On July 4, 2025, the President signed into law the One Big Beautiful Bill Act (“OBBBA”). Totaling just under 900 pages, the OBBBA extends and modifies several expiring provisions from the 2017 Tax Cuts and Jobs Act (“TCJA”), and also introduces new provisions impacting taxation of individuals and businesses. The key changes, described in more detail below, include the following:
- Changes for individuals and families:
- Permanent $15 million exemption for estate, gift, and generation-skipping transfer taxes
- Permanent income tax brackets and rates for individuals, trusts, and estates
- New cap on itemized deductions
- State and local tax (“SALT”) cap increase to $40,000
- Charitable giving changes:
- Permanent 60% of adjusted gross income limitation on cash gifts to qualifying charities
- Reinstated and expanded charitable deduction for non-itemizing taxpayers
- New floors on itemized charitable deductions by individuals and corporations
- Other significant changes:
- Corporate tax rate permanently set at 21%
- Permanent qualified business income deduction
- Changes to Qualified Small Business Stock gain exclusion
- Extension of 100% bonus depreciation deduction
Significant Changes for Individuals and Families
Estate, Gift, and Generation-Skipping Transfer (“GST”) Tax Exemptions
The OBBBA permanently increases the gift, estate, and GST tax exemptions to $15 million per individual ($30 million per married couple) beginning January 1, 2026, to be adjusted annually in subsequent years for inflation. These exemptions—$ 13.99 million per individual in 2025—were scheduled to revert to approximately $7 million per individual in 2026.
This change provides greater certainty about the future, and its permanence will avoid the need to accelerate the use of the exemptions to ensure that they are not lost. Moreover, these ever-higher exemption levels ensure that the federal estate tax impacts only the wealthiest of families.
Individual Income Tax: Rates, Brackets, and Standard Deduction
The OBBBA makes permanent the individual tax brackets, as well as brackets for estates and trusts enacted by the TCJA, that were set to expire at the end of 2025. The highest bracket is taxed at 37%. The standard deduction is also permanently extended and increased to $15,750 per individual and $31,500 per married couple beginning in 2025, again indexed to inflation annually.
Individual Income Tax: Cap on Itemized Deductions
The OBBBA permanently repeals the Pease limitation and instead imposes a cap on all itemized deductions only for taxpayers in the highest tax bracket (37%). For such high-income taxpayers, the value of itemized deductions is effectively reduced to 35 cents on the dollar, rather than 37 cents on the dollar, effective January 1, 2026. The Pease limitation, which was previously suspended by the TCJA on a temporary basis, reduced itemized deductions by 3% of modified adjusted gross income above a certain threshold.
State and Local Tax (“SALT”) Deduction Cap Increase
The OBBBA increases the cap on deductions for state and local taxes to $40,000 per household ($20,000 for a married individual filing separately), effective for 2025 and increasing to $40,400 (and $20,200) in 2026, with 1% annual increases in each of 2027, 2028, and 2029. Beginning in 2030, the SALT cap will revert to the original $10,000 cap absent new legislation.
The increased SALT deduction will phase out for taxpayers with modified adjusted gross incomes over $500,000 ($250,000 for a married individual filing separately). The threshold will increase to $505,000 in 2026, with 1% annual increases in each of 2027, 2028, and 2029. For those over the threshold, the available SALT deduction will be reduced by 30% of the amount exceeding the threshold, but not below the original $10,000 cap ($5,000 for a married individual filing separately).
Pass-Through Entity Taxes
The OBBBA also contains provisions maintaining the benefit of state pass-through entity taxes (“PTETs”) as a potential workaround to avoid the SALT cap limitation. Prior versions of the bill would have restricted certain PTET benefits. A state PTET allows pass-through entities (such as partnerships, S-corporations, and sole proprietorships) to elect to pay state income tax at the entity level rather than at the individual owner level, allowing the entity to deduct the state tax as a business expense on its federal return. The PTET workaround became popular after the TCJA imposed the original $10,000 SALT cap.
Temporary Personal Exemption for Seniors
The OBBBA makes permanent the TCJA’s temporary elimination of personal exemptions. However, the OBBBA includes a temporary $6,000 deduction for individuals aged 65 and older, subject to a phaseout for individuals with a modified adjusted gross income of more than $75,000 ($150,000 for married couples).
529 Plans – Expanded Flexibility
The OBBBA expands permitted uses of funds in 529 college savings plans for students in grades K-12 by allowing $20,000 per year to be used for curriculum materials, books, online education resources, tutoring, educational therapies for students with disabilities, as well as homeschool expenses such as educational software and dual enrollment program fees, effective for distributions made after July 4, 2025. Under prior law, up to $10,000 per year could be paid for tuition for grades K-12.
Charitable Giving Changes
The OBBBA makes mixed changes to the tax laws applicable to charitable gifts, with certain provisions enhancing the income tax benefits generated by charitable giving, and others limiting them. The key provisions, which apply to taxable years beginning after December 31, 2025, are as follows:
Charitable Giving Incentives
- Increased Limit on Cash Gifts. The OBBBA makes permanent the 60% of adjusted gross income (“AGI”) charitable deduction limit on cash gifts to certain qualifying charities by individual donors who itemize deductions (up from 50% of AGI). The TCJA introduced this change on a temporary basis.
- Charitable Deduction for Non-Itemizers. The OBBBA reinstates and expands a charitable deduction for individual donors who take the standard deduction. Non-itemizers may claim a charitable deduction of up to $1,000 annually ($2,000 if married filing jointly) for cash gifts to certain qualifying charities. Gifts to donor advised funds are not eligible.
Limitations on Charitable Giving
- Cap on Itemized Deductions. As noted above, the OBBBA imposes a new cap on itemized deductions, including the charitable deduction, that reduces the value of itemized deductions for high-income earners. High-income donors who are currently considering sizable charitable gifts may wish to make such gifts in 2025 before the provision goes into effect.
- Floor on Charitable Deductions – Individual Donors. Individual donors who itemize deductions will now be permitted to deduct charitable gifts only to the extent they exceed 0.5% of the donors’ AGI. Donors who tend to make smaller charitable gifts over several years may wish to consider “bunching” the gifts into certain tax years to mitigate the impact of this rule.
- Floor on Charitable Deductions – Corporate Donors. Corporate donors will similarly be permitted to deduct charitable gifts only to the extent they exceed 1% of the corporations’ taxable income.
Notably, the OBBBA did not include certain controversial provisions impacting philanthropy that appeared in an earlier House-passed version of the bill:
- Provisions that would have increased the net investment income tax paid by private foundations, and the tax rate therefore remains at 1.39%.
- Provisions that would have provided the Secretary of Treasury with broad discretion to suspend the tax-exempt status of organizations it deemed to be terrorist supporting organizations (referred to as the “Nonprofit Killer” bill).
Other Significant Changes
Corporate Income Tax Rate
The OBBBA maintains and makes permanent the 21% income tax rate on corporations.
Qualified Business Income Deduction (“QBI”)
The OBBBA makes permanent the 20% deduction for IRC Sec. 199A QBI from pass-through entities (such as partnerships, S corporations, and sole proprietorships). Beginning in 2026, the phase-in and phase-out ranges reducing or eliminating the deduction for specified trades, services, or business will be expanded to $150,000 for joint filers and $75,000 for single filers. The OBBBA also adds a flat minimum deduction of $400 for taxpayers with at least $1,000 of QBI who are active in the business creating the deduction, beginning in 2025 and indexed to inflation in each case.
Qualified Small Business Stock
For qualified small business stock (“QSBS”) acquired after July 4, 2025, the OBBBA implements a tiered gain exclusion of 50% of gain from the sale of QSBS held for at least 3 years, 75% for QSBS held for at least 4 years, and 100% for QSBS held for at least 5 years. Also, for QSBS acquired after July 4, 2025, the lifetime cap for the QSBS exclusion increases to $15 million per issuer, indexed to inflation annually beginning in 2027. In addition, the asset threshold for a company to issue QSBS is increased from $50 million to $75 million. Prior law excluded from gross income for most noncorporate taxpayers a range of 50% to 100% of gain from the sale of QSBS, subject to certain limitations and a 5-year holding period.
100% Bonus Depreciation Deduction Extended
The OBBBA restores the 100% bonus depreciation deduction retroactively for most qualifying new and used business assets (such as equipment, machinery and certain vehicles) placed in service on or after January 19, 2025, subject to certain requirements and limitations. It also extends the bonus depreciation deduction to a new category—qualified production property—but on a temporary basis and again subject to certain requirements and limitations. Under prior law, the bonus depreciation deduction had been phased down to 40% in 2025.
Full Expensing of Research and Development (“R&D”) Costs Made Permanent
The OBBBA repeals the prior rule that required businesses to capitalize and amortize R&D expenses over 5 years for domestic R&D and 15 years for foreign R&D. Effective January 1, 2025, businesses are permitted to fully deduct certain domestic R&D expenses in the year that they occur.
Interest Expense Deduction Expanded
The OBBBA also enhances the deductibility of allowable business interest expenses by raising the cap on the amount of interest that a business can deduct. The calculation is complex but is generally expected to be favorable.
If you have questions about how these changes might affect your estate plan, philanthropy, or financial plans, please contact a member of your Choate Wealth team.