Will You Qualify for New Income Tax Deductions?
The OBBBA introduces several new above-the-line deductions, which directly reduce adjusted gross income. However, high earners will not be able to claim all of them. Read below to find out if you qualify:
From 2025 to 2028, those aged 65 and over can take advantage of a new $6,000 per individual deduction – though it will mostly benefit middle-and lower-income seniors. Income phaseouts begin at $75,000 Modified Adjusted Gross Income (MAGI) for individuals and $150,000 for married couples. The deduction is fully phased out at $175,000 for individuals and $250,000 for married couples (MAGI). Do not confuse the new senior deduction with taxation of social security benefits. The taxation of social security benefits has not changed, despite various media outlets reporting so.
For taxpayers purchasing new vehicles assembled within the United States, a new above-the-line deduction for auto loan interest is available, capped at $10,000 annually. This is a temporary provision, applicable to purchases made between 2025 and 2028, and it begins to phase out at $100,000 for individuals and $200,000 for married couples (MAGI). The new auto loan interest deduction phases out completely at $150,000 for individuals and $250,000 for married couples (MAGI).
Good news for taxpayers who do not itemize deductions! Starting in 2026, non-itemizers can deduct charitable donations made in cash. This permanent above-the-line deduction is limited to $1,000 for individuals and $2,000 for married couples.
New Limitations on Charitable Deductions
Conversely, the OBBBA also implements new limitations on charitable deductions, effective next year (2026).
All taxpayers who itemize will be subject to a new adjusted gross income (AGI) floor of 0.5%. In other words, charitable deductions will only be recognized if they exceed 0.5% of the taxpayer’s income. This is a permanent change.
Additionally, taxpayers in the highest federal bracket of 37% will be subject to a permanent 35% cap on charitable deductions. High earners should accelerate large charitable donations to the current tax year, if feasible, or strategically bunch charitable contributions into specific tax years going forward.
Expansion of Child-Related Tax Benefits
The OBBBA introduced and reinforced income tax benefits for families with children.
First, the new law created a tax-deferred investment account for U.S. citizen babies born between 2025 and 2028, known as a “Trump Account.” Each account will receive a one-time $1,000 government contribution and will track a U.S. stock index. Families can make additional private contributions of up to $5,000 annually. These accounts will operate like a custodial trust until the child turns 18, at which point they will function similarly to a Traditional IRA. Withdrawals will be taxed as ordinary income, but qualified expenses – such as higher education or a first-time home purchase – will be exempt from penalties. Final details are still pending, and the IRS is expected to issue further guidance. Custodians will likely require several months to a year before making the accounts available.
Families will be able to take advantage of greater flexibility for 529 plans. Beginning in 2026, families will be able to withdraw up to $20,000 annually from a 529 for qualified K-12 expenses, an increase from the previous $10,000 limit. The definition of “qualified expenses” has expanded as of July 5, 2025, to include certain non-tuition expenses for K-12 schools, religious schools, trade schools, and professional credentials.
Additionally, the Child Tax Credit has increased from $2,000 to $2,200 per child for 2025 and will be indexed for inflation annually thereafter. The refundable portion of the credit is $1,700.
Modified OZ Fund Program
A new, permanent Opportunity Zone (OZ) fund program is slated to commence in 2027. However, the gain recognition deadline for the existing OZ 1.0 program is year-end 2026. This means that deferred gains invested in existing OZ funds must be recognized by December 31, 2026.
Starting in 2027, states will have the power to create new maps of designated OZ communities every 10 years. Stricter rules will apply for which areas can qualify, and new reporting requirements will kick in to provide greater transparency. For gains invested into new OZ funds (starting January 1, 2027), the original deferred capital gain will be recognized after 5 years, at which point there will be a 10% basis step-up. There will be enhanced benefits for rural funds, including a 30% basis step-up in year 5. Separately, any growth on the OZ fund investment itself can be tax-free if held for at least 10 years – applied when the investment is sold.
Taxpayers with newly generated capital gains in 2025 or 2026 should consult with their CPA about other methods of deferring gains, such as installment sales or Charitable Remainder Trusts. New capital gains generated in late 2026 could be invested into OZ funds in early 2027 due to the 180-day reinvestment window.
Please reach out to your Wealth Manager with questions about new income tax benefits from the OBBBA.
Weekly Commentary
Wealth Planning Commentary – July 14, 2025
Mallon FitzPatrick
Will You Qualify for New Income Tax Deductions?
The OBBBA introduces several new above-the-line deductions, which directly reduce adjusted gross income. However, high earners will not be able to claim all of them. Read below to find out if you qualify:
From 2025 to 2028, those aged 65 and over can take advantage of a new $6,000 per individual deduction – though it will mostly benefit middle-and lower-income seniors. Income phaseouts begin at $75,000 Modified Adjusted Gross Income (MAGI) for individuals and $150,000 for married couples. The deduction is fully phased out at $175,000 for individuals and $250,000 for married couples (MAGI). Do not confuse the new senior deduction with taxation of social security benefits. The taxation of social security benefits has not changed, despite various media outlets reporting so.
For taxpayers purchasing new vehicles assembled within the United States, a new above-the-line deduction for auto loan interest is available, capped at $10,000 annually. This is a temporary provision, applicable to purchases made between 2025 and 2028, and it begins to phase out at $100,000 for individuals and $200,000 for married couples (MAGI). The new auto loan interest deduction phases out completely at $150,000 for individuals and $250,000 for married couples (MAGI).
Good news for taxpayers who do not itemize deductions! Starting in 2026, non-itemizers can deduct charitable donations made in cash. This permanent above-the-line deduction is limited to $1,000 for individuals and $2,000 for married couples.
New Limitations on Charitable Deductions
Conversely, the OBBBA also implements new limitations on charitable deductions, effective next year (2026).
All taxpayers who itemize will be subject to a new adjusted gross income (AGI) floor of 0.5%. In other words, charitable deductions will only be recognized if they exceed 0.5% of the taxpayer’s income. This is a permanent change.
Additionally, taxpayers in the highest federal bracket of 37% will be subject to a permanent 35% cap on charitable deductions. High earners should accelerate large charitable donations to the current tax year, if feasible, or strategically bunch charitable contributions into specific tax years going forward.
Expansion of Child-Related Tax Benefits
The OBBBA introduced and reinforced income tax benefits for families with children.
First, the new law created a tax-deferred investment account for U.S. citizen babies born between 2025 and 2028, known as a “Trump Account.” Each account will receive a one-time $1,000 government contribution and will track a U.S. stock index. Families can make additional private contributions of up to $5,000 annually. These accounts will operate like a custodial trust until the child turns 18, at which point they will function similarly to a Traditional IRA. Withdrawals will be taxed as ordinary income, but qualified expenses – such as higher education or a first-time home purchase – will be exempt from penalties. Final details are still pending, and the IRS is expected to issue further guidance. Custodians will likely require several months to a year before making the accounts available.
Families will be able to take advantage of greater flexibility for 529 plans. Beginning in 2026, families will be able to withdraw up to $20,000 annually from a 529 for qualified K-12 expenses, an increase from the previous $10,000 limit. The definition of “qualified expenses” has expanded as of July 5, 2025, to include certain non-tuition expenses for K-12 schools, religious schools, trade schools, and professional credentials.
Additionally, the Child Tax Credit has increased from $2,000 to $2,200 per child for 2025 and will be indexed for inflation annually thereafter. The refundable portion of the credit is $1,700.
Modified OZ Fund Program
A new, permanent Opportunity Zone (OZ) fund program is slated to commence in 2027. However, the gain recognition deadline for the existing OZ 1.0 program is year-end 2026. This means that deferred gains invested in existing OZ funds must be recognized by December 31, 2026.
Starting in 2027, states will have the power to create new maps of designated OZ communities every 10 years. Stricter rules will apply for which areas can qualify, and new reporting requirements will kick in to provide greater transparency. For gains invested into new OZ funds (starting January 1, 2027), the original deferred capital gain will be recognized after 5 years, at which point there will be a 10% basis step-up. There will be enhanced benefits for rural funds, including a 30% basis step-up in year 5. Separately, any growth on the OZ fund investment itself can be tax-free if held for at least 10 years – applied when the investment is sold.
Taxpayers with newly generated capital gains in 2025 or 2026 should consult with their CPA about other methods of deferring gains, such as installment sales or Charitable Remainder Trusts. New capital gains generated in late 2026 could be invested into OZ funds in early 2027 due to the 180-day reinvestment window.
Please reach out to your Wealth Manager with questions about new income tax benefits from the OBBBA.
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