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 passage of 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, the OBBBA 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 on January 1, 2026. This column discusses tax-planning steps federal employees and retirees should consider between now and the end of 2025, to take advantage of the OBBBA changes already in effect.
Permanently Increased Standard Deduction
The OBBBA makes permanent the increased standard deduction amounts from the TCJA. TCJA doubled the standard deduction for all tax filers raising the threshold for itemizing (filing Schedule A). The new standard deduction amounts taking effect in 2025 are $31,500 for married filing jointly, $23,625 for head of household and $15,750 for single and married filing separately tax filers.
Personal exemptions for individuals, spouses and dependents are permanently removed. For federal employees and retirees, the higher standard of deductions raises the threshold for itemizing on one’s federal income return rather than taking the standard deduction, particularly those employees and retirees who were close to pre-OBBBA standard deduction levels. As discussed below, the new state and local tax (SALT) deduction, being raised from a limit of $10,000 to $40,000, and the new rules on charitable contributions taking effect on January 1,2026 will also have an impact on whether an employee/retire should take the standard deduction or itemize on their 2025 federal income tax returns.
Increased Deduction for Seniors
Individuals who attain age 65 on or before the last day of December can qualify for an additional $6,000 deduction or $12,000 for married couples filing jointly, in which both spouses are over age 65. The extra deduction is valid for tax years 2025 through 2028.
In order to claim the deduction, the IRS lists two requirements: (1) The Social Security number of the qualifying individual(s) must be included on the tax return; and (2) If married, the individuals have to file married filing jointly. This deduction is not available for couples who file married filing separately.
There is a “phaseout” for the deduction. Individuals with modified adjusted gross income (MAGI) over $75,000 (and $150,000 for married couples filing jointly) will lose some and perhaps all of the deduction. The “phaseout” is complete at a MAGI of $175,000 for singles and a MAGI $250,000 for married couples filing jointly.
Qualifying federal employees and retirees can take the additional deduction whether they itemize their deductions or claim the standard deduction. The deduction is also in addition to the existing additional standard deduction for older individuals and those who are blind. During 2025, these additional standard deductions of $1,600 per spouse 65 and over, or $3,200 for a married couples filing jointly in which both spouses are 65 and older (plus $1,600 per spouse who is blind), and $2,000 for single filers and head of household filers who are 65 and older (plus $2,000 if also blind).
For federal retirees over age 65 and who are eligible for the full $6,000/$12,000 deduction, there is an opportunity to make some planned taxable moves before the end of 2025 (such as Roth IRA conversion) in order to take advantage of this new deduction. Roth IRA conversions are generally taxable. A married couple who qualifies for the full $12,000 deduction may want to consider converting a traditional IRA worth $12,000, or two traditional IRAs each worth $6,000, to a Roth IRA. The $12,000 of taxable income resulting from the Roth IRA conversions can be effectively offset with the $12,000 deduction.
SALT Deduction Limit Increase
The State and Local Tax (SALT) deduction provides a federal deduction for income or sales; property and personal taxes paid at the state and local levels. The SALT deduction can be used only by individuals who itemize on their federal income tax return. The TCJA puts a limit of $10,000 for all tax filers, no matter what their tax filing status is.
The OBBBA increases the limit on the SALT deduction from $10,000 to $40,000 for tax years 2025 through 2029. The higher SALT limit phases out for high-income individuals, beginning at modified adjusted gross income (MAGI) of $500,000 for both married filing jointly and single filers. Both the limit amount and income thresholds will increase one percent annually from 2026 through 2029, after which the SALT deduction limit will revert to $10,000 effective January 1,2030.
The higher SALT deduction, particularly benefits federal employees and retirees who live in high income tax states and who until this year were limited to $10,000 for their state and local tax deductions on Schedule A. Federal employees and retirees who may benefit from this raised SALT limit are advised to evaluate the timing of other Schedule A itemized deductions (such as charitable contributions) in order to maximize benefits.
Enhanced Child Tax Credit
Beginning in 2025, the child tax credit increases from $2,000 to $2,200 per qualifying child under the age of 17. The credit is permanent and will be indexed for inflation starting in 2026. The income phaseout thresholds remain unchanged at AGI of $400,000 for married filing jointly and $200,000 for other tax filers.
The OBBBA tightens eligibility requirements for individuals taking the child tax credit. Effective in 2025, individuals taking the credit and their children under the age of 17 must have Social Security numbers issued to U.S. citizens or lawful permanent residents. Until this year, only the child needed a Social Security number and parents could claim the child tax credit with an individual taxpayer identification number (ITIN).
Other Dependent Credit Made Permanent
Those families with dependents who do not qualify for the child tax credit (such as a parent or adult relative) may qualify for the Other Dependent tax credit. With the OBBBA, the value of the credit remains $500 and has been made permanent.
Auto Loan Interest Deductible
Interest paid on loans for new passenger vehicles for personal use purchased after December 31,2024 and before January 1,2029 is deductible, up to a limit of $10,000 per year. The deduction phases out at MAGI of $200,000 for married filing jointly tax filers and $100,000 for single tax filers. It is completely phased out at MAGI of $250,000 for married filing jointly and $150,000 for single filers.
To claim the credit on a new passenger vehicle, the vehicle must have had a final assembly in the U.S. The vehicle identification number (VIN) must be included on the tax return.
The deduction can be claimed even if the standard deduction is claimed.
Green Energy Provisions for Individuals
OBBBA ends several of the green energy provisions for individuals earlier than previously legislated by Congress. Individuals who want tax credits on new or previously owned “clean” vehicles must now place them in service by September 30, 2025. The pre-OBBBA deadline was December 31, 2032.
The deadline for qualifying for the energy-efficient home improvement credit is now December 31,2025 and not December 31,2032 as it was pre-OBBBA. The deadline for qualifying for the residential clean energy credit is December 31,2025 and not December 31,2034 as it was pre-OBBBA.