2025 Tax Updates

One Big Beautiful Bill Act (OBBBA)

The One Big Beautiful Bill Act (OBBBA) was passed in 2025 as a wide-ranging tax package. It includes new deductions, credits, and rule changes aimed at lowering taxes for both individuals and businesses. The law is broad, but most taxpayers can expect opportunities for savings depending on their situation.

Senior Deduction

The new bill adds a temporary $6,000 deduction for seniors 65 and older ($12,000 for a married couple if both qualify). It begins to phase out once income passes $75,000 single or $150,000 married filing jointly, and couples must file jointly to claim the full amount. This deduction can provide meaningful savings for qualifying retirees. However, this bill did not accomplish the goal of making social security nontaxable. Social Security is still subject to the same tax rates/applications as previous years.

Child Tax Credit Enhancements

The Child Tax Credit has been permanently increased from $1,000 to $2,000, with a new boost to $2,200. The refundable portion will be $1,700, and both amounts will now adjust with inflation. This provides more lasting tax relief for families with children.

Child and Dependent Care Credit (Daycare/Childcare)

The Child and Dependent Care Credit helps offset daycare and similar costs. It covers up to 50% of expenses at lower incomes, gradually dropping to 35% by $75,000, and never below 20% regardless of income. The maximum expenses allowed are $3,000 for one dependent or $6,000 for two or more, though the credit is nonrefundable.

Dependent Care Assistance

Starting in 2026, the contribution limit for Dependent Care FSAs (DCAPs) will rise to $7,500 per year ($3,750 if married filing separately). These plans let you set aside pre-tax income for qualifying child or dependent care expenses, reducing taxable income.

State and Local Tax Deduction

The SALT deduction limit, originally capped at $10,000 under TCJA, has been raised to $40,000 through 2029. SALT includes state and local income taxes, property taxes, and personal property taxes (or sales tax if elected). For sales tax, the IRS tables apply, with large purchases like cars or boats added on top.

No Tax on Tips

The new law creates a deduction for tips, up to $25,000 per year. It phases out starting at $150,000 income for singles and $300,000 for joint filers, and married couples must file jointly to claim it. Self-employed workers can qualify with limits, though certain service businesses are excluded.

No Tax on Overtime

The bill adds a deduction for overtime pay from 2025–2028. Employees can deduct the overtime premium (the amount above their regular rate), up to $12,500 single or $25,000 joint. The benefit phases out at $150,000 MAGI for singles and $300,000 for joint filers, reduced by $100 for every $1,000 over.

New Car Loan Interest Deduction

From 2025–2028, taxpayers may deduct interest on loans for qualifying new passenger vehicles, up to $10,000. The vehicle must be new, U.S.-assembled, and originally used by the taxpayer (cars, motorcycles, under 14,000lbs). The deduction phases out above $100,000 income ($200,000 MFJ), reduced by $200 per $1,000 over. Certain vehicles—fleet, leased, salvage, or related-party financed—do not qualify.

Mortgage Interest and Insurance Deduction

The mortgage interest deduction remains limited to acquisition debt of up to $750,000. Under the One Big Beautiful Bill Act, mortgage insurance premiums (including PMI) will again be treated as deductible mortgage interest for tax year 2026 and beyond, benefiting buyers with smaller down payments. For tax years before 2026, PMI isn’t deductible. For loans above the $750,000 cap, only the prorated share of mortgage interest tied to the first $750,000 is deductible.