The One Big Beautiful Bill Act was signed into law in July of 2025 and contained several measures that affect taxes. Before we talk about upcoming changes, here is a basic guide about how taxes are calculated.
- First, you earn income. You might earn that income from a job, running a business, renting out property, through investments, gambling, or various other means of earning income. When the year ends and it’s time to file your taxes, you total all your income for the year. Let’s say you made $100,000 last year.
- Then, you subtract deductions from your income. Deductions are eligible expenses that reduce your taxable income. To calculate your deductions you have two choices:
- You can take the standard deduction (a number set by the federal government based on your filing status of single, married, or head of household) or
- You can itemize your deductions (subtract actual qualifying expenses from the year). Let’s say you’re filing as single and taking the standard deduction of $15,750 for 2025 earnings. The majority of people take the standard deduction. It could make sense to itemize if you have large mortgage or medical payments.
- Continuing with our example, we'll take the $100,000 from step 1, minus $15,750 from step 2 to get $84,250 in taxable income.
- That taxable income of $84,250 is taxed as it moves through the tax year’s tax brackets. Let’s use the 2025 tax year single filer bracket for this example.
The first $11,925 out of $84,250 will be taxed at 10%.
The next $36,549 out of $84,250 will be taxed at 12% (that’s every earned dollar between $11,926 and $48,475).
And the remaining $35,776 out of $84,250 will be taxed at 22% (that’s every dollar earned over $48,475 but below $103,351).
There are obviously other factors, such as if you’re having taxes withheld throughout the year or not, and there may be deductions you can take on top of the standard deduction, but this example was meant to describe the absolute basics of taxes so we could set the stage to explain tax changes coming for 2026.
Now, let’s talk about the highlights of those changes.
Updates to Tax Brackets
Here is a side-by-side comparison of tax brackets for 2025 income (filing in 2026) and 2026 income (filing in 2027), both for single and married filings.
Notice that the tax bracket thresholds have increased across the board. This means that you would have to earn more income to be pushed into a higher tax bracket than in previous years. The tax bracket rates themselves did not change.
Deduction Changes
The standard deduction is set to increase, which often happens from year to year to reflect changes in inflation.
But there are also new deductions! Importantly, the following new deductions are only effective for tax years 2025 through 2028.
- The Deduction for Seniors is specifically for seniors age 65 or older.
- In addition to the standard deduction, eligible individuals can claim an extra $6,000 deduction to reduce their taxable income.
- The deduction is $12,000 for married couples filing jointly.
- It also doesn’t apply to individuals over a specific income threshold. That income threshold is based off a number called modified adjusted gross income (MAGI) and the limit is $75,000 for single filers and $150,000 for those filing jointly.
- No Tax on Tips allows individuals to deduct up to $25,000 of ‘qualified tips’ in addition to the standard deduction.
- Qualified tips are voluntary amounts of cash or charges that workers receive from customers.
- IRS has provided guidance that these tips come from occupations that ‘customarily and regularly receive tips’.
- The deduction doesn’t apply to individuals over MAGI of $150,000 for individuals or $300,000 for those filing jointly.
- And regardless of if the filer is a W2 employee or self-employed, the amount of tips deducted cannot exceed their regular income from the work.
- No Tax on Overtime deduction allows filers to deduct extra overtime earnings up to $12,500 for single filers and $25,000 for joint filers.
- The earnings are only on the overtime earnings that exceeds the filer’s regular rate of pay. For example, if you normally make $20 per hour, but working overtime you make $30 an hour, you could deduct the extra $10 an hour.
- The deduction doesn’t apply to individuals over MAGI of $150,000 for individuals or $300,000 for those filing jointly.
- No Tax on Car Loan Interest deduction allows filers to deduct interest paid on an eligible car loan.
- The car purchased with the loan must:
- Be for personal use
- Be a car, minivan, van, SUV, pickup truck or motorcycle
- Weigh less than 14,000 pounds
- Have been assembled in the United States (confirmed by VIN or by the dealership)
- And the loan must have been opened Jan 1st, 2025 or later.
- The maximum annual deduction is $10,000.
- The deduction doesn’t apply to individuals over MAGI of $100,000 for individuals or $200,000 for those filing jointly.
- The car purchased with the loan must:
Trump Accounts
The One Big Beautiful Bill Act also introduced 530A accounts, or “Trump Accounts”. Check out our last blog to learn more about them. https://www.west-invest.com/blog/530a-trump-accounts
Health Insurance
The biggest change related to taxes and health insurance is the elimination of the Enhanced Premium Tax Credits. While the end of this program isn’t a direct result of the One Big Beautiful Bill Act, it is still a major recent change related to taxes. The One Big Beautiful Bill Act has also made additional changes to the ongoing Premium Tax Credit program.
What Are Premium Tax Credits?
The Premium Tax Credit is a federal tax credit meant to reduce the cost of health insurance premiums for individuals and families purchasing health insurance through the Health Insurance Marketplace. Here are some key points about the premium tax credit:
- Based on household size and income, it can be directly applied to monthly health insurance premiums all year long, basically acting as a discount on health insurance.
- While you receive the premium tax credit throughout the year, it is reconciled when you file your taxes the following year.
- If your predicted income used to calculate your premium tax credit exceeds your actual income for the tax year, you may receive extra premium tax credits as part of your tax refund.
- But the inverse is also true. If your predicted income was less than your actual income, you may have to repay part or all of the premium tax credit you received throughout the year.
About the Enhanced Premium Tax Credit
As a result of the COVID-19 pandemic, the Enhanced Premium Tax Credit was introduced. The Enhanced Premium Tax Credit made the premium tax credit larger for eligible households (deeper discounts) and also opened eligibility for premium tax credits to more households at higher income levels. With the sunsetting of this program, we are reverted back to the original Premium Trax Credit eligibility thresholds and subsidy amounts.
Bottom Line for Premium Tax Credits Going Forward
- There are two important takeaways:
- if your household makes just $1 more than 400% of the Federal Poverty Level (FPL), your household is ineligible to receive any Premium Tax Credit,
- for those under 400% of the FPL who do qualify for PTCs, the household expected contribution toward health insurance is capped at a higher percentage of household income (lower PTCs).
- This interactive tool demonstrates the difference: https://www.kff.org/interactive/calculator-aca-enhanced-premium-tax-credit/
Limitations on the repayment of excess premium tax credits were formally included in the program. These have been removed.
Other Changes
There are a lot of other changes. But they apply to businesses, clean energy efforts, tax-exempt charitable organizations, and more entities that go beyond the scope of individual tax planning.
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