2025 Tax Changes Update
H.R. 1 was signed into law on July 4, and with it comes some changes that will affect the 2025 tax year. Here are some of the things you need to know:
What happens next?
When legislation is passed and entered into the US Code, the regulatory body (in this case, the Treasury Department/IRS) must process the law and create regulations to give guidance on how to comply. As the IRS does this, there may be more details released, and they’ll be passed along. Please know while this is a general guide, some things may be tweaked or change slightly.
Exemption of Tip Income
Up to $25,000 of tip income can be excluded from income tax (but still subject to social security/Medicare tax). This is effective from January 1, 2025, through December 31, 2028. To qualify:
- You must have a business that customarily and regularly received tips on or before December 31, 2024. The IRS will be publishing a list of qualifying businesses.
- This means you can’t just decide your business is tip-based now
- Tips must be cash/card, voluntary by the tipper, and not a set amount, and not negotiable
- Tips must be reported
- For those who are employees receiving tips, those should show on your W2.
- For those who are self-employed, you will need to track your tips separately.
- These tips need to be reasonable – for example, if your business income is $10,000, don’t try to say that $9,999 is tips…
- Tips for self-employed will be limited for those showing a loss.
- The allowed deduction is reduced $100 for every $1,000 your income exceeds $150,000 ($300,000 for joint filers).
- If you are married, you must file a joint return to receive this benefit.
Exemption of Overtime Income
Up to $12,500 of overtime wages paid in excess of base pay may be excluded from income. This is effective from January 1, 2025, through December 31, 2028. To qualify:
- Overtime pay must be reported on W-2.
- The deduction is for the overtime premium, meaning if you make $20/hr base, you get $30/hr overtime, you can exclude $10/hr up to $12,500.
- The allowed deduction is reduced $100 for every $1,000 your income exceeds $150,000 ($300,000 for joint filers).
- If you are married, you must file a joint return.
Seniors’ Deduction
A $6,000 deduction for taxpayers who are 65 and over at the end of the tax year beginning January 1, 2025, until December 31, 2028.
- Joint filers can get $6,000 each
- Married individuals must file a joint return to receive this benefit.
- The allowable deduction is reduced by 6% of the amount of income above $75,000 ($150,000 for joint filers).
***NOTE: There is no provision in this new law that changes the taxability of
social security benefits***
While the seniors’ deduction can offset some taxable social security benefits, social security is still subject to tax depending on your income outside of social security. While taxpayers over 65 receive this benefit, those who are under 65 and are on disability income (especially with a working spouse) will have taxable benefits the same as before this law passed.
Also, remember these things that have not changed:
- If your only income is social security, it is not subject to tax.
- If you are married and file a separate return, 85% of your social security benefits are automatically subject to tax.
Child Tax Credit
The child tax credit (dependents under 17) has been raised to $2,200 for 2025 and will be indexed annually for inflation beginning in 2026. The refundable portion of the credit (what you can get back if you have no tax liability) has not changed.
Dependent Care Credit – Beginning 2026
There will be expansion of the dependent care credit beginning in 2026. Up to 50% of the first $3,000 ($6,000 for more than 1 child), could be credited. However, your income to get 50% credit must be $15,000 or less. This really makes no sense – because the credit is nonrefundable (meaning it can’t cause a refund, can just zero out your tax), and the standard deduction for single is more than $15,000. There will have to be some guidance issued on this before it begins.
State and Local Tax Deductions
The limitation on state and local tax deductions for those who itemize has been raised to $40,000 through 2029. There is a reduction in amount allowed if your income exceeds $500,000.
Energy Credits End
Tax credits for EV (new and used) will end on September 30, 2025, and for most residential energy credits (new windows, doors, etc.) on December 31, 2025.
Deductible Car Loan Interest
From 2025–2028, you may deduct interest on a car loan (for personal use) of up to $10,000. To qualify:
- The vehicle must:
- Be originally used by the taxpayer (IRS needs to provide guidance on what this means)
- Be manufactured primarily for use on public roads
- Have a GVWR under 14,000 lbs.
- Be finally assembled in the United States
- You must provide the vehicle’s VIN to receive the benefit.
- The loan must have been acquired after December 31, 2024.
- You may refinance if your loan was before this date but cannot exceed original principal.
- Cannot be commercial, leased, or salvage title.
- The loan cannot be from a related party.
- The deductible amount is reduced by $200 for every $1,000 your income exceeds $100,000 ($200,000 for joint filers)
- You do not have to itemize deductions to receive this benefit.
Mortgage Interest Deduction
The limitation on mortgage interest deduction on the first $750,000 of acquisition debt has been permanently extended. (For example, if your loan was $1,000,000 you can only deduct interest on $750,000).
- Private Mortgage Insurance (PMI) becomes deductible again beginning 2026.
- You have to itemize deductions to receive this benefit.
Charitable Deductions for Non-Itemizers – beginning 2026
For those who do not itemize deductions, you may claim charitable contributions, up to $1,000 ($2,000 joint filers), for the amount your contributions exceed 0.5% of your income. For example, if your AGI is $100,000, and your contributions were $750, you can only claim $250.
Permanent Termination of Miscellaneous Itemized Deductions
The 2017 tax law temporarily eliminated deductions for these items, which has now become permanent:
- Unreimbursed employee expenses
- Investment advisor fees
- Union dues
- Tax preparation fees
- Hobby-related expenses
- Safe deposit box fees
Expansion of deduction for Educator Expenses – beginning 2026
Currently, K-12 educators can deduct up to $300 of education expenses for their classroom. Beginning in 2026, taxpayers who itemize deductions can deduct all of their classroom-related expenses. You must be able to itemize deductions to receive this benefit. If you do not itemize, you can continue to take the $300.
Reduction of Itemized Deductions allowed for High Income Individuals
Beginning in 2026, individuals with high income (over the 37% bracket threshold, roughly $600,000) will have a reduction in allowable itemized deductions.
Savings Accounts for 2025 Newborns
There is a provision for newborns in 2025 through 2028 to have a savings account with $1,000 deposited, which cannot be withdrawn until the child turns 18. There is also a provision for children born before 2025 to have an account established, but no deposit made for them. There is a lot that needs to be sorted out by the IRS in this provision, and deposits are not allowed until mid-2026, so more information will be forthcoming on how this will work.
529 Plan Expansion – beginning 2026
Beginning in 2026, the limit on using a 529 plan to pay K-12 expenses will be raised to $20,000.
529 plans will also be allowed to be used for homeschool expenses and post-secondary credential expenses (i.e. professional licensing).
Premium Tax Credit Repayment – changing 2026
For those of you who have marketplace insurance, it is very important you make sure the marketplace knows what your income is so they can best estimate the appropriate credit for your insurance. For now, if you understate your income and receive too much credit, there is a limit on how much you would have to repay. Beginning in 2026, that limit is removed. If you receive thousands more in premium credit than you should have, you’ll have to pay it all back.
For Business Owners/Gig Workers
1099-K and 1099-NEC Reporting Requirements
Beginning in 2025, payment processors must send a 1099-K if you have
- $20,000 in transactions, AND
- 200 or more transactions
Beginning in 2026, 1099-NEC must be sent to non-employees who receive more than $2,000 (previously $600).
NOTE: this has to do with information return reporting requirements, not taxability. Income from business is and always has been subject to tax, these rules are simply meant to reduce paperwork and administrative processing. You are required by law to report all income.