One of the big takeaways from the passage of OBBBA is that the tax brackets that were reset during the passage of the 2017 Tax Cuts and Jobs Act (TCJA) will not revert back to prior levels next year as previously scheduled. The current tax brackets will remain and are now permanent. Also of note on the brackets is that the 10% marginal bracket and the 12% marginal bracket will be wider starting in 2026. What does that mean? It means that many tax payers will pay slightly lower taxes on those income levels going forward. The exact income ranges for the brackets are typically adjusted for inflation each year.
Regarding the standard deduction, the “higher” standard deduction that was enacted during the passage of TCJA will also continue permanently. The standard deduction will also continue to increase therefore the vast majority of people will continue to take the standard deduction rather than itemize. Also of note, there is a new $6,000 deduction for people that are 65 or older that are in addition to the other senior deductions that are already in place. In total, this will give certain tax payers increased deductions and opportunities for lower tax bills in the years ahead.
Lastly for today, the TCJA brought about a controversial change regarding State and Local Tax (SALT). It capped the SALT deduction at $10,000 per for most tax payers. OBBBA has increased this level significantly, to $40,000. This will allow people who live in higher tax areas to potentially deduct more of their SALT tax. However, this change is only in effect from 2025-2029 and then is scheduled to sunset back to the $10,000 level. Also of note, the new higher deduction starts to phase out when income levels reach $500k per year and goes all the way back to a $10k deduction limit when income reached $600k. This new provision can effectively increase deductions for those earning less rather than those with higher income.