Last year, we explored the uncertainty surrounding the potential expiration of the Tax Cuts and Jobs Act (TCJA) and how one could plan in the face of that ambiguity. At the time, we were preparing for three possible outcomes: an extension of TCJA, a full sunset reverting to pre-2017 tax law, or a new legislative package altogether. As of July 4, 2025, we have our answer.
The newly passed One Big Beautiful Bill Act (OBBB) provides clarity, at least for now. Much like TCJA, which was passed through budget reconciliation and included sunset provisions to comply with deficit rules, OBBB extends many of those same tax cuts and makes several of them permanent. It also introduces a new set of tax benefits, many of which are themselves temporary and set to expire in the coming years.
In this post, we’ll break down what’s staying the same, what’s changing, and what planning opportunities may be worth considering before the next round of sunsets arrives.
Time-Sensitive: Clean Energy Credits Expiring
If you’re considering energy-efficient upgrades or an electric vehicle, act fast. The following credits are being phased out:
Electric Vehicle Credit: Ends for purchases after September 30, 2025.
Solar, Wind, and Geothermal Credits: Worth 30% of qualified costs, this credit now ends for installations after December 31, 2025.
Home Efficiency Credits: Provides up to $3,200 in credits for energy-efficient home improvements like heat pumps, insulation, doors, and windows. This ends after December 31, 2025.
TCJA Extended: What’s Staying the Same
The OBBB extends the many provisions of the TCJA as follows:
Tax brackets and rates remain unchanged.
Key Insight - The OBBB keeps in place the lower tax rates and broader income brackets introduced by the TCJA. If not extended, many taxpayers, especially those with higher income, would have seen their marginal income tax rate rise. For a side-by-side comparison of what tax brackets would have looked like pre-TCJA, see this example.
Standard deductions stay elevated at $15,750 (single) and $31,500 (married filing jointly), though this is partially offset by the Personal Exemption being permanently set at $0.
Child tax credit increases slightly to $2,200 per child as well as makes the tax credit permanent for older dependents worth up to $500. These credits begin to phase out with income at $200,000 ($400,000 in the case of joint filers).
Qualified Business Income (QBI) deduction remains intact, which was a signature part of TCJA that offered up to a 20% deduction of qualified business income for many small businesses and pass-through entities (LLCs, S-Corporations). There are some increases in the phase out of this credit for businesses where this credit is limited (the SSTB limit).
Estate and gift tax exemptions increase to $15 million for a single person and $30 million for a couple electing portability of unused exemption amounts starting in 2026.
Alternative Minimum Tax (AMT) changes made in 2017 remain, meaning it will only apply to a limited number of taxpayers.
Key Changes Starting January 1, 2026
State and Local Tax (SALT) Deduction allows taxpayers to reduce their federal taxable income by deducting state income, real estate, and other local taxes as an itemized deduction. This benefits those living in states with higher income taxes or high property taxes, including Illinois. Limits are increased from $10,000 to $40,000 and add an annual adjustment for inflation. This higher limit reverts to a $10,000 limit in 2030.
Example:
Mary is a single taxpayer who owns a home. Each year, she pays $12,000 in property taxes and $8,000 in state income tax, and donates $3,000 to charity. Previously, Mary could only deduct up to $10,000 of her state and local taxes (SALT), limiting her total itemized deductions to $13,000. This amount was less than the standard deduction ($15,750), so she took the standard deduction instead.
With the new changes, Mary can now deduct the full $20,000 of state and local taxes, plus her $3,000 charitable donation, bringing her total itemized deductions to $23,000. At a 24% marginal tax rate, this change reduces her tax bill by $1,740.
A “Senior Deduction” that has been touted as “no more tax on Social Security for most recipients” is actually a new $6,000 deduction for taxpayers ages 65 and up. This deduction phases out at Income (AGI) of $75,000 (single) / $150,000 (joint). This deduction expires after 2028.
The Dependent Care Benefit is a benefit offered by many employers (University of Illinois for example) that allows employees to set aside money from their paycheck before taxes to pay for eligible dependent care expenses. These expenses typically include costs like daycare, preschool, and after-school programs for children under the age of 13. The bill increases the maximum contribution from $5,000 to $7,500.
Car Loan Interest adds to itemized deductions for the interest on a loan to purchase a car. The deduction is capped at $10,000 per year and will phase out for taxpayers with AGI more than $100,000 ($200,000 for married taxpayers filing jointly).
A Tax Break on Tips adds a temporary deduction of up to $25,000 for qualified tips received by an individual in an occupation that customarily and regularly receives tips. IRS Guidance will be needed to clarify. The deduction is an “above the line” deduction, so would be available even to those who take the standard deduction. This deduction will be available for tax year 2025 and expires after 2028.
Overtime Deduction provides a temporary above-the-line deduction of up to $12,500 ($25,000 in the case of a joint return) for qualified overtime compensation. The overtime would need to be separately stated on Form W-2. This deduction will be available for tax year 2025 and expires after 2028.
Above-the-Line Charitable Deduction brings back a briefly allowed deduction introduced during the COVID pandemic but expired. Once again there is the ability of individuals taking the standard deduction to take a charitable deduction “above the line.” The allowed amount will be $1,000 for single filers and $2,000 for joint filers.
Charitable Deduction Changes
For itemizers, the bill will only allow charitable deductions that exceed 0.5% of the taxpayer’s AGI in much the same way you can only deduct medical expenses that exceed 7.5% of income.
Continuing our earlier example, let’s say Mary has an AGI of $150,000 and itemizes her deductions. To begin deducting charitable gifts under the new rule, she would need to give more than 0.5% of her AGI, which is $750. If she donated $3,000, only the portion of donations exceeding $750 would count toward her itemized deduction, or $2,250 would count.
Additionally, for taxpayers in the highest 37% tax bracket, your itemized deductions are reduced by 2/37 percent of your income exceeding the top tax bracket. In other words, your deductions are limited to 35%.
1099 Reporting Threshold is increased from $600 to $2,000.
Final Thoughts
Please note that this represents our initial review of the bill, and as with any new legislation, some provisions may change as the IRS provides further clarification or as additional legislative adjustments are made. Bluestem will be meeting with all clients throughout the remainder of the year to discuss how these changes may affect your investment, tax, and overall financial planning strategies.
If you have immediate questions, please contact your advisor. For those interested in comprehensive financial planning with integrated tax guidance, we invite you to reach out. We’re here to help you navigate these changes with confidence.
Authored by:
Nick Vogel, CFP®, CPA
Jacob Kuebler, CFP®, EA