The One Big, Beautiful Bill Act (OBBBA) has officially passed through Congress and has been signed into law by the President. At 870 pages, the bill includes sweeping changes to tax policy, benefits programs, and economic incentives.
For federal employees, this raised immediate concerns about possible cuts to retirement benefits and broader financial impacts.
The good news? Many of the most feared changes were dropped. But there are still important shifts that could affect your tax planning, your retirement income, and even the financial future of your children and grandchildren.
Here’s a breakdown of what matters most for the federal workforce.
Federal Retirement Benefits: What Stayed (and What Didn’t)
Let’s start with the big sigh of relief: most of the proposed cuts to federal retirement benefits were removed from the final version of the bill.
Here’s what was not included in the final law:
- The switch from High-3 to High-5 for pension calculations.
- The elimination of the FERS supplement has been pushed off.
- The increase of FERS contribution for all to 4.4%
- The proposed “at-will employment” surcharge for current feds.
These items were dropped after significant pushback and advocacy, especially from federal unions and retiree groups. While a few less impactful provisions remain, none of them fundamentally alter the core benefits structure of federal retirement.
Retirement Planning: New Tax Law Changes to Know
Even though your federal benefits are mostly untouched, the bill introduces several new tax rules that could affect how you save, contribute, and plan for retirement. As always, consult with appropriate professionals before incorporating planning strategies, as many elements of financial planning influence each other.
No Tax-Rate Cliff in 2026
The TCJA tax rates were going to expire in 2026, moving the tax rates back to the levels they were prior. This would effectively increase taxes for many federal employees. While the differences were not major, this new bill makes the rates under the TCJA permanent law with no expiration, with income levels for each bracket increasing each year with inflation.
IRA Deduction Limits
If you’re contributing to an IRA on top of your TSP, be careful:
- Deductibility now phases out at $79K (single) or $146K (MFJ) of income.
- Dual-income federal households or feds on the higher end of the pay scale often exceed these limits—many are unknowingly over-contributing to non-deductible IRAs.
- These overcontributions often happen when feds auto-contribute to IRAs, either annually or as they get paid. They require correction for any disallowed deductions.
Pro Tip: Consider Roth strategies like the Backdoor Roth if you’re above the income limits. Many feds miss this opportunity.
New Overtime Deduction (2025–2028)
While many feds don’t earn overtime, this provision may become more relevant as IRS guidelines clarify the law, or if other members of the family have overtime.
An important distinction is that this deduction is “above the line”, which means you don’t need to itemize to be able to benefit from it.
- Up to $12,500 for single filers or $25,000 for MFJ can be deducted above the line.
- Useful for wage earners with significant overtime.
- Phases out at $150K/$300K respectively.
Expanded Child Tax Credit
- Credit increased from $2,000 to $2,200 per child under 17. (Let your kids know!)
- Will now be indexed for inflation going forward.
“Senior Bonus” Deduction (2025–2028)
The removal of Social Security taxation was not allowed to be on this bill because of the type of bill it was (reconciliation), and this deduction for “seniors” (65+ years old) was in lieu of program changes.
- A new $6,000 deduction for individuals age 65 and older.
- Phases out at $75K (single) and $150K (MFJ) in Modified Adjusted Gross Income (MAGI). Remember that MAGI is different than taxable income.
- Intended as a temporary offset in place of eliminating taxes on Social Security benefits.
New Kids’ Long-Term Savings Accounts
Even if you’re nearing retirement, this may benefit your children or grandchildren:
- Applies to children born between 2025–2028.
- $1,000 contribution to your account at birth by the federal government.
- Parents can contribute $5,000/year, employers up to $2,500/year (not taxed as income to parents).
- Funds are invested in a U.S. stock index, grow tax-deferred, and qualified withdrawals are taxed at long-term capital gains rates, a lower rate than tax on regular retirement account withdrawals.
Think of it like a hybrid between a 529 and a Roth account—but more flexible. We’re likely to get more clarity around how this account will work in the future as the details are released.
New Car Loan Interest Deduction
- Deduction applies to interest on loans for U.S.-assembled vehicles.
- Income caps: $100K (single) and $200K (MFJ).
- Modest benefit: expect tax savings in the hundreds, not thousands.
Pro tip: Multiply the deductible interest by your marginal tax rate—not your effective rate—to estimate your personal tax savings.
EV & Energy Tax Credits Set to Expire
Some green incentives are winding down:
- EV tax credits of $7,500 for new and $4,000 for used vehicles end after September 2025.
- Credits for solar panels, efficient windows/doors, and heat pumps end in December 2025.
If you’re planning to go electric or upgrade your home, the clock is ticking, so take action now.
SALT Deduction Increase
The bill increases the cap on the State and Local Tax (SALT) deduction from $10,000 to $40,000 for those earning less than $500K.
But there’s a catch:
- SALT deductions require that you itemize deductions to benefit. This is considered a “below the line” deduction.
- Most feds take the standard deduction, but if you own a home or rental property in high-tax states (DC, MD, VA, CA, etc.), itemizing may now be more worthwhile. New homeowners with higher interest rates may also have enough interest to merit itemizing deductions.
The 2025 standard deduction is projected to slightly increase the limits of $15K (single) and $30K (MFJ)—if your deductions exceed that, SALT could help.
Broader Impacts (Worth Knowing)
These provisions may not affect a large amount of the federal workforce directly but are significant and worth knowing about:
Medicaid Cuts
- Work requirements of 80 hours/month start in 2026.
- Parents with dependent children and adults over 65 are mostly exempt.
- The CBO estimates 8 million could lose Medicaid coverage by 2034.
SNAP (Food Stamps) Changes
- States now must cover more of the cost.
- Could result in benefit reductions or state-level opt-outs.
- Tighter work and citizenship/residency requirements (permanent residents and U.S. citizens only).
More Clarity Will Come
Anytime there are substantial changes to tax law, the months that follow come with clarifying language from the IRS and financial community. Staying on top of these changes is important for you to maximize your financial planning opportunities.
