OBBBA Tax Law Changes 2026: How They Affect Your Taxes

What Is the OBBBA?

The One Big Beautiful Bill Act (OBBBA) is the most comprehensive tax legislation since the Tax Cuts and Jobs Act of 2017. Signed into law in early 2026, it makes sweeping changes to the federal tax code affecting millions of Americans. The legislation was designed as a budget reconciliation package, combining tax policy changes with spending adjustments across multiple federal programs.

For individual taxpayers, the OBBBA introduces several major changes that will affect your 2026 tax return. Some of these changes benefit you directly (higher SALT cap, new deductions), while others eliminate credits you may have been planning to use (EV and energy credits). Understanding these changes now is critical for tax planning throughout the year.

This guide covers each major change, who it affects, how much it could save or cost you, and links to our calculators so you can model the impact on your specific situation.

1. SALT Deduction Cap: $10,000 → $40,000

The biggest headline change in the OBBBA is the quadrupling of the State and Local Tax (SALT) deduction cap from $10,000 to $40,000. Since 2018, taxpayers who itemize deductions have been limited to deducting just $10,000 in combined state income taxes, local income taxes, and property taxes. This cap disproportionately affected taxpayers in high-tax states like New York, California, New Jersey, Connecticut, and Illinois.

Under the new $40,000 cap, a homeowner in New Jersey paying $15,000 in property taxes and $12,000 in state income taxes can now deduct the full $27,000 on their federal return. Under the old cap, they could only deduct $10,000 and lost $17,000 in deductions.

Who Benefits Most

• Homeowners in high-tax states: If your combined state/local taxes exceed $10,000, you benefit immediately. The higher your taxes, the bigger the benefit, up to the $40,000 cap.
• Middle and upper-middle income earners: Taxpayers in the 24%, 32%, and 35% brackets see the largest dollar savings from the increased SALT deduction.
• People who switched to standard deduction because of the old cap: Many taxpayers stopped itemizing after 2017 because the $10,000 SALT cap made itemizing less beneficial. The new cap may push you back to itemizing. Use our standard vs. itemized calculator to check.

2. Tips Tax Exemption

The OBBBA exempts cash and credit card tips from federal income tax for employees in traditionally tipped occupations. This affects millions of workers in restaurants, hotels, bars, salons, and other service industries. The exemption applies to employees who regularly earn tips as a substantial part of their compensation.

Important limitations: The exemption has an annual income cap — workers earning above a certain threshold may not qualify for the full exemption. Additionally, tips are still subject to Social Security tax (6.2%) and Medicare tax (1.45%). The exemption is from federal income tax only, meaning your tips still count toward your Social Security earnings record.

Employers are still required to report tips, and employees must still report tips to their employer. The difference is that reported tips will not be included in your federal taxable income calculation. State tax treatment varies — some states conform to the federal exemption, while others continue to tax tips as regular income.

Use our Tips Tax Calculator to see how much you save with the new exemption.

3. Overtime Pay Tax Exemption

In another significant change for workers, the OBBBA exempts overtime pay from federal income tax for qualifying employees. Overtime is defined as hours worked beyond 40 in a workweek, compensated at the standard 1.5x rate (or higher if required by your employer). This benefits hourly workers and salaried employees eligible for overtime under the Fair Labor Standards Act.

As with tips, the overtime exemption applies only to federal income tax. Social Security, Medicare, and applicable state income taxes still apply. There is an income phase-out to ensure the benefit targets middle-income workers rather than high-earners. Our Overtime Tax Calculator models the exact savings for your situation.

4. Senior Bonus Deduction: $4,000 for Age 65+

The OBBBA introduces a new $4,000 bonus standard deduction for taxpayers aged 65 and older. This is in addition to the existing standard deduction and the existing additional standard deduction for seniors. In practice, this means a single filer aged 65 or older gets a total standard deduction of $20,100 (the regular $16,100 plus the $4,000 senior bonus), compared to $16,100 for someone under 65.

For a married couple filing jointly where both spouses are 65 or older, the combined standard deduction rises to $40,200 ($32,200 base plus $4,000 per qualifying spouse). This is a significant increase that reduces taxable income for millions of retired and semi-retired Americans.

The senior bonus deduction is available regardless of income level, whether you are still working, and whether you take the standard deduction or itemize. If you itemize, you still get the $4,000 bonus on top of your itemized total. See our Senior Tax Calculator for personalized results.

5. Clean Energy Credit Changes

The OBBBA makes substantial changes to the clean energy tax credits that were expanded under the Inflation Reduction Act (IRA) of 2022. These changes are among the most controversial in the legislation and affect anyone planning to purchase an electric vehicle, install solar panels, or make energy-efficient home improvements.

Electric Vehicle (EV) Tax Credit — Eliminated

The $7,500 federal tax credit for new electric vehicles is eliminated for vehicles purchased after December 31, 2026. The $4,000 used EV credit follows the same timeline. If you are considering an EV purchase, buying before the end of 2026 is critical to capturing the full credit. After that date, there is no federal EV incentive.

Residential Solar Credit — Phased Down

The 30% residential solar investment tax credit is reduced to 22% for systems installed in 2026, 15% for 2027, and eliminated entirely starting in 2028. If you have been considering solar panels, the math changes significantly. A $30,000 solar installation yields a $6,600 credit at 22% in 2026, compared to $9,000 at the previous 30% rate.

Energy-Efficient Home Improvement Credits — Eliminated

Credits for heat pumps, insulation, windows, doors, and other energy-efficient home improvements are eliminated starting in 2027. For 2026, the existing $3,200 annual cap remains in effect. Homeowners planning energy upgrades should prioritize completing them in 2026 to capture available credits.

6. Child Tax Credit Changes

The child tax credit remains at $2,000 per qualifying child under age 17. The OBBBA makes two notable adjustments. First, the income phase-out thresholds are extended, allowing more middle and upper-middle income families to claim the full credit. Second, the refundable portion (Additional Child Tax Credit / ACTC) increases slightly to $1,700, up from the previous level.

The credit continues to phase out at $400,000 for married filing jointly and $200,000 for other filing statuses. The ACTC is particularly important for lower-income families because it provides a refund even if you owe no federal income tax.

7. Other Notable OBBBA Changes

• Estate tax exemption: The estate tax exemption remains elevated at approximately $13.99 million per person ($27.98 million for married couples). The OBBBA extends this level through 2031, preventing the scheduled reduction to approximately $7 million.
• Qualified business income (QBI) deduction: The 20% QBI deduction for pass-through businesses is extended through 2031.
• Student loan interest deduction: The $2,500 student loan interest deduction remains unchanged.
• 401(k) and IRA contribution limits: Adjusted for inflation as usual. The 401(k) limit for 2026 is $24,500 ($31,000 for 50+).

How to Plan for These Changes

The OBBBA changes create both opportunities and urgencies for different taxpayers. Here is a priority checklist:

1. Recalculate standard vs. itemized. With the $40,000 SALT cap, many taxpayers who switched to the standard deduction after 2018 should revisit itemizing. Use our comparison tool.
2. Capture energy credits in 2026. If you are planning EV purchases, solar installation, or energy-efficient upgrades, complete them in 2026 before credits expire or phase down.
3. Review withholding. If you are a tipped employee or earn overtime, the tax exemptions may mean you are over-withholding. Update your W-4 to get more money in each paycheck rather than waiting for a refund.
4. Maximize the senior bonus. If you are 65+ and taking the standard deduction, your tax liability drops by $880 to $1,480 (depending on your bracket) due to the additional $4,000 deduction.
5. Use our calculators. Every situation is different. Model your exact scenario with our free tax calculator to see the net impact of all OBBBA changes combined.

Frequently Asked Questions