Gavin Howe
The One Big Beautiful Bill, signed into law on July 4, 2025, will impact tax filing for last year. This legislation makes permanent many of the temporary tax law changes introduced in 2017 as part of the Tax Cut and Jobs Act (TCJA). The new law includes changes to deductions, tax brackets, and credits, with some provisions effective from 2025 and others from 2026 onwards. It also makes adjustments for inflation, impacting taxpayers in the highest tax bracket and those with gambling losses. Additionally, the IRS introduced annual changes for the 2024 tax year, including adjustments for inflation and an increase in the standard mileage rate for business vehicles.
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What You'll Learn
The One Big Beautiful Bill Act
The OBBBA includes legislation to prevent most tax laws from reverting to their 2017 versions, as they were set to do upon the expiration of the Tax Cuts and Jobs Act (TCJA) at the end of 2025. The TCJA's provisions were temporary, but the OBBBA makes some of them permanent while also introducing new changes.
One notable change in the OBBBA is the adjustment to the seven federal tax brackets, which are now permanent: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The income threshold for high-income filers moving from the 24% to the 32% bracket is $197,300 for single filers and $394,600 for married couples filing jointly.
The OBBBA also introduces a new "bonus" deduction for older adults. From 2025 through 2028, individuals aged 65 and older may claim an additional deduction of $6,000 ($12,000 for married couples where both spouses qualify), phasing out for taxpayers with modified adjusted gross income over $75,000 ($150,000 for joint filers).
Additionally, the OBBBA addresses the alternative minimum tax (AMT), which was created to close tax loopholes for high-income earners. The AMT exemption has been increased to $88,100 for individuals and $137,300 for married couples filing jointly, with phaseouts at 25 cents per dollar earned once AMT income reaches $500,000 for single filers and $1,000,000 for married couples. The maximum child tax credit has also been raised to $2,200 per qualifying child, with annual adjustments for inflation.
The OBBBA also introduces temporary changes, such as the State and Local Tax (SALT) Deduction, which provides a federal deduction for income and property taxes paid at the local and state levels. The cap has been raised to $40,000 for incomes under $500,000, with a gradual reduction of 30% for incomes above this threshold. This rule will increase by 1% annually.
Furthermore, the OBBBA includes the "No Tax on Tips" and "No Tax on Overtime" rules, allowing workers to claim dollar-for-dollar deductions for designated amounts of tips and overtime pay. These deductions are subject to income limits and other requirements.
While the OBBBA brings about many changes, it's important to note that some of its provisions are temporary, and taxpayers should stay informed about how these changes may impact their tax filing for 2025 and beyond.
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Tax deductions for overtime pay
The One Big Beautiful Bill, signed into law on 4 July 2025, includes a provision for "No Tax on Overtime". This provision is retroactive to 1 January 2025 and will remain in effect until 2028.
Under this provision, eligible employees can claim a deduction on their overtime income up to a maximum of $12,500 for single filers or $25,000 for joint filers. This deduction is only applicable to wages paid in excess of an employee's normal wage rate. For example, if an employee usually earns $20 per hour but earns $30 an hour with overtime, they can deduct $10 per hour in overtime pay. The deduction phases out for taxpayers with income exceeding $150,000, or $300,000 in the case of a joint return, reducing the allowable amount of the deduction by $100 for every $1,000 of income over these thresholds.
It is important to note that not all overtime is eligible for the deduction. To qualify, the additional wages must be paid as required by Section 7 of the Fair Labor Standards Act (FLSA), which applies to employees working more than 40 hours per week. Furthermore, certain occupations are ineligible for the deduction, including those working in a trade or business that meets the definition of a Specified Service Trade or Business (SSTB) under Section 199A of the Internal Revenue Code.
While the "No Tax on Overtime" provision eliminates federal taxes on overtime pay, overtime wages will still be subject to payroll taxes for Social Security and Medicare. Additionally, for employees residing in a state with income tax, overtime pay may also be subject to state and local income taxes, depending on the specific regulations of their state and locality.
The "No Tax on Overtime" provision is expected to impact how employers track and report overtime hours and wages. Employers will need to separately identify overtime wages on Form W-2 and may need to update their payroll and reporting systems to meet these new requirements.
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Tax relief for federally declared disasters
The IRS provides tax relief to those affected by federally declared disasters. This includes individuals visiting a covered disaster area who were killed or injured as a result of the disaster, or any other person determined by the IRS to be affected. The IRS works with various agencies to provide assistance and coordinate disaster relief, including the Federal Emergency Management Agency (FEMA), The Weather Channel, and the National Oceanic and Atmospheric Administration.
If you have been affected by a federally declared disaster, you may be eligible for an extension to file your return and pay your tax bill. This extension is often granted automatically and can be confirmed using the FEMA search tool. To get a faster tax refund, you will need to claim your losses from the disaster. You can do this by claiming your losses on a Form 1040 or an amended return using Form 1040-X. The IRS provides disaster loss workbooks to help taxpayers compile a list of their belongings or business equipment to assist in claiming losses.
In addition to tax relief for individuals, the IRS also offers disaster assistance and emergency relief for businesses. This includes relief workers affiliated with government or philanthropic organizations assisting in a covered disaster area. The IRS provides various resources for disaster victims, including tax forms, instructions, and publications.
Some recent examples of tax relief provided by the IRS in disaster situations include:
- Tax relief for victims of Hurricane Ian in Florida, North Carolina, and South Carolina, with various deadlines extended to February 15, 2026.
- Tax relief for taxpayers impacted by severe storms, straight-line winds, flooding, landslides, and mudslides in West Virginia, New Mexico, Texas, and Missouri, with various deadlines postponed to February 2, 2026.
- Tax relief for taxpayers impacted by wildfires in California, with deadlines postponed to October 2025.
- Tax relief for Arkansas and Tennessee storm victims, with various deadlines postponed to November 3, 2025.
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Tax credits for clean vehicles
The Inflation Reduction Act of 2022 changed the rules for tax credits for clean vehicles purchased from 2023 onwards. If you buy a new, qualified plug-in electric vehicle (EV) or fuel cell vehicle (FCV) in 2023 or later, you may qualify for a clean vehicle tax credit of up to $7,500. The vehicle must be placed in service (taken delivery) after 2023, regardless of the purchase date.
To be eligible for the credit, your modified adjusted gross income (MAGI) for either the current year or the prior year must be $300,000 or less if you file taxes jointly with your spouse or are a surviving spouse, or $225,000 or less if you file taxes as the head of a household. For used clean vehicle purchases, your MAGI for either the current year or the prior year must be $150,000 or less if you file jointly with your spouse or are a surviving spouse, or $112,500 or less if you file as the head of a household.
In addition to the above, there are other criteria that vehicles must meet to qualify for the clean vehicle tax credit, including where the vehicle was assembled, the size of the vehicle battery, the location of the extraction, processing, recycling, manufacturing, and assembly of the battery's minerals and/or component parts, and the manufacturer's suggested retail price (MSRP).
Sellers must provide information about the vehicle's qualifications at the time of sale and register online and report the same information to the IRS. If they do not, your vehicle will not be eligible for the credit. You can use the tax credit calculator to determine how much you can claim on a used vehicle.
Furthermore, if you install qualified vehicle refueling and recharging property at your home, including electric vehicle charging equipment, you may be eligible for the Alternative Fuel Vehicle Refueling Property Tax Credit, which can reduce the costs associated with such charging equipment and installation.
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Tax changes for retirement plans
The "One Big Beautiful Bill", signed into law on July 4, 2025, introduces several changes that will impact retirement plans.
Firstly, the bill makes permanent the higher Child Tax Credit (CTC) value set by the TCJA, increasing it to $2,200 per child. This credit will also be adjusted annually for inflation.
Secondly, the bill introduces a new deduction for individuals aged 65 and above, which will be available for both itemizers and nonitemizers. The deduction is $6,000 for single filers and doubles to $12,000 for married couples filing jointly, assuming both partners are 65 or older. This new deduction can be combined with other standard deductions, potentially resulting in significant tax savings for retirees.
Thirdly, the bill maintains the TCJA's tax brackets, with the highest level remaining at 37%. This means that there are no direct changes to how Social Security benefits are taxed. However, the legislation eliminates Social Security taxes for most people receiving benefits.
Additionally, the bill introduces a Trump retirement savings account for children, offering a $1,000 tax credit when opened for a child born between January 1, 2025, and December 31, 2028.
Lastly, the bill proposes a no-capital gains tax on home sales, which, if passed by Congress, could benefit retirees looking to downsize or relocate without incurring additional tax burdens.
It is important to note that these changes may interact with existing tax laws and an individual's unique financial situation, so consulting a tax professional is advisable.
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Frequently asked questions
The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, and introduces significant updates across the tax code. While most of the changes take effect on January 1, 2026, some are retroactive and could impact your 2025 tax returns. These include adjustments to tax brackets, standard deductions, alternative minimum tax exemption thresholds, and child tax credits.
The new tax law, effective for the 2025 tax year, includes adjustments to the seven federal tax brackets, standard deductions, alternative minimum tax (AMT), and the State and Local Tax (SALT) Deduction. It introduces a ""No Tax on Tips" law, allowing a dollar-for-dollar deduction for a designated amount of tips earned, and a "No Tax on Overtime" rule, allowing certain workers to claim a deduction for a designated amount of overtime pay.
Yes, the IRS introduced a change allowing individuals to file their income tax returns electronically even if someone else has already claimed their dependent on a previously filed return. This change was implemented for the 2024 tax year.
