The passage of the One Big Beautiful Bill Act (OBBBA) in July 2025 brought certainty to many individual taxpayers, including federal employees and retirees. Had the OBBBA not been passed and signed into law, many of the significant tax breaks resulting from the Tax Cuts and Jobs Act (TCJA) of 2017 would have expired on December 31, 2025.
While the OBBBA did create new tax-savings opportunities, OBBBA also created many questions about how to navigate the new rules. Some of the OBBBA changes took effect immediately in 2025, and some of the changes will take effect January 1, 2026. A previous column discussed the tax changes taking effect in 2025. This column discusses the OBBBA tax law changes that will take effect on January 1, 2026, and what tax-related moves federal employees/retirees should consider and perhaps perform now in order to take advantage of the OBBBA changes taking effect in 2026.
The OBBBA passage resulted in the extension, modification or making permanent several of TCJA’s tax breaks and suspensions that had been scheduled to expire on January 1, 2026.
Lowest Federal Tax Brackets Maintained
One of the provisions coming out of the TCJA was the lowering of individual federal brackets. These individual marginal tax rate brackets are 10, 12, 22, 24, 32, 35 and 37 percent, and were the lowest individual tax rate brackets in the 100-year history of the federal individual income tax. These brackets were set to sunset on December 31, 2025. The OBBBA makes these marginal tax brackets permanent. The OBBBA also added an additional year of inflation adjustments to the 10 percent, 12 percent and 22 percent tax brackets. The result of the additional year of inflation adjustments is that it will increase the amount of taxable income that is taxed at those marginal tax rates instead of higher marginal tax rates.
New Limitation on Itemized Deductions
Effective January 1, 2026, the OBBBA will replace the suspended Pease Limitation with a new restriction on itemized deductions. The Pease Limitation, named after the late Congressman Donald Pease, was introduced in 1991. The Pease Limitation was scheduled to return on January 1,2026 after being suspended following the passage of TCJA, required individuals with adjusted gross incomes over $339,850 ($407,850 for individuals filing as married filing jointly) to reduce certain itemized deductions by three cents for every dollar over the threshold. The phase-out of itemized deductions under the Pease Limitation is capped at 80 percent of certain itemized deductions.
The new itemized deduction limitation resulting from the OBBBA passage is that the itemized deduction limitation under the OBBBA caps the tax value of itemized deductions at the 35 percent tax rate for those individuals in the highest federal marginal tax bracket (37 percent). Unlike the Pease Limitation, the OBBBA itemized deduction limitations applies to all itemized deductions, including the enhanced State and Local Tax (SALT) deduction (raised from $10,000 to $40,000). As is discussed below, there is another limit on charitable contributions which are included as part of itemized deductions.
Charitable Contribution Changes
Starting in 2026, individuals who take the standard deduction can deduct up to $1,000 of charitable cash contributions ($2,000 for married filing jointly) if they do not itemize on Schedule A. Charitable contributions must be cash/check, regardless of the amount, to any qualified charity and must be supported by a dated bank record such as a canceled check or a dated receipt from the charity that includes the name of the charity, the date, and the amount of the contribution. Donations of goods such as clothing, furniture, and toys to charitable organizations are not permitted for this deduction.
Individuals who itemize (file Schedule A) will also face a new limitation on charitable contributions starting January 1, 2026. Charitable contributions will be deductible on Schedule A only to the extent they exceed 0.5 percent of the individual’s adjusted gross income (AGI). For example, an individual with an AGI of $300,000 will get no tax deduction for the first $1,500 of charitable contributions. Those charitable donors who want to avoid this limitation should consider accelerating their charitable donations into 2025.
Conversely, those individuals who do not itemize their deductions and instead take the standard deduction may want to postpone their cash/check contributions until 2026. Needless to say, individuals who are considering when to make their charitable contributions are advised to consider the immediate needs of the charity they wish to support.
529 Education Savings Plans
Beginning in 2026, the annual limit for tax-free kindergarten through grade 12 withdrawals from 529 Education Savings Plans will increase permanently from $10,000 to $12,000 per beneficiary. Effective July 1, 2025, the definition of kindergarten through grade 12 qualified education expenses is expanded to include curriculum materials, books, online education materials, qualified tutoring services, standardized fees, dual enrollment fees, and educational therapies for students with disabilities. In addition, expenses for certifications and licenses such as HVAC work can be reimbursed from a 529 Education Savings Plan.
Estate Tax and Lifetime Gift Exemptions Remain at Higher Levels
The federal estate tax exemption, currently at $13.99 million per individual ($27.98 per married couple), will increase in 2026 to a permanent base of $15 million per individual ($30 per married couple) in 2026. The new limit will continue to be indexed annually to inflation.
The annual gift tax exclusion of $19,000 (2025) was not changed by OBBBA.
OBBBA Tax-Planning Moves
For many individuals including federal employees and retirees, OBBA’s passage necessitates some tax-planning moves for 2025 and 2026. The enhanced standard deduction amount, the higher SALT deductions, and the new rules on charitable deductions are the determining factors whether it makes sense for an employee or a retiree to itemize deductions or to take the standard deduction for the 2025 and 2026 tax years. As part of that determination, employees and retirees who expect to itemize deductions for the 2026 tax year are advised to ascertain if there are taxable income or deductible expenses they have control over recognizing either in 2025 or 2026.
Those employees and retirees age 65 and older should now consider the AGI phaseout of the new enhanced standard deduction ($6,000/$12,000). This enhanced deduction can lead to savings such as offsetting the taxes resulting from the conversion of traditional IRAs to Roth IRAs.
High-income employees and retirees, particularly those with AGIs over $200,000, should consider accelerating charitable contributions into 2025 before the new 0.5 percent of AGI floor takes effect in 2026. Combining multiple years of charitable giving into 2025 could result in greater benefits than spreading charitable contributions over several calendar years starting in 2026 . Another consideration for those employees and retirees who expect to be in the 37 percent federal marginal tax bracket during 2026 (single tax filers with 2026 taxable income over approximately $640,600; married filing jointly tax filers with 2026 taxable income over approximately $768,800) is that starting in 2026, the total amount of itemized deductions will be capped at 35 percent. This means that in addition to a 0.5 percent of AGI floor limitation, the charitable contribution deduction will be capped at 35 percent for individuals in the 37 percent marginal tax bracket in 2026.
Federal employees and retirees are advised that as with any major tax legislation, individual circumstances will vary as to the new rules will affect an individual. Employees and retirees are therefore advised to consult with a qualified tax professional in order to develop tax saving strategies that are appropriate for their specific situations.