How the New 2025 Tax Law Changes Affect You

Tax Brackets for the 2025 Tax Year

The federal income tax system uses seven tax brackets, ranging from 10% to 37%. Your income is taxed progressively, meaning different portions of your income are taxed at different rates.

Here's a look at the 2025 tax brackets:

Source: IRS

These brackets represent the income thresholds at which different tax rates apply. For example, if you're a single filer with $60,000 in taxable income, you don't pay 22% on the entire amount. Instead, you pay 10% on the first $11,925, 12% on income between $11,925 and $48,475, and 22% on the remaining amount.

Standard Deduction Increase

The standard deduction reduces your taxable income by a set amount based on your filing status. For 2025, the standard deduction amounts are:

• Single filers: $15,750
• Married filing jointly: $31,500
• Married filing separately: $15,750
• Head of household: $23,625

If your itemized deductions, such as mortgage interest, charitable contributions and state and local taxes, are less than the standard deduction, it makes sense to take the standard deduction.

Learn more: Standard vs. Itemized Deductions: Which Saves You Money?

New Deductions for Seniors

A new bonus deduction for taxpayers ages 65 and older is available for tax years 2025 through 2028. Eligible seniors can claim an additional $6,000 deduction (or $12,000 for married couples where both spouses qualify) on top of the standard deduction, whether they itemize or not.

The full deduction is available to single filers with modified adjusted gross income (MAGI) below $75,000 and married couples filing jointly with MAGI below $150,000. The deduction phases out for incomes above these thresholds. Married couples filing separately are not eligible for this deduction.

No Tax on Tips

The OBBBA allows eligible workers to deduct up to $25,000 in qualified tip income from their federal taxable income for tax years 2025 through 2028. This deduction is available whether you take the standard deduction or itemize.

To qualify, you must work in an occupation where tipping is customary and regular. This can include:

• Bartenders
• Wait staff
• Baristas
• Gambling dealers
• DJs
• Maids and housekeepers
• Personal care service providers, such as hairdressers, manicurists and massage therapists
• Nannies and babysitters
• Pet caretakers
• Tattoo artists
• Taxi and rideshare drivers

Tips must still be reported as income, but you receive a deduction that decreases your taxable income.

The deduction begins to phase out for single filers with MAGI above $150,000 and married couples filing jointly with MAGI above $300,000. The deduction is not available for married couples filing separately.

Employers must separately report qualified tips on Form W-2. Tips remain subject to Social Security and Medicare taxes.

No Tax on Overtime

Eligible workers can deduct qualified overtime compensation for tax years 2025 through 2028. Single filers can deduct up to $12,500 in overtime pay, while married couples filing jointly can deduct up to $25,000.

Only overtime required by the Fair Labor Standards Act qualifies. This means you must be a nonexempt employee who earns at least 1.5 times your regular pay rate for hours worked beyond 40 in a workweek. Only the premium portion of overtime pay (the extra half-time pay) qualifies for the deduction.

The deduction phases out for single filers with MAGI above $150,000 and married couples filing jointly with MAGI above $300,000. Like tips, overtime pay remains subject to Social Security and Medicare taxes.

Car Loan Interest Deduction

For tax years 2025 through 2028, eligible taxpayers can deduct up to $10,000 per year in interest paid on qualifying new vehicle loans (leases don't qualify). This deduction is available whether you itemize or take the standard deduction.

To qualify, the vehicle must be new (not used), assembled in the United States and purchased for personal use. Eligible vehicles include cars, minivans, SUVs, pickup trucks and motorcycles with a gross vehicle weight rating under 14,000 pounds.

The deduction begins to phase out for single filers with MAGI above $100,000 and married couples filing jointly with MAGI above $200,000. If you refinance a qualifying loan, the interest on the refinanced loan is generally eligible.

Learn more: Auto Loan Rates and Financing

Child Tax Credit Increase

The maximum child tax credit for 2025 has increased to $2,200 per qualifying child, up from $2,000 in previous years. This amount will be adjusted annually for inflation.

To qualify, a child must:

• Be under age 17 at the end of the tax year
• Be claimed as a dependent on your tax return
• Be a U.S. citizen, U.S. national or U.S. resident alien
• Have a valid Social Security number
• Have lived with you for more than half the year
• Be related to you (son, daughter, stepchild, foster child, brother, sister, stepsibling, half-sibling or descendant of any of these)

The credit begins to phase out for single filers with MAGI above $200,000 and married couples filing jointly with MAGI above $400,000.

Up to $1,700 of the credit is refundable in 2025 through the additional child tax credit, which is designed for taxpayers who earn at least $2,500 during the year but pay little to no federal income tax. This means that you can receive up to that amount as a refund even if you don't owe taxes.

Learn more: Refundable vs. Nonrefundable Tax Credits

State and Local Tax (SALT) Deduction Cap

The SALT deduction allows taxpayers who itemize to deduct state and local income, sales and property taxes paid. The OBBBA temporarily raises the cap from $10,000 to $40,000 for married couples filing jointly—if you're married filing separately, the cap is $20,000—for tax years 2025 through 2029. The cap will increase by 1% annually during this period.

However, the increased cap phases out for taxpayers with MAGI above $500,000 (or $250,000 for married filing separately).

Learn more: Tax Breaks for Homeowners

End of Clean Energy Credits

The OBBBA phases out or eliminates many clean energy tax credits that were expanded under the Inflation Reduction Act:

• Electric vehicle credits: Tax credits for new electric vehicles are eliminated for cars purchased after September 30, 2025. EV charging station credits phase out by June 2026.
• Residential energy credits: Credits for energy-efficient home improvements, such as solar panels, heat pumps and energy-efficient windows and doors, expire at the end of 2025.
• Wind and solar projects: Credits continue for projects that start construction by June 2026 or come online by December 2027 under certain provisions.
• Clean hydrogen production credits: These terminate by December 2027 rather than the originally scheduled 2033.

Estate and Gift Tax Exemptions

The federal estate and gift tax exemption permanently increases to $15 million per individual starting January 1, 2026, up from $13.99 million in 2025. This amount will be indexed for inflation in subsequent years.

This exemption allows individuals to transfer up to $15 million during their lifetime or at death without incurring federal estate or gift taxes. Married couples can combine their exemptions, allowing them to transfer up to $30 million tax-free.

For 2025, the annual gift tax exclusion remains at $19,000 per person. This means you can give up to $19,000 each to as many individuals as you like each year without using any of your lifetime exemption or filing a gift tax return.

How to Save on Taxes in 2026

Taking advantage of available deductions and credits can help reduce your tax bill. Here are some strategies to consider:

• Maximize your retirement savings. Contributing to a traditional 401(k) or individual retirement account (IRA) reduces your taxable income for the year. In 2025, you can contribute up to $23,500 to a 401(k), or $31,000 if you're 50 or older. IRA contributions are limited to $7,000, or $8,000 if 50 or older.
• Choose between standard and itemized deductions. Calculate whether your itemized deductions (mortgage interest, property taxes, charitable contributions and medical expenses) exceed the standard deduction.
• Use tax credits. Tax credits directly reduce your tax bill dollar for dollar. Look for credits you qualify for, such as the child tax credit, earned income tax credit, education credits or retirement savings contributions credit (saver's credit).
• Contribute to a health savings account (HSA). If you have a high-deductible health plan, HSA contributions reduce your taxable income. For 2025, you can contribute up to $4,300 for individual coverage or $8,550 for family coverage ($1,000 extra if you're 55 or older).
• Consider tax-loss harvesting. If you have investments in a taxable account, selling investments that have declined in value can offset capital gains and up to $3,000 of ordinary income.
• Keep good records. Document all overtime worked, tips received, car loan interest paid and other deductible expenses. Proper documentation ensures you can claim all deductions you're entitled to.

The Bottom Line

The One Big Beautiful Bill Act makes significant changes to federal tax law, with some provisions permanent and others temporary. Understanding these changes can help you make informed financial decisions and potentially reduce your tax liability.

Many of the temporary deductions, including the overtime and tip deductions, car loan interest deduction and senior bonus deduction, expire after 2028. If you qualify for these deductions, take advantage of them while they're available.

Consider consulting with a tax professional to understand how these changes specifically affect your situation. They can help you develop a tax strategy that maximizes your deductions and credits while keeping you compliant with tax laws.