07/11/2025
With the passage of One Big Beautiful Bill Act (OBBBA) there are many changes taxpayers should be aware of. Being aware of the changes and planning your tax strategy may benefit you greatly. OBBBA permanently extended many of the provisions of 2017 Tax Cuts and Jobs Act (TCJA), created new deductions and credits and eliminated other credits and deductions. Many of these changes are retroactive to January 1, 2025. Some changes take effect later. Lower-middle and middle-income taxpayers benefit most since many of the deductions and credit have income limits.
Raising the state and local income tax cap (SALT) from $10000 to 40000 will benefit homeowners, those with second homes and employees paying high state tax will benefit up to a few thousand in lower federal tax liability.
A compromise to the promise to eliminate tax for Social Security recipients is a new deduction of $6000 for single and $12000 for married filing joint taxpayers who are 65 and older, regardless if they have begun collecting Social Security. Only lower-middle and middle-income taxpayers benefit from this new deduction. Lower income taxpayer already do not pay income tax on their Social Security. A phase out exists for higher income taxpayers beginning at $75,000 for single filers and $150,000 for joint filers. This is a new deduction, separate from the standard deduction. Those 65 and older that itemize can benefit from both the SALT increase and the new senior deduction.
For 2025 the Child Tax Credit (CTC) will be raised to $2200 for each child under 17. I have not heard any detail for children 17 & older, so I assume that figure remains at $500. This credit has become permanent and will be indexed for inflation going forward.
The “No tax on tips” provision allows tips received to be reported on the tax return, then subtracted to be tax free, capped at $25,000 per year. Higher income earners are phased out if the taxpayer’s MAGI exceeds: $150,000 for individuals, $300,000 for joint filers.
“No tax on overtime” allows the first $12,500 of overtime to be tax free for single filers and $25,000 for MFJ. This has the same income limits as the no tax on tips provision.
Also new is a deduction for auto loan interest. Up to $10000 of interest can be deducted on one’s tax return for any loans initiated this year. This applies to new vehicles assembled in the United States, whether the loan is for the purchase or refinancing a car purchased prior to 2025.
The sunsetting of green energy account is taking place sooner than prior legislation dictated. To take advantage of clean vehicle credit one needs to purchase their vehicle prior to September 30, 2025. For other credits such as solar, and other home energy credits, these expire December 31, 2025. One considering purchases that would qualify for energy credits will need to act quickly before these credits expire.
Laws taking effect beginning 2026:
Charitable deduction for non-itemizers of $1,000 for single filers and $2000 for married filing jointly. For those that itemize a new floor is being added, subtracting the first 0.5% of one’s AGI from their contribution.
The child and dependent care tax credit has been enhanced beginning on 2026 in two ways. Employer pretax account contribution limit will be raised from $5000 to $7500. The second change benefits low and moderate income taxpayers, increasing their deduction for daycare expense by up to 50% when paid outside of employer pretax accounts (on the first $3000 for once child, $6000 for two or more children).
A new law also reinstates the deduction for mortgage insurance premiums (PMI).
Teachers, administrators and coaches will now have the option to deduct ALL of their materials and supplies including those involving extracurricular programs or alternative instructional environments, as long as they are directly tied to educational activities. Since 2017 the deduction was limited to an above like line deduction of $300 per teacher. Beginning in 2026 the taxpaper can select the most beneficial method: $300 without itemizing, or all deductions on Schedule A.
College savings accounts (529) have been expanded greatly to allow contributions to the tax advantaged accounts be used for additional school expenses, including K-12 tuition and fees, vocational programs, apprenticeships, tutoring, testing fees, continuing education, dual college/high school classes and much more.
With these changes in mind taxpayers might want to perform certain activities in 2025, while waiting until 2026 to do others. If you’d like to discuss your individual circumstances and how to maximize the benefits of these changes setting up an appointment to review your situation during the tax off-season is advisable.
