The “One Big Beautiful Bill Act” and How it May Affect Your Personal Tax Planning

Love it, hate it, or ignore it, the One Big Beautiful Bill Act (or the “OBBBA“) is here to stay. At over 900 pages, this statute provides wide-ranging changes to our federal tax and spending policies.

It was no secret that there would be changes coming to the tax system this year. Many provisions in the prevailing tax code created under the 2017 Tax Cut and Jobs Act (the “TCJA“) were set to ‘sunset’ at the end of 2025. And until the conclusion of the recent presidential election, many speculated whether the anticipated changes would be in the form of allowing these tax breaks to expire or the creation of an entirely new tax bill. We now have the answer in the OBBBA. Our team has taken the time to read and digest what is changing, what is staying the same, and what opportunities may be available for our clients. As we realize that most people don’t speak “IRS,” we have added explanations for various keywords and acronyms throughout the article to provide more information. We are pleased to share the highlights of this bill with you below. (A summary table of the OBBBA changes is located at the end of this article.)

Federal Estate and Gift Tax Limits Permanently Increased

The OBBBA increased the Federal Estate and Gift Tax Exemption amount to $15 Million per person AND made the limit permanent. The new limit will begin in 2026.

The TCJA of 2017 temporarily increased the amount that people could give tax-free to others during their lifetime and at their death. This limit, known as the Federal Estate and Gift Tax Exemption, increased from $5 Million per person to $10 Million per person with a timeline to revert to the original amount of $5 Million (plus inflation) at the end of 2025. Many families, including those with small businesses, real estate, or farmland, were concerned about the impact that the lower exemption would have on their financial legacy. This change will give households more clarity around the future impact of estate and gift taxes on their legacy, allowing them to plan more proactively. Keep in mind that even when a law is described as ‘permanent’ it can be changed by future acts of Congress (as we have seen). In addition, it is important to note that if you live in a state that has an Estate, Gift, or Inheritance Tax, beware that the OBBBA only impacts the Federal Estate and Gift Exemption.

Current Federal Tax Rates Permanently Extended

The OBBBA has permanently extended the tax rate cuts from the 2017 TCJA. Before the bill was passed in July, these tax rate cuts were scheduled to expire at year-end. The income thresholds for each tax bracket will continue to be adjusted annually for inflation.

Increased Standard Deductions Now Permanent

The higher standard deduction limits from the TCJA were made permanent and increased under the OBBBA. Without this change, the higher Standard Deduction amounts would have reverted to the pre-TCJA limits in 2026, as estimated in the table below. Note that the additional standard deduction amounts available for seniors and blind individuals are still available.

*We adjusted the original 2017 standard deduction amounts for inflation through 2025 to estimate what the standard deduction might have reduced to if the TCJA had been allowed to sunset at year-end.

The New $6,000 “Senior Bonus”

The OBBBA introduced a new temporary bonus deduction available for older adults. Starting this tax year through 2028, each qualified taxpayer may take an additional bonus deduction of up to $6,000. This deduction is available to taxpayers whether or not they itemize deductions on their returns. To qualify, the taxpayer must be 65 or older before the end of the tax year and meet the following income limits based on their Modified Adjusted Gross Income (MAGI)*:

There has been some confusion around the “Senior Bonus” after the Social Security Administration emailed current beneficiaries regarding the new tax provisions benefiting older adults. While the president had initially pledged to eliminate taxes on Social Security benefits entirely, this did not come to fruition. The “Senior Bonus” is intended to temporarily reduce overall taxable income for many (but not all) older adults.

Temporary Increase to State and Local Tax (SALT) Deductibility

The cap on SALT deductions has increased temporarily from $10,000 to $40,000 for qualifying taxpayers starting in 2025 and expiring at the end of 2029. The SALT cap will revert to $10,000 for tax years beginning in 2030. The deduction increase is phased out for higher income earners as shown below:

The SALT deduction is a component of the Schedule A Itemized Deductions, which include items such as charitable contributions, qualified medical expenses (those above 7.5% of AGI), and qualified mortgage interest. For a taxpayer to benefit from itemizing their deductions, the sum of these items must be larger than the otherwise allowed standard deduction for their filing status. As standard deductions were significantly increased in 2018 (and now made permanent), fewer taxpayers itemize their deductions.

New Floor for Charitable Giving Deductions Starting in 2026

Taxpayers may now only include charitable donations above 0.5% of their Adjusted Gross Income (AGI) in their itemized deductions. This provision is unlikely to have a large impact on most donors. For example, a taxpayer with $250,000 in Adjusted Gross Income and annual charitable donations of $30,000 would only have their deductible amount reduced by $1,250 (0.005*250,000).

New Cap on Itemized Deductions for High Income Earners Starting in 2026

Beginning in 2026, high income earners will have a new cap on their itemized deductions. The OBBBA will cap the value of all itemized deductions at 35% of the taxpayer’s taxable income. This may affect some taxpayers in the highest 37% marginal tax bracket.

The new cap on itemized deductions may impact strategies for higher income earners who have utilized itemized deduction strategies (like “charitable bunching”) to manage their taxable income from year to year. Affected high income earners may want to consider bunching charitable contributions in 2025 prior to the new law taking effect. Charitable donation strategies like the Qualified Charitable Distribution from IRA accounts have gained popularity in recent years and will continue to be a good option for certain individuals (the IRA owner must be at least 70.5 years old) as it reduces taxable income dollar-for-dollar.

Reintroduced and Enhanced Partial Deduction for Charitable Contributions Beginning in 2026

Taxpayers who do not itemize may be able to take advantage of the new permanent Partial Deduction for Charitable Contributions beginning in 2026. Single taxpayers may deduct up to $1,000 of charitable contributions and Married Filing Jointly taxpayers may deduct up to $2,000. Contributions may not be made to Donor Advised Funds.

Child Tax Credit Now Permanent

The Child Tax Credit created under the Tax Cut and Jobs Act is now permanent and slightly increased from $2,000 to $2,200 per qualifying dependent.The income thresholds for qualifying households remain the same and are listed in the table below.

Changes to Child & Dependent Care Credit in 2026

The Child and Dependent Care Credit helps qualified households offset some of the costs of caring for their dependents (children under the age of 13 or dependents who cannot care for themselves) while they work. The maximum credit available increased from $5,000 to $7,500 for two or more qualifying dependents and from $2,500 to $5,000 for one qualifying dependent. The crediting rate (or the percentage of qualified expenses that can be applied to the tax credit) also increased from 35% to 50% with reductions based on household income. The calculation of a household’s crediting rate has been modified based on the following Adjusted Gross Income thresholds as shown below.

Other Changes Under the OBBBA

New Temporary Auto Interest Deduction

There is a new deduction available for the loan interest on the financing of certain new autos purchased between 2025 and 2028. The vehicles purchased must be new American-assembled cars. This deduction is available to taxpayers above-the-line, meaning that eligible taxpayers can deduct the expense whether they itemize or not. Qualified taxpayers may deduct up to $10,000 of annual interest. This deduction is subject to the following phaseout thresholds:

Energy Credit Phaseouts

Many of the renewable and alternative energy credits previously available will be phased out between 2025 and 2026.

Qualified Business Income (“QBI”) Deduction Now Permanent and Expanded

The QBI deduction for business owners of pass-through entities (partnerships, sole proprietorships, S corporations, and certain trusts and estates) has been made permanent and with enhanced provisions particularly for service businesses. These changes are in effect beginning in 2026 tax year.

New Thresholds for Alternative Minimum Tax in 2026

The Alternative Minimum Tax (AMT) computation has been made permanent with some changes to the calculation beginning in the 2026 tax year which may result in additional taxpayers subject to the tax.

New “Trump Account” for Minors

The OBBBA established a new type of tax-incentivized savings accounts for minors, which should be available in 2026. Here is a list of account features:

• Available to individuals under the age of 18
• The contribution limit is $5,000 per year and will be increased by inflation annually
• Contributions are not tax-deductible
• No distributions before age 18
• Qualified Distributions are subject to the preferential long-term capital gains tax rate on account gains. Qualified distributions include:
  • Higher education
  • First-time home purchase
  • Starting a small business
• Accounts may be invested in mutual funds or exchange traded funds

Trump Accounts Contribution Pilot Program

Children born after December 31, 2024 and before January 1, 2029 may be eligible to receive a $1,000 initial deposit in a Trump Account. The mechanism to fund these accounts has not yet been announced.

Expansion of 529 College Savings Plans

The OBBBA expanded the use of 529 College Savings Plans. 529 Plans may now be used to fund post-secondary credentialing programs like trade schools and certificate programs. The bill also increased the annual limit for and expanded the definition of K-12 expenses. Previously, 529 Plan owners were only permitted to withdraw up to $10,000 a year for qualified K-12 educational expenses. This limit is now increased to $20,000. Additionally, the definition of qualified K-12 expenses was enhanced to include curriculum materials, books, online education, standardized test fees, some homeschool expenses, educational therapies for students with disabilities, and some tutoring.

It is important to note that the State of Illinois does not consider K-12 expenses to be Qualified Expenses. Owners of Illinois 529 Plans (through Bright Start or Bright Directions, for example) who take distributions for K-12 expenses may be subject to the recapture of any amounts they previously took as Illinois income tax deductions.

Summary of Key Personal Tax Rate Changes Under the One Big Beautiful Bill Act of 2025

Notes & Glossary

Adjusted Gross Income (AGI) – Your total income minus specific deductions, but before itemized or standard deductions.

Modified Adjusted Gross Income (MAGI) – Your Adjusted Gross Income plus certain deductions added back, such as pre-tax IRA contributions, deductible student loan interest, non-taxable Social Security payments, and tuition and fee deductions.

The Tax Cut and Jobs Act (TCJA) – The 2017 federal tax reform legislation that temporarily reduced tax rates and increased standard deductions, among other changes.

The One Big Beautiful Bill Act (OBBBA) – The 2025 federal legislation that made many TCJA provisions permanent and introduced new tax changes.

State and Local Tax (SALT) Deduction – A federal tax deduction that allows taxpayers to deduct state income taxes and property taxes from their federal taxable income, subject to caps.

Disclosures

The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Sterling to be reliable, and Sterling has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute tax advice, investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Sterling accepts no responsibility for loss arising from the use of the information contained herein.

Risks: Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. Diversification neither assures a profit nor guarantees against loss in a declining market.