Dear Tax Client:
As the season approaches, we’d like to update you on a few of the 2025 tax changes.
On July 4, 2025, President Trump signed into law the One Big, Beautiful Bill Act
(OBBBA). OBBBA includes the largest tax overhaul since the Tax Cuts and Jobs Act of
2017 (TCJA), and it will affect almost every individual and business in the United
States. The provisions in the new law go into effect on various dates, but most of the
key ones affecting individuals apply to the current tax year.
Tax Rates and Brackets. OBBBA makes permanent the current tax rates, which had
been set to revert to higher rates at the end of 2025. Tax brackets will continue to be
indexed for inflation. For 2025, the top rate (37 percent) kicks in at $751,600 of
taxable income for joint filers, $375,800 for married taxpayers filing separately, and
$626,350 for all other individual taxpayers.
Personal Exemptions and Standard Deduction. TCJA repealed the personal exemption
deductions, but nearly doubled the standard deduction amounts for taxpayers who
do not itemize their deductions. OBBBA makes these changes permanent and
increases the standard deduction for the 2025 to $15,750 for single filers, $23,625
for heads of household, and $31,500 for married filing jointly. These amounts will be
indexed for inflation in future years.
Deduction for State and Local Taxes. For taxpayers who itemize, TCJA capped the
deduction for state and local taxes at $10,000. OBBBA provides relief by increasing
the cap to $40,000 for 2025. The amount is increased to $40,400 for 2026 and then
indexed for inflation annually before reverting to the current $10,000 limit in 2030.
The enhanced cap is phased out for taxpayers with modified adjusted gross income
over $500,000.
New Deduction for Tip Income (No Tax on Tips). OBBBA creates a new deduction of
up to $25,000 for qualified tips received by an individual in an occupation which
customarily and regularly receives tips during a given tax year. The deduction is
allowed for both employees and independent contractors. The deduction begins to
phase out when the taxpayer’s modified adjusted gross income exceeds $150,000
($300,000 in the case of a joint return). The deduction, which is allowed for the
2025-2028 tax years, is available regardless of whether you itemize or take the
standard deduction.
New Deduction for Overtime Pay (No Tax on Overtime). OBBBA creates a new
deduction for up to $12,500 ($25,000 in the case of a joint return) for “qualified
overtime compensation” (defined as overtime compensation paid to an individual
under Section 7 of the Fair Labor Standards Act). The deduction begins to phase out
when the taxpayer’s modified adjusted gross income exceeds $150,000 ($300,000 in
the case of a joint return). The deduction, which is allowed for the 2025-2028 tax
years, is available regardless of whether you itemize or take the standard deduction.
New Senior Deduction (No Tax on Social Security). OBBBA adds a deduction for all
individuals who have reached age 65 before the end of the tax year. The deduction
amount is $6,000 per individual. The senior deduction begins to phase out when the
taxpayer’s modified adjusted gross income exceeds $75,000 ($150,000 in the case of
a joint return). The deduction, which is allowed for the 2025-2028 tax years, is
available regardless of whether you itemize or take the standard deduction.
New Deduction for Car Loan Interest. OBBBA creates a new deduction of up to
$10,000 for interest paid on debt incurred after December 31, 2024 for the purchase
of a qualifying new vehicle assembled in the U.S. The deduction is allowed for tax
years 2025 through 2028 and begins to phase out when the taxpayer’s modified
adjusted gross income exceeds $100,000 ($200,000 in the case of a joint return).
The deduction is available regardless of whether you itemize or take the standard
deduction.
Trump Accounts. OBBBA creates Trump accounts, a new type of tax-advantaged
savings account administered by banks and other financial institutions. Starting in
2026, parents of any child under age 18 may open a Trump account for their child.
Aggregate contributions are limited to $5,000 annually, but the limit does not apply
to contributions from tax-exempt entities such as private foundations. Beginning at
age 18, account holders may begin accessing funds for a limited set of purposes,
including higher education. Under a pilot program, for U.S. citizens born between
January 1, 2024, and December 31, 2028, the federal government will contribute
$1,000 per child into every eligible account.
Enhancements to 529 Plans. Beginning in 2026, OBBBA increases the annual limit on
distributions from 529 savings plans from $10,000 to $20,000. It also allows
distributions to be used for additional educational expenses in connection with
enrollment or attendance at an elementary or secondary public, private, or religious
school, including: curriculum and curricular materials; books or other instructional
materials; online educational materials; tutoring or educational classes outside the
home; certain testing fees; fees for dual enrollment in an institution of higher
education; and certain educational therapies for students with disabilities.
Charitable Contribution Deduction. Beginning in 2026, OBBBA provides a charitable
contribution deduction for non-itemizers of up to $1,000 in cash contributions for
single filers ($2,000 for married filing jointly). For individuals who elect to itemize,
OBBBA imposes a new 0.5-percent adjusted gross income floor on charitable
contributions (i.e., it reduces any deduction by 0.5-percent of adjusted gross
income).
Child Tax Credit. OBBBA permanently increases the child tax credit to $2,200 per
child beginning in 2025 and indexes it for inflation.
Deduction for Mortgage Insurance Premiums. Beginning in 2026, OBBBA
permanently restores the deduction for mortgage insurance premiums (previously
available from 2018 through 2021) by treating such premiums as interest on
acquisition indebtedness. As before, the deduction is phased out for taxpayers with
adjusted gross income above $100,000 ($50,000 for married filing separately).
New Limit on Gambling Losses. Under current law, deductions for gambling losses
are limited to gambling winnings. Beginning in 2026, OBBBA limits the deduction
for gambling losses to 90 percent of the amount of such losses. Any deduction
remains limited to the amount of gambling winnings.
Termination of Clean Energy Credits. OBBBA terminated the new clean vehicle credit
and the previously owned clean vehicle credit for vehicles acquired after September
30, 2025. It also terminates the energy efficient home improvement credit and
residential clean energy credit at year’s end.
As you compile your documents for this filing season, please keep in mind the new
provisions which may require additional attention and/or record-keeping on your
part. As always, if you have any questions or need any clarification of rules, feel free
to reach out.
One last note:
As of September 30, 2025 the IRS has stopped issuing paper refund checks. If you
have a refund due to you, we will need your banking info for direct deposit of your
refund.
Sincerely,
Robyn Urig, EA, RIA