From Buying a New Car to Having a Baby: How the OBBBA Affects Everyday Taxpayers
As well as making many tax cuts permanent, the OBBBA also introduced a host of thresholds, phaseouts and deductions that affect everyday taxpayers, including these key changes.
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, made many of the 2017 tax cuts permanent — but it also introduced several new deductions and income rules that could change your take-home pay and your tax return.
While much of the coverage has focused on politics, what matters most is how the law affects everyday taxpayers. Here are seven key changes to understand.
1. A new deduction for tip income — but it's not 'tax-free tips'
This is a super important point.
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The OBBBA allows eligible workers to deduct up to $25,000 of qualified tip income each year.
This is an "above-the-line" deduction, meaning you can claim it even if you take the standard deduction. But there are important caveats:
- The deduction phases out at higher income levels
- You must still report all tips as income
- Payroll taxes (Social Security and Medicare) still apply
In other words, this is not tax-free tip income. It's a deduction against taxable income.
If you work in hospitality, food service or another tip-based industry, make sure your income is properly documented and reported. And if your income hovers near the phaseout thresholds, even a small raise or bonus could reduce the benefit.
2. Overtime pay may be partially deductible
Workers who earn overtime may now deduct up to $12,500 of qualified overtime income per year.
This is an above-the-line deduction, meaning you can claim it even if you take the standard deduction. However, it's important to understand what it does — and what it doesn't do.
The deduction reduces your taxable income for federal income tax purposes. It does not reduce payroll taxes. You will still owe Social Security and Medicare taxes on your full overtime pay (because your overtime is reported on your Form W-2).
In practical terms, if you're in the 22% federal tax bracket and qualify for the full $12,500 deduction, it could reduce your federal income tax by up to $2,750. But your paycheck withholding may not automatically adjust unless you update your W-4.
Like the tip deduction, this benefit phases out at higher income levels — beginning around $150,000 for single filers and $300,000 for joint filers.
If you regularly work overtime, this provision could lower your federal tax bill. But if your income is near the phaseout range, a raise, bonus or side income could reduce or eliminate the benefit. Reviewing your withholding early in the year can help prevent surprises at tax time.
3. Car loan interest is back — with limits
For the first time in years, interest on certain new personal-use auto loans may be deductible, up to $10,000 per year.
However:
- The vehicle must be new
- The deduction phases out at higher income levels
- It does not apply to used vehicles
- Business-use vehicles are already handled under separate tax rules
If you're planning to buy a new car, this deduction could modestly reduce your taxable income. But it shouldn't be the sole reason to purchase a vehicle. Always weigh financing costs carefully.
4. The SALT cap has been raised — temporarily
Taxpayers in high-tax states will welcome this change. The state and local tax (SALT) deduction cap has been raised to $40,000 through 2029. However, the benefit begins phasing out for households with income above $500,000.
If you live in states like New Jersey, New York or California, this could increase your itemized deductions significantly — at least for the next few years.
Keep in mind that this increase is temporary. Planning strategies may still need to account for potential changes after 2029.
5. A new bonus deduction for older people
Taxpayers age 65 and older may now claim an additional deduction of up to $6,000 per person. For a married couple over age 65, that could mean up to $12,000 in additional deductions.
As with many provisions in the new law, the benefit phases out at higher income levels.If you are in retirement and living on Social Security, pension income or required minimum distributions (RMDs), this deduction could help reduce taxable income. But retirees with higher investment income should check whether they qualify.
6. Roth catch-up contributions are now mandatory for higher earners
Beginning in 2026, workers age 50 and older who earned more than $150,000 in the prior year must make their 401(k) catch-up contributions on a Roth basis.
For 2026, the catch-up limit is $8,000 for those ages 50 to 59.
This means:
- You will not receive a current-year tax deduction for those catch-up contributions
- Your paycheck may be slightly smaller
- The money will grow tax-free and can be withdrawn tax-free in retirement
If you are affected, review your payroll elections early in the year to avoid confusion.Over time, this rule may result in more tax-free income in retirement, which could be great, but it does change short-term cash flow planning.
7. Trump Accounts for newborns
The OBBBA introduces a new savings vehicle informally known as Trump Accounts. Children born between 2025 and 2028 will receive a $1,000 federal seed deposit. Families may contribute up to $5,000 per year after tax, and the account converts into a traditional IRA at age 18.
These accounts are not replacements for 529 college savings plans. Withdrawals from a Trump Account for non-retirement purposes may be taxable.
Instead, they function as long-term retirement accounts that begin compounding at birth.
If you have a child born during the eligible years, this could be a powerful long-term savings opportunity. But it works best as part of a broader financial plan — not as a stand-alone strategy.
What this means for you
The biggest takeaway from the OBBBA is much more predictability.
Many of the tax rates and structural rules are now permanent. That allows households to plan more confidently — especially when it comes to retirement savings, charitable giving and long-term investments.
But the new law also adds income thresholds, phaseouts and temporary deductions that make tax planning more nuanced.It may be worth reviewing:
- Whether you qualify for the new tip or overtime deductions
- Whether a car purchase affects your tax position
- How the increased SALT cap impacts itemizing
- Whether you qualify for the bonus deduction for older people
- How Roth catch-up rules affect your paycheck
Understanding how these provisions apply to your situation can help you avoid surprises and potentially reduce your tax bill in the years ahead.
Many of the tax provisions in the One Big Beautiful Bill Act are explained in more detail in my book, Deduct Everything! What You Need to Know About Trump's Tax Cuts and the One Big Beautiful Bill, which walks readers through hundreds of practical tax strategies and deductions.
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