Key OBBBA Tax Changes Taking Effect for 2025 Filing

OBBBA Tax Changes: Key Highlights

Public Law 119-21, also known as the One Big Beautiful Bill Act (OBBBA), introduces several new or expanded deductions that individuals can claim, many of which take effect starting in 2025:

• New deduction for qualified tips – Available to both itemizing and non-itemizing taxpayers.

• New deduction for qualified overtime compensation – Available to both itemizing and non-itemizing taxpayers.

• New deduction for qualified passenger vehicle loan interest – Applies to loans taken in 2025 for eligible passenger vehicles, available to all taxpayers.

• Enhanced deduction for seniors – Additional deduction for taxpayers age 65 and older.

• Increase in the standard deduction

• Increase in the limit for state and local tax (SALT) deductions

• Updates to the child tax credit

1. Deduction for Tips (“No tax on tips”)

Tips are normally subject to income and payroll taxes. Under the new rules:

• Employees and self-employed individuals may deduct up to $25,000 of qualified tips received in occupations listed by the IRS as customarily receiving tips by December 31, 2024, provided the tips are reported to the employer or IRS.

• Qualified tips include voluntary cash or credit card tips from customers or through tip-sharing arrangements. Mandatory service charges are not qualified.

• Self-employed individuals in specified service trades or businesses (SSTB) cannot claim tips earned in those trades as qualified tips.

• The deduction is available for both itemizing and non-itemizing taxpayers and phases out for modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers).

• Taxpayers claiming the deduction must include their valid Social Security number, and married couples must file jointly.

• IRS will publish the official list of eligible occupations by October 2, 2025, with transition relief for 2025 filings.

2. Deduction for Overtime Compensation (“No tax on overtime”)

Overtime pay is subject to income and payroll taxes. New provisions allow:

• Individuals may deduct up to $12,500 ($25,000 if married filing jointly) of qualified overtime pay.

• Qualified overtime pay is the portion exceeding the regular pay rate (e.g., the “half-time” portion of time-and-a-half pay) required under the Fair Labor Standards Act (FLSA) and reported to the IRS.

• Available for all taxpayers, phasing out at MAGI over $150,000 ($300,000 for joint filers).

• Social Security numbers and joint filing requirements apply as with the tip deduction.

3. Deduction for Passenger Vehicle Loan Interest (“No tax on car loan interest”)

Taxpayers may deduct interest on loans taken after December 31, 2024 for purchasing an eligible passenger vehicle for personal use.

• Maximum annual deduction: $10,000

• Must be a loan for a vehicle originally purchased new by the taxpayer; leases and used vehicles do not qualify.

• Eligible vehicles include cars, minivans, SUVs, vans, pickup trucks, or motorcycles weighing less than 14,000 pounds, assembled in the U.S.

• Deduction available to all taxpayers, phasing out at MAGI over $100,000 ($200,000 for joint filers).

• Vehicle Identification Number (VIN) must be reported on the tax return.

• Vehicle assembly location can be verified via the NHTSA VIN Decoder.

4. Enhanced Deduction for Seniors

• Individuals 65 and older may claim an additional deduction of $6,000 ($12,000 if both spouses qualify).

• This is separate from the existing additional standard deduction for seniors.

• Deduction available to all taxpayers, phasing out at MAGI over $75,000 ($150,000 for joint filers).

• Social Security numbers and joint filing rules apply.

5. Standard Deduction Increases

• Married Filing Jointly / Qualifying Surviving Spouse: $31,500 (up from $30,000)

• Head of Household: $23,625 (up from $22,500)

• Single / Married Filing Separately: $15,750 (up from $15,000)

6. Increase in SALT Deduction Limit

• Itemizers may now deduct up to $40,000 ($20,000 if married filing separately) for state and local taxes paid, up from $10,000 ($5,000 if married filing separately).

• Phases out for taxpayers with MAGI over $500,000 ($250,000 if married filing separately).

7. Child Tax Credit Updates

• Maximum credit per qualifying child increased to $2,200 (up from $2,000).

• Taxpayer and child must have valid Social Security numbers.

• For joint filers, at least one spouse must have a valid Social Security number.