Preface: “By failing to prepare, you are preparing to fail.” — Benjamin Franklin
Tax Highlights to Help You Prepare for 2025 Tax Filing
The One Big Beautiful Bill Act of 2025 (OBBBA) ushers in a new tax environment whose full effects will take several years to unfold and will likely require further clarification. Please join us now as we review some of the updated numbers for 2025 and some of the structural changes introduced by this sweeping legislation.
Standard Deduction
The standard deduction has increased for 2025 as follows:
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- Joint filers – $31,500
- Individual taxpayers – $15,750
- Heads of household – $23,625
An additional amount of $1,600 is added to the standard deduction of a taxpayer who is age 65 or older or who is blind. The additional amount is $2,000 if the taxpayer is unmarried and not a surviving spouse. If you are age 65 or older and blind, you get to take the additional amount twice.
Income Tax brackets
Income tax brackets for 2025 are as follows:
| Single | Married Filing Jointly | Rate |
| $0 – $11,925 | $0 – $23,850 | 10% |
| $11,926 – $48,475 | $23,851 – $96,950 | 12% |
| $48,476 – $103,350 | $96,951 – $206,700 | 22% |
| $103,351 – $197,300 | $206,701 – $394,600 | 24% |
| $197,301 – $250,525 | $394,601 – $501,050 | 32% |
| $250,526 – $626,350 | $501,051 – $751,600 | 35% |
| $626,351 and up | $751,601 and up | 37% |
Note that these brackets apply to taxable income after all deductions have been taken. The rates apply in a graduated manner, up to each threshold at the applicable rate, and from that threshold at the next applicable rate, etc.
Changes to Itemized Deductions
SALT
The biggest single change to itemized deductions is that the cap on the state and local tax (SALT) deduction has been increased to $40,000. This increase will expire after 2028, and absent additional legislation, the cap will then revert to $10,000.
Another new wrinkle in the SALT deduction is that the increased cap has a phaseout threshold for high earners. For both single filers and married filing jointly, the phaseout begins at modified AGI of $500,000. The cap phases down from $40,000. At modified AGI of $600,000 or more, the cap is again $10,000.
Mortgage Interest
OBBBA reintroduces the deductibility of mortgage insurance premiums, which had been disallowed in recent years. The indebtedness limit of $750,000 for mortgage interest deductions remains unchanged.
OBBBA makes no changes to deductibility of medical expenses. These are still limited to the amount that exceeds 7.5% of AGI.
The itemized deduction for personal casualty loss has been broadened to include casualty loss due to state as well as federally-declared disasters.
Other miscellaneous itemized deductions are now permanently eliminated.
Changes Coming to Charitable Contribution Deductions in 2026
Starting in 2026, there will be a lower-bound or “floor” on charitable deductions equal to 0.5% of AGI. The itemized charitable deduction will be reduced by this amount.
Also starting in 2026, a new non-itemized charitable deduction will be available as a below-the-line deduction. Unlike the four other new below-the-line deductions introduced in the OBBBA, the charitable deduction will be permanent. It will not expire after 2028.
The non-itemized deduction will be capped at $1,000 for single filers and at $2,000 for joint filers. It is obviously intended for non-itemizers. Unlike the itemized version, the non-itemized version will be restricted to donations by cash or check. It will not be subject to the new 0.5% “floor”.
The Four “No Tax On…” Below-the-Line Deductions
Under OBBBA, you are still required to report tips, overtime pay, and social security as taxable income. However, there are three new deductions that may reduce or eliminate the taxable amount. There is also a new deduction for car loan interest. All four deductions are subject to dollar amount caps, income-based phaseouts, and additional restrictions. All four will expire after 2028.
1. Tips
The deduction for tips is capped at $25,000 regardless of filing status. It begins to phase out at $150,000 of modified AGI for single filers and at $300,000 for married filing jointly.
The IRS has published a list of “tipped occupation codes” they consider valid for purposes of this deduction: https://shorturl.at/k1Gi2. The list does not include artists, musicians, entertainers, or accountants, or any other specified service trades or businesses (SSTBs).
Sole proprietors may not deduct more in tips than their net income from the business through which the tips were earned.
2. OT Pay
The deduction for overtime pay is capped at $25,000 for joint filers, regardless of which spouse had the overtime pay. It is capped at $12,500 for single filers. It begins to phase out at $150,000 of modified AGI for single filers and at $300,000 for married filing jointly.
This deduction is taken on the “and a half” portion of “time and a half” pay. In other words, if you had $1,500 in overtime pay for work that would have earned you $1,000 during non-overtime hours, then you would deduct the extra $500. The amount of overtime an employee can deduct should be reported by the employer.
3. Seniors
The deduction for social security is not in any way capped by the amount of social security benefits the taxpayer actually received during the year. It is available to all filers age 65 and older and has a maximum value of $6,000 per person. It begins to phase out at $75,000 of modified AGI for single filers and at $150,000 for married filing jointly.
Note that this deduction is taken in addition to the increased standard deduction for taxpayers aged 65 and older.
4. Car Loan Interest
There is also a new deduction on car loan interest. It is capped at $10,000. It begins to phase out at $100,000 of modified AGI for single filers and at $200,000 for married filing jointly.
This deduction applies only to car loans taken out after December 31, 2024. The vehicle must be new, assembled in the U.S., and cannot have a GVW of more than 14,000 lbs. The deduction cannot be taken for vehicles used for business or bought for resale.
All four of these deductions are below-the-line deductions, meaning they are taken after AGI is computed. All four will expire after 2028 if not extended by Congress.
Changes to the Qualified Business Income Deduction
The Tax Cuts and Jobs Act of 2017 (TCJA) cut corporate income tax to 21%. In order to compensate unincorporated businesses, TCJA introduced the qualified business income deduction (QBID). The QBID is a below-the-line deduction worth a maximum of 20% of business income, subject to certain restrictions.
While the corporate tax rate cut was permanent in TCJA, the QBID was set to expire in 2025. The OBBBA now makes the QBID permanent as well.
The general structure of the QBID remains as before. For 2025, the phaseout thresholds for higher earners begin at $197,300 for single filers and $394,600 for joint filers. Above these thresholds, the amount of QBID begins to phase out for specified service trades or businesses (SSTBs). For non-SSTBs, the amount of QBID begins to be limited by wage and property requirements.
The upper threshold for the phaseout is $272,300 of taxable income for single filers and $544,600 for joint filers. Above these thresholds, SSTBs can no longer take any QBID. Non-SSTBs must fully meet wage expense and property investment requirements to continue taking the full 20% deduction.
As before, QBID for all earners is limited to the taxpayer’s taxable income minus net capital gains.
One change that OBBBA introduces to QBID is a $400 guaranteed minimum deduction to any taxpayer who has at least $1,000 in qualified business income so long as the business income is “active”. The definition of “active” for this purpose should follow “material participation” as defined for distinguishing passive from non-passive business activity. This guaranteed minimum amount applies if the aggregate of all your active qualified business income is at least $1,000.
Capital Gain Tax Rates
Tax on long-term capital gains and qualified dividends for 2025 is as follows:
| Single | Married Filing Jointly | Rate |
| $0 – $48,350 | $0 – $96,700 | 0% |
| $48,351 – $533,400 | $96,701 – $600,050 | 15% |
| $533,401 or more | $600,051 or more | 20% |
Note that these rates apply in a graduated manner to all your taxable income. So, for instance, if you are single and have $40,000 of taxable income before considering capital gains and qualified dividends, then only the first $8,350 of your long-term capital gains qualify for the zero rate.
Net Investment Income Tax
In accordance with the Affordable Care Act of 2010, the 3.8% net investment income tax (NIIT) continues to apply to income from capital gains, dividends, interest income, royalty , and rental income. The amount of income subject to NIIT is the lesser of:
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- Total investment income as defined above or
- Modified AGI in excess of $200,000 for single filers and $250,000 for joint filers.
The NIIT is then added to your total tax.
Dependent Credits
The child tax credit has been increased to $2,200 for each qualifying child who was under the age of 17 at the end of 2025. The refundable portion of the credit remains at $1,700.
The credit for other dependents remains $500 for each qualifying child who was 17 or 18 years old the end of 2025 or was a student not yet of age 24 at the end of that year, or was of any age but permanently and totally disabled. None of the credit for other dependents is refundable.
This $500 credit is also available for qualifying relatives whose gross income was less than $5,250 in 2025. Note that a qualifying child can earn more than this and still be claimed as a dependent.
Both the child tax credit and the credit for other dependents begin to phase out for taxpayers whose AGI is greater than $200,000 ($400,000 for married filing jointly).
Adoption Credit
For 2025, the adoption credit is available for up to $17,280 of qualified expenses. For a special-needs adoption, the maximum credit may be taken even if the actual costs were less. The credit begins to phase out for taxpayers with modified AGI above $259,190 and is completely phased out at $299,190.
Under OBBBA, $5,000 of this credit is now refundable.
Gift and Estate Taxes
The annual gift tax exclusion for 2025 has increased to $19,000 per taxpayer. So, an individual can give up to $19,000 ($38,000 with spouse) to each child, grandchild or any other taxpayer in 2025 without being required to file a gift tax return.
The lifetime estate and gift tax exemption for 2025 has increased to $15 million per individual.
Mileage Rates
The 2025 mileage rate for business purposes has increased to 70¢ per mile.
The rate for miles driven in service of charitable organizations remains unchanged at 14¢ per mile. The rate for military moving expenses and for medical transportation is 21¢ per mile.
Energy Credits
One of the major effects of the OBBBA is to rapidly phase out many generous energy credits provided by the Inflation Reduction Act of 2022. These credits were originally supposed to be available until the 2030s, but most will now expire much sooner.
The clean vehicle credit can still be claimed for 2025, but only for qualifying vehicles purchased by the end of September 2025.
The energy efficient home improvement credit and residential clean energy credit are available through the end of 2025. In the past, unused portions of these credits could be carried forward to future years. It is not yet clear if this will still be possible for portions that re0main unused after 2025.
For a business to claim business credit for wind or solar property, the property must either begin construction before July 5, 2026, or be placed in service by December 31, 2027. Business credit for energy storage, hydropower, and geothermal will not phase out until 2033.
OBBBA also restricts these business credits if they are generated by either a “specified foreign entity” or a “foreign influenced entity.”
Research and Experimental Expenses
Under OBBBA, 100% of domestic research and experimental costs may now be expensed. Unamortized R&E expenditures remaining from tax years 2022-2024 may be amortized in 2025 or ratably over 2025 and 2026.
Foreign R&E expenditures must still be amortized over 15 years.
Depreciable Property
Under OBBBA, bonus depreciation is permanently restored to 100%.
The maximum Section 179 deduction is increased to $2.5 million and begins to phase out at $4 million of eligible property placed in service in 2025.
Most amazingly of all, OBBBA now allows 100% expensing of some real property. There are, of course, a number of requirements and restrictions. Most importantly, the property must be used for production, manufacturing, or refining activities. The activity must be performed by the owner, so lessors are not eligible. This provision is set to expire after 2028.
Digital Assets
All taxpayers must state on Form 1040 whether they received, sold, or otherwise exchanged any digital assets during the year. This includes cryptocurrency, stablecoin, non-fungible tokens, and other digital assets. This question is informational and is independent from the requirement to report gains or losses from actual sales. Digital assets are taxed much the same as stocks and other capital assets.
The IRS has now finalized Form 1099-DA to report sales and exchanges of digital assets. For 2025, brokers are required to report gross proceeds of digital asset transactions. Starting in 2026, they will be required to report the basis for covered securities.
Forms 1099
Under OBBBA, the threshold for filing Form 1099-K (payment card and third-party network transactions) is restored to $20,000 and 200 transactions, effective 2025.
The threshold for filing Forms 1099-NEC and 1099-MISC will be increased to $2,000, but only in 2026.