An OBBBA Summary for 403(b) Plan Participants
August 29, 2025
By Barbara O'Neill, CFP®, AFC®
On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law. Note that the word “beautiful” is not a personal opinion, but part of its official title. Over 900 pages long, OBBBA is a comprehensive piece of legislation affecting income and estate taxes, health care services, Medicaid, immigration, clean energy programs, and more. This post will address tax law changes that are most likely to impact 403(b) participants.
First and foremost, OBBBA eliminated uncertainty regarding the impending December 31, 2025 sunset of the 2017 Tax Cuts and Jobs Act (TCJA), particularly fears that many Americans would be pushed into a higher marginal tax bracket. With OBBBA, TCJA features were made “permanent,” which in “tax-speak” means in effect until a future Congress passes a new tax law to change them.
This post is organized into five sections: permanent tax law changes, limited time offers, 2025 changes, 2026 changes, and 403(b) participant implications. Also included is a summary of preliminary research about estimated impacts on Americans’ incomes and OBBBA winners and losers. The post concludes with three “need to know” facts and six take-away action steps.
Permanent Changes
Tax Rates and Tax Brackets — Under OBBBA, income tax rates and tax brackets from TCJA are permanent with future cost-of-living adjustments on tax bracket income ranges. The seven tax rates will continue to be 10%, 12%, 22%, 24%, 32%, 35%, and 37%, as shown in the table for 2025 tax rates and brackets, below.
Tax Write-Offs — Other TCJA features also became permanent, including:
- Suspension of miscellaneous itemized deductions subject to a 2% of adjusted gross income (AGI) floor
- The $750,000 cap on mortgage debt for the home mortgage interest deduction
- The casualty loss deduction for federally declared disasters; now expanded to state disaster declarations
- The child tax credit, increased to $2,200 in 2025 and indexed for inflation thereafter
Estate and Gift Tax Exemption — The very generous estate and gift tax exemption ($13,990,000 in 2025) enacted by TCJA is now permanent. It will be set at $15 million in 2026 and indexed for inflation thereafter.
Limited-Time Offers
A number of new tax law features enacted under OBBBA are short-lived with a defined expiration date.
“No Tax on Tips” — From 2025 through 2028, employees in customarily tipped occupations can deduct up to $25,000 in qualified tip income as an “below-the-line” deduction (i.e., subtracted after AGI is calculated). Caveats: many tipped workers will likely not hit the cap and the deduction phases out: $150,000 (single) and $300,000 (married filing jointly (mfj). Tips are also still subject to payroll tax.
“No Tax on Overtime” — From 2025 through 2028, extra overtime wages (i.e., the “half” in “time and a half” overtime pay) for jobs covered by the Fair Labor Standards Act can be deducted from taxable income “below-the-line.” Again, phaseouts apply: $12,500 of qualified overtime pay (single) and $25,000 (MFJ).
Car Loan Interest Deduction — From 2025 through 2028, OBBBA provides a deduction up to $10,000 per year for interest on new car loans. Caveats: few middle-income households pay this much annually and vehicles must be assembled in the U.S. There is an income-based phaseout starting at $100,000 modified AGI (singles) and $200,000 MAGI (mfj). This, too, is a below-the-line deduction.
State and Local Tax (SALT) Deductions — The $10,000 cap on SALT deductions enacted under TCJA will increase to $40,000 in 2025 and inflation-adjust by 1% annually through 2029. A five-year boon for taxpayers in high-tax states, it, too, phases out for MAGI above $500,000 and remains $10,000 for high earners. The cap also reverts to $10,000 for everyone in 2030.
Child Savings Accounts — For children born from 1/1/25 through 2028, the U.S. government will provide $1,000 in funding to a new tax-advantaged savings account for children, as a pilot project. In addition, up to $5,000 per year can be contributed to these accounts (indexed for inflation after 2029) that can grow tax-free until a child reaches age 18.
No income limits apply for parents. Employers may also contribute up to $2,500 (of the $5,000) to children’s savings accounts and deposits are excluded from workers’ (i.e., parents’) income. Caveats: withdrawals for qualified expenses will be treated as capital gains and actual accounts will not be available until mid-2026.
Senior Tax Deduction — As a workaround for “no tax on Social Security benefits,” which did not occur, OBBBA established a new “below-the-line” deduction for older taxpayers whether they itemize deductions or not. From 2025 through 2028, this benefit, $6,000 for singles and $12,000 for married couples filing jointly, is available in addition to the existing extra standard deduction ($2,000 for singles and $1,600 for each spouse in a couple filing jointly in 2025) for taxpayers age 65+.
Phaseouts begin at MAGI of $75,000 (single) and $150,000 (mfj) and the deduction is fully phased out at $175,000 (single) and $250,000 (mfj). Thus, there is a “marriage penalty” for affluent older couples.
2025 Changes
While OBBBA was passed in July, it still has 2025 impacts in addition to those mentioned above.
Higher Standard Deduction — A higher standard deduction directly lowers taxable income, meaning taxpayers owe taxes on a smaller portion of their earnings. OBBBA increased the 2025 standard deduction to $15,750 (up from $15,000) for singles, $23,625 (up from $22,500) for heads of households, and $31,500 (up from $30,000) for married tax filers.
Repeal of Green Energy Incentives — Expiration dates were moved forward. Taxpayers who want to take a tax credit for the purchase of a new or used “clean” vehicle (e.g., EV) must place it in service by September 30, 2025. The deadline for qualifying energy-efficient home improvements (e.g., solar panels) is December 31, 2025.
2026 Changes
Below are tax law changes that specifically take effect in 2026.
Charitable Contributions — OBBBA reinstates a cash charitable contribution deduction for non-itemizers, last seen during the COVID era (CARES Act), but with larger amounts: $1,000 (single) and $2,000 (mfj). It also made the 60% of AGI cash contribution limit permanent and reduced the charitable contribution deduction for itemizers by 0.5% of a taxpayer’s AGI. Example: an itemizing taxpayer with $100,000 AGI would have a $500 floor ($100,000 x .005).
Educator Expenses — In 2025, eligible educators (working at least 900 hours at a state-certified school) can deduct up to $300 ($600 mfj for two teachers) in qualified expenses (e.g., classroom supplies and unreimbursed PD) as an above-the-line deduction from income.
In 2026, the $300/$600 deduction will continue to be claimed on Schedule 1 as before. In addition, any additional qualified expenses can be claimed on Schedule A with no dollar limit if an educator itemizes deductions.
Caveat: Educators will need to itemize to take advantage of this new tax write-off. About 90% of taxpayers currently take the standard deduction, which makes itemizing very difficult, especially for married couples.
403(b) Participant Implications — Below are implications of OBBBA for the 403(b) community
- Some plan participants who have tipped “side hustles” may benefit from the “no tax on tips” rules.
- For four years, 403(b) participants with high SALT deductions (and a new ability to itemize, especially for singles) and those with increased senior deductions may decide to offset their tax breaks with Roth conversions, long-term capital gains distributions, and/or increased 403(b) plan contributions.
- Beyond OBBBA’s time-limited tax benefits, its permanently lowered tax brackets and child tax credit provide more “runway” to execute income-timing strategies. No need to beat a 12/31/25 deadline!
- Educators must “do the math” for their own situation to determine if they are helped by new educator expense deduction rules. Many will likely be disappointed
- If it already aligns with personal plans, from now through 2028 might be a good time to buy a car or have a baby.
- Tax preparation time burdens will increase with new required income-based phase-out calculations.
- Many educators are women, who are the primary caregivers for older adults. Concerns have been raised about OBBBA’s impacts on Medicaid funding and nursing homes. These changes could result in more family care-giving responsibilities (both time-wise and financial) and 403(b) plan participants leaving their jobs sooner than planned with reduced retirement savings.
Research Results
While it is too early to analyze the impact of OBBBA, several articles about estimated impacts have been published, comparing OBBBA provisions with what would have happened if the TCJA was allowed to sunset. The Tax Foundation estimated that OBBBA will increase taxpayers’ average after-tax income by 2.9% in 2025 and 5.4% in 2026. Middle-income quintiles will see the largest income tax increases in 2026 due to a combination of TCJA tax rate extensions and limited-time tax breaks with phase-outs.
A Wall Street Journal analysis of OBBBA winners and losers noted that “not everyone wins or loses by the same amount.” Even if two households have the same income, factors like state of residence, sources of income, and applicable tax deductions and credits all affect their tax bill differently. Their analysis also noted that “the biggest winners aren’t the bottom 20% or top 1% but the group just below the top 1%.”
Three (More) Things
- Child tax credit phaseouts begin at MAGI of $200,000 (single) and $400,000 (mfj) and are fully phased out at $244,000 (single) and $440,000 (mfj). OBBBA also permanently increased the refundable portion of the CTC to $1,700 for 2025, adjusted annually for inflation thereafter.
- OBBBA expanded the definition of qualified expenses for 529 plans after 7/4/25 to include post-secondary credentialing programs and education needed to obtain and maintain professional certifications and licenses. It also increased the amount that can be used for K-12 tuition from $10,000 to $20,000 per year starting in 2026.
- For 403(b) participants with side hustles, OBBBA made the Qualified Business Income (QBI) deduction permanent for businesses with pass-through income (e.g., sole proprietorships and partners in partnerships). The deduction is generally up to 20% of qualified business income.
Six Smart Strategies
No. 1: Prepare a Pro Forma Tax Return — Take time this fall to estimate your 2025 taxes by comparing your 2024 tax return with OBBBA-related changes and changes in your income and lifestyle.
No. 2: Review Your Tax Withholding — Use your pro forma tax calculation to see if your 2025 tax withholding is adequate and revise it, if necessary, for the remainder of the year.
No. 3: Consider Getting Help — Contact a financial advisor for help with “filling up your tax bracket” without reaching the next one and for strategies to lower MAGI to avoid phaseouts.
No. 4: Make a Charitable Gifting Plan — Plan ahead to take advantage of the charitable deduction for non-itemizers next year. Use this worksheet to identify and prioritize charitable organizations.
No. 5: Consider Increasing Retirement Savings — Consider saving more money in a Roth IRA or your 403(b) plan if less money can be withheld for taxes from your pay due to OBBBA-related changes.
No. 6: Keep Learning — Seek out additional information and analyses of the impact of OBBBA as the law becomes fully implemented.
In Summary
This post is not a complete summary of OBBBA. Rather, it is focused on tax law changes most germane to middle-income workers (or retirees) in K-12 education and public sector jobs. Your next step is to consider how OBBBA affects you personally.
For example, I was positively impacted by continuation of TCJA tax rates and tax brackets and the small 2025 bump in the standard deduction. However, I am ineligible for the new senior tax deduction, pay less than $4,000 in SALT tax (no state income tax in Florida!), do not work for tips, do not have a home mortgage, and have no plans to buy a car.
Do a similar OBBBA analysis for yourself. It will help you make informed future plans.
This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.
...
Dr. O'Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.