The One Big Beautiful Bill Act was signed into law on July 4, 2025, enacting the largest set of individual income tax changes since the Tax Cuts and Jobs Act of 2017. For individual filers, the bill makes several TCJA provisions permanent, adds new temporary exclusions for tip and overtime income, raises the SALT deduction cap, increases the child tax credit, and creates a new senior deduction. Here is what changed and how it affects your 2025 and 2026 returns.
Standard deduction: TCJA amounts made permanent
Under the TCJA, the standard deduction was roughly doubled starting in 2018, but those higher amounts were set to expire after 2025. The OBBB eliminates that sunset. The higher standard deduction is now permanent.
For 2026, the IRS projects standard deduction amounts of approximately $15,750 for single filers and $31,500 for married filing jointly, reflecting ongoing inflation adjustments. These amounts will continue to be adjusted annually for inflation going forward.
Making the standard deduction permanent has downstream effects: it continues to reduce the value of itemized deductions for most filers, meaning fewer households will benefit from itemizing (mortgage interest, charitable contributions, SALT). If your total itemized deductions are below your applicable standard deduction, you take the standard deduction automatically.
No federal income tax on qualified tips (2025–2028)
The OBBB creates a temporary federal income tax exclusion for qualified tip income. Workers in customarily-tipped occupations — food service, hospitality, personal care, and similar service roles — can exclude up to $25,000 in tip income per year from federal income tax.
Key eligibility limits from IRS OBBB guidance:
- Occupation must be one where tipping is customary (not a forced service charge)
- The exclusion phases out starting at $150,000 MAGI for single filers and $300,000 for married filing jointly
- FICA taxes (Social Security and Medicare) still apply to tip income in full — this is an income tax exclusion only
- The provision applies to tax years 2025 through 2028
Workers who receive tips should continue to track and report them — the exclusion is claimed on the tax return, not withheld at source.
No federal income tax on qualifying overtime pay (2025–2028)
A companion provision creates a federal income tax exclusion for qualified overtime pay. FLSA non-exempt employees who receive overtime compensation above their regular rate can exclude up to $12,500 per year ($25,000 for married filing jointly) from federal income tax.
The same income phase-outs apply: the exclusion begins to phase down at $150,000 MAGI (single) or $300,000 (MFJ). Like the tip exclusion, FICA taxes still apply to overtime pay in full. The provision is temporary, covering 2025 through 2028.
SALT deduction cap raised from $10,000 to $40,000
The TCJA capped the state and local tax (SALT) deduction at $10,000 for all filers regardless of actual state and local taxes paid. The OBBB raises that cap to $40,000 for filers with MAGI below $500,000. Above $500,000, the cap phases down.
This change primarily benefits taxpayers in high-tax states (California, New York, New Jersey, Illinois, Connecticut) who itemize deductions and pay significant property taxes and/or state income taxes. For homeowners in those states who were previously limited to the $10,000 cap, the higher cap may now make itemizing more advantageous than taking the standard deduction — but the math depends on your total itemized deductions.
Per the IRS OBBB provisions summary, filers should recalculate their itemized vs. standard deduction comparison for 2025 returns filed in 2026.
Child tax credit increased to $2,500 per qualifying child
The OBBB increases the child tax credit from $2,000 to $2,500 per qualifying child. Phase-out thresholds are $400,000 MAGI for married filing jointly filers and $200,000 for single and other filers. A portion of the increased credit remains refundable — meaning some families may receive a refund even if their federal tax liability is zero or near zero.
Qualifying child requirements (under age 17, U.S. citizen or resident, properly claimed as a dependent) remain substantively unchanged. See IRS Publication 501 for the full dependency and qualifying child rules as updated for 2025 and 2026.
New temporary senior deduction: $6,000 for filers 65+
The OBBB adds a new above-the-line deduction of up to $6,000 for taxpayers who are age 65 or older by the end of the tax year. Unlike an itemized deduction, this is available to both itemizers and standard-deduction filers — it reduces adjusted gross income directly.
Phase-out: the deduction begins to phase out at $75,000 MAGI for single filers ($150,000 for MFJ) and is fully phased out at $175,000 single ($250,000 MFJ). The provision is temporary through 2028.
For retirees on fixed income, this deduction stacks with the existing additional standard deduction for taxpayers 65 or older — the two are separate benefits.
What this means for your 2026 tax return
- Standard deduction filers: your deduction is permanent and continues to rise with inflation. No TCJA cliff to plan around.
- Tipped workers and overtime earners: track qualifying income carefully. The exclusion is claimed on your return, and FICA still applies.
- Itemizers in high-tax states: recalculate your SALT deduction with the $40,000 cap. Itemizing may now beat the standard deduction if property + state income taxes are significant.
- Parents: the higher child tax credit reduces your tax bill by an additional $500 per qualifying child. Check refundability rules if your income is low.
- Taxpayers 65+: the new senior deduction reduces AGI directly. It phases out at moderate income levels, so higher-income retirees may see only a partial benefit.
For OBBB provisions affecting small business owners — including the pass-through income deduction, bonus depreciation, and expensing changes — see the companion post One Big Beautiful Bill: Small Business Tax Changes for 2026.
For self-employed individuals navigating both the individual and business sides, the retirement plans for self-employed guide covers how AGI-based deduction rules interact with your overall tax picture.
This content is for educational purposes only and does not constitute tax or legal advice. Tax rules change frequently and individual circumstances vary significantly. Consult a licensed CPA or tax advisor for guidance specific to your situation and 2025–2026 returns.