OBBBA - A Closer Look at Tax Rates and Deductions

This article is to take a deeper dive into the outcome of the One Big Beautiful Bill (OBBB) on tax rates and the standard deduction (including the age 65+ extra deduction).

Tax rates: The bill makes permanent the tax rate reductions of the 2017 Tax Cuts and Jobs Act (TCJA) at 10%,12%, 22%, 24%,32%, 35%, and 37%, adjusted for inflation, ensuring long-term tax savings.

The new law effectively extends the rates of the TCJA, which was set to largely expire at the end of 2025. As such, OBBBA's enactment finally puts to rest nearly eight years of speculation over what the Internal Revenue Code – and the tax pictures of millions of Americans – will look like at the start of 2026.

The one minor change, which will begin in 2026, is to set the 'base' year for inflation adjustments back one year to 2016 – but only for the 10% and 12% tax brackets. Effectively, this means that the 10% and 12% brackets will receive an extra inflation adjustment bump in 2026, slightly increasing their income thresholds compared to what they would have been without the adjustment. These changes could amount to, depending on filing status, a few hundred extra dollars in the 10% bracket and one to two thousand extra dollars in the 12% bracket.

The result of these adjustments will slightly reduce effective tax rates for most households by having more income taxed in the lowest two brackets.

Another (possibly unintended) consequence is that the breakpoint between the 12% and 22% ordinary income tax brackets is now further away from the breakpoint between the 0% and 15% capital gains brackets. The change may require extra attention to taxpayers trying to harvest capital gains in the 0% capital gains tax bracket. Under the TCJA, a person in the 12% ordinary income bracket was also in the 0% capital gain bracket. With slightly larger space between the brackets, there could be a rare possibility that you could be recognizing long term capital gains rates at 15% but would have been better off with a short-term capital gain if the taxpayer was at the end of the12% bracket.¹

Standard deduction: The bill will enable a slight rise from $15,000 to $15,750 for single filers; $22,500 to $23,625 for heads of household; and $30,000 to $31,500 for joint filers. These amounts, adjusted for inflation, will be permanent going forward. There was lots of discussion about “no tax on Social Security”. The political outcome of this in the bill is that taxpayers 65 years old or over, will have a temporary additional deduction of $6,000 (single) or $12,000 (joint) from 2025 to 2028. This deduction does not require a taxpayer to be collecting Social Security. However, there is a phaseout which will cause single households over $175,000 and joint households over $250,000 to fully phase out. For married couples the phaseout will be applied simultaneously to each spouse’s deduction – so it will not reduce one spouse only. The temporary age 65+ deduction is on top of the current additional standard deduction given to individuals who are either age 65+ or blind, which adds an extra $2,000 to the standard deduction for single filers or $1,600 for each eligible married filer. So, for example, a married couple over 65 who does NOT phase out on the deduction will have a standard deduction of $46,700 with the OBBB vs, $33,100 under the TCJA bill.

The 65+ deduction in the OBBB is a “below the line” deduction and can be taken even if a taxpayer itemizes as opposed to taking the standard deduction. It will not, however, change the calculations for taxability of Social Security (50% or 85% included in the tax calculation) OR the floor to have medical expenses become deductible.

So, while the OBBB does not exempt Social Security from taxation, there is an impact to seniors.

It is important to note that for taxpayers planning to have other income events (example: Roth IRA conversion) the additional income could increase the percentage of Social Security subject to income tax as well as phase out the ability to take the 65+ deduction and other new deductions that utilize phaseouts. Please check with your advisor before making these decisions considering this new tax feature.²

In our next article we will more fully explore the SALT deduction cap increase and how some taxpayer actions can cause a “SALT torpedo”! Stay tuned…

¹https://www.kitces.com/blog/obbba-one-big-beautiful-bill-act-tax-planning-salt-cap-senior-deduction-qbi-deduction-tax-cut-and-jobs-act-tcja-amt-trump-accounts/

²https://taxfoundation.org/research/all/federal/one-big-beautiful-bill-act-tax-changes/