What Every Individual Taxpayer Needs to Know

The tax landscape for individual taxpayers has shifted dramatically in 2025. From the sweeping provisions of a landmark new law to a string of Tax Court decisions that serve as cautionary tales for taxpayers and advisors alike, there is a lot to unpack. This article draws on the AICPA Individual and Self-Employed Tax Technical Resource Panel's semiannual update to bring you the most important developments.

The One Big Beautiful Bill Act: What Changed and What It Means for You

On July 4, 2025, President Trump signed H.R. 1, the One Big Beautiful Bill Act (OBBBA), into law. The legislation permanently extended and, in many cases, enhanced key provisions from the 2017 Tax Cuts and Jobs Act (TCJA) that were set to expire at the end of 2025, while introducing several entirely new benefits for individual taxpayers. 

Tax Rates and Brackets Are Here to Stay

The TCJA reduced the top individual income tax rate from 39.6% to 37% and restructured the brackets to push more income into lower rate tiers. Both changes are now permanent. The IRS has already reflected updated inflation-adjusted brackets for 2026 in Rev. Proc. 2025-32. This is good news for long-term planning as the uncertainty of a potential "sunset" is gone.

Standard Deduction: Permanently Elevated

The near doubling of the standard deduction under the TCJA, one of the most impactful changes for middle-income households, is now permanent, with a slight additional increase for 2025. Personal exemptions, by contrast, are permanently eliminated (they had been suspended since 2018).

Child Tax Credit Increases and Becomes Indexed

Starting in 2025, the child tax credit rises to $2,200 per qualifying child, with $1,700 of that amount refundable. The credit is now indexed for inflation, meaning it will grow over time. Income phaseouts begin at $200,000 for single filers and $400,000 for married filing jointly. A separate $500 nonrefundable credit remains available for other dependents.

Dependent Care Gets a Long-Overdue Boost

The annual exclusion for employer-sponsored dependent care assistance (such as dependent care FSAs) has been frozen at $5,000 since 1986, nearly 40 years. Starting in 2026, that limit rises to $7,500. Separately, the child and dependent care tax credit is enhanced for lower-income taxpayers, with the maximum credit rate increasing from 35% to 50% of eligible expenses (phasing down for those with AGI above $15,000 and further reduced above $75,000). Eligible expense limits, $3,000 for one qualifying individual and $6,000 for two or more, remain unchanged.

New Temporary Deductions: Tips, Overtime, Vehicle Loan Interest, and Seniors

For tax years 2025 through 2028, four new below-the-line deductions are available to both itemizers and non-itemizers:

• Qualified tips: up to $25,000

• Overtime premium pay: up to $12,500 (or $25,000 on a joint return)

• New U.S.-assembled vehicle loan interest: up to $10,000

• Senior deduction (age 65+): up to $6,000

Each deduction is subject to income phaseouts and specific eligibility rules. These temporary provisions deserve careful review for clients in service industries, hourly roles, or those nearing retirement.

SALT Cap Relief: Temporary and Tiered

One of the most discussed changes affects the state and local tax (SALT) deduction. The $10,000 cap is raised to $40,000 for 2025 for both single and joint filers, phasing down to $10,000 for those with modified AGI between $500,000 and $600,000. The $40,000 cap and phaseout thresholds each increase by 1% annually through 2029, after which the deduction reverts to $10,000. This may meaningfully affect whether higher-income clients in high-tax states should itemize.

Important Changes Affecting Charitable Giving

The OBBBA made significant, and in some cases complex, modifications to the rules governing charitable deductions. Here is what itemizers and non-itemizers alike need to know.

Good News: A Deduction Returns for Non-Itemizers

The CARES Act temporarily allowed non-itemizing taxpayers to deduct up to $300 ($600 for married couples) in cash charitable contributions in 2020 and 2021. That benefit expired. The OBBBA revives and significantly expands it: starting in 2026, non-itemizers can deduct up to $1,000 ($2,000 for married filing jointly) in cash gifts to public charities. This is a meaningful opportunity for the majority of taxpayers who do not itemize.

The 60% AGI Cap on Cash Contributions Is Now Permanent

The TCJA temporarily raised the AGI cap on cash contributions to public charities and donor-advised funds from 50% to 60%. That increase is now made permanent by the OBBBA, which is welcome news for high-income philanthropists.

New Floor on Charitable Deductions for Itemizers: 0.5% of AGI

Here is where it gets more nuanced. For tax years beginning after December 31, 2025, the OBBBA introduces a new floor on charitable contribution deductions for itemizing taxpayers. Individuals can only deduct charitable contributions to the extent they exceed 0.5% of their adjusted gross income. For a taxpayer with $100,000 in AGI, the first $500 of charitable giving generates no federal deduction benefit.

Disallowed amounts can be carried forward, but only if the taxpayer also has contributions carried over due to the existing percentage-of-AGI ceiling. This floor applies only to itemizers; the new $1,000 non-itemizer deduction is not affected.

High Earners Face a 35% Cap on the Tax Benefit of Itemized Deductions

Replacing the old "Pease limitation," the OBBBA introduces a new restriction for taxpayers in the top income tax bracket: the tax benefit of all itemized deductions is effectively capped at 35% rather than 37%. This is achieved by requiring a reduction of 2/37ths of the lesser of total itemized deductions or the excess of taxable income over the top bracket threshold. For a taxpayer with $1 million in itemized deductions, the tax savings drop from $370,000 to $350,000 beginning in 2026. Importantly, there are no carve-outs; charitable contributions are treated the same as any other itemized deduction under this rule.

For high-income clients, 2026 charitable giving could be subject to two separate limitations simultaneously: the 0.5% floor and the new itemized deduction cap.

Other Notable Legislative Changes

Qualified Business Income (QBI) Deduction: Made Permanent

The popular 20% deduction on qualified pass-through income under Section 199A is now permanent. The income phaseout thresholds are increased to $150,000 for joint filers and $75,000 for others. A new minimum $400 deduction is available starting in 2026 for taxpayers with at least $1,000 of QBI from an activity in which they materially participate.

Opportunity Zones Permanently Extended: With Key Modifications

The opportunity zone program, which provides capital gains tax incentives for investments in designated low-income communities, is permanently extended for investments made after December 31, 2026. Key changes include deferred gains are now recognized at the earlier of five years after initial investment or the date of sale; a 10% basis step-up is available at the five-year mark (with no additional step-up at seven years); and gains from investments held longer than 30 years will no longer fully escape tax; only appreciation through the 30-year anniversary qualifies for the basis-to-FMV election.

Enhanced QSBS Exclusion for New Investments

For qualified small business stock (QSBS) acquired after July 4, 2025, the OBBBA provides new partial exclusions (50% at three years, 75% at four years) alongside the existing 100% exclusion at five years. The per-issuer gain exclusion limit rises from $10 million to $15 million (indexed for inflation), and the eligible corporation asset limit increases from $50 million to $75 million.

Lessons from the Courts: Real Cases, Real Consequences

Beyond legislation, the courts have been busy, and their decisions offer important guidance on issues that affect everyday clients.

Your Filing Status Must Reflect Your Legal Status

In Muse and Abdalla, the Tax Court denied head-of-household filing status to a couple who had undergone a religious divorce ceremony but never obtained a legal decree of dissolution under Minnesota law. Because federal tax law looks to state law to determine marital status, and Minnesota does not recognize religious or ceremonial divorces, both taxpayers were considered legally married and could not claim the more favorable head-of-household status. Takeaway: Filing status must be grounded in legal reality, not personal belief or cultural practice.

Legal Settlements Are Often Taxable

Two Tax Court cases reinforced the rule that legal settlements are generally taxable unless they arise from physical personal injury or physical sickness. In Fortune-Paladino, a $135,000 employment settlement for sex discrimination and retaliation was found taxable because the underlying complaint referenced only emotional distress and no physical injury. In Mennemeyer, a $1.51 million FINRA arbitration settlement primarily related to defamation and economic claims was similarly held taxable. Takeaway: Do not assume a settlement is tax-free. The nature of the underlying claim, and the specific language of the settlement agreement, is critical.

Substantiation Is Non-Negotiable for Charitable Deductions

Two separate Tax Court cases (Besaw and Johnson) denied charitable contribution deductions for failing to meet the strict substantiation requirements under Section 170. In Besaw, the noncash contribution receipts lacked descriptions of the donated items. In Johnson, a letter from a foundation the taxpayer himself helped lead was found inadequate; proximity to the organization and irregularities in documentation undermined the deduction entirely. Takeaway: For contributions of $250 or more, a contemporaneous written acknowledgment is required, and for noncash donations exceeding $500, records of acquisition and basis must also be maintained.

Conservation Easement Valuations Are Under Intense Scrutiny

Multiple Tax Court decisions this year reaffirmed that the IRS and courts will not accept inflated conservation easement valuations based on discounted cash flow analyses that conflate the value of raw land with the value of a speculative business operation. In Beaverdam Creek Holdings, a claimed deduction of nearly $22 million was reduced to $193,250. In Veribest Vesta, a $20.4 million claimed deduction was reduced to $111,000. In both cases, the court found that comparable sales, especially arm's-length transactions occurring near the valuation date, provided far more reliable evidence of fair market value than hypothetical business income models. A consolidated case involving four Georgia partnerships saw over $62 million in conservation easement deductions disallowed entirely because the appraiser was not "qualified" under the regulations, the promoter effectively had a predetermined, inflated value in mind before any formal appraisal was conducted.

Innocent Spouse Relief Has Clear Limits

In Wright, the Eleventh Circuit confirmed that innocent spouse relief under Section 6015 is designed to protect a spouse from the other spouse's tax liabilities; not from one's own. Because Wright's deficiency arose from her own unreported Social Security income, relief was unavailable. Separately, in Stacey, a district court applied the "duty of consistency" doctrine to prevent a taxpayer from claiming ownership of property after having previously represented to the IRS (on Form 8857) that she owned no assets in order to obtain innocent spouse relief. Takeaway: Representations made to the IRS have lasting consequences, and innocent spouse relief is not a catch-all remedy for joint return liability.

What You Should Do Now

The OBBBA represents the most significant reshaping of individual tax law since the TCJA itself. Many of the changes are permanent, which creates genuine long-term planning opportunities, but also new traps for the unwary. Whether you are reviewing your withholding, planning a charitable gift, evaluating a settlement, or considering an opportunity zone investment, the details matter more than ever.

We encourage you to contact our office to discuss how these developments affect your specific situation. Our team stays current on legislative changes and court decisions so that you can make well-informed decisions with confidence.