Comprehensive Guide to 2025 Tax Changes: What Taxpayers Need to Know

Article Highlights:

• Modified Adjusted Gross Income (MAGI)
• Senior Deduction Enhancements
• Tax Relief for Tips and Overtime Earnings
• Vehicle Loan Interest Deduction
• Adoption and Child Tax Credits
• SALT Deduction Limit 2025-2029
• Reduction in Environmental Incentives
• Super Retirement Catch-Up Contributions
• Expanded Use of Educational Funds
• Trump Account Election
• Business Tax Changes
• Qualified Small Business Stock
• Third Party Network Transaction Reporting
• Beneficiary RMD Requirements

As we deal with 2025 tax return preparation, you should be aware of significant shifts in the tax rules brought by the One Big Beautiful Bill (OBBBA) legislation and some delayed effective dates from other legislation. These changes are poised to impact various taxpayer categories, affecting both individual and business tax returns. Navigating these changes requires careful planning and strategic adjustments to ensure compliance and to optimize tax liabilities. This article delves into the key alterations and enhancements for the 2025 tax returns.

Modified Adjusted Gross Income (MAGI) - Modified Adjusted Gross Income (MAGI) is a calculation used to determine eligibility for certain tax benefits, credits, and deductions. The term is used extensively in this article. It starts with a taxpayer’s Adjusted Gross Income (AGI), which is total gross income minus various exclusions and deductions allowed by law. Then, AGI is modified by certain types of the excluded income - in other words, some of the excluded income is added back to the AGI, with the result being the modified AGI (MAGI).  

Senior Deduction Enhancements - Beginning for 2025 and extending to 2028, seniors aged 65 or older will benefit from a new deduction opportunity. Eligible seniors can each claim a $6,000 deduction usable by both itemizers and those opting for the standard deduction. However, this senior-friendly benefit is reduced when the senior’s Modified Adjusted Gross Income (MAGI) hits $75,000 for singles and $150,000 for married couples filing jointly.

Tax Relief for Tips and Overtime Earnings - A new deduction allows employees in customary tip-receiving roles to deduct up to $25,000 of their tip income from their taxable income from 2025 to 2028.

Additionally, employees can deduct portions of their overtime (OT) pay that exceed their regular rates, generally limited to (1) OT hours more than 40 per week and (2) the premium portion of the OT on up to time and a half pay. The deduction is capped at $12,500 for individuals and $25,000 for married couples filing jointly.

Both deductions are limited for higher income taxpayers. They begin to phase out for taxpayers with a MAGI of $150,000 for singles and $300,000 for joint filers.

Important Warning About Overtime (OT) - The law that created the OT deduction was enacted in mid-2025 and applied retroactively to the beginning of the year. As a result, employers may not have the details to provide the OT amount needed for calculating an employee’s deduction. Consequently, it is the responsibility of taxpayers and their tax preparers to determine the deductible amount. Taxpayers should aim to provide pay stubs or other documentation for the periods they received OT.

It's crucial to recognize that only hours worked more than 40 hours per week qualify as deductible overtime, limited to 50% of the regular pay rate (the premium amount). Therefore, there may be cases where some overtime hours do not qualify, or where the premium exceeds the permissible 50% of the regular pay, requiring adjustment.

Please consider contacting our office in advance to discuss what information and documentation might be necessary for your particular situation.

Vehicle Loan Interest Deduction - A significant shift for vehicle owners is the deduction pertaining to loan interest for new personal-use vehicles assembled in the U.S. and acquired after 2024. This deduction, which is available to both itemizers and non-itemizers, allows up to $10,000 of interest to be deducted annually on loans secured by vehicles weighing less than 14,000 pounds. Introducing a structured framework, it mandates documentation including the Vehicle Identification Number (VIN) be included on the tax return. The deduction phases out once MAGI reach $100,000 ($200,000 if filing a joint return).

Adoption and Child Tax Credits - With the intention of supporting family growth and education, the Adoption Credit will increase to $17,280, of which $5,000 is refundable. There’s a MAGI phase-out threshold starting at $259,190 and fully phased out at $299,190.

A more generous Child Tax Credit was introduced, allowing $2,200 per child, with a refundable segment of $1,700. The credit incorporates a phase-out initiated at $200,000 for individuals and $400,000 for joint filers.

SALT Deduction Limit 2025-2029 - For 2025 the limit for deducting state and local taxes when itemizing is $40,000, and the limit phases down starting at $500K MAGI, reaching a $10K floor at $600,000. The limit never drops below $10,000. Limit and phaseouts increase annually thru 2029, then the limit reverts to $10K in 2030.

Reduction in Environmental Incentives - Residential clean energy credits, including solar, and home energy efficient improvement credits are no longer available after December 31,2025. The electric vehicle credits expired for purchases after September 30, 2025.

Super Retirement Catch-Up Contributions - Individuals aged 60 through 63 can now contribute a greater amount than the standard catch-up contribution amounts 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 was $11,250, except for SIMPLE plans which is $5,250. The standard catch-up amount for those ages 50 through 59 and over 63 is $7,500 ($4,000 for SIMPLE plans).

Expanded Use of Educational Funds - Further flexibility is granted for 529 Plans post-July 4, 2025, allowing distributions to cover expenses related to elementary and secondary schooling as well as credentialing programs.

Trump Account Election - Trump Accounts are the equivalent of an IRA for children allowing contributions from birth through age 17, giving youngsters a financial head start for their future. The government establishes Trump Accounts for parents or guardians that elect to open a Trump Account, and the accounts can begin accepting contributions July 4, 2026. The election to establish these accounts can easily be done on the 2025 tax return. The government will seed these accounts with a $1,000 contribution for children born in 2025 through 2028. There are downsides to establishing these accounts.

Business Tax Changes:

• Bonus Depreciation - 100% bonus depreciation was made permanent after January 19, 2025. Between January 1, 2025, and January 19, 2025, the bonus depreciation rate was 40%.
  
  
• Interest Deduction Limit - Beginning for 2025 the business Interest Deduction limit is determined using EBITDA instead of EBITA. Small businesses are exempt from this limitation in 2025 if their average gross receipts over the past three years does not exceed $31 million.
  
  
• Sec 179 Expensing - The Sec 179 expense limit was increased to $2.5 million. However, the deduction phases out dollar-for-dollar when purchases for the year exceed $4 million.
  
  
• Research or Experimental Expenditures - Domestic research or experimental expenditures are immediately deductible. Those incurred outside the U.S. continue to be amortized over 15-years.

Qualified Small Business Stock (QSBS) – QSBS refers to shares in a domestic C corporation that meet specific IRS requirements. Shareholders benefit from a substantial exclusion from capital gains tax on profits earned from selling the stock. For shares acquired after July 4, 2025, shareholders can exclude gains from the sale of QSBS acquired after that date; the exclusion rates are 50% after three years, 75% after four years, and 100% after five years of holding the stock. Exclusion cap is $15 million, and the Corp’s asset limit is increased to $75 million, both of which will be adjusted for inflation after 2026.  

Third-Party Network Transaction Reporting (1099-K) - In an effort to streamline tax compliance, the IRS has reinstated higher thresholds for the third-party network transaction reporting – Form 1099-K, setting it back to $20,000 in gross payments and 200 transactions. This reinstatement aims to ease reporting burdens and improve transactional transparency.

Beneficiary RMD Requirements - Confusion arose regarding the RMD requirements for IRAs under the 10-year rule. Beneficiaries must deplete the account by the end of 10 years and take annual RMDs. Due to the confusion, the IRS waived penalties for years before 2025. Beneficiaries should have taken an RMD in 2025. If not taken in 2025, both one for 2025 and 2026 must be taken in 2026 and a penalty waiver requested for 2025.

In conclusion - Staying informed about the latest changes affecting your 2025 tax return is essential to maximizing your potential tax benefits and ensuring a smooth preparation process. By gathering the appropriate documentation, familiarizing yourself with relevant changes, and developing a list of questions you may have, you can engage in a more efficient and successful discussion with your tax preparer. If you have any questions or need further clarification on specific aspects of your tax situation, please do not hesitate to contact this office to assist you in navigating these changes effectively.

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