One Big Beautiful Bill: What the Tax Changes Mean for You – Tom Wheelwright and Andrew Lautz

Tax Law Changes for 2025 & 2026: A Deep Dive

Key Concepts:

• One Big Beautiful Bill (OB3): Legislation enacted July 4th, 2025, with retroactive provisions to January 1st, 2025, impacting various tax deductions and credits.
• State and Local Tax (SALT) Deduction: Deduction for state and local taxes, capped at $10,000 (prior to OB3) and increased to $40,000 for 2025, with income-based phase-out.
• Bonus Depreciation: Allows businesses to immediately expense a percentage of qualifying property. Phased down prior to OB3, now restored to 100% retroactive to January 20th, 2025.
• Section 179 Deduction: Allows businesses to expense the full purchase price of qualifying property up to a certain limit. Increased from $1.25 million to $2.5 million with a higher phase-out threshold.
• Research & Development (R&D) Expenses: Tax treatment changed requiring amortization over 5 years, now reverted to full and immediate expensing.
• Qualified Overtime & Tips Deduction: New deduction for qualified overtime pay and tips for eligible workers, with complex eligibility requirements and reporting challenges.
• Specified Service Trade or Business (SSTB): A business category impacting eligibility for certain deductions, particularly related to tips.
• IRS Modernization: Ongoing efforts to update IRS technology and improve customer service, facing challenges due to funding cuts and staffing shortages.

I. Introduction & Overview of Tax Law Changes

Tax season is underway with significant changes stemming from the “One Big Beautiful Bill” (OB3), many of which are retroactive to January 1st, 2025, and some to January 20th, 2025. The discussion focuses on what taxpayers, particularly entrepreneurs and investors, need to be aware of during tax preparation, the impact of IRS staffing challenges, and upcoming changes in 2026. Andrew LZ, Director of Tax Policy at the Bipartisan Policy Center (BPC), provides insights into these changes. BPC is a leading bipartisan think tank working to simplify the US tax system.

II. Changes for 2025 Tax Returns

OB3 includes several key changes impacting 2025 tax returns:

• State and Local Tax (SALT) Deduction: The SALT deduction cap has been raised to $40,000, but this is subject to a phase-out. The $40,000 cap begins to phase down for taxpayers with adjusted gross income (AGI) exceeding $500,000, returning to $10,000 at an AGI of $600,000. This creates a “marriage penalty” as the $40,000 cap applies per return, not per individual.
• Business Tax Changes:
  • R&D Expenses: The requirement to amortize R&D expenses over 5 years has been reversed, returning to full and immediate expensing.
  • Bonus Depreciation: 100% bonus depreciation for machinery and equipment has been restored, retroactive to January 20th, 2025 (not January 1st). Investments made between January 1st and January 20th require careful consideration of the rules.
  • Section 179 Deduction: Increased from $1.25 million to $2.5 million, with the phase-out threshold raised from $3.1 million to $4 million. For purchases between January 1st and January 20th, utilizing Section 179 may be more advantageous than bonus depreciation.
• Individual Tax Changes:
  • Standard Deduction: Increased to $15,750 for single filers and $31,500 for married filing jointly.
  • Child Tax Credit: Increased to $2,200 per child, phasing out for single taxpayers with income exceeding $200,000 and married filing jointly with income exceeding $400,000.

III. Changes for 2026 Tax Returns & Beyond

Looking ahead to 2026, several changes are scheduled to take effect:

• Charitable Deduction Floor: A new floor on charitable deductions is introduced. For itemizers, the first 0.5% of AGI is ineligible for deduction. For C corporations, the first 1% of taxable income is ineligible.
• Gambling Losses: The ability to deduct gambling losses up to the amount of winnings is limited. Losses are now capped at 90% of winnings, potentially resulting in taxes owed even with net gambling losses.

IV. IRS Challenges & Filing Season Outlook

The IRS is facing significant challenges due to substantial staff reductions (a 25% loss as of May 2024), leadership turnover (seven IRS commissioners in 2024, five acting), and funding cuts. This poses a risk to a smooth filing season.

• Potential Delays: While electronic filing should be relatively straightforward, taxpayers claiming new benefits, needing assistance, or dealing with errors may experience longer processing times and difficulty reaching the IRS.
• Digital Filing Recommendation: Taxpayers are advised to file digitally and request refunds via direct deposit to avoid potential delays associated with paper filings.
• IRS Modernization: Ongoing efforts to modernize IRS systems are hampered by funding cuts, but remain a long-term goal.
• Regulatory Input: Taxpayers can influence the implementation of new tax provisions by providing input during the regulatory process.

V. Qualified Overtime & Tips Deduction – A Complex Area

The new deduction for qualified overtime and tips is particularly complex, with numerous restrictions related to the Fair Labor Standards Act (FLSA), Railway Labor Act, and specific employment types. The IRS is still developing reporting guidelines for employers, initially encouraging but not requiring reporting for the 2025 filing season. Employers are advised to consult with their accountants and legal counsel.

VI. Bipartisan Cooperation & Future Outlook

Despite partisan divisions, there is potential for bipartisan cooperation on tax administration reform and issues like digital asset taxation. The IRS modernization efforts and potential reforms to address issues like the SALT deduction and gambling loss limitations offer opportunities for progress.

VII. Actionable Recommendations for Taxpayers

• Consult a Tax Professional: Seek guidance from a qualified accountant or tax preparer.
• Monitor IRS.gov: Stay informed about updates and guidance from the IRS.
• Engage in the Regulatory Process: Provide input on proposed regulations.
• File Digitally: Opt for electronic filing and direct deposit of refunds.

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