On July 4th, the President signed into law the so-called “One Big Beautiful Bill” Act (OBBBA), a significant piece of legislation that ushers in a plethora of tax provisions designed to impact taxpayers across the spectrum. Though the act introduces measures that stretch beyond this year, our focus here narrows to changes coming into effect in 2025—critical for taxpayers to note. As you navigate through the list of modifications, consider whether any of these alterations may apply to your financial situation and determine if pertinent actions must be taken before year’s end. Particularly pressing are the numerous environmental tax credits that face imminent termination by the close of the year (some soon), meaning those wishing to claim these benefits must not delay taking action. This guide will equip you with the knowledge necessary to timely optimize your tax responsibilities and benefits efficiently amidst these legislative changes.
Here is a detailed summary of the tax law changes included in the OBBBA that will apply in 2025:
- Standard Deduction Increase: Starting in 2025, the standard deductions will be increased to $15,750 for singles and married filing separately, $23,625 for heads of household, and $31,500 for married filing jointly. These deductions will be adjusted for inflation in subsequent years.
- Special Temporary Deduction for Seniors: Individuals 65 or older will receive a $6,000 ($12,000 for a married couple if both qualify) deduction, provided their modified adjusted gross income (MAGI) doesn’t exceed $75,000 for singles or $150,000 for joint filers. This is in place of the no tax on Social Security proposal advanced during the presidential campaign. The deduction is available whether receiving Social Security benefits or not and is available for both itemizers and non-itemizers. This deduction will apply for years 2025 through 2028, and does not take the place of the additional standard deduction allowed to those age 65 and older.
- Child Tax Credit: The nonrefundable child tax credit will increase to $2,200 per child. The income thresholds for phaseout of the credit will be $400,000 for joint filers and $200,000 for others. Both child and parent(s) need Social Security Numbers (SSNs) to qualify.
- Qualified Small Business Stock (QSBS) Exemption: A tiered gain exclusion will be applied for QSBS acquired after July 4, 2025, allowing a 50% exclusion when the stock is sold after three years, a 75% exclusion after four years, and a 100% exclusion after five years. This only applies to C Corporations and includes limits on the amount that can be excluded. Contact this office for details and to see if your corporation qualifies.
- New Deduction for Tips: Tips received in occupations that customarily receive tips are eligible for a deduction, capped annually at $25,000. For individuals with an adjusted gross income (AGI) exceeding $150,000 or $300,000 for joint filers—the deduction is incrementally reduced by $100 for every $1,000 over the AGI threshold. In addition, this deduction is not available to individuals working in specified service trades or businesses, such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, etc. The IRS will be publishing a list of qualifying occupations by October 2, 2025. This deduction is only available through 2028. A valid Social Security number is required on the return and married taxpayers must file jointly. Employees eligible for this deduction may want to revise their federal income tax withholding, while qualifying self-employed individuals may be able to adjust their estimated tax payments, to take this deduction into account.
- Overtime Deduction: This above-the-line deduction allows individuals to exclude the portion of their overtime compensation that exceeds their regular pay rate from their taxable income. Like the tip deduction, the deduction amount is reduced by $100 for each $1,000 that the taxpayer’s modified adjusted gross income exceeds $150,000 ($300,000 for joint returns). This deduction is only available through 2028. Employers will be required to specify the eligible overtime income on Form W-2 or other statement as will be required by the IRS. As with the tip deduction, married taxpayers can claim the overtime deduction only if they file a joint return. All individuals must include a valid Social Security number on the return.
- Deduction for Car Loan Interest: The deduction for car loan interest allows taxpayers a deduction of up to $10,000 in interest for loans secured by a first lien used to purchase vehicles that are assembled in the United States. Available from 2025 through 2028. Like the tip and overtime deductions this deduction is also phased out for higher income taxpayers. The deduction begins to phase out for single taxpayers with modified adjusted gross income (MAGI) above $100,000 and for married couples filing jointly with above $200,000. The phaseout is $200 for each $1,000 (or portion thereof) the MAGI exceeds the threshold. The deduction is available for both itemizers and non-itemizers. Lenders or other recipients of qualified interest must file information returns with the IRS and furnish statements to taxpayers showing the total amount of interest received during the taxable year. Taxpayers will need to include the vehicle’s VIN (vehicle identification number) on their return when claiming the deduction.
- Adoption Credit: Which has most recently been a non-refundable credit, meaning it only reduces a taxpayer’s tax liability, will become partially refundable up to $5,000 for 2025 through 2028.
- 529 Savings Plan Enhancements: Tax-exempt distributions from 529 plans can be used for additional educational expenses, including elementary, secondary, or home school expenses up to $20,000 (up from the previous limit of $10,000) for distributions after July 4, 2025 (date of legislation’s enactment). Additionally, eligible expenses now include qualified postsecondary credentialing expenses in connection with recognized postsecondary credential programs and recognized postsecondary credentials.
- Bonus Depreciation: The 100% bonus depreciation deduction rate for qualified business property acquired after January 19, 2025, has been restored and made permanent.
- Qualified Production Property Special Depreciation Allowance: Taxpayers can immediately deduct 100% of the cost of certain new factories, certain improvements to existing factories, and certain other structures that would generally be 39-year property. Specifically, this provision allows taxpayers to deduct 100% of the adjusted basis of qualified production property in the year such property is placed in service. Construction of the property must begin after January 19, 2025, and before January 1, 2029, and the property must be placed in service before January 1, 2031.
- Third-Party Network Transaction Reporting (1099-Ks): For transactions facilitated through third-party networks, such as payment processors or platforms, reporting on Form 1099-K is required only if the gross amount of the transactions exceeds $20,000 coupled with more than 200 transactions within a calendar year. This returns the threshold to what it was before being phased down to $600.
- Termination of Previously Owned Clean Vehicle Credit: The up to $4,000 credit for purchase of previously owned clean vehicles is accelerated to expire by September 30, 2025, instead of the initial 2032 sunset date.
- Termination of Clean Vehicle Credit: The Clean Vehicle Credit will be disallowed for vehicles purchased after September 30, 2025. Previously, taxpayers could claim a credit up to $7,500 for new clean vehicles.
- Termination of Commercial Clean Vehicle Credit: The commercial clean vehicle credit allowed a business tax credit from $7,500 to $40,000 for the purchase of commercial vehicles. That credit now terminates September 30,2025.
- Termination of Alternative Fuel Vehicle Refueling Property Credit: This credit for installation of refueling stations, will terminate after September 30, 2025, instead of its original date of December 31, 2032.
- Termination of Energy Efficient Home Improvement Credit: Allowed taxpayers a credit up to $1,200 for household energy efficient improvements through 2032. This credit will no longer apply to improvements placed in service after December 31, 2025.
- Termination of Solar Energy Credit: A lot of homeowners have benefited from the 30% tax credit for installing solar electric panels on their residences. But that credit comes to an end on December 31, 2025.
- Domestic Research Expenditures: Business taxpayers can immediately deduct domestic research expenditures for taxable years starting after December 31, 2024.
- SALT Deduction Changes: The cap on the itemized deduction for state and local tax (SALT), which has recently been limited to $10,000, has been increased to $40,000 for 2025, then increases ever so slightly each year until 2029 when it drops back down to $10,000. That is the good news! The bad news, if a taxpayer’s MAGI goes over $500,000 the deduction begins to reduce and returns to $10,000 for those with a MAGI of $600,000 or more.
These updates to the tax law provide significant information for planning your tax strategies. If you have any questions or need detailed analysis on how these changes may affect your personal or business finances, please feel free to call or schedule an appointment with our office.
