New OBBB tax breaks taking effect in 2025

Photo by Jess Bailey Designs

Tax law changes, even when they benefit you, can be frustrating. Not only do we have to get up to speed on what’s new, we have to know when they take effect.

Generally, making tax laws retroactive is, at best, sloppy tax policy. When it’s done late in a tax year, it can scramble tax moves that the new laws might necessitate.

But our tax planning problems sometimes aren’t top of mind for Congress. They too often go ahead and make a tax law effective back to the start of a tax year, even at the end of the year.

Federal lawmakers continued this tax time shifting with the One Big Beautiful Bill (OBBB) Act. But at least they did so mid-year this time. The OBBB was signed into law on July 4, giving us months to examine whether they changes apply to us and make any moves to ensure we maximize the new tax benefits.

Old and new tax measures: For the most part, the OBBB took care of its primary tax task. It extended, permanently, most of the individual tax provisions that were create by the last major tax reform bill, 2017’s Tax Cuts and Jobs Act. Those tax laws had been scheduled to expire at the end of this year.

But rather than just letting those renewed tax laws roll into 2026 and beyond, lawmakers decided to tweak a few of them, add some new ones, and make some effective for 2025. This allows eligible taxpayers to claim them on their tax 2025 tax returns they’ll file in 2026 rather than having to wait another year.

The move wasn’t necessarily just so eligible filers could benefit sooner. The lawmakers had their political futures in mind.

All House and 33 Senate seats are up in 2026. Members of Congress who want to keep those positions are hoping that taxpayers, also known as voters, who benefit from the new and/or extended tax laws will remember the tax-filing savings from earlier in the year when they go to the polls on Nov. 3, 2026.

Here, for your current tax planning and future voting information, are the major individual tax changes in the OBBB that are effective for tax year 2025.

Standard deductions bump: The TCJA made filing easier for millions of taxpayers simply by increasing the standard deduction amounts. That tax bill essentially doubled the standard amounts, meaning even more filers found that their new increased standard deduction was more than their potential itemized claims.

Standard deduction amounts are set for each filing status, and the IRS adjusts them each year for inflation. The OBBB took those amounts and juiced them a bit for the 2025 tax year.

The table below shows what they were, and the amounts that now can be claimed as the standard deduction on this year’s returns.

Senior bonus: Taxpayers age 65 or older already get an increased standard deduction amount in 2025 of $1,600. It, too, is adjusted for inflation, and you can read more about it in Part 2 of the annual tax inflation series.

The OBBB gives older taxpayers even more to claim. It provides them a new senior bonus, an additional $6,000 deduction per eligible filer, starting in 2025.

There are income limitations, and the added amount is temporary, available only through tax year 2028. My earlier post has more on the senior bonus.

Tip income tax break: Donald J. Trump promised no tax on tips when he was campaigning for president. That is not in the OBBB.

But there is some tax relief, with limits, for some people whose jobs include gratuities.

Starting with their 2025 tax return, they can deduct up to $25,000 of qualified tips annually from their taxable income. You don’t have to itemize to claim this deduction, but if you do itemize, you also can claim the tip tax write-off if you qualify.

In addition to the $25,000 limit, the tipped taxpayer also must work in a field where tips are customarily and regularly received. The IRS will determine what those occupations are in a list it is to publish by Oct. 2.

The tip deduction also is temporary, in effect for just the 2025 through 2028 tax years, and phases out when the taxpayer’s adjusted gross income (AGI) exceeds $150,000 ($300,000 for joint filers).

Overtime pay tax relief: Employees who get overtime pay get a tax break similar to the one for tipped workers. They can deduct up to $12,500 in overtime compensation against their taxable income.

However, it applies just to workers who are not exempt from Fair Labor Standards Act (FLSA) overtime rules are eligible for this tax deduction. Only the 0.5 “premium” portion of a time and a half is eligible for the deduction. And the deduction amount phases out when the taxpayer’s AGI is more than $150,000 ($300,000 for married joint filers).

The overtime tax break also is temporary, applying only to the added earnings in tax years 2025 through 2028.

But it can be claimed by eligible taxpayers regardless of which deduction method, standard or itemized, they choose.

Auto loan interest deduction: Beginning this tax year, and through 2028, you may be able to deduct interest you pay on a new car loan. Note, this applies to loans to buy (not lease) a new (not used) vehicle.

The maximum annual loan interest deduction is $10,000. The deduction phases out for taxpayers with modified AGI exceeding $100,000 ($200,000 for joint filers). It is available to itemizers and those who claim the standard deduction.

Loans on a wide variety of new vehicles are allowed, but the auto (or SVU or motorcycle) must be assembled in the United States. You can use the National Highway Traffic Safety Administration’s (NHTSA) online VIN Decoder to find the plant of manufacture information.

Child Tax Credit increased: The Child Tax Credit (CTC) is a long-standing, and popular, tax break for families. The TCJA doubled it to $2,000. During the COVID-19 pandemic, the CTC was increased substantially, and paid in advance, to help families where breadwinners were unable to work.

But in 2022, the CTC returned to the $2,000 per qualifying child level. And if the TCJA provisions had been allowed to expire, it would have dropped to its pre-tax reform $1,000 amount.

The OBBB ended that unwanted reversion. Beginning with the 2025 tax year, the CTC is $2,200 per qualifying child. Since it is a tax credit, it can reduce eligible filers’ tax liability dollar-for-dollar. And the CTC’s refundable portion — that’s the amount you can get back from the Treasury if your credit is more than the tax you owe — stays at $1,700 and will be adjusted for inflation.

The CTC also now is permanent, meaning families won’t have to worry about it being dropped from the tax code at the end of an upcoming tax year. But the OBBB does tighten CTC eligibility rules.

Adoption tax credit enhancement: Families who grow by adoption get more tax relief this year thanks to OBBB.

Previously, the adoption tax credit, which is up to $17,280 for the 2025 tax year, was not refundable. But beginning in 2025, up to $5,000 in qualifying adoption expenses are refundable under the credit. The credit and refundable portion amounts will be adjusted annually for inflation.

Adoption advocates say the tax credit’s partial refundability should make adoption more accessible to lower- and moderate-income families.

More eligible 529 plan expenses: A 529 plan is a popular tax-advantaged way to save for college expenses. The OBBB has made the higher education savings accounts more useful for those facing pre-college school expenses.

And the change is effective as of July 5, 2025.

Previously, 529 funds could only be applied to K-12 tuition expenses up to $10,000 annually. Now, qualified non-college costs include books, materials, testing fees, dual enrollment fees, educational therapies and tutoring costs incurred after July 5.

Bigger SALT deduction: The state and local taxes, or SALT, federal itemized tax deduction limit has been a thorn in many taxpayers’ sides since it was instituted as part of the 2017 tax reform bill.

The TCJA caps the SALT claim on Form 1040 Schedule A at $10,000. But thanks to OBBB, the cap is $40,000 beginning in 2025. It will increase by 1 percent each year through 2029. Then in 2030, it will revert to the TCJA $10,000 limit.

The $40,000 amount will help many taxpayer facing high state income and real estate taxes. However, the full deduction is phased out for higher earners. That phase-out amount is $500,000 modified AGI in 2025.

Climate-friendly tax breaks ending: While the OBBB generally extended tax benefits beyond 2025, a few were targeted for elimination this year. Notably, they were part of the environmentally friendly portions of the Biden administration’s Inflation Reduction Act.

The electric vehicle tax credits end after Sept. 30, 2025.

Residential clean energy and energy efficient tax credits expire on Dec. 31, 2025.

If you’re interest in buying an EV or making environmentally-friendly home upgrades, best get going now.

All these 2025 tax-related dates are why this tax year is this weekend’s By the Numbers figure. I hope that you find at least a few that will work to your benefit when you get to work next January on your 2025 tax return.

As for the Capitol Hill lawmakers’ decision to speed up these tax provisions, I’ll let you decide whether to reward — or penalize — your elected officials responsible for the 2025 changes after you sort through all the OBBB specifics.

You also might find these items of interest:

• New tax law changes present challenges to IRS and taxpayers 
• Tax law changes highlight the importance of professional tax help
• ETAAC has legislative advice for Congress, which it is ignoring as it works on the one big tax bill

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