Kara Sears
The current tax law in the United States is the One Big Beautiful Bill Act (OBBBA), which was signed into law on July 4, 2025. This legislation made significant updates to the tax code, impacting how Americans file their taxes in 2025 and beyond. The OBBBA extended many provisions of the previous Tax Cuts and Jobs Act (TCJA) of 2017, including increased standard deductions, lower tax brackets, and a higher lifetime estate tax exemption amount. The IRS makes annual inflation adjustments to tax provisions, and for 2025, these adjustments increased by an average of 2.8%. The OBBBA also introduced a new “No Tax on Tips” law, allowing a dollar-for-dollar deduction for designated tip earnings. The law also impacts premium tax credit rules, eligibility for certain individuals, and expands scenarios for repaying excess advance premium tax credits. The current tax law also makes permanent the seven federal tax brackets ranging from 10% to 37%. It is recommended that individuals consult with tax professionals to understand how these changes impact their financial plans.
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What You'll Learn
The One Big Beautiful Bill Act
One of the key features of the new Act is the mix of permanent and temporary tax provisions. While some provisions, such as the increased standard deductions and lower tax brackets, are permanent, others are temporary and require careful attention to timing and strategy. This includes the phase-out of certain clean energy tax credits, which are intended to help offset the fiscal impact of the new law.
The Act also makes substantive changes to international tax rules, including taxpayer-friendly changes to FDII and GILTI, as well as reductions in deduction rates. These changes will have a significant impact on multinational businesses and strategic planning.
In addition, the new law adjusted the alternative minimum tax (AMT) by reducing income levels for exemption phase-out and increasing the AMT exemption for individuals and married couples filing jointly. The AMT was created in 1969 to close tax loopholes for those in higher tax brackets.
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Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) was passed in 2017 and brought about changes to deductions, depreciation, expensing, tax credits, and other tax items that affect businesses. The TCJA has simplified the tax code for some, lowered corporate debt, and led to a temporary increase in investment. It also cut taxes for most U.S. taxpayers, with the Tax Policy Center stating in 2019 that it had lowered individual income taxes for approximately 65% of U.S. households. However, it is worth noting that the TCJA was also expected to increase deficits.
The TCJA introduced a tax credit for employers who provide paid family and medical leave to their employees. It also maintained certain provisions, such as Internal Revenue Code section 1031, which allowed the deferment of capital gains taxes on "like-kind exchanges" of real property. At the same time, it repealed similar provisions for other types of property. The Act included a tax break for citrus growers, allowing them to deduct the cost of replanting citrus plants lost or damaged due to freezing, natural disasters, or diseases. Additionally, it extended "full expensing," a favourable tax treatment provision for film and television production companies, until 2022.
The TCJA also made changes to standard deductions, tax brackets, and the lifetime estate tax exemption amount. The seven federal tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37% were made permanent. Standard deductions were increased, and a new "bonus" deduction was introduced for older adults. The alternative minimum tax exemption thresholds were reduced for phase-out, and the child tax credit was increased to $2,200 per qualifying child.
The TCJA has had a significant impact on businesses and individuals, with many provisions extended into the 2025 tax year. It is important to stay informed about the latest tax laws and seek professional advice to understand how these changes may affect your specific situation.
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Tax Brackets
In 2025, the IRS made inflation adjustments to over 60 tax provisions, impacting taxpayers filing their returns in 2026. The income limits for all tax brackets and filers were adjusted for inflation, with the top tax rate remaining at 37% for individual single taxpayers with incomes above $626,350 ($751,600 for married couples filing jointly). The other marginal rates for 2025 are 35%, 32%, 24%, 22%, 12%, and 10%.
The 2025 tax changes also included extensions from the 2017 Tax Cuts and Jobs Act (TCJA), such as an increased standard deduction, lower tax brackets, and a higher lifetime estate tax exemption amount. The standard deduction for single taxpayers and married individuals filing separately rose to $15,000, an increase of $400 from 2024. For married couples filing jointly, the standard deduction increased to $30,000, an $800 rise from the previous year.
Additionally, the alternative minimum tax (AMT), designed to prevent tax loopholes for those in higher tax brackets, underwent adjustments. The AMT exemption increased to $88,100 for individuals and $137,300 for married couples filing jointly, with phaseouts at specific income levels.
It's important to note that when your income moves into a higher tax bracket, you only pay the higher tax rate on the portion of your income within that new bracket. This progressive tax system ensures that as income increases, the applicable tax rate also rises.
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Standard Deductions
The standard deduction is a fixed amount that reduces the portion of your income that is subject to tax. It is a welcome tax break for most taxpayers as it is less work than itemizing. The standard deduction amount depends on your tax filing status, age, and other criteria. For instance, people who are married and filing jointly get a bigger deduction than single filers. Those who are 65 or older or blind are also eligible for an additional standard deduction.
The standard deduction is adjusted each year for inflation and varies according to your filing status, age, and whether you are blind or claimed as a dependent by another taxpayer. Certain taxpayers are not eligible for the standard deduction, such as those who itemize their deductions.
For the 2024 tax year, the standard deduction is $14,600 if you file as single or married filing separately. It is $21,900 for heads of household and $29,200 for married filing jointly or qualifying widow(er) taxpayers.
The 2025 tax year, which was signed into law in July 2025, has seen an increase in standard deductions. For single filers and married individuals filing separately, the standard deduction has increased to $15,000. For married couples filing jointly, the standard deduction is now $30,000, and for heads of households, it is $22,500. Seniors (those aged 65 or older by the end of 2025) may also be eligible for an additional standard deduction of up to $6,000 if they meet certain modified adjusted gross income (MAGI) limits.
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Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice: first, under ordinary income tax rules, and then under the AMT. Taxpayers must then pay the higher of the two amounts. The AMT was created in 1969 to close tax loopholes for those in higher tax brackets and prevent them from using too many tax preferences to reduce their taxable income.
The AMT exemption amounts and AMT tax rates are set by law. Taxpayers can use the special capital gain rates in effect for the regular tax if they are lower than the AMT tax rates that would otherwise apply. Some tax credits that reduce regular tax liability do not reduce AMT tax liability. The AMT exemption for 2024 was $85,700 for single filers and $133,300 for joint filers, with exemptions phased out once AMTI hit $609,350 for single filers and $1,218,700 for joint filers. The AMT exemption increased to $88,100 for individuals and $137,300 for married couples filing jointly in 2025, with the AMT exemptions phased out at 25 cents per dollar earned once AMT income (AMTI) reaches $500,000 for single filers and $1,000,000 for married couples filing jointly.
The AMT is imposed on an alternative, more comprehensive measure of income than regular federal income tax. It is imposed instead of, rather than in addition to, regular tax. AMT is imposed if the tentative minimum tax exceeds the regular tax. Tentative minimum tax is the AMT rate of tax times AMTI less the AMT foreign tax credit. Regular tax is the regular income tax reduced only by the foreign and possessions tax credits.
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Frequently asked questions
The current tax laws are those outlined in the 2025 Reconciliation Legislation, also known as the One Big Beautiful Bill Act (OBBBA). This legislation was signed into law on July 4, 2025, and impacts how Americans file their taxes for 2025 and beyond.
Some key changes in the new tax law include:
- Increased standard deductions, with a new "bonus" deduction for older adults.
- Reduced alternative minimum tax exemption thresholds.
- Increased child tax credit to $2,200 per qualifying child.
- Increased maximum Earned Income Tax Credit amount for qualifying taxpayers with three or more children.
- Increased standard mileage rates for business use of automobiles.
The new tax laws took effect on January 1, 2025, for the 2025 tax year. However, some provisions of the One Big Beautiful Bill Act will take effect on January 1, 2026, and beyond.
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