This semiannual update surveys key federal individual tax developments for the six months ending October 2025, as compiled by the AICPA Individual and Self-Employed Tax Technical Resource Panel. It highlights statutory changes under the One Big Beautiful Bill Act (OBBBA), P.L. 119-21 (enacted July 4, 2025), alongside notable Tax Court decisions and judicial rulings arranged by Internal Revenue Code (IRC) section.

Executive Summary of OBBBA Legislative Changes

Key OBBBA Technical Provisions

• Top-Bracket Itemized Deduction Cap: Replaces the former Sec. 68 Pease limitation with a cap on the tax benefit of itemized deductions for top-bracket filers at 35% (down from 37%). Deductions are reduced by 2/37ths of the lesser of allowable itemized deductions or taxable income exceeding the top-bracket threshold.
• Charitable Contribution Modifications:
  • AGI Ceiling: Permanently extends the 60% AGI cap for cash donations to public charities.
  • Non-Itemizer Deduction: Reinstated for tax years after Dec. 31, 2025, at $1,000 ($2,000 MFJ).
  • 0.5% AGI Floor: Effective 2026, itemizers may only deduct charitable gifts exceeding 0.5% of AGI. Disallowed amounts carry forward only if the taxpayer also carries forward a ceiling-limited contribution.
• Dependent & Childcare Tax Relief:
  • Dependent Care Exclusion: Annual limit for flexible spending arrangements increases from $5,000 to $7,500 effective 2026.
  • Child & Dependent Care Credit: Max expense credit rate increases from 35% to 50% for lower-income taxpayers starting 2026 (phasing down to 35% at $15,000 AGI).
• Qualified Opportunity Zones (QOZs): Program permanently extended for post-2026 investments. Deferred gains are recognized on the earlier of five years or investment sale. Provides a 10% basis step-up at five years (30% for rural QOFs) and caps fair market value basis step-ups at the 30-year holding mark.
• Qualified Small Business Stock (QSBS): For stock acquired after July 4, 2025, introduces partial exclusions (50% at 3 years, 75% at 4 years), increases the per-issuer gain limit to $15 million (indexed), and raises the asset ceiling to $75 million.
• Temporary Above-the-Line / Below-the-Line Deductions (2025–2028): Available to both itemizers and non-itemizers (subject to income phaseouts):
  • Qualified Tips: Up to $25,000.
  • Overtime Pay: Up to $12,500 ($25,000 MFJ).
  • Vehicle Loan Interest: Up to $10,000 for new, U.S.-assembled vehicles.
  • Senior Deduction: Up to $6,000 for taxpayers age 65 and older.
• Sec. 1245 Ordinary Income Recapture: Asset dispositions of “qualified production property” (under Sec. 168(n)(2)) placed in service between July 5, 2025, and Dec. 31, 2030, are subject to ordinary income recapture if sold within 10 years.

Judicial Rulings & Case Law Developments

• Sec. 2(b) Head of Household Status (Muse v. Commissioner): The Tax Court held that taxpayers who underwent a traditional religious divorce without obtaining a formal dissolution decree from a state court remain legally married under state and federal law, disqualifying them from Head of Household filing status.
• Sec. 61 Taxability of Legal Settlements:
• • Fortune-Paladino v. Commissioner: Settlement proceeds for sex discrimination and emotional distress lacking underlying physical injury are fully taxable under Sec. 104(a). Legal fees remain deductible.
  • Mennemeyer v. Commissioner: An arbitration settlement resolving defamation and economic loss is taxable; uncorroborated physical symptoms do not meet the Sec. 104(a) personal injury exclusion. Legal fees for employment-related claims qualify for an above-the-line deduction under Sec. 62(a)(20).

• Sec. 83 Property Received for Services (Feige v. Commissioner): Stock issued after employment termination was deemed taxable compensation upon receipt because the taxpayer held full transfer rights without a substantial risk of forfeiture, despite the employer issuing the shares in error.
• Sec. 117 Foreign Fellowships (Kramarenko v. Commissioner): Payments to a postdoctoral research fellow were classified as taxable employment income rather than an exempt grant under the U.S.-Russia Income Tax Treaty, as the host institution maintained operational control and work product ownership.
• Sec. 164 & Gambling Deductions (Besaw v. Commissioner): Unsubstantiated sales tax deductions and estimated gambling losses were disallowed due to a lack of verifiable records, subjecting the taxpayer to Sec. 6662(a) accuracy-related penalties.
• Sec. 166 Bad Debt Deductions:
  • Anaheim Arena Management, LLC v. Commissioner: Corporate advances to manage a municipal facility failed multi-factor debt tests, barring a bad debt deduction.
  • Kelly v. Commissioner: The Ninth Circuit affirmed that debt cancellation does not automatically render a debt “worthless” under Sec. 166 without objective proof of uncollectibility.