Kara Sears
The 2025 Reconciliation Legislation, known as the One Big Beautiful Bill Act (OBBBA), introduces significant changes to the tax code, impacting how Americans file their taxes in 2025 and beyond. The new law makes permanent several aspects of the 2017 Tax Cuts and Jobs Act (TCJA), including the larger standard deduction, lower tax brackets, and higher lifetime estate tax exemption amounts. It also introduces temporary changes, such as limiting taxes on tips and overtime pay. The OBBBA has been criticized for benefiting high-income households more than low- and moderate-income families, with some calling for higher taxes on the wealthy. The new law also introduces a bonus deduction for older adults and adjusts tax brackets, deductions, and retirement contributions for inflation. These changes will impact how Americans file their taxes and may result in some people paying higher taxes.
| Characteristics | Values |
|---|---|
| Tax laws affecting 2025 taxes | Filed in 2026 |
| TCJA rules | Bigger standard deduction, no personal or dependent exemptions, income tax rates |
| Form 1099-NEC threshold raised from | $600 to $2,000 |
| Child Tax Credit (CTC) | $2,200 per child |
| Taxpayers aged 65 and older | $21,750 for a single person and $43,500 for a married couple filing a joint return |
| Marginal rates for individual single taxpayers with incomes greater than | $626,350 |
| Marginal rates for married couples filing jointly with incomes greater than | $751,600 |
| No taxes on tips or overtime | Deduction capped at $25,000 for tips and $12,500 for overtime |
| No taxes on Social Security | N/A |
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What You'll Learn
Higher income thresholds for tax deductions
The One Big Beautiful Bill Act (OBBBA), which was signed into law on July 4, 2025, introduces significant updates across the tax code, impacting how Americans file their taxes in 2025 and beyond.
One of the key changes introduced by the new tax law is the adjustment of income thresholds for tax deductions. The law adds a new "bonus" deduction for older adults, which will be in effect from the 2025 tax year until 2028. For 2025, the total standard plus bonus deduction for individuals aged 65 and above is $21,750 for single filers and $43,500 for married couples filing jointly. However, income thresholds apply to this deduction. Only single filers with a Modified Adjusted Gross Income (MAGI) of $75,000 or less, or married couples with a MAGI of $150,000 or less, can claim the full deduction. The deduction phases out gradually for those with incomes above these thresholds.
The new tax law also introduces higher income thresholds for other tax deductions. For example, the Child Tax Credit (CTC) has been increased to $2,200 per child, and the higher value is now permanent. Additionally, the Alternative Minimum Tax (AMT) exemption thresholds have been reduced for phase-out, and higher exemptions and income phaseouts will occur in 2025.
The OBBBA also makes permanent several aspects of the 2017 Tax Cuts and Jobs Act (TCJA), including the larger standard deduction, lower tax brackets, and higher lifetime estate tax exemption amounts. The seven federal tax brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%) have been made permanent, and the standard deductions have increased. These adjustments aim to keep income tax brackets, deductions, and other inputs in line with changes in the cost of living.
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Changes to IRA credits
The One Big Beautiful Bill Act (OBBBA) has brought about several changes to IRA credits. The OBBBA significantly alters the Inflation Reduction Act (IRA) green energy subsidies. The law ends the clean hydrogen production tax credit after 2027 and introduces restrictions on foreign entities of concern (FEOC). The FEOC rules target individuals or organisations associated with adversarial nations like Russia, China, North Korea, and Iran. The OBBBA's approach to electric power credits is complex, rendering wind and solar projects ineligible for the IRA's flagship tax credits unless they enter service before December 31, 2027, or begin construction within 12 months of the law's passage.
The OBBBA also expands several credits, including those for clean fuel and carbon oxide sequestration. Metallurgical coal is eligible for the advanced manufacturing production credit in tax years from July 4, 2025, to December 31, 2029. Clean hydrogen production facilities beginning construction before January 1, 2028, remain eligible for credits under section 45V, without FEOC requirements. The law also repeals several consumer-focused credits related to electric vehicles and buildings.
The new tax law has also modified and made permanent individual income and estate tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA). The standard deduction has increased, with $15,000 for single taxpayers and married individuals filing separately, $22,500 for heads of households, and $30,000 for married couples filing jointly. The exemption amount for unmarried individuals has increased to $88,100, with a phase-out beginning at $626,350. For married couples filing jointly, the exemption amount is $137,000, with a phase-out at $1,252,700.
Additionally, the new law has introduced a deduction of up to $10,000 for loan interest on vehicles assembled in the US for single taxpayers with a modified adjusted gross income of $100,000 or less ($200,000 or less for married couples filing jointly). The law also includes a Trump savings account for children, fundable up to $5,000 per year, similar to a nondeductible traditional IRA contribution. Parents of newborns between January 1, 2025, and December 31, 2028, can receive $1,000 in federal seed money for the account. The maximum child tax credit is $2,000 per qualifying child, with a refundable amount of up to $1,700.
The new law has also brought changes to retirement-related items, including higher income thresholds for Roth IRA contributions. The income phase-out range for taxpayers has increased to between $150,000 and $165,000 for singles and heads of households, and between $236,000 and $246,000 for married couples filing jointly. For those married and filing jointly with IRAs but not actively participating in another plan, while their spouse does, the phase-out range is $236,000 to $246,000. The phase-out range for a married individual filing separately remains between $0 and $10,000.
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New bonus deduction for older adults
The One Big Beautiful Bill Act (OBBBA) introduced a new "bonus" deduction for older adults, which came into effect in 2025 and will remain in effect until 2028. This new tax deduction is worth up to $6,000 for individuals aged 65 and above, and $12,000 for married couples filing jointly where both spouses are 65 or older. If only one spouse is 65 or older, the additional deduction is $1,600. The deduction is available to both itemizing and non-itemizing taxpayers.
The new bonus deduction is in lieu of tax-free Social Security benefits for retirees, which would have been a more complex and expensive process. While the new tax law does not eliminate taxation of Social Security benefits, the new deduction could reduce the tax on these benefits for millions of recipients, as it lowers overall taxable income.
There are, however, income limits to this bonus deduction. The value of the tax break starts to decrease once a single filer's modified adjusted gross income (MAGI) exceeds $75,000, or $150,000 for married couples filing jointly. The deduction is reduced by 6% for every dollar over the threshold. For single filers with a MAGI of $175,000 or more, and married couples filing jointly with a MAGI of $250,000 or more, the deduction is completely phased out.
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Adjustments to tax brackets
The IRS makes annual inflation adjustments to more than 60 tax provisions to maintain income tax brackets, deductions, and other inputs in accordance with changes related to the cost of living. The 2025 adjustments, which will impact taxpayers when they file their returns in 2026, include:
- An increase in the standard deduction to $15,000 for single taxpayers and married individuals filing separately, an increase of $400 from 2024.
- For married couples filing jointly, the standard deduction rises to $30,000, an increase of $800 from tax year 2024.
- For heads of households, the standard deduction will be $22,500 for tax year 2025, an increase of $600 from 2024.
- The maximum credit allowed for the adoption of a child with special needs is increased to $17,280, up from $16,810 in 2024.
- The Child Tax Credit (CTC) has been increased to $2,200 per qualifying child, up from $2,000 in 2024.
- The income limits for all tax brackets and all filers will be adjusted for inflation. The federal income tax has seven tax rates in 2025: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
- Seniors over the age of 65 may claim an additional standard deduction of $2,000 for single filers and $1,600 for joint filers.
- The alternative minimum tax (AMT) exemption has been increased to $88,100 for individuals and $137,300 for married couples filing jointly.
- The AMT exemption phase-out threshold has been raised to $500,000 for single filers and $1,000,000 for married couples filing jointly.
- The phase-out threshold for the Lifetime Learning Credit has been increased to $80,000 for single filers and $160,000 for married couples filing jointly.
- The threshold for Form 1099-NEC and certain items on Form 1099-MISC has been raised to $2,000 from $600.
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Repeal of energy-efficient credits
The One Big Beautiful Bill Act (OBBBA) has been cited as the reason for the repeal of several "green energy" tax incentives, including the energy-efficient home improvement credit. This credit was previously available to homeowners who made energy-efficient upgrades to their primary residences, such as solar or geothermal equipment. The credit was equal to 30% of the costs of eligible upgrades, up to a maximum of $1,200 per year.
The OBBBA, signed into law by President Donald Trump in July 2025, significantly altered the Inflation Reduction Act (IRA) green energy subsidies. The IRA's tax credits were intended to incentivize consumers to invest in renewable energy sources and reduce carbon emissions. However, critics argue that these credits were flawed and provided less effective incentives than a straightforward carbon tax.
Evidence suggests that the home energy property and energy efficiency tax credits had a high cost relative to emissions mitigation. Additionally, these credits tended to benefit higher-income households more than lower-income ones. As a result, the OBBBA's approach to electric power credits is to make wind and solar projects ineligible for the IRA's flagship tax credits unless they meet certain construction or service date requirements.
The repeal of the energy-efficient home improvement credit means that homeowners can no longer claim this credit on their tax returns. This may result in higher taxes for some people, especially those who had planned to take advantage of this credit to offset the costs of energy-efficient home improvements.
It is worth noting that the OBBBA has set an end date of December 31, 2025, for these tax credits. Therefore, homeowners who are eligible and interested in taking advantage of the energy-efficient home improvement credit should do so before the end of the year.
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