2025 tax law changes (OBBBA): Full analysis for tax and estate planning

Executive summary

The One Big Beautiful Bill introduces significant changes that will impact tax planning and charitable giving. Key provisions include the permanent establishment of lower tax rates and a higher standard deduction. The bill also outlines both temporary and permanent modifications to itemized deductions, including new limits. Additionally, it introduces a new charitable deduction for non-itemizers and a tax credit for contributions to scholarship-granting organizations.

On the 249th anniversary of the founding of the United States, the President and Congress completed a massive change in the Internal Revenue Code that began eight years ago. The One Big Beautiful Bill signed into law on July 4, 2025 permanently codifies the 2017 Tax Cuts and Jobs Act’s lower tax rates, enhanced standard deduction, and business tax breaks. It added new tax deductions, both temporary and permanent, and eliminated several deductions and credits. Several of the Bill’s provisions affect charitable gift planning for existing clients and open a door for the next generation of charitable givers.

Tax rates and standard deduction

The 2025 Tax Bill permanently sets the Individual tax rates at 10%, 12%, 22%, 24%, 32%, 35% and 37%. The 37% bracket begins with taxable incomes over $751,600 for Married taxpayers ($626,350 Single) in 2025.

The increased Standard Deduction implemented in the 2017 Tax Bill will be permanent. In 2025, the Standard Deductions are $31,500 for Married taxpayers and $15,750 for Singles. Single taxpayers 65 years and older receive an additional standard deduction of $2,000; Married taxpayers receive $1,600 each if both spouses are over 65.

The bill implemented a temporary bonus deduction for taxpayers 65 years and older effective only for tax years 2025 – 2028. The exemption will be $6,000 per person per year. A 6% phaseout of the exemption begins for Married taxpayers with Adjusted Gross Income (AGI) of $150,000 and Single taxpayers with AGI exceeding $75,000. The Exemption is in addition to the Standard Deduction or Itemized Deductions and can be claimed by Itemizers and Non-Itemizers who qualify. The Bill also permanently eliminates exemptions for taxpayers and dependents under 65 years of age.

George and Louise are 70 years old in 2025. Their Standard Deduction plus the senior deduction will be $46,700 (31,500 + 1,600 + 1,600 + 6,000 + 6,000).

Assume George and Louise’s AGI significantly exceeds $150,000. Their Standard Deduction will be $34,700 (31,500 + 1,600 + 1,600), and they will not receive the senior deduction.

Estate and gift tax

The Code allows U.S. citizens and residents an exclusion from the individual’s estate or gift tax. The 2025 Tax Bill sets the exemption at $15 million per individual for estates of decedents dying or gifts made after December 31, 2025 and will increase every year thereafter for inflation. A deceased spouse’s unused exclusion (DSUE) after death can be used by the surviving spouse, potentially excluding up to $30 million of the surviving spouse’s assets from the estate and gift tax.

With the Federal estate exclusion permanently set, advisors can anticipate a client’s taxable estate, and craft a charitable giving plan within an estate plan.

Randolph and Mortimer are Single brothers. Eight years ago, the brothers’ advisor planned their estates assuming each would have a gross estate of roughly $8 million to leave the other brother, which was under the exclusion amount of $10 million that year. The brothers’ estates’ projected worth will be between $12 and $16 million each. The first brother to die will only be assessed Federal estate tax on the estate over $15 million. The surviving brother will have twice the assets but the same $15 million exclusion from Federal estate tax. The brothers are close in age and in reasonable health. The advisor proposes each brother amend his will to leave one-third of his estate to a Donor Advised Fund. The first-to-die brother’s estate will not be subject to Federal estate tax if its value after charitable and other deductions stays under $15 million. The second-to-die brother’s gross estate will benefit from a charitable deduction plus his own $15 million exclusion.

The $15 million exemption applies to deaths and gifts after December 31, 2025. Deaths prior to that date must use the exclusion amount in affect in the year of death.

Alex passes away in 2026. His late wife Elaine passed away in 2023, when the Federal estate tax exclusion was $12.92 million. Elaine’s estate used the unlimited marital deduction and did not use its exclusion. The Estate of Elaine’s DSUE is $12.92 million. The Estate of Alex’s Federal estate tax exclusion will be $27.92 million – Alex’s $15 million plus DSUE $12.92 million.

Twelve states and Washington D.C. assess estate tax (Estate and Inheritance Taxes by State, 2024). The exclusion amounts are lower in all states, subjecting residents to State estate tax while excluding them from Federal estate tax. Consult with tax advisor on how testamentary charitable giving can reduce the taxable estate for the state estate tax.

Itemized deductions

The 2025 Tax Bill contains extensions to the 2017 Tax Bill and adds additional itemized deductions and limitations. The timing and expiration of certain deduction will require detailed tax planning but can create tax planning opportunities.

Extensions and Expirations of Itemized Deductions

Several provisions of the 2017 Tax Bill were either extended or permanently disallowed:

  • PERMANENT: Mortgage interest deduction limited to $750,000 acquisition debt
  • PERMANENT: Cash contributions to qualifying public charities limited to 60% of AGI
  • ELIMINATED: Miscellaneous itemized deductions such as tax preparation fees, investment advisory fees, and unreimbursed employee expenses

State and Local Tax Deduction (SALT)

One of the biggest temporary deductions is the increase in State and Local Tax (SALT) deduction. The 2017 Tax Bill’s $10,000 SALT limit prevented taxpayers in high-tax states from itemizing deductions. Starting with 2025’s tax returns, the SALT limit increases to $40,000. It will increase 1% per year through 2029. 2030 tax returns will return to the $10,000 SALT limit. Phaseout of the SALT deduction begins with Modified AGI of $500,000. Modified AGI over $600,000 will completely phase out the increased SALT, and the taxpayer gets a $10,000 SALT deduction.

During the 2017’s Tax Bill’s tenure, roughly ninety percent of taxpayers took the Standard Deduction. Tax planning around charitable contributions shifted to the high-net-worth taxpayers. Giving strategies such as bunching (Year-end tax planning and charitable contributions) could be effective for taxpayers whose Itemized Deductions do not exceed the Standard Deduction. By increasing the SALT deduction to $40,000, Itemized Deductions are temporarily back in play for taxpayers with large SALTs, particularly those in high-tax states.  

George and Martha are a high-income married couple living in a high-tax state. Since their primary income source is a W-2, Itemized Deductions were the primary means the couple used to lower Federal taxes prior to 2018. After the 2017 Tax Bill, their itemized deductions with the $10,000 SALT cap did not exceed the Standard Deduction. Bunching charitable deductions into one year was not a viable strategy because at most they can give about $10,000 annually.

The new SALT cap under the 2025 Tax Bill increases their itemized deductions to $50,000 before the charitable deduction. The opportunity exists to create a five-year charitable giving program starting 2025 designed to minimize Federal income tax using the charitable deduction. Working with a tax advisor, they predicted a 3% annual increase to AGI. Martha will also be awarded non-qualified stock options in 2027. The advisor suggests increasing charitable contributions by 3% per year. In 2027, the year of the windfall event, the advisor proposed an additional $5,000 contribution:

YearAGISALT+OtherCharitable*Total*Tax Savings^
2025$275,000$50,000$10,000$60,000$14,400
2026$283,000$50,400$10,300$60,700$14,600
2027$330,000$50,800$15,600$66,400$15,900
2028$300,000$51,200$10,900$62,100$14,900
2029$309,000$51,600$11,300$62,900$15,000

*Charitable and total deductions in this example are not adjusted for limits imposed by the 2025 Tax Bill

^Marginal tax rate is 24%

At the 24% rate, a 2025 Standard Deduction would yield $7,500 tax savings. If George and Martha implement their advisor’s Itemized Deduction plan, their tax savings could double!

Charitable Deduction

The 2025 Tax Bill introduced a new limit, or floor, for charitable deductions beginning with the 2026 tax year. The floor is calculated as 0.5% of AGI. The floor applies to both current contributions and carryover contributions. Amounts excluded by the floor can be carried forward for five years.

Duncan contributes $10,000 to a public charity in 2026 and a $2,000 carryover that is three years old. His AGI is $100,000. His charitable deduction will be $11,500:

(10,000 + 2,000) – (100,000 x 0.005). Duncan’s charitable carryforward will be $500 of the original $2,000 carryforward, which will expire after next year.

The floor will be applied before traditional AGI limitations. The floor must first be applied to contributions in the 20% category, then the 30% category all the way to the 60% category until it reaches 0.5% AGI. After the floor is applied, the traditional charitable deduction limits will be applied.

Paul contributes $40,000 cash and stock worth $5,000 to a public charity in 2026. His AGI is $65,000. His charitable deduction will be $39,000 calculated as follows:

  1. The floor is applied against the stock gift first since it is in the 30% category:          5,000 – ($65,000 x .005) = 4,675
  2. The 60% AGI limit is applied against the cash gift: (65,000 x .60) = 39,000.
  3. Using the charitable deduction worksheet in IRS Publication 526, $4,675 charitable deduction for the stock gift will be disallowed because Paul reached the AGI limit in the 60% category.
  4. Carryforwards to next year will be $1,000 excluded in the 60% category and $5,000 excluded in the 30% category. The $5,000 carryover consists of $325 excluded by the floor and $4,675 excluded by AGI limitations.

Limit for Itemized Deductions for High Earners

The 2025 Tax Bill introduced a permanent limit for Itemizers in the top tax bracket beginning with the 2026 tax year. It replaces the Pease amendment that was in effect prior to 2018. After all other limits are applied against other deductions, like SALT and charity, total Itemized Deductions will be subject to a limit, or cap. The calculation for the cap is 2/37 of the lesser of a) Itemized Deductions, or b) Excess Taxable Income in the top tax bracket.

Jessica’s AGI will be $1.1 million in 2026 and Itemized Deductions after all other limitations will be $447,500. This will result in a tentative taxable income of $652,500. Assume in 2026 the 37% Single tax bracket begins at $626,350. Jessica’s adjusted itemized deductions will be $446,087:

  1. Compare Itemized Deductions to excess taxable income and pick the lowest: (652,500 – 626,350) = 26,150  <  447,500
  2. Multiply by 2/37: (26,150 x 2/37) = 1,413. This is the reduction to total Itemized Deductions.
  3. Itemized deductions after the cap will be $446,087: (447,500 – 1,413)

This limit only applies to taxpayers whose taxable income will put them in the highest tax bracket.

Alternative minimum tax (AMT)

Between the increase in the SALT deduction and changes to the AMT exemption and phaseout within the 2025 Tax Bill, certain taxpayers will need to reconsider AMT in their tax planning.

SALT deductions must be added back to taxable income to determine Alternative Minimum Taxable Income (AMTI). Pre-2018 tax law allowed unlimited SALT deductions, and it triggered AMT for some taxpayers. After the 2017 Tax Law when SALT was limited to $10,000, those same taxpayers avoided AMT. The SALT limit temporarily increases to $40,000 but the AMT exemption will be $1 million; middle and upper-middle income taxpayers with SALT and income under $1 million should not be impacted.

The 2017 Tax Bill raised the AMT exemptions, and the 2025 bill retains the elevated exemption amounts. The AMT exemption amount is set at $137,000 for Married taxpayers and $88,100 for Single taxpayers in 2025. Exemptions will be adjusted annually for inflation. The AMT rate for Married taxpayers is 26% for AMTI under $239,100 and 28% for AMTI exceeding $239,100. $119,550 is the threshold rate for Single taxpayers.

The AMT exemption will be phased out for high-income taxpayers. For every dollar in AMTI over the following thresholds, the exemption will be phased out by a percentage until zero. The 2025 Tax Bill will set the 2026 threshold at $1 million for Married taxpayers and $500,000 for Single taxpayers, annually adjusted for inflation, and increase the phaseout from 25% to 50%:

20252026
Phaseout %25%50%
Starts when AMTI is$1,252,700 ($626,350 Single)$1,000,000 ($500,000 Single)
Lose Exemption when AMTI is$1,800,700 ($978,750 Single)$1,274,000 ($676,200 Single)

High income taxpayers will lose their exemption at twice the rate under the 2025 bill. The phaseout plus the increased SALT will put more taxpayers in the crosshairs of AMT. Taxpayers with the following common AMT adjustments will need to be vigilant:

  • Certain tax-exempt investments
  • Incentive Stock Options (ISO)
  • Differences between regular capital losses and AMT capital losses
  • Differences between regular passive losses and AMT passive losses
  • Differences between regular NOL and AMT NOL

Bruce is married and has the choice to exercise his ISOs in either 2025 or 2026. The ISO adjustment will make AMTI in either year about $1.4 million. How will AMTI be affected?

20252026
Tentative AMTI1,400,0001,400,000
Exemption(100,175)NONE
AMTI1,299,8251,400,000

Bruce will have $100,000 additional AMTI if he exercises his ISOs in 2026. The lowered exemption and faster phaseout will eliminate the AMT exemption in 2026.

Deduction for car loan interest

In the tax years 2025 through 2028, up to $10,000 in car loan interest for the purchase of a new car can be deducted. This deduction is available to Itemizers and Non-Itemizers. The phaseout for the deduction begins when MAGI exceeds $200,000 for Married taxpayers or $100,000 for Single taxpayers. This is a below-the-line deduction that will not factor into the calculation of AGI.

Charitable deduction for non-itemizers

Beginning with the 2026 tax year, taxpayers who use the Standard Deduction will be able to deduct up to $1,000 ($2,000 for Married filers). This deduction only applies to cash contributions to qualifying 501(c)(3) organizations. Currently, contributions to Donor Advised Funds or supporting organizations (as defined in IRC 509(a)(3)) will NOT qualify for the deduction. This is another below-the-line deduction that will not factor into the calculation of AGI.

Tax credit for contributions to scholarship-granting organizations

Beginning 2027, cash donations to eligible scholarship-granting organizations will be eligible for a tax credit up to $1,700 per taxpayer. An eligible scholarship-granting organization:

  • 501(c)(3) public charity,
  • Maintains a separate account for these contributions,
  • May only fund scholarships to eligible students solely within the state in which the organization is listed as a qualifying scholarship-granting organization,
  • Located in a state that elects to participate in the program.

Amounts claimed for the credit cannot be claimed for the charitable deduction.

Charitable planning opportunities and the OBBB

The 2025 Tax Bill’s permanent extension of lower individual tax rates offers clearer tax planning and eliminates the threat of impending higher rates.  The estate tax exemption is also set to allow advisors to target estates over $15 million.

The permanent elevated Standard Deduction again limits Itemized Deductions to roughly 10% of Individual tax filers. Bunching charitable contributions into a single year can be effective for approximately 90% of taxpayers who do not itemize deductions annually, and this approach is ideal with a Donor Advised Fund.  Donors can target years with expected financial windfalls for a large charitable deduction and grant the DAF funds when they choose.

The Bill includes an array of temporary deductions through 2029 but one of the most popular is the increase of the SALT deduction to $40,000. The deduction will not benefit taxpayers over $500,000 AGI but a five-year window of opportunity opens for middle-class taxpayers sensitive to the SALT deduction, such as W-2 earners in high-tax states or contractors who derive earned income from multiple states. Combine SALT and other itemized deductions with a charitable giving plan to take full advantage.

With the 0.5% floor on charitable deductions and the cap to overall itemized deductions beginning 2026, there is incentive to accelerate charitable giving to 2025 to get the maximum value out of charitable and itemized deductions. For example, a taxpayer might consider paying his fourth quarter State estimate in December 2025 rather than January 2026 to maximize SALT and combine with a large charitable gift. The unused amount of charitable deduction from 2025 will be available for five-year carryforward; he will not get the full benefit now but will over five years.

Planning around charitable carryforwards should be planned over a multi-year period under a range of variables. Particular attention should focus on taxpayers with an annual variety of charitable gifts (cash/noncash, public charity/private foundation) subject to varying AGI limitations. The new 0.5% floor applies first to the lowest 20% AGI category and proceeds upward, followed by the traditional AGI limitations which begin in the 60% category and apply downward. For example, the floor could annually exclude a material amount from a public stock gift and expire after five years. This might happen because cash gifts to 60% organizations and 50% noncash gifts to public charities will be utilized first under traditional AGI limitations every year, leaving the 30% deduction unused.

The One Big Beautiful Bill offers both stability and opportunity, locking in lower rates while opening short-term windows for strategic giving and deduction planning. With the higher standard deduction, increased SALT cap, and new charitable incentives, well-timed contributions can deliver outsized tax benefits—especially before the charitable floor and deduction cap take full effect. The key is acting deliberately: pairing generosity with careful timing to capture every available advantage.

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