The OBBB made the higher standard deduction permanent, exempts tips and overtime from federal income tax, raises the SALT cap to $40,000, and increases the child tax credit to $2,500. Here's what these 2026 changes mean for individual filers.
The One Big Beautiful Bill Act (signed July 4, 2025) delivers five major changes for individual filers: the TCJA-era standard deduction is made permanent (no 2025 sunset); qualifying tips and overtime pay are temporarily excluded from federal income tax; the SALT deduction cap rises from $10,000 to $40,000; the child tax credit increases from $2,000 to $2,500 per qualifying child; and a temporary $6,000 senior deduction is available for taxpayers 65 and older. These provisions affect 2025 and 2026 tax returns.
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.
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.
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:
Workers who receive tips should continue to track and report them — the exclusion is claimed on the tax return, not withheld at source.
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.
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.
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.
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.
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.
The OBBB tip exclusion applies to workers in occupations where tipping is customary — hospitality, food service, personal care, and similar service roles. The worker must receive tips from a customer in the normal course of business, not a forced service charge. The exclusion is up to $25,000 per year and phases out for taxpayers with modified adjusted gross income above $150,000 (single) or $300,000 (married filing jointly). The provision is temporary: it applies to tax years 2025 through 2028.
No. The OBBB overtime exclusion is a federal income tax exclusion only — Social Security and Medicare taxes (FICA) still apply to overtime pay in full. The exclusion covers up to $12,500 per year for single filers and $25,000 for married filing jointly for FLSA non-exempt workers receiving qualified overtime pay. The same income phase-outs apply as the tip exclusion ($150,000 single / $300,000 MFJ MAGI), and the provision is temporary through 2028.
The OBBB raised the SALT cap from $10,000 (TCJA level) to $40,000 for tax years beginning in 2025, primarily benefiting taxpayers in high-tax states who itemize deductions. The higher cap applies only to filers with MAGI under $500,000; it phases down above that threshold. For homeowners paying significant property taxes and state income taxes, itemizing may now produce a larger deduction than the standard deduction — run both calculations with your tax preparer before filing.
The OBBB increased the child tax credit from $2,000 to $2,500 per qualifying child. The phase-out thresholds were also adjusted: the credit begins to phase out at $400,000 MAGI for married filing jointly filers and $200,000 for all other filers. A portion of the increased credit is refundable, meaning some families may receive a refund even if they owe no federal income tax. Qualifying child requirements (age, residency, dependency) remain essentially the same.
The OBBB added a temporary above-the-line deduction of up to $6,000 for taxpayers who are age 65 or older by the end of the tax year. It is available to both itemizers and standard-deduction filers. The deduction phases out starting at $75,000 MAGI for single filers ($150,000 for MFJ) and is fully phased out at $175,000 single ($250,000 MFJ). This provision is temporary, covering tax years 2025 through 2028.