:

• • • $150,000 for individuals
    • $300,000 for joint filers

The deduction is phased out by $100 for every $1,000 over the threshold. Married taxpayers must file jointly to claim the deduction. Further guidance is expected to be issued regarding the reporting requirements for W-2s, 1099-NECs, etc. to reflect overtime compensation.

The deduction is considered an “above-the-line” deduction which means taxpayers are not required to itemize deductions to claim the Overtime deduction.

The increased standard deduction from the Tax Cuts and Jobs Act of 2017 has been made permanent in the One Big Beautiful Bill Act of 2025. Standard deductions for all taxpayers are as follows for tax year 2025:

• • Single/MFS – $15,750
  • MFJ – $31,500
  • Head of Household – $23,625

Additionally, those taxpayers age 65 and older get an additional $1,600 per qualifying taxpayer added to the Standard Deduction as follows for tax year 2025:

• • Single/MFS – $17,750
  • MFJ – $33,100
  • Head of Household – $25,625

There are two potential tax benefits that Families could benefit from as a result of OBBBA.

Deductible Car Loan Interest

Interest paid on a loan to purchase a qualifying passenger vehicle for personal use may qualify for a tax deduction. The deduction is capped at $10,000 per year. The deduction is an “above-the-line” deduction which means the taxpayer can claim either standard or itemized deductions without impacting the deduction.

A qualifying passenger vehicle includes a new car, SUV, truck or motorcycle assembled in the US.

This deduction is subject to phase-outs based on the taxpayer’s modified adjusted gross income and filing status. The deduction is reduced by $200 for every $1,000 of MAGI over the following thresholds:

• • $100,000 for Individuals
  • $200,000 for Married Filing Jointly

State and Local Tax Deduction (SALT)

The state and local tax deduction, also known as SALT is a deduction available to those taxpayers that itemize deductions. Prior to the OBBBA enactment, the SALT deduction was limited to $10,000 per return ($5,000 if MFS). However, the OBBBA enhances the SALT deduction by increasing the deduction cap from $10,000 to $40,000 for eligible taxpayers.

The state and local tax deduction allows taxpayers to deduct the following state and local taxes:

• • State and Local Income Taxes including W-2 state withholding, estimated tax payments and state taxes paid for a prior year (if paid during the current year)
  • Real Estate Taxes on personal residence, second home and/or land
  • Personal Property Taxes

The SALT deduction enhancement only applies to tax years 2025-2029.

Eligible taxpayers to claim the enhanced SALT deduction are those households modified adjusted gross income of less than $500,000 ($250,000 MFS). This deduction is not subject to a phase-out. Ineligible taxpayers will still be able to claim a SALT deduction capped at $10,000 per year. 

If you have questions about how this topic will impact you, Team LittleOwl CPA is here to help. Schedule a discovery call today!