OBBBA
The new One Big Beautiful Bill Act (herein called OBBBA) signed into law in July, 2025 impacts both 2025 and future returns. The purpose of this post is to give you a high level summary of what to expect for your 2025 return.
Bigger refunds expected
In most cases deductions have increased under the new law. As a result, all things being equal, most taxpayers should have a lower tax bill than in the previous year, resulting in larger refunds. According to the IRS, 64% of taxpayers received a refund for the 2024 tax return season, with the average refund being $3,138. This will likely increase for many as a result of the new tax law changes.
New Enhanced Deduction for Seniors
Beginning with tax year 2025, those age 65 or older may be eligible for a $6,000 enhanced deduction per person, or $12,000 for a joint return. This deduction is in addition to the standard deduction or itemized deduction that a taxpayer can take. The deduction is reduced for modified adjusted gross incomes over $75,000 for a single filer or $150,000 for a married filing jointly return. See IRS publication 554 for more details.
Deduction for qualifying tip income
Qualifying taxpayers can take a tax deduction of up to $25,000 per tax return to offset allowable tip income earned in 2025. This deduction phases out for taxpayers earning higher incomes ($150,000 single / $300,000 joint MAGI). This is only for voluntary tips and only for industries that the IRS allows for this deduction.
Tips need to be paid with cash, check or a card to qualify (not property). The tips need to be voluntary. When a gratuity is automatically put on a bill, such as when dining out with larger groups, it does not count because it is not voluntary.
Qualifying industries are those that the IRS deems that tipping is customary. You can see the list of qualifying businesses here.
Since the law was not signed until July of 2025, employers are granted relief and are not required to report this separately on W-2’s for 2025. Employers are required, however, to report this separately on W-2’s for tax year 2026.
As a result, employees need to work with their employer to receive a separate statement for the 2025 tax year or use the existing reporting of overall tips on the W-2 as well as Forms 4070 submitted to their employer as the basis in determining the amount of qualified tips. See IRS notice 2025-69 for more information.
Deduction for qualifying overtime
The new law also allows a deduction of up to $12,500 for a single filer, and $25,000 for joint filers of qualifying overtime. This deduction phases out for taxpayers with MAGI (modified adjusted gross income) over $150,000 for single filers and $300,000 for joint filers.
This overtime is only the overtime premium portion. So, for example, lets say that the taxpayer usually makes $20 per hour. However, they make $30 per hour when working overtime. It’s the $10 overtime premium portion ($30 – $20) that would qualify. In addition, the only overtime that qualifies is the Fair Labor Standards Act (FLSA) definition of overtime. Taxpayers need to be careful of this.
The FLSA definition of overtime, generally speaking, is overtime in excess of a 40 hour workweek. This is important, because in many industries, states, and businesses, a different definition might be used. This could be due to a specific union contract, state law or employer policy. For example, if a company pays overtime by the day (not the week) and an employee works a 9 hour day but still 40 hours for the week, the employee might get one hour of overtime for that day per the employer policy. However, that hour would not qualify for the deduction because FSLA overtime is based on the week, not the day.
Because of this nuance, employers and employees need to be careful on what they report as qualifying overtime for the deduction. Since the law was not signed until July of 2025, employers are granted relief and are not required to report this separately on W-2’s for 2025. They are required, however, to report this separately on W-2’s for tax year 2026.
Employees will need to work with their employers to get a separate statement or perform a calculation to determine the amount of qualifying overtime premium for 2025. See IRS notice 2025-69 for more information.
Larger deduction of State and Local Taxes (SALT)
Taxpayers take the greater of the standard or itemized deduction for their tax return in any tax year. Most taxpayers have been taking the standard deduction in recent years. This is because of the higher standard deduction levels from the 2017 tax law changes.
With the new OBBBA, the state and local tax deduction cap for itemized deductions has been raised from $10,000 to $40,000. For many in higher tax states, this increase could flip the scales to itemizing rather than using the standard deduction. Of course, it’s always proper to do both calculations each year (standard deduction or itemized deduction) to determine the best result.
The SALT deduction will phase out for higher incomes (phase outs begin at $500,000 MAGI).
Deduction for domestic car loan interest
This new law allows the taxpayer to deduct up to $10,000 in qualifying car loan interest. This is regardless of whether they take the standard deduction or itemize. This is because it is an “above the line” deduction.
The spirit of the deduction is to incentivize taxpayers to buy new domestically produced cars. Because of that, there are a number of restrictions in order to qualify for the deduction.
The car, SUV, minivan, van, pickup truck, or motorcycle must at least have had the final assembly in the US. It must be a new vehicle purchased with a loan originating after December 31, 2024. The vehicle must be under 14,000 pounds and used primarily for personal use (not business). You are required to include the VIN number on the new Schedule 1-A of form 1040.
MAGI phase outs of this deduction start at $100,000 for single filers and $200,000 for joint filers. For more information, please see publication 6126 and the IRS website here.
Other notable changes with the new law
- The standard deduction was increased to $15,750 (single), $23,625 (head of household) and $31,500 (MFJ) and will be inflation adjusted for future years.
- The child tax credit increased from $2,000 per qualifying child to $2,200.
- The adoption tax credit now allows up to $5,000 of the credit to be refundable.
- 529 Plans are now expanded to allow up to $20,000 to be used for K-12 expenses (previous law was $10,000), as well as more non-tuition qualifying expenses now allowed (books, online learning materials, tutoring fees).
- EV tax credits are no longer available for vehicles acquired after September 30, 2025.
Disclaimer: Mistakes can happen. Please verify data from multiple sources before using.
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