OBBB Tax Changes Explained: No Tax on Tips, Bigger Credits, and More

The One Big Beautiful Bill, Enacted July 4, 2025. In 2025, the Big Beautiful Tax Bill ushered in numerous changes that affect individuals, small business owners, and investors. This post looks at some of the bill's biggest changes and explains how they'll affect your tax filings and liability. Facing a tax problem? Use TaxCure to find a licensed local professional today.

Key takeaways

• OBBB – tax reform that starts in the 2025 tax year (with some changes retroactive to 2022), impacting income tax returns filed in 2026.
• Major reforms for individuals – up to a $25,000 deduction on tip income, a $12,500 deduction against overtime income, and a $6000 deduction for seniors.
• Changes for small business owners – new 1099 reporting thresholds, 100% bonus depreciation made permanent, and expensing for R&D. 
• Modifications for investors – benefits for investments in Opportunity Zones made permanent and expanded eligibility for the capital gains exclusion on the disposition of QSBS.
• Tips for taxpayers – work with a tax professional to ensure you get the most benefit from the new tax act; keep records in case of an audit.

Major OBBB Changes for Individual Taxpayers

The OBBB made several changes for individual taxpayers. Some of these changes affect how business owners must report income – for example, overtime now needs to be broken out on W-2 forms, and tips must be shown on 1099-NEC forms. However, the tax savings affect individuals. Here's a look at the major changes for individual taxpayers in the wake of the OBBB.

No Tax on Tips (§70201)

No tax on tips was a hugely popular campaign slogan, and it became reality with the passage of the OBBB. The OBBB created this provision for tax years 2025 through 2028. Qualifying taxpayers may claim a deduction of up to $25,000 against tip income. The deduction starts phasing out for single filers with $150,000 in modified adjusted gross income (MAGI) and for joint filers at $300,000, and it phases out completely at $400,000 MAGI for single filers and $550,000 for married filers. 

The tax deduction on tips means that you don't pay income tax, but you still face FICA taxes. For instance, if you claim a deduction for $20,000 and that income is in the 12% tax bracket, you save $2400. You can claim the deduction if you're employed or self-employed, but the tips must be reported on a W-2 or 1099.

Qualifying workers include bartenders, chefs, servers, dishwashers, dancers, musicians, DJs, maids, landscaping and groundskeepers, as well as professionals in similar industries. However, the deduction also extends to electricians, plumbers, HVAC technicians, locksmiths, photographers, nannies, babysitters, massage therapists, hairstylists, and tattoo artists.

No Tax on Overtime

The OBBB also brought taxpayers no tax on overtime, another popular campaign promise with widespread populist support. This provision lets employees claim up to a $12,500 deduction ($25,000 for married taxpayers who file jointly) against overtime income. The deduction only applies to the extra half in the time-and-a-half rate, and it provides a break from income tax, not FICA taxes. 

To explain, imagine a worker's usual rate is $20 per hour, and they earn $30 for one hour of overtime pay. They must pay FICA taxes on the full $30, but they'll only face income tax on $20. If they earn $6000 in overtime pay, they'll get a deduction for one-third of that amount ($2000).

Increased Child Tax Credit

The child tax credit increased to $2200 per child starting in 2025, with inflation-based increases scheduled for future years. To qualify, taxpayers and their children must have a valid Social Security Number – if filing jointly, only one spouse needs an SSN. 

You must have at least $2500 in income to claim this credit, and it starts to phase out once your income hits $200,000 ($400,000 for married couples filing jointly). Up to $1700 of the credit may be refundable, while amounts over that threshold can only be used to reduce your tax liability.

Senior Tax Exemption

The senior tax exemption in the OBBB gives individual taxpayers age 65 and over a $6000 deduction ($12,000 for taxpayers over 65 who file jointly). Although this provision is often referred to as no tax on Social Security, that's not exactly how the deduction works – in fact, all qualifying taxpayers age 65 and older can claim the deduction, even if they're not receiving Social Security income. 

Analysts expect the deduction to allow close to 90% of senior taxpayers to avoid paying taxes on their Social Security income. However, Social Security is still taxed the same way it has been for decades. Taxpayers are taxed based on their adjusted gross income, nontaxable interest, and half of their Social Security benefits. 

In past years, that meant that a single filer earning over $25,000 would have 50% of their benefits taxed, while those with $34,000 in income would have about 85% of their SS income taxed. The new deduction means that single taxpayers with up to $75,000 in income are unlikely to face any tax on their Social Security. 

The deduction starts in tax year 2025 and expires in tax year 2029, unless extended by new tax legislation. It starts to phase out when a taxpayer's income reaches $75,000 for single filers or $150,000 for joint filers. 

Car Loan Interest Deduction

Qualifying taxpayers can claim a deduction of up to $10,000 for interest paid on new car loans. The deduction phases out for single taxpayers at $100,000 MAGI and for joint filers at $200,000 MAGI. The vehicle must be for personal use – this is not a business tax deduction.

Remittance Transfer Tax

This new excise tax requires remittance transfer services (such as Western Union) to collect a 1% tax on certain international money transfers. The tax applies to transfers made with cash, money orders, cashier's checks, or similar instruments.

Changes to Itemized Deductions

The OBBB also made a few changes to itemized deductions. 

• Increase in the cap on state and local tax (SALT) deductions from $10,000 to $40,000, with phaseouts starting at $500,000 in income.
• Mortgage interest deduction permanently limited to interest on the first $750,000 of a mortgage; also made deductions for mortgage interest permanent starting in tax year 2026.
• Limits deductions for charitable donations to the amount that exceeds 0.5% of your AGI. 
• Cap of 35% of AGI on itemized deductions for taxpayers in the 37% bracket.

The OBBB also made several itemized deductions permanently unavailable, including unreimbursed employee expenses, tax preparation fees, investment expenses, and personal casualty and theft losses. This won't feel like a change to taxpayers, as these deductions have been suspended since 2017. 

How the OBBB Affects Business Taxes

Business owners must be aware of the rules that affect how they report tip and overtime income, but the OBBB also created several changes that affect information return filing requirements, R&D expenses, and asset depreciation.

1099 Reporting Thresholds

Prior to the OBBB, payers needed to issue 1099-NECs or 1099-MISCs when they paid more than $600 to a worker – the OBBB increased the threshold for these 1099 forms to $2000 for tax year 2026 and indexed the threshold to inflation for future years. The OBBB also changed the threshold for 1099-Ks issued by payers to 200+ transactions or $20,000 in payments.

R&D Expensing

Thanks to the OBBB, businesses may now expense domestic research and development (R&D) costs in the year they incur the expense. Since the Tax Cuts and Jobs Act (TCJA) of 2017, businesses have been amortizing these costs over a 5-year period. Businesses that amortized R&D costs on returns from 2022 to 2024 have three to four options:

• Continue to amortize the costs as planned over the next few tax years.
• Taking the remaining amortization and write it off over tax years 2025 and 2026.
• Claim all of the remaining amortization in 2025.
• Only available for small businesses (less than $31 million in average annual receipts over the last three years) – amend returns from 2022 to 2024 to expense R&D costs retroactively, instead of amortizing them. 

The change only applies to domestic R&D. You still must amortize foreign R&D over a 15-year period.

Bonus Depreciation

The OBBB made bonus depreciation permanent. This rule allows businesses to claim 100% depreciation on qualifying capital costs, which include most property with a recovery period of 20 years or less and capital improvements. Bonus depreciation offers several benefits over Section 179 – namely, there's no annual limit on bonus depreciation, and businesses can use bonus depreciation to generate a loss.

OBBB and Investor Taxes

Smart investments require strong knowledge of the tax code, and the OBBB brought in a few changes to help investors. Here are two of the most significant ones:

Qualified Small Business Stock

Taxpayers can now enjoy more relaxed terms when selling qualified small business stock (QSBS). For decades, individuals and trusts have been able to exclude qualifying capital gains from selling QSBS from their taxable income. To qualify, the stock must have been received at issuance for the exchange of nonstock property or as compensation for services. 

The OBBB created several changes:

• The stock only needs to be held for at least three years (previously, it was five).
• Corporations with gross asset value of up to $75 million can issue QSBS (previously, it was $50 million). 
• The maximum capital gain exclusion for a single issuer is now the greater of $15 million or 10 times the adjusted stock basis (previously, it was $10 million).

Opportunity Zone Program Made Permanent

The OBBB made the opportunity zone program, created with the 2017 TCJA, permanent. The OZ program lets investors avoid capital gains tax on qualifying investments into distressed communities. The new tax act brought the following changes to the now permanent qualified opportunity funds (QOF):

• Standard QOF investors receive a 10% basis step-up after five years.
• Rural QOF investors receive a 30% basis step-up after five years.
• Rural investors also get a reduced substantial improvement threshold of 50%, instead of 100% – that means they only need to invest half of the property's basis into repairs to qualify. 

The OBBB also defined rural zones as any area that is not a city or town with a population over 50,000 or an area contiguous with a city or town with over 50,000 residents. 

What Didn’t Change

Although the OBBB created numerous changes to the tax code, several elements remain the same, including:

• Federal income tax brackets – unchanged, but of course, taxpayers will see the usual annual changes due to inflation. 
• Standard deductions – the OBBB made the TCJA increase to the standard deduction permanent, so taxpayers will continue to use the same standard deductions they've used for the last several years, with annual increases for inflation.
• Estate tax exclusion – the temporary increase in the estate tax exemption created by the TCJA was made permanent by the OBBB. For tax year 2026, the exemption is $15 million per individual and indexed to inflation for future tax years.

• Payroll taxes – there were no changes to the payroll tax system, and tips and overtime continue to be subject to payroll taxes. 

Potential Areas for Confusion 

Anytime new tax legislation is passed, it creates the potential for confusion. Here are some of the areas where analysts expect to see mistakes on returns or other problems:

• Tips for the self-employed: The OBBB does allow many self-employed taxpayers to claim tips, but only if they're reported on a 1099 or another specified statement. The tips must be given voluntarily and not required for services.
• Confusion with tips for employers: For employers, the requirements around reporting tip income have not changed. Employers must still report tip income on their employees' paystubs and W-2s, and just as in previous years, employers can still claim a credit for the employer share of FICA paid on tip income.
• Senior exemption: Due to the vast confusion about the possibility of no tax on Social Security, some seniors may think that they don't have a filing requirement. If Social Security is your only income, you generally don't need to file. However, if you have other income, you still need to take half of your Social Security into account when determining if you have a filing requirement due to exceeding the standard deduction. 

These are just a few of the potential areas for confusion – there are many more, especially when you get into investor tax returns that include QSBS or Opportunity Funds. Taxpayers should be aware of the risks, and they should maintain well-organized records in case of an audit. 

Get Ready for the OBBB

The OBBB created tax changes that affect workers, families, small business owners, investors, and most other taxpayers. To ensure you're compliant with the changes, consider consulting with a tax professional – especially if you're a high-income earner, an investor, or a small business owner. 

Are you struggling with a tax problem now? Then, use TaxCure to find experienced help today – TaxCure is designed to help you find and assess enrolled agents, CPAs, and tax attorneys who have the exact experience you need.. 

FAQs

When do the new tax law changes officially take effect?

Most of the changes take effect starting in tax year 2025 – that includes no tax on tips, no tax on overtime, and the new senior tax deduction. Others (like the new reporting thresholds for 1099s) aren't slated until tax year 2026. But some changes – namely, the R&D expensing rules for small businesses are retroactive to 2022. 

Are gig workers eligible for the tip or overtime tax exemption?

Yes, if the tips are reported on a 1099. For instance, if you work for a company like DoorDash or Uber, your 1099 should break down which of your compensation was payment and which is tips. Then, you don't have to pay tax on the tips, but you will still face self-employment tax on those amounts. 

How much is the new Child Tax Credit for 2025 income?

For tax year 2025, the child tax credit is $2200, with up to $1700 being refundable. This is an increase from tax year 2024, when the credit was $2000 and up to $1700 was refundable.

What is the 1% remittance tax? Who does it affect?

The 1% remittance tax is paid by people who send cash (including money orders and cashier's checks) transfers to other countries. However, the tax also affects transfer services that must collect and pay the tax. The IRS already anticipates confusion and plans to offer penalty relief for businesses that make late deposits when the law is first implemented.

Should businesses amend past returns for R&D expensing changes?

Consult with your tax advisor to see if amending your 2022 to 2024 returns to expense R&D investments makes sense for your business. For most businesses, that will lower tax liability retroactively for those years. Note that you may need to meet the three-year timeline for claiming refunds.