Kara Sears
The US tax code is constantly evolving, with changes made almost every year. In 2025, the One Big Beautiful Bill (OBBB) was signed into law, impacting how Americans filed their taxes in 2025 and beyond. The OBBB made permanent many temporary tax law changes from the 2017 Tax Cuts and Jobs Act (TCJA). These changes included adjustments to tax brackets, deductions, and retirement contributions. The OBBB also introduced new provisions, such as a temporary deduction for tips and a limit on gambling loss deductions. Additionally, the standard deduction was increased, and the child tax credit was raised to $2,200 per qualifying child. These changes demonstrate how tax laws can differ from one season to another, and it's essential for taxpayers to stay informed about the latest updates to ensure accurate compliance and maximize their financial benefits.
| Characteristics | Values |
|---|---|
| Tax laws | Changed since last season |
| Tax deductions | Changed since last season |
| Tax credit amounts | Changed since last season |
| Federal tax brackets | Adjusted for inflation |
| Tax table | Substantially increased |
| Tax credits | Introduced for electric vehicles and home energy improvements |
| Alternative minimum tax exemption thresholds | Reduced for phaseout |
| Child tax credit | Increased to $2,200 per qualifying child |
| SALT deduction cap | Increased temporarily, with income-based phaseouts |
| Tax filing | Direct File program expanded |
| Tax examinations | Decreased due to lack of staffing and funding |
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What You'll Learn
Tax laws change annually
Tax laws do change annually, and it's important to be aware of these changes when filing your taxes. For example, during the 2025 tax season, you would be filing taxes for the 2024 tax year.
The Internal Revenue Service (IRS) makes updates to common tax provisions and procedures for various reasons. One of the main reasons for annual changes is to ensure that certain parts of the tax code keep up with inflation. Federal tax brackets and other amounts are typically adjusted each year for inflation. This means that you could fall into a higher or lower tax bracket each year, depending on your income, and pay a different tax rate from one year to the next.
In addition to adjustments for inflation, there are often other tax process changes, new laws, and adjustments to be aware of. For example, in 2024, the standard deduction amounts based on filing status were adjusted, and the IRS allowed taxpayers to file their individual income tax returns electronically even if someone else had already claimed their dependent on a previously filed return.
It's important to note that not all tax law changes will affect everyone in the same way. The impact of tax law changes can vary depending on individual circumstances, such as income level, filing status, and eligibility for tax credits and deductions.
For the 2025 tax year, some key changes in the new tax bill include:
- The seven federal tax brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%) are now permanent.
- Standard deductions have increased, plus a new "bonus" deduction for older adults.
- Alternative minimum tax exemption thresholds have been reduced for phase-out.
- The child tax credit has increased to $2,200 per qualifying child.
- The SALT deduction cap has been temporarily increased, with income-based phase-outs.
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Inflation and income tax bracket updates
The Internal Revenue Service (IRS) makes annual adjustments to tax provisions to account for inflation. For the 2024 tax year, the tax brackets were increased to account for inflation. This means that if your wages remained the same in 2024 or increased by a lower percentage than the inflation rate, you may pay less tax overall.
The IRS previously used the Consumer Price Index (CPI) as a measure of inflation. However, following the Tax Cuts and Jobs Act of 2017 (TCJA), the IRS now uses the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values.
The 2025 tax year will also see inflation adjustments to more than 60 tax provisions, impacting taxpayers when they file their returns in 2026. The income limits for all tax brackets and filers will be adjusted for inflation. The standard deduction for single taxpayers and married individuals filing separately will increase to $15,000, up from $14,600 in 2024. For married couples filing jointly, the standard deduction will rise to $30,000, an increase of $800 from 2024. Heads of households will see their standard deduction increase to $22,500, up from $21,900 in 2024.
Other adjustments for 2025 include an increase in the foreign earned income exclusion to $130,000, up from $126,500 in 2024. The annual exclusion for gifts will increase to $19,000, up from $18,000 in 2024. The maximum Earned Income Tax Credit (EITC) for qualifying taxpayers with three or more qualifying children will increase to $8,046, up from $7,830 in 2024. The maximum EITC for single and joint filers with no children is $649, $4,328 for one child, and $7,152 for two children.
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Tax credits and deductions
The Internal Revenue Service (IRS) makes annual updates to tax provisions and procedures. These changes are made to ensure that certain parts of the tax code keep up with inflation. For instance, federal tax brackets and other amounts are typically adjusted each year to account for inflation.
Tax Credits
A tax credit is an amount you can subtract from the tax you owe, potentially lowering your tax payment or increasing your refund. There are three types of tax credits: refundable, partially refundable, and nonrefundable. An example of a refundable tax credit is the Earned Income Tax Credit, which can result in a refund that exceeds the amount paid in taxes. The saver's credit is another example of a refundable tax credit, which can be worth 10% to 50% of up to $2,000 in contributions to certain retirement plans.
For the 2024 tax year, the maximum child tax credit (CTC) is $2,000 per qualifying child under 17, with a refundable portion of $1,700. This means that families with lower tax liabilities can receive up to $1,700 back as a refund, even if they owe no taxes.
Additionally, there are federal tax credits available for energy efficiency improvements made to homes and buildings. These credits can help reduce energy costs and demand. Homeowners can claim a credit of 30% of the cost of energy-efficient upgrades, up to $3,200, through December 31, 2025. There is also the Residential Clean Energy credit, which provides a 30% income tax credit for clean energy equipment such as rooftop solar, wind energy, and geothermal heat pumps.
Tax Deductions
A tax deduction is an amount you subtract from your income when you file, reducing the amount of tax you pay. The standard deduction represents the amount of income you can exclude from taxes. Most taxpayers take the standard deduction, which is based on their filing status. However, if your deductible expenses and losses exceed the standard deduction, you may save more by itemizing your deductions.
For the 2024 tax year, the standard deduction amounts have been updated. Additionally, there is now a "bonus" deduction for older adults, which is in effect for the 2025 tax year and will remain in place through 2028. For 2025, the total standard plus bonus deduction for those age 65 and older is $21,750 for a single person and $43,500 for a married couple filing a joint return.
It's important to note that tax laws can vary from year to year, and staying informed about the latest changes is essential when filing your tax return.
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Retirement plan distributions
The IRS has released tax inflation adjustments for the tax year 2025, which will impact taxpayers when they file their returns in 2026. These adjustments include changes to standard deductions, marginal rates, alternative minimum tax exemption amounts, earned income tax credits, and qualified transportation fringe benefits.
Now, regarding retirement plan distributions, here is some key information:
Required Minimum Distributions (RMDs)
Account owners of retirement plans and IRAs generally must make annual withdrawals once they reach the age of 73 (or 70 1/2 before 2020). This includes traditional IRAs, SEP IRAs, SIMPLE IRAs, and workplace retirement plans such as 401(k) or profit-sharing plans. However, participants in a workplace retirement plan can delay RMDs until the year they retire, unless they own 5% or more of the business.
Taxation of Distributions
Distributions from retirement plans and IRAs are generally included in taxable income. If you are under 59 1/2, you may also be subject to an additional 10% tax on early distributions. There are exceptions to this additional tax, which are outlined in IRS publications. Additionally, if you receive a lump-sum distribution from a 401(k) plan and were born before 1936, you may be able to elect alternative methods of figuring the tax on the distribution.
Rollovers
A rollover occurs when you transfer a distribution from one qualified retirement plan to another or to a traditional IRA within 60 days. This transaction is not taxable but must be reported on Form 1099-R and your federal tax return. Most distributions can be rolled over, except for certain types of payments, such as those based on life expectancy or paid over ten years or more.
Beneficiary Distributions
If a retirement plan or IRA owner passes away before their RMDs are required to begin, the entire benefit must generally be distributed to the beneficiary within five years or over the beneficiary's lifetime. However, for deaths occurring after December 31, 2019, the SECURE Act requires the entire balance to be distributed within ten years, with some exceptions for specific beneficiaries.
Please note that this information is intended as a general guide, and for the most up-to-date and comprehensive details, it is recommended to refer to the official IRS publications and seek professional tax advice.
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Tax form requirements
The Internal Revenue Service (IRS) makes annual updates to tax provisions and procedures. These changes are made for various reasons, including keeping up with inflation. The tax laws, tax brackets, tax deductions, and tax credit amounts can all differ from one tax season to the next. For instance, the 2024 tax brackets and individual income tax rates were substantially increased compared to the previous year.
When it comes to tax form requirements, it is essential to gather all the necessary documents to prepare and file your tax return. The specific forms and requirements may vary depending on your individual circumstances, such as your income sources, deductions, and credits. Here are some key considerations for tax form requirements:
- Income Documentation: Collect all relevant documents that verify your income. This includes W-2 forms from your employer(s), which show your wages and withholdings, and 1099 forms if you have received income from freelance work, investments, or other sources.
- Deductions and Credits: Gather documentation for any deductions or credits you plan to claim. For example, if you own a business, you will need records of expenses that can be deducted. If you are claiming the Child Tax Credit, ensure you have the necessary information for each qualifying child.
- Interest and Dividend Statements: If you have received interest income from savings accounts or investments, you will need to report this on your tax return. Gather 1099-INT or 1099-DIV forms from your financial institutions.
- Self-Employment Income and Expenses: If you are self-employed, you will typically need to fill out a Schedule C form to report your business income and expenses. Keep track of all business-related expenses, such as office rent, supplies, advertising costs, and vehicle expenses, as these may be deductible.
- Retirement Contributions and Withdrawals: Report any contributions to or distributions from retirement accounts, such as traditional IRAs or 401(k) plans. You will likely receive a 1099-R form for retirement plan distributions and can use this information to fill out the relevant tax forms.
- Healthcare Coverage: Information regarding your healthcare coverage is important for your tax return. If you purchased health insurance through a marketplace, you should receive a Form 1095-A, which includes details about your coverage and any premium tax credits received.
- Education Expenses: If you are claiming education-related deductions or credits, such as the Student Loan Interest Deduction or the American Opportunity Tax Credit, gather your records of eligible expenses, including tuition fees, books, and supplies.
Remember to stay informed about the latest tax law changes and updates, as they can differ from one tax season to another. Consult official sources, such as the IRS website or publications, to ensure you are aware of any new requirements or adjustments that may impact your tax form filings.
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Frequently asked questions
The One Big Beautiful Bill is a 2025 legislation that brings significant updates to the tax code, impacting how Americans file their taxes in 2025 and beyond.
The One Big Beautiful Bill makes permanent many of the temporary tax law changes that were first introduced as part of the Tax Cuts and Jobs Act (TCJA) in 2017. Some of the key changes include:
- Increased standard deductions with a new "bonus" deduction for older adults.
- Increased child tax credit to $2,200 per qualifying child.
- Increased state and local tax (SALT) deduction cap to $40,000, up from $10,000.
- Repeal of energy-efficient credits for electric vehicles, hybrids, and energy-efficient home improvements.
- Temporary deduction for tips up to $25,000 for tax years 2025 through 2028.
Most of the changes in the One Big Beautiful Bill take effect on January 1, 2026, but some are retroactive and could impact your 2025 tax returns filed in 2026.
It is recommended to consult with a tax and financial professional to understand how the new tax laws impact your specific situation and financial plan. Online tax filing services such as TurboTax and H&R Block also offer resources and tools to help you navigate the changes.
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