Recent changes in the tax and spending legislation, known as the One Big Beautiful Bill (OBBB), have introduced significant tax benefits that taxpayers should start planning for now, even before the tax season opens.
The latest tax guidelines offer several enticing opportunities beyond the well-known provisions like the elimination of taxes on tips and overtime and the $6,000 bonus deduction for seniors. Notable additions include deductions for charitable contributions and auto loan interest, as well as enhanced deductions and credits for families.
Brian Gray, a certified public accountant and tax partner at Gursey Schneider, notes the increase in planning opportunities for taxpayers who normally take the standard deduction, compared to past regulations such as the 2017 Tax Cuts and Jobs Act (TCJA). This change aims to make tax planning more accessible to everyday Americans.
Charitable Contributions for All
Under OBBB, taxpayers who take the standard deduction can benefit from a reinstated charitable contributions deduction starting in 2026. During the pandemic, the CARES Act allowed a temporary deduction for cash donations, but this provision expired. Now, individuals can deduct $1,000, or $2,000 per couple, as above-the-line charitable contributions without needing to itemize. This deduction not only reduces adjusted gross income but may also qualify taxpayers for additional deductions or tax credits.
Deducting Interest on Auto Loans
The new law also allows taxpayers to deduct interest on new personal auto loans without itemizing, marking a significant shift from previous requirements that were repealed in 1986. Starting in 2025 and through 2028, individuals can claim up to $10,000 in such deductions, provided they meet specific conditions. Brian Schultz from Plante Moran Wealth Management highlights that qualifying vehicles must be newly bought, assembled in the U.S., and intended for personal use, with certain income limitations.
Such deductions could change the decision-making process for potential car buyers, enabling them to weigh the benefits of purchasing versus leasing a vehicle.
Enhanced Benefits for Families
The OBBB also increases benefits for families who do not itemize deductions. For those with a Dependent Care Flexible Spending Account (DCFSA) through their employer, the annual contribution limit will permanently rise to $7,500, up from $5,000. Despite the increase taking effect next year, plans for this hike will begin in 2025, offers Schultz.
Previously, the highest contribution occurred briefly in 2021 during COVID circumstances, reaching $10,500, up from the long-standing $5,000, as noted by Newfront, an insurance brokerage firm.
The Child and Dependent Care Credit (CDCC) will also experience a double increment starting in 2026. For families with the lowest incomes, the credit percentage will increase to 50% from 35% of qualifying expenses, capping at $3,000 for one child and $6,000 for two or more children. The percentage gradually lessens as household income rises.
Schultz warns that new income phase-outs need attention, prompting taxpayers to be vigilant about their income levels to maximize the benefits of these new provisions.
While the tax season may seem far off, these developments underline the importance of early planning to harness the full potential of the new tax law changes, according to USA Today.
Source: Original article