Unraveling the 2025 Tax Overhaul: How New Laws Could Impact You

Article Highlights

• Standard Deductions Increased
• New Senior Deduction
• Qualified Sound Recording Production Expenses
• Required Minimum Distributions (RMD)
• No Tax on Tips
• No Tax on Qualified Overtime
• New Vehicle Loan Interest Deduction
• Adoption Credit Changes
• Child Tax Credit Increase
• Environmental Tax Credits Sunset
• Qualified Small Business Stock Gain Exclusion
• SALT Deduction Limit Increase
• Expensing Research or Experimental Expenditures
• Limit on Business Interest Deduction
• Minimum Qualified Business Income (QBI) Deduction
• Qualified Production Property Expensing
• Section 179 Expensing Limits Increased
• 100% Bonus Depreciation Reinstatement
• Super Retirement Catch Up Contributions
• Increased Third Party Network Transaction Reporting Threshold (1099-K)
• Sec 529 Qualified Funds Usage Expanded

The year 2025 marks a pivotal moment for taxpayers across the nation as sweeping changes take effect, ushered in by the One Big Beautiful Bill Act (OBBBA) and the delayed implementation of other significant legislative provisions. This comprehensive update is a must-read for every taxpayer seeking to navigate the transformed tax landscape and optimize their financial strategies. From adjustments in tax rate tables and heightened tax credits to expanded deductions and employer incentives, the ripple effects of these changes touch individuals and families in myriad ways. Understanding these updates is crucial, not only for compliance but also for capitalizing on potential tax savings. Dive into the essential details and ensure you’re fully prepared for the coming tax season.

Standard Deductions Increased: The 2025 inflation adjusted amounts are $16,100 for single and married separate filers, $24,150 for heads of household, and $32,200 for married filing jointly. For 2026, the amounts are $16,100 for single and married separate filers, $24,150 for heads of household, and $32,200 for married filing jointly.

New Senior Deduction: From 2025 through 2028, seniors aged 65 or older can each claim a $6,000 deduction. It phases out for unmarried individuals with a MAGI over $75,000 and for married couples filing jointly over $150,000, reducing by $100 for each $1,000 exceeding these thresholds. Both itemizers and standard deduction filers are eligible. Reported on the new 1040 Schedule 1-A, it is a below the line deduction, but does not reduce AGI.

Qualified Sound Recording Production Expenses: Effective after July 4, 2025, and through December 31, 2028, these expenses are qualified for bonus depreciation.

Required Minimum Distributions (RMD): Taxpayers must start annual withdrawals from traditional IRAs at age 73. The RMD is calculated by dividing the account's previous year-end value by the taxpayer’s life expectancy based on the IRS’s Uniform Lifetime Table. In the year a taxpayer turns 73, the RMD can be postponed until April 1 of the following year.

Special RMD rules apply for retirement plans inherited from decedents who died after 2019, specifically for surviving spouses, disabled or chronically ill individuals, and minor children of the account owner. Other beneficiaries must take RMDs until the account is exhausted and it must be totally distributed within 10 years of the decedent’s passing.

No Tax on Tips: From 2025 through 2028, a deduction up to $25,000 is allowed for qualified cash tips in customary tip-receiving occupations, excluding specified service trades. The IRS has provided a list of qualifying occupations in an information release, IR-2025-92, and will also include details in the instructions for 2025 returns. The deduction phases out when AGI is over $150,000 for singles and $300,000 for joint filers, reducing by $100 for every $1,000 over. The deduction applies per return and is available to both itemizers and standard deduction filers.   Employers will include qualifying tips on the employee’s W-2. Taxpayers claim the deduction on the new 1040 Schedule 1-A. It is a below the line deduction that does not reduce AGI.

No Tax on Qualified Overtime: From 2025 through 2028, a deduction of up to $12,500 ($25,000 for MFJ) is allowed for overtime pay exceeding the regular rate as per the Fair Labor Standards Act. Phases out for MAGI over $150,000 (singles) and $300,000 (joint), reducing by $100 for every $1,000 over. Available to both itemizers and standard deduction filers.

Example:

Overtime Hourly Rate: $30.00

Regular Hourly Rate: <$20.00>

Deductible Amount:    $10.00 per eligible overtime hour

For the 2025 tax year, employers can use a reasonable method to estimate the deductible amount of overtime, as the IRS has not yet finalized its forms and guidance. For the 2026 tax year, the IRS is expected to require reporting qualified overtime pay in Box 12 of the W-2 using the code "TT". Employees claim the deduction on the new 1040 Schedule 1-A as a below the line deduction. It does not reduce AGI.

New Vehicle Loan Interest Deduction: From 2025 through 2028, individuals may deduct up to $10,000 in interest on loans secured by a new personal-use passenger vehicle, assembled in the U.S. and weighing under 14,000 pounds. Excludes family loans and non-personal vehicles like campers. Phases out for incomes between $100,000-$150,000 (single) and $200,000-$250,000 (MFJ). Available to both itemizers and standard deduction filers by filing a new 1040 Schedule 1-A with the vehicle's VIN. A below the line deduction, it does not reduce AGI.

Adoption Credit Changes: OBBBA added a refundable amount. For 2025 the credit is $17,280 with $5,000 refundable. Those inflation adjusted amounts are $17,670 and $5,120 for 2026. Phases out between $259,190 and $299,190 for 2025 and in 2026 between $265,080 and $305,080 for all filing statuses. Any excess can be carried forward 5 years.

Child Tax Credit Increase: OBBBS increased the credit amount. In 2025 through 2028 the credit is $2,200 ($1,700 refundable) for dependents under 17. Phases out at $400,000 MAGI for joint filers, $200,000 for others, decreasing by $50 per $1,000 above these limits. A work-eligible SSN is required for the child and one filer.

Environmental Tax Credits Sunset: OBBBA terminated most of the environmental credits early. Electric vehicle credits ended after September 30, 2025. Residential clean energy credits, including solar, and home energy efficient improvement credits are no longer available after December 31,2025,

Qualified Small Business Stock (QSBS) Gain Exclusion: C Corporation shareholders can exclude gains from the sale of QSBS, and for QSBS acquired after July 4, 2025, the exclusion rates are 50% after three years, 75% after four years, and 100% after five years of holding the stock. The exclusion cap is raised to $15 million, and the corporation's asset limit is increased to $75 million, both of which will be adjusted for inflation after 2026. More restrictive exclusions apply to QSBS acquired before July 5, 2025, the most recent being for the period September 28, 2010, through July 4, 2025, providing 100% exclusion for stock held for more than 5 years.

SALT Deduction Limit Increase: For 2025 OBBBA increased the deduction limit for state and local taxes (SALT) to $40,000 up from the prior $10,000 limit. However, the SALT limit for higher income taxpayers’ phases down starting at $500,000 MAGI, reaching a $10,000 floor at $600,000. It never drops below $10,000. For 2026 the deductible limit increases to $40,400 and the phase down range goes from $505,000 to $606,333. The deduction limits continues to increase through 2029 and reverts to $10,000 in 2030 and subsequent years.

Expensing Research or Experimental Expenditures: Effective beginning in 2025, domestic expenditures are immediately deductible. Expenses incurred outside the U.S. continue to be amortized over 15-years.

Limit on Business Interest Deduction: In the past, the business interest deduction was generally limited to 30% of a taxpayer's earnings before interest and taxes (EBIT) and any "floor plan financing interest" for the year. Effective for tax years after 2024 the limit is determined using taxpayer's earnings before interest, taxes, depreciation, and amortization (EBITDA), which allows many businesses to deduct a higher amount of interest.

However, the OBBBA also implements additional, less favorable changes to the business interest deduction for tax years beginning after December 31, 2025. These changes include: 

• Excluding foreign income items from the Adjusted Taxable Income (ATI) calculation, which may reduce the deductible interest amount for multinational companies.
  
  
• Largely eliminating the effectiveness of electing to capitalize business interest to avoid the Section 163(j) limitation. 

Small businesses are exempt from this limitation in 2025 if their average gross receipts over the past three years do not exceed $31 million. The amount is inflation adjusted annually and increases to $32 million for 2026.

Minimum Qualified Business Income (QBI) Deduction: Beginning in 2025, taxpayers with at least $1,000 of QBI from actively managed businesses are allowed a minimum deduction of $400.  

Qualified Production Property Expensing: To encourage domestic production, OBBBA, added a new temporary provision. Nonresidential real property placed in service after Jan 19, 2025, within the U.S. or its possessions can be expensed. The original use of the property must commence with the taxpayer. Construction of the property must begin after January 19, 2025, and before January 1, 2029, and be placed in service before January 1, 2031. This provision is geared to manufacturing, production (limited to agricultural and chemical production) or refining of qualified products. So, any portion of a property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or certain other functions is ineligible for this benefit.

Don’t limit your thinking to big business and overlook the possibilities for this to apply to small, even mom-pop manufacturing businesses.

Section 179 Expensing Limits Increased: Allows businesses to immediately expense the cost of qualifying assets such as machinery, equipment, and certain vehicles, although SUVs are limited to a specific deduction cap. Sec 179 expensing benefits many small and medium-sized business enterprises and provides upfront tax savings and encourages investment. OBBBA substantially increased the limits for Sec 179 expensing. For 2025 the limit was increased to $2.5 million and for 2026, it is inflation adjusted to $2.56 million. However, the deduction phases out dollar-for-dollar when purchases for the year exceed $4 Million in 2025 and $4.09 in 2026.  

A drawback to the Section 179 expensing method is that if the business’ use of the asset drops to 50% or less, some or all the amount deducted may need to be recaptured.

Bonus Depreciation Reinstatement: 100% bonus depreciation was made permanent by OBBBA and after January 19, 2025, allows businesses to immediately write off 100% of the cost of qualifying assets in the year they are placed in service. This applies to new and used tangible property with a recovery period of 20 years or less, such as machinery, equipment, and certain improvements. This provision is designed to incentivize business investments by accelerating tax deductions, providing businesses immediate financial benefits and improved cash flow. For qualifying property placed in service between January 1, 2025, and January 19, 2025, the bonus depreciation rate was 40%.

Super Retirement Catch Up Contributions: Beginning in 2025 retirement plan catch-up contribution limits have significantly increased for individuals aged 60 through 63. They can now contribute the greater of $10,000 or 50% more than the standard catch-up amount to qualified plans, such as SIMPLE plans, 401(k)s, 403(b) annuities, and 457(b) government plans, but not IRAs. For 2025 the enhanced catch-up is $11,250 except for SIMPLE plans which is $5,250. The enhanced catch-up is inflation adjusted beginning in 2026.

Increased Third Party Network Transaction Reporting Threshold (1099-K): OBBBA retroactively repeals the American Rescue Plan Act's lower reporting threshold for Form 1099-K. It restores the threshold to the original $20,000 in gross payments and 200 transactions, effective for tax years beginning in 2022. This change nullifies the lower, phased-in thresholds for 2024 and 2025.

Sec 529 Qualified Funds Usage Expanded: Effective for distributions after July 4, 2025, OBBBA expands the use of Section 529 plans, allowing funds to cover expenses associated with elementary and secondary school and postsecondary credentialing programs. This includes costs related to tuition, fees, books, and other educational expenses for both school levels, as well as expenses for obtaining professional certificates and licenses at the postsecondary level. By broadening the scope of qualified expenses, the OBBBA enhances the flexibility and utility of 529 plans, making them a more versatile tool for families planning educational investments across various stages of learning.

As the 2025 tax landscape unfolds with profound changes under the One Big Beautiful Bill Act and other pivotal provisions, it's crucial to understand how these new regulations impact your unique financial situation. Navigating these changes can be complex, and personalized advice often makes a significant difference. We invite you to reach out with any questions or for a detailed consultation. Our office is ready to help you interpret these changes and explore strategies tailored to your circumstances, ensuring you maximize potential benefits while maintaining compliance.