07/15/2025
Special Edition: 2025 Tax Reform 1040 News Quarterly news & tips for folks in every tax bracket On 7/4/25, the One Big Beautiful Bill (OBBB) Act was signed into law. It replaces the Tax Cuts and Jobs Act (TCJA), which was scheduled to expire on 1/1/26. This Special Edition of 1040 News outlines the tax provisions of OBBB that will affect most folks. As always, we will focus on the big picture, intentionally leaving out many of the detailed qualifiers. Lower Tax Brackets Now Permanent Background: The TCJA lowered tax brackets for years 2018 through 2025. However, it did not make the lower rates permanent (so tax brackets would have reverted to the higher 2017 rates on 1/1/26). Key OBBB changes: • OBBB maintains the same TCJA brackets (10, 12, 22, 24, 32, 35, & 37%). • Lower brackets are now permanent (not scheduled to expire). Higher Standard Deduction Now Permanent Background: The TCJA roughly doubled the standard deduction for years 2018 through 2025. However, it did not make the change permanent (so standard deductions would have reverted to the lower 2017 levels on 1/1/26). Key OBBB changes: • OBBB slightly increases the standard deduction above the TCJA levels (adding an additional $750/$1,125/$1,500 for Single/HOH/MFJ). • For tax year 2025, the standard deduction will be $15,750 (single/MFS), $23,625 (HOH), and $31,500 (MFJ). Individuals aged 65 and older (or blind) receive an additional $1,600 (MFJ, QSS, MFS) or $2,000 (S, HOH). • Beyond 2025, the standard deduction will be indexed for inflation and made permanent (not scheduled to expire). $6000 Bonus Deduction for Ages 65+ Background: Congress debated reducing the amount of Social Security income that is taxed. However, they settled on a separate deduction for those aged 65 and above. Key OBBB changes: • $6000 deduction is in addition to the standard deduction. • Deduction is per person (so married filing jointly gets $12,000 if both the taxpayer and spouse are age 65+). • Valid for tax years 2025 through 2028. • Deduction phases down by 6% of income exceeding $75,000 (or amount over $150,000 if married filing jointly). Higher Limits on State & Local Tax (SALT) Deductions Background: The TCJA placed a $10,000 cap on SALT deductions. Key OBBB changes: • OBBB increases the SALT deduction limit to $40,000, helping many taxpayers in high-income tax states (and some with high property taxes, too). • Valid for tax years 2025 through 2029 • Single, HOH, and MFJ filing statuses get $40,000 limit (married filing separately limited to $20,000). • $40,000 limit phases down at higher income levels (reduced by 30% of income exceeding $500,000, or exceeding $250,000 if married filing separately). • Income-based phase-down stops when SALT deduction reaches $10,000 (or $5,000, if married filing separately). Child Tax Credit (CTC) Increase Now Permanent Background: The TCJA doubled the CTC and significantly increased the income level at which the credit begins to phase out. However, these changes were not permanent (valid only for 2018 through 2025). Key OBBB changes: • OBBB permanently increases the CTC to $2200 per child under age 17 (up from $2000 per child). • Income-based phase-out limits and formula remain unchanged (same as TCJA’s $50 reduction per $1000 of income exceeding $200,000 (single/HOH/MFS) or $400,000 for joint filers). • Valid in 2025 (& permanent thereafter). • CTC indexed for inflation each year (starting in 2026). No Tax on Tip Income Background: Excluding tips from taxable income is a new provision (not part of the expiring TCJA rules). Key OBBB changes: • Deduction is limited to $25,000 (the lesser of tip income or $25,000). • $25,000 limit also applies to married couples filing jointly (even if both the taxpayer and spouse have tip income). • Not available for married filing separately filing status. • Deduction begins to phase out at income levels of $150,000 (single/HOH) and $300,000 (MFJ). The reduction is $100 per $1000 over the threshold. • Deduction is available for the self-employed (and further limited to net income from the business). • Qualified tip income must be reported on either a W2, 1099-K, 1099-NEC, or self-reported on IRS form 4137. • All tip income is still subject to Social Security and Medicare tax. • Valid for tax years 2025 through 2028. • Limited to professions that “traditionally and customarily” receive tips. • Qualified tips must be paid voluntarily, rather than a set amount determined before service.
Let’s continue to explore the OBBB Act... No Tax on Overtime Background: Excluding overtime pay from taxable income is a new provision (not part of the expiring TCJA rules). Key OBBB changes: • Limited to employees who receive overtime pay as defined by section 7 of the Fair Labor Standards Act. • Deduction is limited to the lesser of overtime pay or $12,500 (single/HOH) or $25,000 (MFJ). • Not available for married filing separately filing status. • Deduction begins to phase out at income levels of $150,000 (single/HOH) and $300,000 (MFJ). The reduction is $100 per $1000 over the threshold. • All overtime pay is still subject to Social Security and Medicare tax. • Valid for tax years 2025 through 2028. Charity Deduction for Non-Itemizers Background: The TCJA’s higher standard deduction and $10,000 SALT limit reduced the tax savings from charitable giving (for most, but not all taxpayers). Key OBBA changes: • Above-the-line deduction (in addition to the standard deduction), limited to the lesser of charitable giving or $1000 ($2000 max for couples filing jointly). • Cash only (not goods). • Donor-advised funds excluded. • Begins in tax year 2026 and is permanent thereafter (not scheduled to expire). Auto Loan Interest Deduction Background: Deducting auto loan interest payments is a new provision (not part of the expiring TCJA rules). Key OBBA changes: • Deduction is limited to the lesser of auto loan interest paid or $10,000. • Income-based phase-out begins at $100,000 (single/HOH/MFS) or $200,000 (MFJ). The reduction is $200 per $1000 over the threshold. • Limited to new vehicles assembled in the USA. Most vehicle types (including cars, trucks, SUVs, vans, and motorcycles) will qualify. Some vehicles are excluded from the 2025 Tax Reform (including those weighing over 10,400 pounds, campers, trailers, ATVs, & others). • Valid for 2025 through 2028 (loans originated before 1/1/2025 don’t qualify). Trump Accounts Background: Trump accounts are a new provision (not part of the expiring TCJA rules). Key OBBB changes: • US Treasury makes a one-time $1000 contribution for children born between 2025 and 2028. • Parents (or others) can contribute up to $5000/yr until the child turns 18. Contributions are nondeductible. • Children born before 1/1/25 will not get the $1000 government contribution (but an account can still be created for making annual contributions). • Earnings are not taxed until distributed. • Qualified distributions receive favorable tax treatment (earnings taxed at long-term capital gain rates). • Qualified distributions are generally not allowed until age 18. The funds must also be used for qualified expenses (including higher education, first-time home purchase, starting a business, and other qualified uses). Elimination of Clean Energy Tax Credits Background: Prior legislation created tax credits for energy-saving home improvements (including a long list of equipment such as solar/wind/geothermal, heat pumps, furnace, AC, water heater, windows/doors/skylights, insulation, panel boards, & more). Key OBBA changes: • All clean energy home improvement tax credits will be eliminated for tax year 2026 and beyond. • Credits will remain in place for 2025. Equipment must be fully installed and put into service by 12/31/25. Elimination of Plug-In EV Tax Credits Background: Prior legislation created tax credits for buying plug-in EVs (with qualifiers based on where the vehicle was assembled & many other factors). Key OBBB changes: • All EV tax credits will be eliminated for vehicles placed in service after 9/30/25. Itemized Deduction Limitations Background: The OBBB creates a variety of new limitations on itemized deductions. Key OBBB changes: • Starting with tax year 2026, taxpayers in the top federal tax bracket will only get 35% tax savings on their itemized deductions (vs. 37%, which is the marginal rate for the top tax bracket). • Gambling loss deduction limited to 90% of reported winnings. • Charitable contributions must exceed 0.5% of income to be deductible. Note: This only pertains to itemized deductions (not the $1,000 ‘above-the-line’ charity deduction mentioned previously). Other Tax Provisions Kept Similar to TCJA. Many of the TCJA’s tax provisions were maintained. Here are several OBBA rules that follow the TCJA closely (with some differences that are beyond the scope of this newsletter): • Qualified Business Income (QBI) deduction kept at 20% (and made permanent). • Businesses can deduct 100% of certain expenditures in the year purchased. • Elimination of personal exemptions made permanent. • Alternative Minimum Tax (AMT) remains similar (not identical) to TCJA rules. AMT exemption amounts and phaseouts are now permanent. • The elimination of the moving expense deduction is now permanent. • Elimination of personal casualty loss deductions is now permanent (exception for federally declared disasters remains unchanged). • Elimination of miscellaneous itemized deductions is now permanent (including non-reimbursed employee expenses, tax prep & investment advisory fees, safe deposit boxes, hobby expenses, and certain legal fees, etc.). • Mortgage interest deduction limited to $750,000 of original indebtedness.
