The passage of the One Huge Stunning Invoice Act (OBBBA) in July 2025 introduced certainty to many particular person taxpayers, together with federal workers and retirees. Had the OBBBA not been handed and signed into legislation, most of the vital tax breaks ensuing from the Tax Cuts and Jobs Act (TCJA) of 2017 would have expired on December 31, 2025.
Whereas the OBBBA did create new tax-savings alternatives, OBBBA additionally created many questions on navigate the brand new guidelines. A number of the OBBBA modifications took impact instantly in 2025, and a number of the modifications will take impact January 1, 2026. A earlier column mentioned the tax modifications taking impact in 2025. This column discusses the OBBBA tax legislation modifications that may take impact on January 1, 2026, and what tax-related strikes federal workers/retirees ought to contemplate and maybe carry out now as a way to reap the benefits of the OBBBA modifications taking impact in 2026.
The OBBBA passage resulted within the extension, modification or making everlasting a number of of TCJA’s tax breaks and suspensions that had been scheduled to run out on January 1, 2026.
Lowest Federal Tax Brackets Maintained
One of many provisions popping out of the TCJA was the reducing of particular person federal brackets. These particular person marginal tax price brackets are 10, 12, 22, 24, 32, 35 and 37 p.c, and have been the bottom particular person tax price brackets within the 100-year historical past of the federal particular person earnings tax. These brackets have been set to sundown on December 31, 2025. The OBBBA makes these marginal tax brackets everlasting. The OBBBA additionally added a further yr of inflation changes to the ten p.c, 12 p.c and 22 p.c tax brackets. The results of the extra yr of inflation changes is that it’ll enhance the quantity of taxable earnings that’s taxed at these marginal tax charges as an alternative of upper marginal tax charges.
New Limitation on Itemized Deductions
Efficient January 1, 2026, the OBBBA will change the suspended Pease Limitation with a brand new restriction on itemized deductions. The Pease Limitation, named after the late Congressman Donald Pease, was launched in 1991. The Pease Limitation was scheduled to return on January 1,2026 after being suspended following the passage of TCJA, required people with adjusted gross incomes over $339,850 ($407,850 for people submitting as married submitting collectively) to cut back sure itemized deductions by three cents for each greenback over the brink. The phase-out of itemized deductions beneath the Pease Limitation is capped at 80 p.c of sure itemized deductions.
The brand new itemized deduction limitation ensuing from the OBBBA passage is that the itemized deduction limitation beneath the OBBBA caps the tax worth of itemized deductions on the 35 p.c tax price for these people within the highest federal marginal tax bracket (37 p.c). Not like the Pease Limitation, the OBBBA itemized deduction limitations applies to all itemized deductions, together with the improved State and Native Tax (SALT) deduction (raised from $10,000 to $40,000). As is mentioned beneath, there may be one other restrict on charitable contributions that are included as a part of itemized deductions.
Charitable Contribution Adjustments
Beginning in 2026, people who take the usual deduction can deduct as much as $1,000 of charitable money contributions ($2,000 for married submitting collectively) if they don’t itemize on Schedule A. Charitable contributions have to be money/verify, whatever the quantity, to any certified charity and have to be supported by a dated financial institution file resembling a canceled verify or a dated receipt from the charity that features the title of the charity, the date, and the quantity of the contribution. Donations of products resembling clothes, furnishings, and toys to charitable organizations aren’t permitted for this deduction.
People who itemize (file Schedule A) can even face a brand new limitation on charitable contributions beginning January 1, 2026. Charitable contributions can be deductible on Schedule A solely to the extent they exceed 0.5 p.c of the person’s adjusted gross earnings (AGI). For instance, a person with an AGI of $300,000 will get no tax deduction for the primary $1,500 of charitable contributions. These charitable donors who need to keep away from this limitation ought to contemplate accelerating their charitable donations into 2025.
Conversely, these people who don’t itemize their deductions and as an alternative take the usual deduction might need to postpone their money/verify contributions till 2026. For sure, people who’re contemplating when to make their charitable contributions are suggested to contemplate the quick wants of the charity they want to help.
529 Training Financial savings Plans
Starting in 2026, the annual restrict for tax-free kindergarten by means of grade 12 withdrawals from 529 Training Financial savings Plans will enhance completely from $10,000 to $12,000 per beneficiary. Efficient July 1, 2025, the definition of kindergarten by means of grade 12 certified training bills is expanded to incorporate curriculum supplies, books, on-line training supplies, certified tutoring providers, standardized charges, twin enrollment charges, and academic therapies for college kids with disabilities. As well as, bills for certifications and licenses resembling HVAC work may be reimbursed from a 529 Training Financial savings Plan.
Property Tax and Lifetime Reward Exemptions Stay at Larger Ranges
The federal property tax exemption, presently at $13.99 million per particular person ($27.98 per married couple), will enhance in 2026 to a everlasting base of $15 million per particular person ($30 per married couple) in 2026. The brand new restrict will proceed to be listed yearly to inflation.
The annual present tax exclusion of $19,000 (2025) was not modified by OBBBA.
OBBBA Tax-Planning Strikes
For a lot of people together with federal workers and retirees, OBBA’s passage necessitates some tax-planning strikes for 2025 and 2026. The improved customary deduction quantity, the upper SALT deductions, and the brand new guidelines on charitable deductions are the figuring out elements whether or not it is smart for an worker or a retiree to itemize deductions or to take the usual deduction for the 2025 and 2026 tax years. As a part of that willpower, workers and retirees who anticipate to itemize deductions for the 2026 tax yr are suggested to determine if there are taxable earnings or deductible bills they’ve management over recognizing both in 2025 or 2026.
These workers and retirees age 65 and older ought to now contemplate the AGI phaseout of the brand new enhanced customary deduction ($6,000/$12,000). This enhanced deduction can result in financial savings resembling offsetting the taxes ensuing from the conversion of conventional IRAs to Roth IRAs.
Excessive-income workers and retirees, significantly these with AGIs over $200,000, ought to contemplate accelerating charitable contributions into 2025 earlier than the brand new 0.5 p.c of AGI flooring takes impact in 2026. Combining a number of years of charitable giving into 2025 may lead to better advantages than spreading charitable contributions over a number of calendar years beginning in 2026 . One other consideration for these workers and retirees who anticipate to be within the 37 p.c federal marginal tax bracket throughout 2026 (single tax filers with 2026 taxable earnings over roughly $640,600; married submitting collectively tax filers with 2026 taxable earnings over roughly $768,800) is that beginning in 2026, the whole quantity of itemized deductions can be capped at 35 p.c. Which means along with a 0.5 p.c of AGI flooring limitation, the charitable contribution deduction can be capped at 35 p.c for people within the 37 p.c marginal tax bracket in 2026.
Federal workers and retirees are suggested that as with every main tax laws, particular person circumstances will fluctuate as to the brand new guidelines will have an effect on a person. Workers and retirees are subsequently suggested to seek the advice of with a professional tax skilled as a way to develop tax saving methods which can be acceptable for his or her particular conditions.
