Three Tax Highlights of OB3

This summer Congress passed new tax law. This One Big Beautiful Bill Act (OBBBA or “OB3”)[1] made “permanent” the tax provisions in the Tax Cuts and Jobs Act (TCJA) passed in 2017. Permanent tax law changes mean they don’t expire, but they can be changed by passing new tax law. The TCJA was not permanent and was scheduled to expire at the end of 2025. OB3 extended many of TCJA’s provisions and added some new wrinkles.

Of the many changes in tax rules in the new law, three of them will impact many of you, as they change whether – and how – you might take deductions on your tax return. If you are itemizing deductions, you are reporting the details of what you’ve paid in state and local taxes, in addition to property taxes, and any charitable giving.  The rules for these have changed under the new law, with greater deductions for some and more limited deductions for others. While you may have been taking the standard deduction in the past, you will want to review your taxes in light of changes to itemized deductions related to state and local taxes, and charitable giving.

TO ITEMIZE OR NOT TO ITEMIZE?
The first set of tax law changes relate to the standard deduction. Once you buy a home, you will almost always file a Schedule A, allowing you to take deductions for mortgage interest and property taxes on your tax return. The modern tax system was built to incent home purchases, among other things, and the system had been structured so that together the interest and property tax you pay on a home would be greater than taking a standard deduction.

Before TCJA, 31% of Americans itemized deductions on their returns[2].  In 2020, only 9% did.  Under OB3, even with the return of a more expanded deduction for state and local taxes (see below), it is expected that only about 10% of taxpayers will itemize[3].  Itemizing deductions makes tax reporting more complex, but it allows for incentives for certain actions (home ownership, charitable giving). While OB3’s higher standard deduction simplifies some parts of tax reporting, overall, the new law adds complexity to the tax code and creates some traps with phase-outs and new thresholds.

Here is how the standard deduction has changed since TCJA:

While TCJA increased the standard deduction, it also eliminated personal exemptions.  The personal exemption was the amount that each member of a household was allowed “just for being you.”  Each spouse, each kid, was allowed another $4,050 in 2017; in 2018, this was $0.  (OB3 makes the elimination of the personal exemption permanent.) All this makes comparing taxes before TCJA with taxes now more complex.

A SENIOR STANDARD DEDUCTION
For many older taxpayers who have paid off their mortgages, the standard deduction provides greater tax savings than itemizing.  For taxpayers age 65 and older, taking the standard deduction gets even better when they add a second standard deduction just for seniors.  In 2024, this “second standard deduction” was $1,950 for a single taxpayer, $3,100 for a married couple filing jointly.

For 2025, the combined standard deduction a single taxpayer age 65 or older will see on their tax return is $17,750 ($15,750 + $2,000) and $34,700 for a married couple filing jointly ($31,500 + $3,200).

A BONUS ELDER “ADD ON”
Under OB3, taxpayers age 65 and older get to add a new deduction to either the standard deduction or their total itemized deductions.

It was a campaign promise to eliminate taxes on Social Security, which didn’t happen. But OB3 adds a new senior deduction of $6,000 per taxpayer. This new senior deduction applies whether you take the standard deduction or itemize – the extra $6,000 applies to ALL taxpayers age 65 and older, starting with the 2025 tax year. And while this tax break is in lieu of “no tax on Social Security”, you don’t need to be taking Social Security to use it.

An older married couple does really well under the new rules:

These figures for 2025.

This new senior deduction ends in 2028 (coinciding with the outgoing administration) and it does phase out at higher income levels, starting at $75,000 for single taxpayers and $150,000 for joint filers.

STATE AND LOCAL TAXES (SALT)
The second set of tax law changes relates to the deductibility of state and local taxes. Before TCJA, the deduction for state and local taxes was unlimited.  These taxes included state income taxes or sales taxes, local taxes (like the RTA excise tax on Washington state car tabs), and property taxes.  Collectively, the tax break for these items was called the SALT deduction. After TCJA, the tax deduction for these taxes was limited to $10,000, regardless of how much you actually paid.  For many, property taxes alone could be more than $10,000 per year.  Since 2018, taxpayers in economically stronger states like California, Washington and New York have been pinched by both the loss of a deduction for all taxes paid and by the generally higher cost of living in these areas.

The compromise in OB3 settled on raising the cap on the SALT deduction from $10,000 to $40,000, starting in 2025, but phasing out for taxpayers with higher incomes.  For a taxpayer with $50,000 in state and local taxes, she can deduct the maximum of $40,000 for 2025, until her Modified Adjusted Gross Income (MAGI) reaches $500,000.  After MAGI surpasses $500,000, the $40,000 maximum is reduced by 30% of the amount MAGI exceeds $500,000. The deduction for SALT does not phase out to zero but can still be capped at the $10,000 pre-OB3 level for taxpayers in the highest tax brackets.

Here’s what that looks like:

With MAGI of $500,000, the taxpayer gets the full $40,000 deduction (but less than the total of her $50,000 in taxes paid), but if her MAGI is $550,000, her SALT deduction drops to $25,000:

$550,000 – $500,000 = $50,000

$50,000 x 30% = $15,000

$40,000 – $15,000 = $25,000

Because taxes should be simple, right?

The same folks who argued for the preferential tax treatment for dividends and long-term capital gains (they argued for cutting the tax on this income because it was “unfair” to tax the same income twice, at the corporate level, and then for the investor). Yet here, the same group argued it was unfair to give a tax deduction for taxes paid to state and local government.  Meaning, the same income was taxed twice (sometimes three times), at the state (sometimes local) and federal levels combined.

The research cuts both ways about whether higher state taxes support local and regional investment and thus help to grow these predominantly urban economies, or whether bigger economies create the need for more social support funded by state and local taxes.

CHARITY BEGINS ABOVE THE LINE
A third set of tax changes affect tax benefits of charitable giving. Until this year, a tax deduction for charitable giving was only allowed to those who itemized, generally higher income households, generally homeowners. This benefit was a below-the-line tax deduction, a deduction that gets calculated on your Schedule A and deducted from your Adjusted Gross Income (AGI).

The pandemic brought with it a change – briefly – to this rule.  For 2020 and 2021 returns, you could deduct cash donations directly from your AGI, without itemizing deductions.  So a renter, for example, who takes the standard deduction and who writes a check for $50 to an animal shelter can deduct that $50 right off the income on the front of their tax return.  No need to have enough other deductions to itemize in order to get the benefit of a gift to charity. For 2020, it was a deduction of up to $300 on each return for cash donations to charity, which was expanded to $300 per taxpayer ($600 for a married couple) for the 2021 tax year.  Then it disappeared.

Personally, I think you should be able to deduct income that you give outright to a charitable organization right off the top of your tax return.  In doing this, you are saying “don’t give ME this income, give it to THEM – a food bank, a library, a church.”

With OB3, we get an above-the-line deduction (before you calculate Adjusted Gross Income (AGI), and before you take any deductions (itemized or standard).   Starting in 2026, single taxpayers who do not itemize can deduct up to $1,000 off the top (Married Filing Jointly can deduct up to $2,000.  This deduction is in addition to the standard deduction.  Note only donations of cash qualify for this deduction, and you must be taking the standard deduction (no Goodwill donations). These contributions are subject to the same documentation as all charitable giving.

ONE HAND GIVETH, AND THE OTHER HAND LIMITS YOUR TAX DEDUCTION
But there’s a new catch for charitable taxpayers who itemize (two catches, actually).

First, OB3 has introduced a threshold over which charitable contributions will be deductible.  Like the 7.5% threshold for medical expenses (your total medical expenses must exceed 7.5% of your AGI before you get any deduction for medical costs), for charitable giving, a new 0.5% of AGI threshold applies for taxpayers who itemize, which will reduce the amount of charitable giving you can deduct.

EXAMPLE:
Your AGI is $200K. You donate $10K to charity. You must reduce your charitable deduction by $1K (0.5% of $200K = $1K).  You gave $10K to charity but can only deduct $9K.

The new threshold for charitable giving could quash taxpayers making smaller donations.  For a taxpayer with AGI of $50,000 making $250 in gifts to charity would receive no tax break if they are also itemizing other deductions.

Second, in addition to this 0.5% threshold for the deductibility of charitable donations, there is also a cap on the deduction depending on your tax bracket.  If you are paying federal income taxes at the top bracket (37%), OB3 limits the tax benefit to you at the 35% bracket for charitable gifts.

EXAMPLE:
If your AGI puts you in the 37% tax bracket, and you make charitable contributions of $100,000, before OB3 your tax savings from those donations was $37,000 ($100,000 x 37%).  But under OB3, you are not allowed the benefit of tax savings at your effective tax bracket (37%), but are capped at tax savings of 35%, or $35,000 in this example, costing the donor $2,000 more in taxes.

Together, the OB3 cuts the tax benefit of charitable gifts from the highest income taxpayers at the bottom and the top: A single taxpayer with income at the top bracket making a $100,000 charitable donation loses $2,000 off the top (from the 35% cap) and at least $3,132 off the bottom (from the 0.5% threshold).  The $37,000 tax deduction from 2024 becomes $31,848, a loss of $5,152 in tax savings.

WHAT YOU CAN DO:

• Plan to prepare your 2025 and future tax returns both using the standard deduction and itemizing. (Most tax prep software will have a method for doing the math each way (provided you enter your detailed deductions) and will use the method that is optimal on your tax return.
• The new haircut on your itemized charitable deductions goes into effect in 2026. You can front-load your future charitable deductions by donating to a donor-advised fund (DAF) before the end of 2025.
• Incorporate portfolio rebalancing into the tax equation. DAFs and most larger charities can accept appreciated securities, meaning if you haven’t rebalanced your portfolio and have mutual funds and stocks that have grown in value, you can donate shares of these securities and do two things:
  • avoid the tax on capital gains on the sale of these investments AND
  • enjoy a tax deduction for the full market value of the investments you donate. (One more step: You need to make a grant from your DAF to charities to help the organizations you value.)
• For taxpayers age 70-1/2, you can use a Qualified Charitable Deduction (QCD), a donation directly from your IRA to one or more charities and avoid the new 0.5% haircut on giving.
• A note to those of you on using a one-time QCD when you might attend services where there is an expectation of a regular offering: Some can feel a stigma of not contributing something to an offering plate when asked; you can use an annual QCD or grant from a DAF to maximize your giving, and can add an envelope with a note telling your house of worship that you gave through QCD or DAF.
• Don’t downplay the benefit of small charitable gifts. If you are taking the standard deduction, note that an above-the-line deduction of $1,000 per taxpayer ($1,000 for singles, $2,000 for a married household) can allow your charitable giving to have a double benefit: to the organization, and for your tax return. In our current economic times, it can be tough to make even a small gift, but know that particularly in these times, those small gifts can collectively have a great impact.

Heading into the last months of the year, it’s a good time to review how the new tax law might change your tax return, and to use the final months of the year to make the most out of the 2025 rules.

[1] Unofficially known as the One Bloated, Butt-Ugly Bill Act (OBBBA).  Beauty, we know, is in the eye of the beholder.

[2] How did the TCJA change the standard deduction and itemized deductions? TPC, updated January 2024, accessed 09/25/25.

[3] One Big Beautiful Bill Act makes the individual income tax more complex, Tax Foundation, 09/09/25, accessed 09/25/25.