Analysis of Tax Provisions in OBBBA Reconciliation Bill

The bill permanently extends income tax rates meaning that the minimum individual tax rate is permanently 37% and the rates for the seven tax brackets are 10%, 12%, 22%, 24%, 32%, 35% and 37%.

The AMT ensures that high-income taxpayers pay a minimum level of federal taxes. H.R. 1 permanently increased the AMT exemption amounts and phaseout thresholds and implements a faster phase-out rate for the exemption.  

• Exemption Amount: The AMT exemption limits of $88,100 for individuals and $137,000 for joint filers are permanently extended, meaning taxpayers can exempt up to this amount of taxable income from alternative minimum taxable income (AMTI)
• Phaseout Threshold: The bill returns the exemption limit phaseout threshold to the 2018 levels of $500,000 for individual filers and $1 million for joint filers, indexed for inflation meaning the amount of income you can exempt from AMTI is reduced for filers with annual income over the threshold  
• Phaseout Rate: The bill increases the phaseout rate to 50% rather than 25%, meaning that the exempted amount will decrease at 50-cents for every dollar in excess of the income threshold.

While current law does not have a limitation on itemized deductions through December 31, 2025, H.R. 1 now limits itemized deductions to 35 cents per $1 of income for taxpayers in the top marginal tax bracket.

The bill permanently extends the expanded standard deduction and indexes it for inflation. For tax years beginning after 2024, the standard deduction is increased to $15,750 for single filers, $23,625 for heads of household and $31,500 joint filers. The bill includes an annual adjustment for inflation and does not allow for personal exemptions.

H.R. 1 establishes a new $6,000 deduction for taxpayers over 65 years old through December 31, 2028. The deduction has an income threshold of $150,000 for joint filers and $75,000 for all other filers where the deduction will phase out based on income in excess of these thresholds.

The bill raises the $10,00 cap on the SALT deduction enacted by TCJA to $40,000 for taxpayers making $500,000 or less in modified adjusted gross income (MAGI) in 2025. Itemizing taxpayers will be able to deduct up to $40,000 in local property taxes and either state and local income or sales taxes already paid this year.

• The cap is raised to $40,400 for taxpayers making $505,000 or less in MAGI in 2026.
• From 2026 to 2030, both the cap and income threshold would be equal to 101% of the previous year’s cap and income threshold before returning to $10,000 in 2030.  
• For 2026 through 2029, if individuals have MAGI greater than the income threshold the cap will be reduced by 30% of the excess until the cap is back to $10,000.  
• NACo supports the full deductibility of SALT, however this expansion is a first step in restoring the full deduction and our federalist tax code.

H.R. 1 establishes a new income tax deduction through December 31, 2028 where taxpayers who received qualified overtime compensation can deduct the amount they earned in excess of their regular rate of pay. For example, if a taxpayer made $100 in base pay but $120 with overtime, they would be able to deduct $20.  

• Taxpayers can deduct up to $12,500 in qualified overtime pay per year (or $25,000 for joint filers) and begins to phase out for individuals making more than $150,000 in annual MAGI ($300,000 for joint filers) at a rate of 10% until the deduction is $0.  
• The deduction is limited to overtime compensation required by the Fair Labor Standards Act (FLSA), meaning that the deduction is available to both hourly-wage and salaried employees so long as they are non-exempt employees eligible for overtime.  
• To access the deduction, the overtime compensation must be reported on IRS Forms W-2 or 1099 and taxpayers must provide a Social Security Number (SSN).  
• “No Tax on Overtime” is available to both itemizing and non-itemizing taxpayers who opted for the standard deduction
• This provision will also impact counties as employers of individuals qualifying for this deduction. Employers will be required to file information returns with the IRS (or Social Security Administration) and issue statements to employees showing the total amount of qualified overtime compensation paid during the year. The IRS will provide transition relief in 2025 for taxpayers claiming the deduction and employers with reporting requirements.

The bill establishes a new income tax deduction through December 31, 2028 where employed and self-employed taxpayers can deduct qualified tips received in occupations that “customarily and regularly received tips” before 2025. The bill requires the U.S. Department of Treasury (Treasury) to publish a list of qualified occupations by October 2, 2025.  

• Taxpayers can deduct up to $25,000 per year in qualified tips and begins to phase out for individuals making more than $150,000 in annual MAGI ($300,000 for joint filers) at a rate of 10% until the deduction is $0.
• To access the deduction, tips must reported on IRS Forms W-2, 1099 or 4137 and taxpayers must provide a Social Security Number (SSN).
• “No Tax on Tips” is available to both itemizing and non-itemizing taxpayers who opted for the standard deduction.
• Employers will be required to file information returns with the IRS (or Social Security Administration) and issue statements to employees showing certain cash tips received and the occupation of the tip recipients. The IRS will provide transition relief in 2025 for taxpayers claiming the deduction and employers with reporting requirements.

H.R. 1 created a new income tax deduction where individual taxpayers can deduct qualified interest earned on a loan use to purchase a qualified vehicle.

• The deduction is capped at $10,000 per year and phases out for individuals making more than $100,000 in MAGI ($200,000 for joint filers).
• Qualified interest originated after December 31, 2024 and the loan must be used to purchase a car originating with the taxpayer (meaning used vehicles do not qualify) for personal use and secured by a lien on the vehicle.
• A qualified vehicle is a car, minivan, SUV, pickup truck or motorcycle with a gross weight rating of less than 14,000 pounds and has undergone final assembly in the United States.
• Car lease payments do not qualify for the deduction and in the case of the loan being refinanced, the interest paid on the refinanced amount is generally eligible for the deduction.
• The deduction is available to both itemizing taxpayer and non-itemizing taxpayers who opted for the standard deduction so long as a vehicle identification number (VIN) is included on the tax-return.
• The IRS will provide transition relief for tax year 2025 for taxpayers claiming this deduction.

The bill permanently expands the CTC from the current $2,000 level to $2,200 beginning in tax year 2025, meaning taxpayers will be able to claim the expanded CTC on this year’s tax return. The credit will then be adjusted for inflation in years after. NACo supported structural changes to the CTC that increase the number of eligible households and provide higher benefit amounts, which was partially achieved in H.R. 1.

• The bill makes the refundable portion of the CTC permanent. The refundable portion is currently capped at $1,700 and will be adjusted for inflation in years after.
• The bill permanently indexes the $500 nonrefundable Credit for Other Dependents (COD) for inflation beginning after tax year 2025.
• The CTC is permanently phased out for individuals with modified adjusted gross income exceeding $200,000 ($400,000 in the case of a joint return) at a rate of $50 per $1,000 of income over the threshold.
• The bill requires both the parent claiming the CTC (or both parents if filing jointly), and the child to have a Social Security Number (SSN).
• The credit's phase-in was not addressed, preventing over 17 million children from low-income families from receiving the full credit.

For certain low-income taxpayers, the bill expands the CDCTC beginning in 2026. The CDCTC is a nonrefundable tax credit based on child and dependent care expenses and calculated by multiplying qualifying expenses ($3,000 for one child, $6,000 for two or more) by the appropriate credit rate, which is determined by the taxpayer’s income. The CDCTC was expanded under the American Rescue Plan Act (ARPA) for one year with increased qualifying expenses and credit rates, and by being fully refundable. NACo urged Congress to restore CDCTC’s refundability and to index the credit rate to inflation, however H.R. 1 instead expands the CDCTC and implements a new tiered scale to the credit rating based on income:

• The maximum credit percentage is increased to 50% for taxpayers with adjusted gross income (AGI) under $15,000 and is reduced by one percentage point per $2,000 in income over $15,000 until the credit percentage is 35% or the AGI is $43,000.
• The credit remains at 35% for taxpayers with AGI between $43,001 and $75,000 (or $150,000 in the case of joint returns).
• The credit is further phased down to 20% for AGI between $75,001 and $103,001 ($150,001 and $206,001 for joint filers).

The bill enhances the adoption tax credit for qualified adoption expenses by making the credit refundable. Beginning in 2025, parents will be able to refund up to $5,000 indexed for inflation, however the refundable portion of the credit cannot be carried forward to future years. For 2025, taxpayers can claim adoption tax credits of up to $17,820 but it begins to phase out for taxpayers with modified adjusted gross income of $259,190 until the credit is fully phased out for taxpayers making over $299,190 in MAGI.

The bill permanently extends the home mortgage deduction with a principal amount of up to $750,000 and allows some mortgage insurance premiums and acquisition indebtedness to be treated as qualified residence interest.

Makes permanent the 20% deduction for qualified business income, increases the phase-in range by 50% for both joint- and individual-filers and establishes a new, inflation-based minimum deduction of $400 for individuals with at least $1,000 in qualified business income from one or more trade or business.

The bill establishes a permanent deduction for eligible charitable contributions of up to $1,000 ($2,000 for joint filers) for taxpayers who do not itemize their deductions beginning in tax year 2026. Additionally, for filers who do itemize their deductions the bill establishes a floor for the deduction where taxpayers can only deduct contributions to the extent that it exceeds 0.5 percents of the individuals AGI.

The limit of the personal casualty deduction to federally declared disasters is permanently extended and expanded to also include state-declared disasters.

The bill disallows any deduction of miscellaneous expenses, allowing the exception for certain educator expenses expire on December 31, 2025.

H.R. 1 makes permanent the exclusion of discharged student loan debt because of death or total disability of the student from taxable income.

Permanently increases the estate and gift tax exemption to $15 million indexed to inflation.

The bill makes permanent provisions of the TCJA that eliminated the business tax deduction that employers could claim for costs related to transportation fringe benefits and makes permanent the temporary income exclusion for bicycle commuting reimbursements. This means that employers still cannot deduct transportation fringe benefit provided to employees and exclude qualified bicycle reimbursements from employees’ income.

H.R. 1 makes PFML tax credit permanent for employers that applies to wages paid during PFML-covered leave. The bill expands the credit to allow employers to access the credit providing PFML to individuals employed for at least 6 months instead of the previous requirement of 1 year but requires employees to be employed for at least 20 hours a week.

• The bill allows employers to calculate the PFML credit using the original method calculated as a percentage of wages paid or a new second option based on total premiums paid or incurred for insurance policies covering PFML.

The bill makes permanent TCJA provisions allowing employers to make student loan reimbursement payments and indexes the overall education assistance exclusion of up to $5,250 to inflation.

Beginning in tax year 2026, the bill increases the maximum annual exclusion to $7,500 (or $3,750 for married individuals filing separately) from $5,000 but does not adjust the limit to inflation.

The bill permanently maintains the repeal of the moving expense deduction and the exclusion of employer-provided qualified moving expenses reimbursements except for members of the Armed Forces and intelligence community.

H.R. 1 limits eligibility for individuals to receive premium tax credits to U.S. citizens and nationals, permanent residents and certain Cuban, Haitian and COFA immigration categories beginning on January 1, 2027. Additionally, beginning in 2026 lawfully permanent residents with household incomes less than 100% of the federal poverty line who are ineligible for Medicaid due to their immigration status will be ineligible for premium tax credits. For individuals who become ineligible for premium tax credits, the cost of ACA coverage could become too high and therefore the number of uninsured individuals in our community seeking care at county facilities could increase.  

• Beginning on January 1, 2026, the bill ends income-based special enrollment periods and disallows the premium assistance credit.
• Beginning on January 1, 2028, the bill ends automatic re-enrollment, requiring annual verification of immigration status, residency and income.

Limits Medicare coverage eligibility to foreign persons who are “lawfully present” in the United States. Unlike Medicaid, Medicare is solely administered by the federal government and is not a partnership with states, but changes to Medicare eligibility could increase the number of uninsured individuals in our community seeking care at county facilities.

Beginning January 1, 2026, the bill allows bronze and catastrophic plans offered in the individual market to be treated as Health Savings Account (HSA)-eligible High-Deductible Health Plan (HDHP).

The bill makes permanent the pandemic-era safe harbor allowing HDHPs to provide first-dollar telehealth and remote care services prior to the individual satisfying their plan’s deductible.

The bill clarifies that DPC participants are able to contribute to an HSA so long as the DPC operates on a fixed fee that does not exceed $150 per month for an individual and $300 per month for more than one person and clarifies that these fees can be paid tax-free from a HSA.

The bill establishes new “Trump Accounts” or an individual retirement account (IRA) that can be opened for children under the age of 18 who are U.S. citizens with a Social Security number (SSN). The bill additionally establishes a Trump Account pilot program where children born after January 1, 2025 but before January 1, 2029 will be eligible to receive a $1,000 deposit in a newly opened account from the federal government. Treasury is not required to, but can, establish automatic enrollments for all eligible children in the pilot program. Beginning on July 4, 2026, children under the age of 18 who were born before January 1, 2025, will be able to open a Trump Account but they will not be eligible to receive the $1,000 from the pilot program.

Contributions

• Beginning on July 4, 2026, children, parents and grandparents can contribute after-tax up to $5,000 per year, however these contributions cannot be deducted from federal income tax until the child turns 18. After age 18, then the account follows regular IRA rules.  
• Employers can contribute up to $2,500 per year to the dependent child of an employee or an employee directly if they are under 18 which applies to the $5,000 per year per account limit  
• State and local governments and other tax-exempt organizations can contribute unlimited amounts to Trump Accounts so long as the beneficiaries are under 18 and the contributions are evenly distributed to all children among a set group such as age or geography. Contributions from state and local governments will not count towards a plan’s annual $5,000 limit.

Distributions

• Account holders cannot take distributions until the age of 18, meaning that the account value does not impact eligibility to means-tested programs like the Supplemental Nutrition Assistance Program and veterans’ benefits.
• Starting at 18, Trump Account funds can be withdrawn penalty-free for specified uses such as unlimited amounts for post-secondary education, up to $10,000 for the purchase of a first home, and up to $5,000 for the birth or adoption of a first child but are otherwise treated as a traditional IRA where a 10-percent tax penalty is applied for early distributions.

Guidance

• Treasury will be providing guidance on remaining questions, such as the process to open a Trump Account, by the effective date of July 4, 2026.

The bill expands the definition of qualified education expenses that can be paid for with income tax-free distributions from a Section 529 plan to include certain credential programs in addition to costs associated with traditional post-secondary education. Additionally, the bill expands the limitation for elementary and secondary education (public, private and religious) expenses from $10,000 to $20,000 and expands qualified K-12 expenses to include additional costs beyond tuition including instructional materials, online education, tutoring, certain testing fees, and certain educational therapies.

The bill permanently extends the current contribution limits for ABLE Accounts for individuals with certain disabilities and provides for an additional year of inflation adjustment. Additionally, the bill permanently allows beneficiaries who contribute to ABLE Accounts to receive a Saver’s Credit of up to $2,100 against the beneficiaries gross income as well as tax-free rollovers from 529 tuition programs into ABLE Accounts.

H.R. 1 permanently extends the New Markets Tax Credit that serves to attract private capital to low-income communities by providing individuals with a tax credit against their federal income tax for making investments in Community Development Entities (CDEs) worth 39% of the original investment collected over 7 years. The CDEs then use the capital to finance projects in distressed communities such as commercial real estate development and support to small businesses. NACo supported the permanent of this tax credit as it has been an effective tool to spur investments in low-income communities.

The bill permanently expands the LIHTC which helps the development of affordable housing by increasing the volume cap of the 9% credit by 12 percent and lowering the tax-exempt bond financing requirement to access the 4% credit from 50 percent to 25 percent, intended to increase the accessibility of the credit. NACo supported the permanent expansion of LIHTC as it has been an effective tool in stimulating private investment in the provision of affordable housing.

• The 9% credit is competitively awarded by state housing agencies to developers and   provides a subsidy rate of 70% for low-income unit costs so long as the project does not utilize any additional federal subsidies. The amount of LIHTC a state can award is limited by the federal government, but H.R. 1 permanently raises this limit per state by 12 percent beginning in 2026 meaning more credits will be available.
• The 4% credit is available on a non-competitive basis to rental property projects who finance a certain amount of land and building costs with private activity bonds (PABs) and provides a 30% subsidy rate for low-income unit costs. H.R. 1 permanently lowers the PAB threshold from 50% to 25% beginning in 2026 so long as at least 5% of the aggregate land and building costs are financed with PABs issued after December 31, 2025. Since PAB issuances are subject to a volume cap per state the 50% threshold requirement can be difficult to mean therefore limiting the amount of affordable rental housing projects that can access the 4% LIHTC. This is also anticipated to increase the amount of LIHTC available to projects.

The bill authorizes a second, permanent round of the Opportunity Zones program, called “Opportunity Zones 2.0,” to attract investments Qualified Opportunity Funds (QOFs) for a temporary deferral of tax on certain gains earned. QOFs are the vehicle that makes direct investments in designated census tracts. Opportunity zones (OZs) were established by the 2017 TCJA and allowed Governors to designate up to 25% of qualified census tract as OZs. The first round was set to expire on December 31, 2026.  

• The OZ 2.0 program will begin January 1, 2027, and requires Governors to designate new opportunity zones every 10 years. Existing opportunity zones may or may not be re-designate by discretion of the Governor.
• The bill narrows the definition of “low-income community” to those with a 20% poverty rate or median family income less than 70% of the area median income. Census tracts with median family incomes 125% or greater than the area median income cannot be designated as OZs and the bill ends automatic eligibility for census tracts contiguous to low-income census tracts.
• The bill also establishes a rural qualified opportunity fund (RQOF) to make targeted investments in rural communities defined as those with a population of less than 50,000 and excluding tracts adjacent to but does not require a certain amount of OZs to be located in rural areas.
• Maintains existing QOF investment incentive of a 10-percent reduction in taxable gain, but investments in RQOFs would receive a 30-percent reduction, triple the benefit over the same 5-year schedule.
• The bill included reporting requirements for QOFs to increase transparency for investors and the economic impact of the program can be measured and analyzed.
• As Treasury develops guidance for Opportunity Zones 2.0, counties stand ready to work with our federal partners to ensure these investments can meet the needs of our communities.

The bill terminates the $7,500 tax credit for qualified vehicles acquired after Sept. 30, 2025, instead of December 31, 2032.

The bill terminates the tax credit of up to $100,000 and equal to 30% of the cost of alternative fuel vehicle refueling properties placed in service in non-urban and low-income for property placed in service after June 30, 2026, instead of December 31, 2032.

The 45V credit that is based on the qualified clean hydrogen a facility produces for sale or use and that is available for the 10-year period from when the facility is originally placed into service will now only be available to projects that begin construction by Dec. 31, 2027, rather than by January 1, 2033.

The bill eliminates the credit for wind and solar facilities placed into service after 2027 or that begin construction after July 4, 2026, or one year after the bill’s enactment. Wind and solar facilities that are placed into service after this date will remain eligible for the credit if they are placed into service before December 31, 2027. Credits for wind and solar facilities leased to third parties are terminated immediately and the bill includes a provision denying the credit for facilities that receive any material assistance from prohibited foreign entities.

For all other eligible facilities, such as hydropower, nuclear and geothermal, the credit will begin to phase-out. Projects that begin construction by 2033 will receive 100% of the credit and credit amount is reduced by 25% each year until it is eliminated fully in 2036.

The bill eliminates the credit for wind and solar facilities placed into service after 2027 or that begin construction after July 4, 2026, or one year after the bill’s enactment. Wind and solar facilities that are placed into service after this date will remain eligible for the credit if they are placed into service before December 31, 2027. Credits for wind and solar facilities leased to third parties are terminated immediately and the bill eliminates the credit for facilities that receive any material assistance from prohibited foreign entities for any tax year beginning after July 4, 2025.

For all other eligible facilities, such as hydropower, nuclear and geothermal, the credit will begin to phase-out. Projects that begin construction by 2033 will receive 100% of the credit and credit amount is reduced by 25% each year until it is eliminated fully in 2036.

The bill eliminates the credit for facilities that receive any material assistance from prohibited foreign entities for any tax year beginning after July 4, 2025.

The bill eliminates the credit for wind components produced or sold after Dec. 31, 2027 and phases-out the credit for the production of critical minerals by reducing the value of the credit by 25% beginning in 2031 until the credit is fully eliminated in 2034.

The bill extends the clean fuel production credit for fuel sold before January 1, 2028 to fuel sold before December 31, 2029. Additionally, the bill limits eligibility for the credit to transportation fuel exclusively derived from feedstock grown within North America beginning after December 31, 2025, and eliminates the credit for facilities that receive any material assistance from prohibited foreign entities for any tax year beginning after July 4, 2025.

The bill increases applicable dollar amounts for captured carbon oxides used in allowable manner to match the dollar amount for captured carbon disposed. Additionally, the bill eliminates the credit for facilities that receive any material assistance from prohibited foreign entities for any tax year beginning after July 4, 2025.