Gavin Howe
The One Big Beautiful Bill Act, signed into law on July 4, 2025, introduces significant updates to the US tax code, impacting how Americans file their taxes in 2025 and beyond. The new tax laws affect 2025 taxes (filed in 2026), but most will come into effect in 2026 or later. The changes range from adjustments to tax brackets, deductions, and retirement contributions to expanded repayment scenarios for premium tax credits. The bill also introduces temporary changes, such as limiting taxes on tips or overtime pay for certain workers. These changes will have a direct impact on individuals' paychecks, with most Americans expected to see an increase in their take-home pay.
| Characteristics | Values |
|---|---|
| Name of the new tax law | One Big Beautiful Bill Act (OBBBA) |
| Date of implementation | 1 January 2026 (some changes are retroactive to 2025) |
| Key changes | No tax on tips, bigger standard deduction, no personal or dependent exemptions, income tax rates, no tax on overtime, senior deduction, adjustments to tax brackets, deductions and retirement contributions |
| Impact | Americans will have to wait until they do their taxes for 2025 to know how the new law affects their tax situation. Most households (about 85%) are expected to get a tax cut in 2026. |
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What You'll Learn
No tax on tips
The "No Tax on Tips" provision is part of the One Big Beautiful Bill (OBBB), which was signed into law by President Trump on July 4, 2025. This provision is structured as a temporary deduction for tax years 2025 through 2028, allowing eligible workers to deduct a portion of their reported tip income from their federal income tax.
The "No Tax on Tips" law allows workers in qualifying tipped occupations to deduct up to $25,000 in reported tip income from their taxable income. This deduction is available for specified workers earning up to $150,000 annually, or $300,000 for those filing jointly. It's important to note that this provision does not exclude tips from taxable income but rather allows workers to claim a deduction when filing their taxes.
The eligibility for this tax break is determined by the Treasury Secretary and the IRS, who are responsible for publishing a list of "customarily tipped" occupations based on jobs where tipping is customary as of the end of 2023. Employers are required to file information returns with the IRS, showing the total amount of qualified tip income received by their employees.
While the "No Tax on Tips" provision offers a significant benefit to eligible workers, it's important to understand that it only applies to cash tips. Non-cash tips, such as credit card tips or electronic payment methods, are still considered taxable by the IRS and are not covered under this bill. Additionally, payroll taxes, including Social Security and Medicare taxes, will still apply to tip income, even if the income tax deduction is claimed.
The "No Tax on Tips" measure was designed to provide financial relief to workers in tipped occupations, many of whom rely on tips as a significant portion of their income. By allowing eligible workers to deduct a portion of their tip income from their taxes, this provision can help increase their take-home pay and provide immediate financial assistance to hardworking families.
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No tax on overtime
The One Big Beautiful Bill Act (OBBBA) of 2025 includes a "No Tax on Overtime" rule, which is effective from 2025 to 2028. This rule allows certain workers to claim a dollar-for-dollar deduction for a designated amount of overtime pay. The income eligible for this deduction is capped at $12,500 for single filers and $25,000 for married couples filing jointly. The benefit begins to phase out for those with higher Modified Adjusted Gross Incomes (MAGI), starting at $150,000 for single filers and $300,000 for married couples filing jointly. It is important to note that this deduction is not available for people using the "Married Filing Separately" status.
To be eligible for the "No Tax on Overtime" deduction, employees must meet certain requirements. Firstly, the taxpayer receiving the overtime must have a valid Social Security number for work. Secondly, employers are required to designate overtime wages on the taxpayer's Form W-2. Additionally, the overtime pay must be in excess of the employee's normal wage rate and must meet the definition of overtime as per the Fair Labor Standards Act (FLSA). This typically applies to employees working more than 40 hours per week and requires that they be paid time-and-a-half of their regular rate for overtime hours.
It is worth mentioning that while the "No Tax on Overtime" rule eliminates federal income tax on overtime pay, employees will still owe payroll taxes such as Social Security and Medicare taxes, as well as applicable state and local taxes. Employers should work with payroll providers, accountants, or tax professionals to ensure they are accurately tracking eligible overtime wages.
The "No Tax on Overtime" provision is part of the OBBBA's broader goal of preventing most tax laws from reverting to their 2017 versions while also introducing additional changes. This particular provision is temporary and will expire after 2028. The IRS has started providing guidance on the OBBBA, including the "No Tax on Overtime" rule, to help taxpayers and employers understand and navigate these changes.
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Changes to tax brackets
The 2025 tax law changes, also known as the "One Big Beautiful Bill", include adjustments to tax brackets, deductions, and retirement contributions. These changes will impact how Americans file their taxes in 2025 and beyond.
One significant change is the permanent extension of the lower individual income tax rates and thresholds from the 2017 Tax Cuts and Jobs Act (TCJA). The seven federal tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37% are now permanent. Additionally, the standard deduction has increased, with single taxpayers and married individuals filing separately eligible for a $15,000 standard deduction, an increase of $400 from 2024. Married couples filing jointly can claim a standard deduction of $30,000, an increase of $800. The TCJA's $2,000 per child tax credit has also been made permanent and will be adjusted for inflation from 2029 onwards.
For taxpayers in the top tax bracket of 37%, there are limitations on itemized deductions. These deductions are now limited to 35 cents on the dollar, resulting in a lower tax liability. The bill also introduces a new limitation on itemized deductions for taxpayers in the top bracket, reducing the value of SALT deductions by five percentage points.
The 2025 tax law changes also include temporary provisions, such as the "No Tax on Overtime" rule, which allows certain workers to claim a dollar-for-dollar deduction for a designated amount of overtime pay. Income eligible for this deduction is capped at $12,500 for single filers and $25,000 for married couples filing jointly. The "No Tax on Tips" law also takes effect in 2025, allowing workers to claim a dollar-for-dollar deduction for a designated amount of tip income.
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Adjusted standard deductions
For the 2023 tax year, the standard deduction for married couples filing jointly rose to $27,700, an increase of $1,800 from the previous year. For single taxpayers and married individuals filing separately, the standard deduction rose to $13,850, up $900 from the previous year. The standard deduction for heads of households was $20,800, an increase of $1,400 from the previous year.
The standard deduction for the 2024 tax year is $14,600 for single filers and married people filing separately, $21,900 for heads of household, and $29,200 for those married filing jointly and surviving spouses. People aged 65 and older are entitled to an additional standard deduction amount, which may vary based on filing status and other factors.
The "One Big Beautiful Bill" (OBBB) or "One Big Beautiful Bill Act" (OBBBA) of 2025 introduced changes to the standard deduction. For the 2025 tax year, the standard deduction for single filers and married filing separately increased to $15,750, while for married filing jointly, it increased to $31,500. The standard deduction for heads of household rose to $23,625. Seniors aged 65 and older may be eligible for an additional standard deduction of up to $6,000 until 2028 if they meet certain modified adjusted gross income (MAGI) limits.
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Changes to premium tax credit rules
The premium tax credit is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. The American Rescue Plan Act of 2021 (ARPA) temporarily expanded eligibility for the premium tax credit by eliminating the rule that a taxpayer with a household income above 400% of the federal poverty line cannot qualify for a premium tax credit.
However, changes to the premium tax credit rules and underlying Marketplace eligibility and insurer options may decrease the number of individuals with health insurance coverage through the Marketplace. These changes include:
- Expanded repayment scenarios (starting in 2026): The new law expands the situations where an individual may be required to repay the full amount of any excess advance premium tax credit received during the year.
- Household income changes and eligibility (starting in 2026): Eliminates eligibility for the premium tax credit for individuals who enroll in marketplace coverage during a special enrollment period due solely to a change in household income.
- Eligibility restrictions (starting in 2027): Decreases in eligibility for certain lawfully present individuals, including those who have income below 100% of the federal poverty level (starting in 2026).
It is important to note that individuals who benefit from advance payments of the premium tax credit must report life changes, such as household, income, or family size alterations, to the Marketplace as they happen. These changes can affect the amount of the premium tax credit and, subsequently, impact the tax refund or result in owed taxes.
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Frequently asked questions
The new tax law will affect paychecks differently depending on income brackets. The One Big Beautiful Bill Act (OBBBA) will make permanent many of the temporary tax law changes from the 2017 Tax Cuts and Jobs Act (TCJA). The new tax law will also introduce new changes, such as the “No Tax on Overtime” rule, which will allow certain workers to claim a dollar-for-dollar deduction for a designated amount of overtime pay.
High-income earners will receive significant tax breaks under the new tax law. The top marginal income rate of 37% will apply to single filers with taxable income of $626,350 and married couples filing jointly with income above $751,600.
Low-income earners may see a smaller impact on their paychecks. Those making below $34,600 a year would see their taxes decrease by about $150, or a 0.8% increase in their after-tax income. However, benefits for low-income Americans may be offset by cuts to Medicaid and nutrition assistance.
Most of the changes in the One Big Beautiful Bill Act will take effect on January 1, 2026. However, some changes are retroactive and could impact 2025 tax returns filed in 2026.
Yes, there are several other changes that may impact paychecks. These include adjustments to tax brackets, deductions, and retirement contributions. Additionally, the new law introduces a "senior deduction," allowing more people over 65 to avoid Social Security taxes.
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