While these provisions are not specific to just federal employees, they will undoubtedly affect the wallets of the federal workforce. Image: Tada Images / Shutterstock.com
By: Tyler Weerden, CFE, Layered FinancialWith President Trump’s signature on July 4, 2025, the One Big Beautiful Bill Act (OBBBA) became law. Federal employees should be relieved to know that many of the detrimental proposals to federal employee benefits did not make it into the final bill.
As of now, the Retiree Annuity Supplement will not be eliminated or modified. Pensions will continue to be calculated using the average high-3 salary instead of the proposed high-5. Lastly, increased withdrawals from your paycheck for retirement contributions did not make the cut.
So, what did make the final version of the bill?
Below are 10 sections of the bill that will impact many taxpayers. While these provisions are not specific to just federal employees, they will undoubtedly affect the wallets of the federal workforce. These are listed in order of universally impactful to more situational dependent.
(1) HIGHER STANDARD DEDUCTION
Section 70102
Effective for tax year: 2025
Expires after tax year: Permanent
When figuring out your total federal taxable income for the year, the government lets you deduct a standard amount, known as the standard deduction. If you have itemized deductions that total more than the standard deduction, you can itemize your deductions on Schedule A and deduct that higher amount.
Itemized deductions generally include state & local tax (SALT), mortgage interest, charitable contributions, medical / dental expenses above a certain threshold, and casualty and theft losses from a federally declared disaster.
When the standard deduction was lower, more people itemized deductions. Generally speaking, itemizing results in more complex tax returns. According to the IRS, for tax year 2016, 68.6% of filers used the standard deduction. In 2017, 68% of filers used the standard deduction. Post-TCJA, this jumped to 87.3% in 2018 and the latest data from tax year 2021 shows that 88.2% of returns used the standard deduction. With OBBBA, I would expect the number of taxpayers taking the standard deduction to remain high.
This increased standard deduction was scheduled to expire in 2026. The OBBBA makes the higher standard deduction permanent, and even increased the 2025 amounts. The higher standard deduction will now be adjusted annually for inflation.
Why does this matter? All else being equal, a higher standard deduction equals less taxable income.
(2) TAX BRACKETS WILL NOT EXPIRE
Section 70101
Effective for tax year: 2026
Expires after tax year: Permanent
Scheduled tax bracket increases will not occur. Like the standard deduction, the lower federal tax brackets enacted under the Tax Cuts & Jobs Act (TCJA) were set to expire as of 1/1/2026.
Before the Tax Cuts & Jobs Act (TCJA) was signed in 2017, the federal tax brackets were:
10%, 15%, 25%, 28%, 33%, 35%, and 39.60%
After the Tax Cuts & Jobs Act (TCJA) became effective, the federal tax brackets changed to:
10%, 12%, 22%, 24%, 32%, 35%, and 37%.
The OBBBA makes these lower tax brackets permanent.
(3) SALT LIMIT INCREASE
Section 70120
Effective for tax year: 2025
Expires after tax year: 2029
SALT? What we’re talking about is State and Local Tax (SALT), typically in the form of income and property tax. One of the itemized deductions on Schedule A that may help you surpass the standard deduction amount is SALT.
Under the prior law, the maximum amount of SALT you could add to your itemized deductions on Schedule A was $10,000. If you paid $15,000 in state income tax and local property tax, you were stuck with the lesser $10,000 deduction, essentially throwing away the other $5,000.
Under the OBBBA, the SALT limit has been increased from $10,000 to $40,000, and will increase by 1% each year. For those who itemize, or are close to being able to itemize, this could be a big deal. Like most things in life, there are a few catches.
(1) This is only in effect from 2025-2029, in 2030 it goes back to $10,000.
(2) You must itemize deductions to take advantage of this.
(3) $40,000 is the limit, regardless of whether you file Single or Married Filing Jointly.
(4) The limit is reduced to $20,000 for those who file Married Filing Separately.
(5) There are income phase-outs.
Income Phase-Out
The amount of the reduction to your SALT deduction is 30% of the amount you’re over the threshold.
Single & MFJ: $500,000 MAGI threshold (set to increase annually with inflation until 2030).
Married Filing Separately: $250,000 MAGI threshold (set to increase annually with inflation until 2030).
Here’s an example.
If a tax filer (single or MFJ) has $600,000 worth of income, they’re $100,000 over the $500,00 threshold. 30% of $100,000 = $30,000. The maximum SALT deduction of $40,000 is reduced by $30,000 for a final SALT deduction of $10,000. The income phase-out will not make the SALT deduction smaller than $10,000. Regardless of income level, $10,000 is as small as the SALT deduction will get.
(4) OVERTIME DEDUCTION
Section 70202
Effective for tax year: 2025
Expires after tax year: 2028
How much? For tax years 2025 – 2028, up to $12,500 worth of overtime for single tax filers, or up to $25,000 worth of overtime for those who file Married Filing Jointly (MFJ), may be deducted from federal income. It’s important to know that we’re just talking about a federal income tax deduction. This deduction does not mean the overtime pay will be free from state tax or the 7.65% federal payroll / FICA tax.
You do not have to itemize deductions on Schedule A to take advantage of this deduction.
Who Qualifies?
On 7/14/25, the IRS released guidance here. They confirmed that the deduction can only be taken for overtime, “required by the Fair Labor Standards Act (FLSA).” They also confirmed that the overtime pay eligible for possible deduction is the “half” portion of “time-and-a-half”. If your regular pay rate is $20, and your OT rate is $30 (1.5 x 20), you would deduct the $10 amount over your regular rate.
Therefore, it is my understanding that federal employees who are categorized as FLSA exempt will not be able to take any deduction. If you are categorized as FLSA non-exempt, it appears that you may be able to deduct some overtime, based on the additional factors below. Check box 35 of your SF-50 to see which FLSA category you fall into.
Section (e) for married individuals’ states that the overtime deduction can only be used if you file a joint return. This means individuals who file their taxes as Married Filing Separately (MFS) will not be eligible to deduct any overtime.
Income Phase-Out
These deductible overtime amounts ($12,500 single & $25,000 MFJ) are phased-out once tax filers reach a certain level of Modified Adjusted Gross Income (MAGI).
“The amount allowable as a deduction shall be reduced (but not below zero) by $100 for each $1,000 by which the taxpayer’s modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return).”
What does that mean?
For every $1,000 you earn over the threshold ($150,000 single / $300,000 MFJ), the allowable overtime deduction is reduced by $100.
Single filers with MAGI at / above $275,000 get $0 overtime deduction.
Couples filing MFJ with MAGI at / above $550,000 get $0 overtime deduction.
(5) CHILD TAX CREDIT INCREASE
Section 70104
Effective for tax year: 2025
Expires after tax year: Permanent
OBBBA increases the Child Tax Credit (CTC) from $2,000 to $2,200 for qualifying children under age 17, and will adjust for inflation annually. Check out the IRS website to see if you qualify for the CTC.
The “refundable” portion of the tax credit will be $1,700 for 2025, and will adjust for inflation annually.
What does “refundable” mean? It means that even if you owe $0 in taxes, you’ll get a refund worth the amount of remaining credit owed to you. On the other hand, a non-refundable credit means if you owe $0 tax, and there’s no tax for the remaining credit to offset, you won’t be getting a check.
Here’s an example of refundable vs non-refundable.
Refundable
(1) You owe $1,000 in taxes
(2) You’re entitled to a $1,400 refundable credit
(3) $1,000 worth of tax credit wipes out your $1,000 tax liability
(4) You get a $400 refund.
Non-Refundable
(1) You owe $1,000 in taxes
(2) You’re entitled to a $1,400 non-refundable credit
(3) $1,000 worth of tax credit wipes out your $1,000 tax liability
(4) You get no refund. The remaining $400 credit is lost because it was non-refundable.
Income Limits
The amount of CTC phases-out once you surpass the below income-based thresholds. For every $1,000 you earn above the threshold, the CTC will be reduced by $50.
Single/Head of Household: $200,000
Married Filing Jointly: $400,0000
Married Filing Separately: $200,000
For example, let’s assume a couple filing Married Filing Jointly has two eligible children under age 17 and has $410,000 of income. Their maximum possible CTC is $4,400 ($2,200 for each child). However, they’ve exceeded the threshold by $10,000. For every $1,000 over the threshold, they are subject to a $50 reduction. $50 (x) 10 = $500 reduction. Therefore, their remaining CTC is $3,900.
The OBBBA also makes permanent the $500 non-refundable Credit for Other Dependents. This is used when you have dependents who don’t qualify for the standard CTC.
(6) TRUMP ACCOUNTS
Section 70204
Effective for tax year: 2026
Expires after tax year: Permanent
OBBBA has created “Trump Accounts”, which “shall be treated for purposes of this title in the same manner as an individual retirement account under section 408(a).” You can think of this account as a hybrid traditional IRA.
Trump Accounts become effective in 2026 and contributions can be made after July 4, 2026. The bill specifically states, “No contribution will be accepted before the date that is 12 months after the date of the enactment of this section.
The bill states that the account can be funded for any child who, “has not attained the age of 18 before the end of the calendar year.” More information on post-age 18 contributions below. Just like with a 529, the account can be funded by a parent or any other adult.
There is no earned income requirement like there is for a custodial Roth IRA.
Contributions are capped at $5,000 per year (adjusted for inflation starting in 2028).
There is no tax deduction for the contribution. Contributing money to a Trump Account will not reduce your taxable income like a contribution to your traditional TSP would.
501(c)(3) charitable organizations and government entities (state, local, and federal) can contribute to the account, and their contribution will not count against the $5,000 limit.
Employers (of the parent or the child) can also contribute up to $2,500, which will not be included as income to the employee. The employer contribution will count towards the $5,000 annual contribution limit.
The bill talks about a “pilot program” for the Trump Accounts. This program provides for a $1,000 contribution by the U.S. Treasury for children born 1/1/25 – 12/31/28.
No distributions can be taken before the child is 18.
Tax on Distributions
Distributions will be taxed as ordinary income, just like a traditional IRA, with the same exceptions to the 10% early-withdrawal penalty (higher education expenses, 1st time homebuyer, age 59.5, disability, death, etc.).
However, there’s a slight complication. Some of the money in the account has already been taxed.
The Trump Account will contain after-tax contributions (“basis” or “principal”), which will be withdrawn tax-free. The account will also contain earnings / growth which has not been taxed yet. So, this means you’ll have a mix of after-tax basis / contributions and pre-tax growth that has to be accounted for and calculated at the time of withdrawal. You cannot just distribute contributions / basis like you can with the Roth IRA ordering rules.
Here’s an example of a pro-rata distribution of both pre-tax and after-tax money.
If you have an account balance of $10,000, and $4,000 is original after-tax contribution (tax-free “basis”) and $6,000 is pre-tax growth, you have a 40% / 60% split between tax-free and taxable. If you were to withdraw $1,000, $400 (40%) would be tax-free and $600 (60%) would be taxed as ordinary income.
What investments can a Trump Account invest in?
“Eligible investments” for the Trump Account include:
1. Mutual fund or Exchange Traded Fund (ETF)
2. Tracks the returns of a qualified index
2a. Qualified index means: The S&P 500 stock market index or any other index which is comprised of equity (stock) investments in primarily U.S. companies.
2b. It shall not include any industry or sector-specific index.
3. Does not use leverage
4. Does not have annual fees and expenses of more than 0.1 %
Warning – After the beneficiary turns age 18, they can invest in other options just like a regular IRA. This means they could invest in the non-eligible investments above. The only things they cannot invest in, within the Trump Account, regardless of age, are the IRA prohibited investments: (1) life insurance, (2) collectibles, (3) S-corporation stock, and (4) property used by them personally / “self-dealing”.
Post-Age 18 Contributions – Once the minor turns age 18, contributions will still be allowed, however they will follow the regular traditional IRA contribution rules. This means that the traditional IRA contribution limits would apply to the Trump Account ($7,000 in 2025). It also means that the ability to deduct contributions would be determined by the same IRS rules that apply to traditional IRA deductibility: (1) Modified Adjusted Gross Income (MAGI) and (2) whether the account owner and / or their spouse are covered by an employer retirement plan.
Trump Accounts & IRAs – Contributing to a Trump Account will not count against the contribution limits for IRAs. Trump Accounts are not included for IRA aggregation purposes.
Death of a child – Similar to an HSA passed to a non-spouse beneficiary upon the death of the owner, when the child beneficiary of a Trump Account dies, “such account shall cease to be a Trump account as of the date of death.” This means the fair market value of the account (minus the after-tax basis / “investment in the contract”) will be taxable to the beneficiary or the estate.
(7) 529 PLANS
Section 70413
Effective for tax year: (1) The new qualified expense provision is effective for 529 distributions taken after 7/4/25. (2) The new $20,000 K-12 expense limit starts in 2026.
Expires after tax year: Permanent
529 plans are traditionally used to save for a child’s education-related expenses; however, they are not limited to children. Any U.S. resident, age 18+ can open a 529 and contribute after-tax money for a beneficiary of any age. The 529 beneficiary does not have to be a relative. There are no income limits to contribute. The money can be invested in stocks, bonds, or mutual funds, just like an IRA. Depending on your individual state rules, you may get a tax deduction for contributions. The money grows tax-free and can be withdrawn tax-free for “qualified education expenses”.
529 withdrawals are generally exempt from both federal and state tax, when used for qualified education expenses.
Prior to OBBBA, the maximum amount of K-12 eligible expenses that could be paid for with 529 funds was $10,000, and the only eligible education expense was tuition. OBBBA changes both of these limitations.
Starting in 2026, the amount that can be withdrawn from a 529 for K-12 eligible expenses will increase to $20,000.
OBBBA also adds new expenses that qualify as education expenses connected to enrollment or attendance at an elementary or secondary public, private, or religious school. 529 funds can be distributed for these new qualified expenses after July 4, 2025.
New eligible education expenses include:
(A) Tuition.
(B) Curriculum and curricular materials.
(C) Books or other instructional materials.
(D) Online educational materials.
(E) Tuition for tutoring or educational classes outside of the home, including at a tutoring facility, but only if the tutor or instructor is not related to the student and-
(i) is licensed as a teacher in any State,
(ii) has taught at an eligible educational institution, or
(iii) is a subject matter expert in the relevant subject.
(F) Fees for a nationally standardized norm-referenced achievement test, an advanced placement examination, or any examinations related to college or university admission.
(G) Fees for dual enrollment in an institution of higher education.
(H) Educational therapies for students with disabilities provided by a licensed or accredited practitioner or provider, including occupational, behavioral, physical, and speech-language therapies.”.
Section 70414
Effective for tax year: Distributions from 529s taken after 7/4/25
Expires after tax year: Permanent
OBBBA allows tax-free 529 withdrawals for “postsecondary credentialing expenses”. This would include tuition, fees, books, continuing education, and exam costs to obtain a credential.
(8) AGE 65 BONUS DEDUCTION / EXEMPTION
Section 70203
Effective for tax year: 2025
Expires after tax year: 2028
If you’re going to be at least age 65 by the end of the year, you may be eligible for a “bonus deduction” / exemption on top of the standard deduction, which is already increased by the age 65+ “additional deduction”.
Clear as mud, right? Let’s break it down.
Those age 65 and older are eligible for:
(1) The standard deduction that everyone is eligible for (single: $15,750 / married filing jointly: $31,500)
(2) The “additional deduction”, which in 2025 is:
-$2,000 (single filers and joint filers with only one spouse age 65+) or
-$1,600 each for married filers where both spouses are age 65+ ($3,200 total)
(3) The OBBBA “bonus deduction” / exemption, which in 2025 is:
-$6,000 (single filers and joint filers with only one spouse age 65+) or
-$6,000 each for married filers where both spouses are age 65+ ($12,000 total)
Income Phase-Out
The $6,000 bonus deduction does phase-out once Modified Adjusted Gross Income (MAGI) reaches $75,000 (single) or $150,000 (MFJ).
The bonus deduction is reduced by 6% of the amount of income over the threshold.
Single filers with MAGI at / above $175,000 get $0 bonus deduction.
Couples filing MFJ (regardless of whether one or both spouses are age 65+) with MAGI at / above $250,000 get $0 bonus deduction.
MFJ filers where both spouses are age 65+ will have their separate $6,000 bonus deductions phased-out at the same time by the same income.
So, let’s take a couple who are both over age 65 and therefore have a possible maximum bonus deduction of $12,000. If their income is $250,000, they (as a joint tax unit) have exceeded the threshold by $100,000. 6% of $100,000 is $6,000. So, both of their $6,000 deductions are reduced by $6,000, leaving them with $0 bonus deduction.
This “bonus deduction” is technically an exemption, which generally functions the same as a “below-the-line” deduction, meaning it will still reduce taxable income, but won’t reduce Adjusted Gross Income (AGI) on line 11 of the 1040. This means that other tax triggers centered around AGI (e.g., deductible medical expenses, Medicare Part B premiums, taxation of Social Security, traditional IRA deductibility, etc.) won’t be affected by this exemption.
(9) CAR LOAN INTEREST DEDUCTION
Section 70203
Effective: 2025
Expires: 2028
If you have an auto loan on an “applicable passenger vehicle” used for personal use, you may be able to deduct a portion of the loan interest for tax years 2025 – 2028.
The maximum deductible interest is $10,000 annually.
You do not have to itemize deductions on Schedule A to take advantage of this deduction.
The “applicable passenger vehicle” must:
1. Be a new vehicle (purchased after December 31, 2024).
2. Not be leased, a fleet vehicle / commercial use, or purchased for salvage or scrap.
3. Have at least two wheels.
4. Be a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle (no ATVs).
5. Have a gross vehicle weight rating of less than 14,000 pounds.
6. Have had “final assembly” in the United States. Final assembly is not defined other than: “The process by which a manufacturer produces a vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.”
There are phase-outs once income reaches $100,000 (single) and $200,000 (MFJ). The reduction is $200 for every $1,000 above the threshold.
Single filers can deduct $0 once income reaches $150,000.
Married Filing Jointly filers can deduct $0 once income reaches $250,000.
The VIN must be included on your tax return.
(10) CHARITABLE CONTRIBUTION DEDUCTION
Section 70424 & 70425
Effective: 2026
Expires: Permanent
Starting in 2026, you can deduct $1,000 for charitable contributions (single) or $2,000 (Married Filing Jointly), even if you take the standard deduction and do not itemize deductions on Schedule A. In fact, if you do itemize, there’s a catch (explained below).
26 U.S. Code § 170(p) confirms that the donation must be monetary (cash, checks, credit / debit card payments, ACH transfers, etc.). Clothes, books, your least-favorite child, other items donated to Goodwill do not count.
The amount of cash donations to a public charity which you can deduct is typically limited to 60% of your Adjusted Gross Income (AGI). There are different rules for non-cash donations and non-public charities.
There are no income phase-outs for this charitable contribution deduction.
Itemized Deductions
For those who do itemize on Schedule A vs. taking the standard deduction, there is now a floor for your charitable deductions. The floor is 0.5% of Adjusted Gross Income.
This means only the amount of your charitable contribute ABOVE 0.5% of your AGI can be deducted.
So, if your AGI is $100,000, the floor is $500. (0.5% x $100,000). Charitable contributions ABOVE $500 can be added to your itemized deductions. Donate $1,000, deduct $500 on Schedule A.
Tyler Weerden, CFE is a financial planner and the owner of Layered Financial, a Registered Investment Advisory firm. In addition to being a financial planner, Tyler is a full-time federal agent with 15 years of law enforcement experience on the local, state, and federal level. He has served in both domestic and overseas Foreign Service assignments. Tyler has experience with local, state, and federal pension systems, 457(b) Deferred Compensation, the federal Thrift Savings Plan (TSP), Individual Retirement Arrangements (IRAs), Health Savings Accounts (HSAs), and invests in rental real estate. He holds a Bachelor of Science degree, a Master of Science degree, passed the Series 65 exam, and is a Certified Fraud Examiner (CFE).
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See also
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Primer: Early out, buyout, reduction in force (RIF)
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