Gavin Howe
The world of tax law is ever-evolving, and 2025 has brought several notable changes. The One Big Beautiful Bill Act, signed into law in July 2025, has introduced a range of adjustments, including changes to deductions, tax brackets, and retirement contributions. This legislation has made permanent certain provisions of the 2017 Tax Cuts and Jobs Act (TCJA), such as increased standard deductions and lower tax brackets. Additionally, the new law introduces a bonus deduction for older adults and an increased child tax credit. For those in the market for a wealth advisor, now may be a good time to seek guidance, as markets are in flux. The IRS is also offering free tax filing options for eligible taxpayers, and it's worth noting that the standard mileage rates for vehicles have increased as of January 1, 2025. With tax laws constantly adapting, staying informed is essential for effective financial planning.
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What You'll Learn
The One Big Beautiful Bill Act
Tax Provisions for 2025 and Beyond
The Act brings a significant number of new tax laws, most of which will come into effect in the tax year 2025, with some provisions applicable for 2026 and beyond. The Act includes changes to various deductions, credits, and exemptions.
Deductions and Credits
The state and local tax (SALT) deduction cap has been increased from $10,000 to $40,000 for the tax year 2025. This cap will continue to increase gradually, reaching $40,400 in 2026 and rising by 1% each year until 2029. This change benefits taxpayers in states with high property taxes, allowing them to deduct more of their related expenses.
Additionally, the Act introduces a new deduction for individuals aged 65 and older, amounting to $6,000 per eligible individual or $12,000 for a married couple where both spouses qualify. This deduction is in addition to the existing standard deduction for seniors.
The Act also repeals energy-efficient credits for electric vehicles (EVs), hybrids, charging, and energy-efficient home improvements, effective 2025. Credits for electric vehicles up to $7,500 will no longer be available for EVs purchased after September 30, 2025. Similarly, credits for energy-efficient home improvements like windows, doors, and solar installations will sunset after 2025.
Extensions and Adjustments
The Act permanently extends the deduction for qualified business income at 20%. It also extends the $2,000 per child credit amount from the TCJA, which was set to expire in 2025. This extension provides a temporary $500 per child boost from 2025 to 2028, with the amount growing with inflation from 2029 onwards.
Additionally, the Act extends TCJA's 100% bonus depreciation for business investments in machinery, equipment, and other short-lived assets from January 19, 2025, through 2029. It also restores full expensing for businesses' domestic research and development (R&D) investments from 2025 through 2029.
Impact on Taxpayers and Businesses
The Act introduces changes that will impact both taxpayers and businesses. With the AMT exemption amount now automatically adjusting for inflation, many taxpayers will be able to avoid the AMT tax. Additionally, the increased SALT deduction cap will benefit taxpayers in states with high taxes.
For businesses, the extended bonus depreciation and restored full expensing for R&D investments will provide tax benefits. However, the repeal of energy-efficient credits and deductions may impact businesses investing in energy-efficient measures.
Overall, the One Big Beautiful Bill Act introduces a range of tax law changes that will have varying impacts on individuals and businesses. These changes aim to provide tax relief, simplify tax filing, and promote certain investments. Taxpayers and businesses should stay updated on these changes and seek guidance to ensure compliance and strategic tax planning.
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Tax Cuts and Jobs Act (TCJA)
The Tax Cuts and Jobs Act (TCJA) is a United States federal law that amended the Internal Revenue Code of 1986. It is also known as the Trump Tax Cuts. The TCJA was expected to lower taxes by an average of $1,600 in 2018 and 2025, according to a 2017 report by the nonpartisan Tax Policy Center. The TCJA lowered the corporate income tax rate from 35% to 21%four percentage points lower than the OECD average at the time. It also reduced most individual income tax rates, including the top marginal rate from 39.6% to 37%. The law maintained the seven-bracket rate structure but updated the income thresholds.
The TCJA increased the standard deduction to $12,400 for single filers and $24,800 for married filers (tax year 2020), a significant increase from the previous amounts of $6,500 and $9,550, respectively. It also eliminated the personal exemption and limited certain itemized deductions, such as the state and local tax (SALT) deduction, mortgage interest deduction (MID), and charitable contribution deduction. The TCJA also included changes to deductions, depreciation, expensing, and tax credits for businesses.
According to Bloomberg, the TCJA simplified the tax code for some but not for others. It lowered corporate debt and brought money back from overseas without bringing back business activity. A Bloomberg Economics analysis found that while business investment did increase in 2018, relatively little of that activity could be attributed to lower taxes. Studies show that the TCJA increased the federal debt and after-tax incomes disproportionately for the most affluent. It led to an estimated 11% increase in corporate investment, but its effects on economic growth and median wages were smaller than expected.
The TCJA was expected to increase deficits, thereby stimulating the economy. It was projected to benefit the top 20% of Americans by income, with about 65% of the tax savings going to this group. The bottom 80% of taxpayers were estimated to receive 34%-35% of the benefit in 2018 and 2025, respectively, with some groups even incurring costs. Additionally, the TCJA was estimated to adversely impact 72% of taxpayers in 2019 and beyond if the tax cuts were financed by spending cuts separate from the legislation.
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Marginal rates
Marginal tax rates refer to the percentage of tax applied to each additional dollar of income within a specific bracket, rather than being applied to the whole income. In other words, it is the amount of additional tax paid for every additional dollar earned as income. Marginal tax rates emerged in the early 20th century as governments sought ways to fund public services while maintaining economic fairness.
In the United States, the 2025 tax system has seven marginal brackets ranging from 10% to 37%. The marginal tax rate is the highest income tax rate an individual will pay on their income. As an individual's income increases, portions of it are taxed at higher rates. The marginal tax rate is the rate that applies to the last dollar of income earned. It is important to note that only a portion of an individual's income is taxed at the highest rate, and their effective tax rate, which takes into account the portions of income taxed at lower rates, is likely to be lower than the marginal rate.
Understanding marginal tax rates can help with effective tax planning, investment strategies, and other financial decisions. For example, claiming all applicable tax deductions may help reduce an individual's marginal tax rate and, consequently, their total tax bill. Additionally, certain “above-the-line” deductions, such as those for student loan interest, educator expenses, business expenses, and self-employment taxes, can be used to reduce taxable income and potentially lower the marginal tax rate.
Effective marginal tax rates are important to calculate as they can influence workers' incentives to work additional hours and earn higher incomes. Higher effective marginal tax rates may discourage individuals from working additional hours, resulting in lower productivity and economic growth. Marginal tax rates also have implications for businesses, as they account for statutory rates, cost recovery, and financing.
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Mileage rates
For 2024, the standard mileage rate for the use of a car, van, pickup, or panel truck is 67 cents per mile driven for business use, as announced by the IRS in December 2023. This rate represents a 1.5-cent increase from the 2023 rate. Leased vehicles must use the standard mileage rate method for the entire lease period if they choose the standard mileage rate option.
Beginning on January 1, 2025, the standard mileage rates have been adjusted. For self-employed and business use, the rate is 70 cents per mile. For charities, the rate is 14 cents per mile. Medical and moving purposes (for military only) have a rate of 21 cents per mile. It is important to note that these rates are for tax year 2025 and may change in subsequent years.
The GSA (General Services Administration) has also adjusted its POV (Privately Owned Vehicle) mileage reimbursement rates effective January 1, 2025. These rates are applicable for government employees and contractors who use their personal vehicles for official travel. The specific rates vary depending on the location and type of travel.
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Deductions and retirement contributions
The One Big Beautiful Bill Act, signed into law on July 4, 2025, introduces several tax deductions for working Americans and seniors. One notable provision allows individuals who receive qualified tips in occupations customarily receiving tips (as listed by the IRS) to deduct these tips from their taxable income. This deduction is effective from 2025 through 2028 and has a maximum annual limit of $25,000. For self-employed individuals, the deduction cannot exceed their net income.
Additionally, the Act introduces a new deduction for individuals aged 65 and older, who can claim an additional $6,000 deduction for the tax years 2025 through 2028. This is in addition to the existing additional standard deduction for seniors. For married couples where both spouses qualify, the total deduction amounts to $12,000.
The Act also includes a provision for individuals who receive qualified overtime compensation. They can deduct the pay that exceeds their regular rate, as required by the Fair Labor Standards Act (FLSA). This deduction is also effective from 2025 through 2028 and applies to compensation reported on Form W-2, Form 1099, or other specified statements.
Regarding retirement contributions, the IRS sets limits on how much individuals can contribute to their traditional IRAs and Roth IRAs each year. These limits may vary depending on the individual's filing status, income, and participation in other retirement plans. For 2023, the total contributions to traditional and Roth IRAs cannot exceed certain limits. Traditional IRA contributions may be tax-deductible, but this deduction may be limited if the individual or their spouse is covered by a retirement plan at work and their income exceeds certain levels. On the other hand, Roth IRA contributions are not deductible, and contribution limits may be based on filing status and income.
For 2024, the basic limit on elective deferrals for retirement plans is $23,000, an increase from $22,500 in 2023. Catch-up contributions are allowed for individuals aged 50 or older, and these contributions may exceed the basic limit. It is important to note that individuals should refer to the specific retirement plan they are participating in to understand the contribution limits and rules that apply to their situation.
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Frequently asked questions
The One Big Beautiful Bill Act is a 2025 Reconciliation Legislation that introduces significant updates to the tax code. It includes adjustments to tax brackets, deductions, and retirement contributions. It also extends provisions of the 2017 Tax Cuts and Jobs Act (TCJA), such as an increased standard deduction and a higher lifetime estate tax exemption amount.
Some key changes include adjustments to the seven federal tax brackets, which are now permanent, an increased standard deduction, a reduced alternative minimum tax exemption threshold, and an increased child tax credit of $2,000 per child.
The House Republican Tax Bill includes changes to clean energy tax provisions that raise $570 billion from FY2025-2034. The specific implications for individuals or businesses will depend on their unique circumstances.
Yes, under the new law, taxpayers who claim the Standard Deduction can also claim a Charitable Deduction for cash contributions. However, if you claim an itemized deduction for a charitable contribution, you must reduce your deduction by 0.5% of your contribution base, typically your adjusted gross income.
Yes, there are a few tax changes related to foreign income or transactions. For tax year 2025, the foreign earned income exclusion has increased to $130,000. Additionally, money transfers to foreign locations will be subject to a 1% excise tax starting in 2026.
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