One Big Beautiful Bill Act is Passed: What You Should Know

On Thursday, July 3 House Republicans passed the One Big Beautiful Bill Act (H.R. 1) by a vote of 218 to 214, nearly entirely along party lines. All 212 Democrats voted in unison against the bill, and were joined by two Republicans, Reps. Thomas Massie of Kentucky and Brian Fitzpatrick of Pennsylvania. The bill is now headed to President Trump’s desk for his signature.

The following are provisions of interest to HR Policy Association member companies.

• Temporary Deduction on Taxes for Overtime: Provides a temporary above-the-line deduction for qualified overtime compensation earned between tax years 2025 and 2028. Under the proposal, overtime pay would be exempt from federal income tax up to $12,500 for individuals and $25,000 for married couples filing jointly. The deduction phases out for taxpayers with modified adjusted gross income (MAGI) over $150,000 (individuals) or $300,000 (joint filers). Qualified overtime compensation is defined as overtime pay mandated by the Fair Labor Standards Act (FLSA) that exceeds the employee’s regular rate of pay. This deduction would be available to all eligible taxpayers, whether or not they itemize deductions. To claim it, filers must include their Social Security number—or their spouse’s, if filing jointly—on their Form 1040. Employers would be required to report the total overtime compensation on employees’ W-2 forms, which employees will need to substantiate their deduction. Importantly, while the proposal eliminates federal income tax on qualifying overtime pay, payroll taxes for Social Security and Medicare would still apply.
  
  
• Temporary Deduction on Taxes for Tips: Establishes a temporary above-the-line deduction of up to $25,000 for qualified tips received by individuals working in occupations where tipping is customary and regular. The deduction would be available to employees who receive a Form W-2 as well as independent contractors who receive Form 1099-K, Form 1099-NEC, or who report tips on Form 4317 (Social Security and Medicare Tax on Unreported Tip Income). Taxpayers could claim this deduction whether they take the standard deduction or itemize. The benefit begins to phase out for taxpayers with modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers). This deduction would apply to tax years 2025 through 2028. For 2025, employers required to report tip income could rely on “any reasonable method” to estimate designated tip amounts under a transition rule. Within 90 days of enactment, the Secretary of the Treasury would publish a list of qualifying occupations. This provision would take effect for taxable years starting after December 31, 2024, and would expire for taxable years beginning after December 31, 2028.
  
  
• Executive Compensation: Adds an entity aggregation rule to Section 162(m). Under this provision, compensation paid to a specified covered employee by any member of a controlled group must be combined to determine whether the $1 million deduction limit has been exceeded. The allowable deduction would then be allocated among all members of the controlled group that paid compensation to that employee. The controlled group would be determined using the rules under Sections 414(b), (c), (m), and (o), which treat related entities as a single employer for various employee benefit purposes. A specified covered employee includes the principal executive officer (PEO), principal financial officer (PFO), the three other highest-paid executive officers, and prior covered employees of the publicly held corporation. For tax years beginning after 2026, it also includes the five highest-paid employees across the controlled group. When multiple entities in the controlled group pay aggregate compensation exceeding $1 million to a specified covered employee, the deduction limit would be proportionately allocated among those entities. This provision would apply to tax years beginning after December 31, 2025.
  
  
• Permanent Exclusion for Employer-Provided Student Loan Assistance and Inflation Adjustment: The bill would make permanent the exclusion allowing employees to exclude up to $5,250 per year from gross income for employer-provided student loan repayment. Employers can also exclude these amounts from wages for employment tax purposes. Starting in tax year 2027, the $5,250 annual exclusion limit for Section 127 benefits—including education assistance and student loan payments—would be indexed for inflation.
  
  
• Permanent Increase to ABLE Account Contribution Limits: Employed individuals with disabilities may contribute extra funds to their ABLE accounts, up to the lesser of their annual earnings or the federal poverty level for a single-person household. The bill permanently extends this higher contribution limit and adds one additional year of inflation adjustments to the contribution threshold.