Article Highlights:

• Senior Deduction
• No Tax on Tips
• No Tax on Qualified Overtime
• Vehicle Loan Interest Deduction
• Adoption Credit
• Child Tax Credit
• Environmental Tax Credits
• SALT Deduction Limit
• Super Retirement Plan Catch Up Contributions
• Third Party Network Transaction Reporting (1099-K)
• Sec 529 Plans Qualified Funds Usage
• Qualified Small Business Stock (QSBS)
• Business Research or Experimental Expenditures
• Business Interest Deduction
• Minimum Qualified Business Income (QBI) Deduction
• Qualified Production Property
• Section 179 Expensing
• Bonus Depreciation

With tax season upon us, taxpayers across the nation are trying to grasp the many tax changes for 2025. Central to these transformations is the One Big Beautiful Bill Act (OBBBA), a comprehensive tax reform. This pivotal legislation introduces a range of changes that will directly impact virtually everyone’s tax return—whether a working individual, a family, or a small business owner. From adjustments in child tax credits to new guidelines on deductions, the OBBBA aims to make tax preparation more beneficial for everyday Americans. In this article, we will explore the key provisions of the OBBBA and other crucial updates, helping to understand how to navigate these changes effectively and ensure taxpayers are well-prepared for tax season. Whether aiming to maximize deductions or simply file accurately and on time, staying informed will be the greatest asset in working with tax preparers or accountants this upcoming tax season.

Before getting into the many changes affecting 2025, an understanding of Adjusted Gross Income (AGI) is needed as it has a significant impact on many of the new tax provisions for 2025. AGI is a foundational figure used in the U.S. tax system, representing a taxpayer’s total income for the year after accounting for specific deductions, such as contributions to retirement accounts or student loan interest. It serves as the baseline for determining taxable income and eligibility for various tax credits and deductions. Modified Adjusted Gross Income (MAGI), on the other hand, builds upon the AGI by adding back certain deductions and exclusions, such as foreign income, tax-exempt interest, or educational expenses, depending on the particular tax provision. MAGI is often used to assess eligibility for income-limited benefits or credits, making it slightly broader than AGI. When a tax provision phases out, it means that the benefits gradually decrease as your income surpasses a certain threshold, ultimately disappearing entirely once a higher income level is reached. This approach ensures that tax benefits are targeted towards individuals or families below certain income levels.

The following is a list of significant changes beginning in 2025, with some being permanent and other only temporary for a specific number of years.

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.

No Tax on Tips: From 2025 through 2028, a deduction up to $25,000 per year 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 IR-2025-92. 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, but since 2025 is a transition year, the employer may provide a separate statement that reports the tips.

No Tax on Qualified Overtime: From 2025through2028, allows a deduction of up to $12,500 ($25,000 for MFJ) for overtime pay exceeding the individual’s regular pay rate. 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 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 with the W-2

Vehicle Loan Interest Deduction: From 2025through 2028, individuals may deduct up to $10,000 per year 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.

Adoption Credit: OBBBA added a refundable amount. For 2025 the credit is $17,280 with a new $5,000 refundable amount. Those inflation adjusted amounts are $17,670 and for $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: 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: 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.

SALT Deduction Limit: For 2025 OBBBA increased the itemized 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 continue to increase through 2029 and reverts to $10,000 in 2030 and subsequent years.

Super Retirement Plan Catch Up Contributions: Beginning in 2025 catch-up contribution limits have significantly increased for individuals aged 60 through 63, who 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.

Third Party Network Transaction Reporting (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 Plans Qualified Funds Usage: 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.

Qualified Small Business Stock (QSBS): 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.

Business 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.

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: 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.

While generally thought of as affecting just big businesses, this provision may also apply to small, even mom-pop, manufacturing businesses.

Section 179 Expensing: 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 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 million 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: 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%.

It's more important than ever for individuals and businesses to be aware of the recent tax changes that could significantly impact their financial landscape. These updates not only influence how taxes are calculated but also provide opportunities for strategic advantages if navigated wisely. At our practice, we're committed to ensuring that our clients are fully prepared to face these changes head-on. By partnering with us, you can gain a clear understanding of how the new provisions might affect your unique situation. Together, we’ll craft a tax strategy that not only complies with the latest regulations but also optimizes your financial outcomes. Trust us to guide you through this complex environment so you can focus on what truly matters—achieving your financial goals and securing peace of mind in an ever-evolving tax landscape.