The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, introduces sweeping reforms to the U.S. tax code beginning in tax years 2025 and 2026. This guide walks you through major changes to credits, deductions, and international reporting—and highlights how they may affect U.S. citizens and green card holders living abroad.
1. Individual Tax Rates Made Permanent
OBBBA repeals the sunset provisions of the Tax Cuts and Jobs Act (TCJA), locking in current income tax brackets:
- Top individual rate remains at 37%
- No automatic increase scheduled for 2026
- Alternative Minimum Tax (AMT) exemptions are increased
What is AMT? A parallel tax system to ensure high-income taxpayers pay a minimum amount, even after applying deductions. If your regular tax liability falls below a set threshold, the AMT may trigger a higher tax bill.
2. Senior Deduction
Starting in 2025, taxpayers aged 65 and older may claim a $6,000 deduction, available through 2028.
- Reduced, but not below zero, by 6% of AGI exceeding:
– $75,000 (single)
– $150,000 (joint)
A valid Social Security number is required.
Expats: May benefit if reporting taxable U.S. income that isn’t excluded by the Foreign Earned Income Exclusion (FEIE).
3. Standard Deduction Increase
OBBBA permanently increases the standard deduction to:
- $15,750 (individuals)
- $23,625 (head of household)
Effective Date: Applies to tax years beginning after December 31, 2024
Note: Nonresidents and dual-status filers must itemize deductions.
4. Child Tax Credit Increase
Beginning in 2025, the Child Tax Credit rises to $2,200 per qualifying child. Children must have valid SSNs.
Expats: Claiming the FEIE limits eligibility to the nonrefundable portion only. The refundable Additional Child Tax Credit is unavailable when income is excluded under FEIE. However, if you live in a high-tax country, revoking FEIE and using the Foreign Tax Credit (FTC) may allow you to qualify for the refundable portion—if you meet earned income requirements and your FTC offsets any remaining U.S. tax.
5. Expanded Child and Dependent Care Credit
Effective for tax years beginning after December 31, 2025:
- Credit rate increases to 50% of qualifying care expenses
- Phased down to 35% as AGI exceeds $15,000
- Further reduced (not below 20%) for AGI above $75,000 ($150,000 joint)
Eligible expenses must be incurred to allow both spouses to work or look for work, or the taxpayer if filing singly.
Expats: May qualify when care is provided in the U.S. and income and documentation requirements are met.
6. Charitable Deduction for Non-Itemizers
For 2025 through 2028, non-itemizers may deduct:
- Up to $300 (single)
- Up to $600 (joint)
Only cash donations to IRS-approved U.S. 501(c)(3) charities qualify.
Expats: Foreign charities generally do not qualify unless registered with the IRS.
7. SALT Deduction Cap Increased
Raises the cap on State and Local Tax deductions to:
- $40,000 in 2025
- $40,400 in 2026
Phaseout begins at AGI over $500,000 ($505,000 in 2026). Cap reverts to $10,000 in 2030.
Expats: May apply if you file a U.S. state return (e.g., for rental income) and itemize deductions.
8. Adoption Credit
Refundable credit of up to $5,000 for qualifying adoption expenses.
Eligibility for children with “special needs” will be determined by state and tribal governments.
9. Auto Loan Interest Deduction
A new deduction is available for interest paid on loans used to purchase U.S.-assembled passenger vehicles (excluding RVs and campers). The deduction is:
- Capped at $10,000
- Phased out by $200 for each $1,000 of modified AGI over: – $100,000 (single)
– $200,000 (joint) - Available to itemizers and non-itemizers
- Requires a valid VIN and applies only to qualifying loans
- Loan servicers must report under §6050AA
- Effective Date: Applies to loans incurred after December 31, 2024, for tax years 2025–2028
10. Tip and Overtime Income Deductions
Available through 2028:
- Tip income: Up to $25,000
- Overtime income: Up to $12,500 (or $25,000 joint)
Rules:
- Excludes highly compensated employees (AGI over $150,000 single / $300,000 joint)
- Overtime income excludes qualified tips
- FICA tip credit extended to food service, beauty, barber sectors
- Spouse’s SSN not required
- Available to itemizers and non-itemizers
11. Expanded 529 Plan Use
Beginning July 2025:
- Adds K–12 public, private, and religious school tuition to qualified expenses
- Raises distribution limit to $20,000 per beneficiary annually
Expats: U.S.-based institutions generally qualify. Confirm eligibility for foreign schools on the IRS list.
12. Student Loan Relief
Starting in 2026:
- Loans discharged due to death or disability are excluded from income
- Employer-paid student loan assistance up to $5,250/year remains tax-free and indexed for inflation
13. Other Notable Changes
- SSNs and school EINs required for education credits (2026 onward)
- $2,100 Savers Credit available for ABLE account contributions
- Mortgage interest remains capped at $750,000; home equity interest eliminated
- Casualty losses extended to state-declared disasters
- Trump Accounts: $5,000/year federal savings plan with a $1,000 match per child; available 2025–2028
- $1,700 scholarship credit for approved education donations (2027 onward)
- Clean energy credits sunset after 2025–2026, including:
– Energy Efficient Home Improvement Credit
– Residential Clean Energy Credit
– Clean Vehicle Credit
– New Energy Efficient Home Credit - Personal exemptions permanently repealed
14. Updates for U.S. Owners of Foreign Corporations
Major changes arrive in 2026 for Americans who own foreign corporations.
Controlled Foreign Corporation (CFC)
Defined as any foreign business where more than 50% is owned by U.S. shareholders—each holding at least 10%.
Key Updates:
- Restoration of §958(b)(4):
The new law brings back a rule that was removed in 2017. It stops the IRS from treating U.S. taxpayers as owning shares that are actually held by foreign relatives or foreign companies.
For example: If a U.S. company is owned by a foreign parent, it won’t automatically be treated as owning the parent’s other foreign companies.
This change means some U.S. owners may no longer have to file Form 5471 under the “control” rules, depending on how ownership is structured. - No more 10% exemption for foreign assets. Under the old rules, companies got a break on income tied to physical assets like buildings or machinery. That’s gone.
- Flat 12.6% U.S. tax rate applies. Instead of a complex formula, a straightforward 12.6% rate applies to the foreign company’s profits (for corporate shareholders).
- More generous foreign tax credit. If your foreign company already paid at least 14% tax abroad, you likely won’t owe more tax in the U.S.
- No deductions for interest or R&D. U.S. owners can no longer reduce their U.S. tax on income from foreign corporations by claiming interest or research expenses.
- Who reports and when: Even if you only owned shares in the foreign company for part of the year, you now must report your share of its income. It doesn’t matter whether you owned it at year-end or not—ownership at any point during the year counts.
What this means for you:
If you are a U.S. citizen or resident and own shares in a foreign company where more than 50% is owned by U.S. shareholders, you may not owe additional U.S. tax on that company’s income—if it paid at least 14% tax abroad. These rules aim to reduce double taxation and ease cross-border filing obligations.
Disclaimer: The information above does not cover every tax provision in the legislation. It is intended to provide a general overview of key changes affecting U.S. citizens living abroad.
Helping Expats File Right—Every Year
We’ve spent over a decade helping U.S. citizens, green card holders, and inbound filers file confidently—from standard returns to complex international cases.
We assist with Form 5471, Form 8938, Form 8621, and other IRS disclosures required for overseas assets, foreign entities, and passive income. Whether you’re navigating CFC rules, foreign tax credits, or multi-country filing obligations, we’re here to ensure full compliance and peace of mind.
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