Child Tax Credit

One Big “Beautiful” Bill

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This post contains a non-exhaustive summary of the most impactful (to my clients) tax and personal finance-related provisions of the One Big Beautiful Bill (OBBB) that was passed into law on 7/4/2025. That’s the actual name of the Bill / Law, by the way, not an editorial on the Bill’s beauty. In fact, I put “Beautiful” in quotes in the title to give just the opposite impression. To be fair though, this Bill is to beauty about as the Inflation Reduction Act of the previous administration was to reducing inflation. Names of Laws don’t imply meaning, intention, or effectiveness of those Laws. That’s as far as I’m going to get into politics on this one. I’m also not going to get into the budget portions, appropriations, cuts to programs like Medicaid, etc. While the importance of those parts of the Bill probably surpasses the importance of tax changes to many Americans, this post is only about taxes and personal finance, where I can contribute most. I leave it to you to dive into the rest of the Bill as you feel is appropriate, using the sources you feel are appropriate. Better yet, give the 870-page OBBB a read yourself.

Many of the provisions are retroactive to the start of 2025 and so they impact taxes this year. Some begin later in 2025, some in 2026, a few even after that. Some provisions are permanent (meaning it would take a new law to change them). Some are temporary (meaning they will revert back to old law at a future date unless a new law is passed to extend them). I tried my best below to include the effective dates for each change. Please keep in mind that this is my personal interpretation of the OBBB after skimming it and cross referencing various other summaries that have been published. It is not guaranteed to be 100% accurate. Lastly, it will take some time to update tax projection software and really get into the details of what, if any, actions clients should take, given their current situation. Unlike other recent tax bills, which were passed in the final days of the tax year, this one gives time to interpret, project, and act. There will be more to come on those actions in the coming months.

Key tax and personal finance provisions of OBBB:

  • Current tax brackets made permanent (would have reverted back to pre-TCJA in 2026).  That includes the 10%, 12%, 22%, 32%, 35%, and 37% rates, as well as their income ranges for Single, Head-Of-Household (HoH), Married Filing Jointly (MFJ), and Married Filing Separately (MFS).  Those income ranges are adjusted upward annually for inflation.  The OBBB adds one additional year of inflation adjustments to the 10% and 12% brackets by setting their “base year” back to 2016 from 2017 starting in 2026. This effectively increases the 10% and 12% brackets for inflation twice in 2026 only, making those brackets higher, and reducing taxes slightly for everyone that pays any Federal tax.
  • Standard deduction made permanent (would have reverted back to pre-TCJA in 2026).  Increased slightly for 2025 to $31,500 for couples, $23,625 for head of household and $15,750 for individuals.  Inflation-adjusted going forward. 
  • New $6,000 personal exemption for those age 65+ (remains $0 for everyone else).  Acts like another standard deduction and phases out by 6% of the amount that MAGI (adjusted gross income plus excluded foreign income in most cases) exceeds $75k single / $150k MFJ.  Effective 2025-2028, only.  This new deduction was Congress’s way of trying to implement President Trump’s “no tax on social security” campaign promise.  Since the Budget Reconciliation process (requires majority vote in the Senate to pass instead of 60 votes) can’t make changes to Social Security, this new deduction is the best they could do.  Social Security taxation rules have not changed at all.  Contrary to the message the administration is putting out there, there is still tax on Social Security income if overall income is above certain thresholds.
  • New phaseout of deductions for those in the top (37%) tax bracket so that their deductions only reduce tax by 35%.
  • Child tax credit raised to $2200 / child + inflation and made permanent (would have reverted back to $1k in 2026).  Still phases out starting at AGI of $200k single / $400k MFJ.
  • $500 Other Dependent Credit made permanent.
  • Gift/Estate tax exemption increases to $15M per person / $30M per couple in 2026 + inflation in future years ($14k now + inflation, so not a huge change, but would have reverted back to pre-TCJA in 2026) and permanent.
  • QBI deduction (this is better known as the 20% “small business deduction” created by TCJA) made permanent (would have ended for 2026).  Phase-in ranges for the §199A limitations increase to $75,000 for non-joint returns and $150,000 for joint returns (from previous $50k/100k).  Other enhancements in the initial House version did not make the final bill.
  • SALT deduction limit (which would have ended in 2026) increases to $40k for 2025 (from $10k) +1% per year.  This higher deduction limit will be in effect for 5 years (ends after 2029).  Applies to single or MFJ (so increases the marriage penalty), but MFS is only $20k (so increases the penalty for married filing separately, which already rarely makes sense).  Reverts back to $10k in 2030.  Phased out by 30% of the amount that AGI is > $500k (so fully phased out at $600k), but can’t go below $10k.  That $500k phase applies to both single and MFJ too (MFS = $250k). The cap is also indexed +1% per year.  A ban on certain state-level workarounds for businesses that were included in the House version of the Bill were NOT included in the final version.
  • Current AMT exemption made permanent but AMT exemption phaseouts reset to 2018 levels ($500k single / $1M MFJ) which backed out a few years of inflation.  Also cuts exemption phaseout to $1 for every $2 of AMTI over the threshold (vs prior $1 for every $4 of AMTI).
  • Mortgage interest deduction limited to $750k of debt made permanent.  Grandfathering of pre-TCJA mortgages at $1M still applies.
  • Mortgage insurance premiums deductible (as they were pre-2022) permanently.
  • Casualty loss deduction limited to Federally declared disaster area made permanent.
  • Elimination of the moving expenses deduction made permanent
  • Elimination of miscellaneous itemized deductions by TCJA (e.g. unreimbursed employee expenses, business mileage, home office deduction) made permanent (i.e. you cannot deduction business mileage, home office, etc. as an employee).
  • Charitable Deduction changes (starting 2026):
    • For non-itemizers a new, permanent deduction of up to $1k single / $2k MFJ.  No income phaseouts. Only direct cash contributions qualify (no property, no DAF, etc.)
    • For itemizers, a new, permanent floor of 0.5% of AGI for deductibility (e.g. if you earn $200k per year, the first $1000 of charitable contributions would not count toward an itemized deduction)
  • Deduction for gambling losses (already limited to gambling gains) limited so that only 90% of losses could be considered.  Means even those with net losses in a year could be taxed on gambling “income”.
  • Dependent Care Credit enhanced to 20-50% of up to $3k/child (max 2) of expenses (from 20-35%).  Permanent.
  • Dependent Care FSA limit increased to $7500 from $5k.  Permanent, but not inflation-adjusted.
  • Tax exclusion for employer-paid student loan assistance permanent
  • “No tax on tips” – New deduction (separate from itemized deductions, but after the calculation of adjusted gross income) for up to $25k (all filing statuses except MFS, which gets $0!) of tips included in income.  Effective 2025-2028.  Tips must be voluntarily paid in customary tipping occupations.  All SSTB (specified service trades or businesses) are excluded.  Deduction phases out at 10% of income over a threshold of MAGI starting at MAGI of $150k single / $300k MFJ.
  • “No tax on overtime”– New deduction (separate from itemized deductions, but after the calculation of adjusted gross income) for up to 12.5k single / $25k MFJ / $0 MFS of overtime pay included in income (shown on W-2).  Effective 2025-2028.  Deduction phases out at 10% of income over a threshold of MAGI starting at MAGI of $150k single / $300k MFJ.
  • Auto Loan Deduction – up to $10k of interest per year would be deductible on auto loans from 2025-2028.  New vehicles purchases only (no leases or used cars), with final assembly in the US. Deduction phases out at 20% of income over a threshold of MAGI starting at MAGI of $100k single / $200k MFJ.
  • Enhanced Affordable Care Act (“Obamacare”) Premium Tax Credits were not extended.  These increased the tax credit for (“the subsidy”) for ACA purchased health insurance and implemented a new, slower phaseout to the credit for those earning more than 4x the federal poverty level in income.  They were increased for 2021 and 2022 and then extended by the Inflation Reduction Act, but have now been allowed to revert back to the original ACA level with a hard cliff at 4x the federal poverty level.  This means that if you purchase your health insurance through a state ACA exchange and you currently receive a subsidy to offset the cost of your insurance, starting in 2026 that subsidy may be reduced and / or you may have to pay part of it back when you file your taxes.
  • HSA Enhancements -the broad HSA enhancements that were part of the initial House version of the OBBB, including doubling the max HSA contribution, were not included in the final Bill.  These changes were included:
    • Telehealth visits with deductible waived, won’t disqualify plans from being HSA eligible.  Starts 2025 when the old laws that allowed this during COVID expired.
    • All ACA Bronze and Catastrophic health plans will be HSA eligible, regardless of whether they would otherwise qualify.  Starts in 2026.
    • Direct Primary Care arrangements with subscription costs not exceeding $150/mo individual / $300/mo family can be HSA-eligible.  Additionally, HSAs can be used to pay those subscription fees.  Starts in 2026.
  • Credit for the purchase of new and used electric cars ends 9/30/2025 instead of 12/31/2032.
  • Credit for energy efficient home improvements ends 12/31/2025 instead of 12/31/2032.  This was the up to $1200/yr for energy efficient doors, windows, HVAC, water heaters, etc.
  • Credit for installing certain residential renewable energy systems such as solar, wind, geothermal, batteries, etc. ends 12/31/2025 instead of 12/31/2032.  This includes the 30% credit for solar installations.
  • 100% Bonus Depreciation restored for business assets purchased on or after 1/20/2025.  Permanent.
  • Section 179 expensing permanently increased from $1.16M to $2.5M, with phase-out starting at $4M.
  • Business loss limitation provision from the TCJA made permanent.
  • Employer credit for paid family and medical leave permanent.
  • Opportunity Zones permanent with several changes including the definition of a low-income community.  Effective 1/1/2027.  More guidance will be necessary on this one as Opportunity Zones were already a very complicated portion of the TCJA.
  • New 100% credit for donations up to $1700/yr to state-approved Scholarship Granting Organizations (SGOs).  Scholarships received from those organizations for qualified elementary or secondary education would be tax-free.
  • Expands the allowable uses of 529 accounts to include K-12 education expenses (previously just tuition, with a cap, now more broad) and allows 529s to be used for “qualified postsecondary credentialing expenses” (seemingly certificate programs).
  • New 1% excise tax starting in 2026 on certain money transfers funded from cash, money orders, cashier’s check, or similar, rather than bank account, credit card, or debit card, sent from the US to an international destination.  A new tax credit is available to offset the excise tax if it is paid by a US citizen or US resident.
  • Many changes to student loan annual and lifetime maximums as well as repayment plan options.
  • “Trump Accounts” – IRAs established for minors that will follow most Traditional IRA rules.  Contributions can start 7/4/2026.  $1k granted per child born between 2025 and 2028 by the Feds.  Additional contributions of up to $5k / yr allowed until child turns 18.  No deduction.  Tax-deferred (not tax-free) growth, with distributions taxed at ordinary income rates.  With few exceptions, can’t be accessed prior to age 18.  Seems to follow the IRA rules for access prior to age 59.5 with penalties unless due to death, disability, home purchase, etc.  Must be invested in a low-cost US mutual fund or ETF.  Employers can contribute up to $2500 pre-tax for the employee.  Withdrawals after age 18 taxed pro-rata (gains and untaxed employer contributions taxed as income, after-tax contributions returned tax-free). 
  • 1099 Reporting changes –
    • The minimum threshold to report payments to individuals engaged in a trade or business (1099-MISC / 1099-NEC) increases to $2000, from $600.  Inflation-adjusted starting in 2026.
    • The minimum threshold to report third-party network transaction via 1099-K (e.g. Venmo, Paypal, etc.) reverts back to $20k or greater than 200 transactions.  That was scheduled to be reduced to $600 starting in 2026.
  • Qualified Small Business Stock (QSBS) – increases the max gain exclusion from $10M to $15M and creates new partial gain exclusions for stock acquired after 7/4/2025 where 50% of the gain can be excluded if held for 3-4 years or 75% if held between 4-5 years. 100% exclusion still occurs at 5 years.

Proposed Credits & Deductions in the Upcoming Infrastructure & Broader Spending Plan

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In the last post, I covered the potential “pay-fors” that would… well… pay for some of the spending, deductions, and credits enabled by the proposed infrastructure and broader spending legislation that Congress is working on passing via reconciliation this fall.  That proposed legislation is currently 645 pages, and subject to many changes as it makes its way through committees in both chambers.  There are many proposed changes to the tax code (enough to make the TCJA look simple) to go along with various spending appropriations.  The majority have to do with infrastructure incentives and credits for business.  But, there are a few notable ones for individuals/families.  Keeping in mind that this is just a proposal, here is a non-exhaustive list of the provisions that may provide some benefit to you:

  • Increases the credit for adding solar to a residence back to 30% of the cost.  Extended through 2031, then phases down to 26% in 2032, 22% in 2033, and then expires.  Includes residential battery storage technology as well.
  • Extends the non-business energy property credit (energy-efficient windows, doors, furnaces, , water heaters, etc.) to 2031 and expands the credit to 30% of the cost from the current 10%.  Additionally, it eliminates the (frustrating and hard to track) lifetime limit and replaces it with a $1200 annual limit.
  • Creates a new Plug-In Electric Vehicle Credit ranging from $4000 to $12,500 (limited to 50% of the cost), depending on battery capacity, assembly location, and what portion of the vehicle is made with domestic parts.  It won’t apply to vehicles weighing more than 14,000 lbs or vehicles with an MSRP exceeding certain thresholds. The credit phases out starting at income of $400K single / $800K Joint.
  • Creates a new Plug-In Electric Vehicle Credit for purchase of used qualifying vehicles.  Much lower income thresholds, lower credit amount, and the vehicle must be at least 2 years old.
  • Creates a new credit for certain electric bicycles, and reinstates the employer provided fringe benefit for bicycle commuting (with the max benefit raised to $52.50/mo from $20/mo)
  • Extends the enhanced Child Tax Credit ($3k per child age 6-17, $3600 per child age 5 or under), as created by the American Rescue Plan (ARPA) earlier in 2021, including monthly checks of half of the expected amount of the credit, through 2025 (previously expired in 2021).  However, instead of defaulting to including the monthly checks, the default will be to not have monthly checks sent and the taxpayer will have to opt in in some manner to be determined at a later date by the Treasury/IRS.  Income phaseouts continue to apply as defined in ARPA (phaseout for the original $2k is $200K Single / $400K Married, and for the enhanced $1600 it’s $75K Single / $150K Married.
  • Makes the Child Tax Credit permanently (until changed by future legislation) refundable.  This means the credit amount can exceed the taxpayer’s total tax liability for the year and the taxpayer will still get the full credit.  No longer reverts back to the pre-ARPA rules after 2025
  • Extends the $500 credit for “Other Dependents” through 2025.
  • Makes the Dependent Care Credit changes from APRA permanent.  That increased the maximum qualifying expenses to $8K for one child or $16K for two or more children.  The amount of the credit starts at 50% of qualifying expenses.  If income exceeds $125K, the credit percentage is reduced, until it drops to 20% at $400K.  It then completely phases out if income exceeds $500K.  Also makes permanent the income exclusion for employer provided Dependent Care Assistance (e.g. Dependent Care Flexible Spending Accounts) at the ARPA enhanced level of $10,500 per year (up from the $5k limit pre-ARPA).  Note that employers still need to adopt this change in order for employees to take advantage of it.
  • Creates a new credit for caregivers of 50% of qualified expenses up to a $4K maximum credit.  Begins to phase-out at $75K of income.  This is for people who care for those with long-term care needs in their own home.
  • Enhances the Earned Income Credit.
  • Creates a new credit for contributions to a Public University that provide infrastructure for research.  The credit, available through 2032, is 40% of the amount contributed to the qualifying project (lots of rules as to what qualifies).  Note: this is a credit, not a deduction, so you don’t have to itemize to take it.

American Rescue Plan Act (ARPA) of 2021

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With the latest covid relief / stimulus bill now signed into law, I wanted to give the usual summary of the key financial planning / tax-related elements that may impact clients. Another round of stimulus checks has gotten most of the press to date about the $1.9 trillion legislation, but there are quite a few provisions, including those stimulus checks, in here that are worth noting:

  • Direct Payments (Stimulus Checks) – $1400 per eligible individual, $2800 for joint filers, and $1400 per qualifying dependent (which include full-time students under 24 and adult dependents this time). The payment begins phasing out at $75k per individual filer and $150k per joint filer, and is completely phased out at $80k individual and $160k joint, regardless of the size of the payment (different that in previous rounds of stimulus). See the graphic from the Tax Foundation below for a visual depiction of the phaseouts. The IRS will use 2020 income if available, otherwise 2019 to determine the payments. These will be reconciled on 2021 tax forms so that anyone who should have received a payment based on 2021 income and didn’t, will get a credit for the missing amount. Anyone who received a payment and shouldn’t have based on 2021 income will not have to pay it back. Payments are set to start going out the weekend of 3/13/21.
  • Unemployment Benefits:
    • Extension to the first week of September of the additional $300/week of Federal unemployment benefits which is added on to existing state benefits.
    • New provision that exempts the first $10,200 per person of unemployment benefits from tax for 2020. Limited to those with AGI < $150k single or joint (all filers, no phaseouts). The IRS is expected to provide guidance in the coming weeks for those who already filed their 2020 returns and treated the unemployment benefits as taxable. Note that this is for 2020 only. It currently does not include 2021 benefits. The IRS has released guidance on how this should be reported for tax purposes for those who have not filed yet. Tax software will need to be updated over the next few weeks to reflect the change and make sure everything passes through to state returns correctly.
  • Child Tax Credit – formerly $2k per child under age 17, now raised to $3k per child for children age 6-17 and $3600 for those under age 6. Lower income phaseouts apply to the expanded credit through (starting at $150k married, 75k single and reducing the enhancement portion of the credit by $50 for each $1k of income over the threshold). The law also instructs the IRS to pay the Child Tax Credit periodically (monthly?) for the 2nd half of 2021, meaning additional periodic checks to be received by qualifying taxpayers. Keep an eye on this. While we don’t know yet how it will be implemented, if you start receiving checks for the credit through the year and you have withholding set to take the credit into account, then you’ll need to adjust withholding or you’ll wind up owing the credit back in April. When the IRS sets this up, they’re supposed to provide a website which will allow you to opt out. Keep in mind that the IRS hasn’t even opened some mail from mid-2020 yet, so they have a bit on their plate. A good article from Kiplinger in available with more details.
  • Dependent Care Credit – For 2021 only the credit will be worth up to 50% (was 35%) of eligible expenses up to $8k for one child or $16k for more than one (was $3k/$6k) with a sliding scale % based on income. It is reduced at income levels over $125k and reduced below the previous lower bound of 20% at income levels over $400k (i.e. this is a reduction in credit available at those levels vs. previous years).
  • Dependent Care Flexible Spending Accounts (DCFSA) – for 2021 only, you can contribute a max of $10,500 (instead of the usual $5k) toward a DCFSA. But, your employer’s plan has to enact this change and they are not forced to do so. They’d also have to allow mid-year changes in contribution level (which was authorized under the last covid bill). Note that because of the enhancement to the Dependent Care Credit (see above), and the fact that any contributions to a DCFSA reduce the amount of expenses that qualify for the Dependent Care Credit, many taxpayers (generally AGI< mid $100,000’s) would be better off foregoing a DCFSA and using the Dependent Care Credit instead. Again, just for 2021.
  • Affordable Care Act (ACA) – increases subsidies for plans purchased through the ACA exchanges. This includes the level of subsidy for a given income level and the eligibility for any subsidy for a given income level (now > 400% of the Federal poverty level). Total cost after subsidy, regardless of income cannot exceed 8.5% of income. Effective for 2021 and 2022. Also, big change, excess subsidies received for 2020 only will not need to be paid back. And, (even bigger!) if you have any unemployment benefits in 2021, you’re subsidy for 2021 only is 100% of the cost of the second highest Silver plan available to you, regardless of your actual income.
  • COBRA Subsidies – covers 100% (!!!) of COBRA premiums for eligible individuals who are unemployed (lost job or reduced hours, not voluntary termination), and their families, Effective from enactment through 9/30/2021.
  • Earned Income Tax Credit (EITC) – for 2021:
    • raises the maximum credit for those without children to ~$1500
    • makes 19-24 year old workers eligible if they are students
    • makes those over age 65 eligible
    • can use 2019 income to determine EITC instead of 2021.
  • Student Loan Forgiveness – will not be taxable for 2021-2025 (normally debt forgiveness is taxable as income). Note that the new law does not actually forgive any student loans.
  • Employee Retention Credit (ERC) – extended to 12/31/2021, adds new clauses that allow newly formed businesses post 2/15/20 to claim (which wouldn’t be able to claim the credit because they don’t have the required decline in revenue), and adds special benefits to “severely financially distressed employers” with revenue down 90%+ to the same quarter of 2019.
  • Paid Leave Credits – credits for employers that provide paid leave under certain situations (which is no longer mandated). For 4/1/21 – 9/30/21, eligible wages climb to $12k per employee (from $10k), includes vaccination leave as qualified, and increases the leave for self-employed individuals to 60 days (from 50).
  • Executive Compensation Limits – Businesses currently can’t deduct compensation > $1M for CEO, CFO, and the next three highest paid employees. This legislation increases that to the next eight highest paid employees starting in 2027.
  • $15B for new Economic Injury Disaster Loans (EIDL) grants and clarification that EIDL grants are non-taxable and the expenses the money is used to pay are still deductible.
  • $22B toward emergency rental assistance for individuals and families struggling to pay rent and utilities. Renters must meet several conditions to receive the assistance.
  • $10B toward assistance for homeowners struggling to pay their mortgage, utilities and other housing costs.
  • $86B toward rescuing multiple soon-to-fail-without-help union pension plans. The plans that will receive the money cover approximately 11 million people in various unionized trades.
  • $25B Restaurant Revitalization Fund to be administered by the SBA. These are non-taxable grants for qualified businesses.
  • $7B additional funding for Paycheck Protection Program (PPP), mostly under the same rules as before.
  • $350 Billion for state and local government support, which could create more state/local level tax changes or stimulus actions.
  • Various other spending allocations for K-12 schools, vaccines, testing, etc., that are beyond the scope of the financial planning discussions so I won’t dive into the details here. You can read the table of contents of the actual bill/law and dive into those areas if you’re interested. The non-tax provisions are mostly written in English rather than legalese/financialese.