The passage of the One Big Beautiful Bill Act (OBBBA) in July 2025 has brought a sense of certainty to many taxpayers, especially federal employees and retirees. Had this bill not been signed into law, key tax credits established by the 2017 Tax Cuts and Jobs Act (TCJA) would have faced expiration at the end of 2025.
While the OBBBA introduces several new tax cut opportunities, it also raises many questions about how to navigate the new rules. Some of these changes will become effective immediately in 2025, while others will kick in on January 1, 2026. This piece aims to clarify the tax policies that retirees should keep in mind to make the most of the adjustments before the end of 2025.
Permanent Increase in Standard Deductions
One of the key features of the OBBBA is the permanent increase in the standard deduction established by the TCJA, which had previously doubled the standard deduction for all taxpayers, making it harder to justify itemization on tax returns. In 2025, the updated standard deductions will be $31,500 for married couples, $23,625 for heads of households, and $15,750 for single filers.
Additionally, personal exemptions for individuals, spouses, and dependents will be permanently eliminated. For federal employees and retirees, a higher standard deduction could affect the threshold for itemizing deductions, especially for those nearing those thresholds prior to the OBBBA changes. The adjustments to state and local tax (SALT) deductions, which will increase from a $10,000 to $40,000 limit, along with new rules on charitable contributions set to take effect on January 1, 2026, will influence whether retirees should opt for standard or itemized deductions on their 2025 tax returns.
Increased Deductions for Seniors
Individuals who turn 65 by the last day of December are eligible for an additional deduction of $12,000, while married couples where both spouses are 65 or older can also claim the same amount.
To qualify for this deduction, two requirements must be met: (1) Include the Social Security number of the qualified individual on your tax return, and (2) If married, file jointly. This deduction isn’t available for couples who file separately.
It’s important to note that there’s a phase-out for the deduction for individuals whose modified adjusted gross income (MAGI) exceeds $75,000, or $150,000 for married couples filing jointly. This phase-out occurs completely for an individual earning $175,000 or more, and $250,000 for those filing jointly.
Eligible federal employees and retirees can benefit from additional deductions, regardless of whether they choose to itemize or take the standard deduction. For those over 65, the extra standard deductions of $1,600 per spouse, or $3,200 for couples filing jointly, alongside additional amounts for blind individuals, will apply as well. Federal retirees over 65 eligible for the full $6,000/$12,000 deduction might want to consider strategic taxable moves, such as converting to a Roth IRA, before the end of 2025 to benefit from this new deduction.
Increased SALT Deduction Limit
The SALT deduction allows for federal deductions on state or local income and sales taxes, as well as property and personal taxes, but it’s only available to those who itemize on their federal returns. Previously, the TCJA capped the SALT deduction at $10,000 regardless of the tax filer’s status.
With the OBBBA, this limit is set to rise to $40,000 for the 2025-2029 tax years. The threshold for high-income earners will also increase, going up by 1% each year from 2026 to 2029, returning to $10,000 thereafter.
This adjustment particularly benefits federal employees and retirees residing in states with high income taxes, who have had to contend with the previous limit until now.
Strengthening Child Tax Credits
Starting in 2025, the child tax credit will increase from $2,000 to $2,200 for each qualifying child under 17. These credits will be permanent and indexed for inflation beginning in 2026. The income threshold remains at $400,000 for those filing married applications.
Additionally, the OBBBA makes changes to the eligibility criteria, requiring individuals to issue valid Social Security numbers for children under 17 in order to claim the credit. Previously, parents could use an Individual Taxpayer Identification Number (ITIN) for this purpose.
Other Dependent Credits Become Permanent
Families with dependents outside of the traditional child tax credit (like a parent or other relatives) can now claim a permanent credit worth $500 per dependent.
Car Loan Interest Deductions Available
Interest on new auto loans for personal use is now deductible up to an annual limit of $10,000 for vehicles purchased after December 31, 2024. To qualify, a joint tax filer must have a modified adjusted gross income (MAGI) below $200,000, and a single filer must also stay below this threshold.
To receive the credit, the vehicle must undergo a final assembly process in the U.S., and the Vehicle Identification Number (VIN) must be stated on your tax return. It’s also worth noting that even those taking a standard deduction can still claim this deduction.
Changes to Green Energy Regulations
The OBBBA will revise certain green energy tax credits for individuals, moving up deadlines for eligibility. Individuals seeking credits for new or used “clean” vehicles now need to complete their purchase by September 30, 2025, instead of the previously set date of December 31, 2032.
The deadlines for credits related to energy-efficient home improvements and residential clean energy have also shifted, now set for December 31, 2025, before reverting to pre-OBBBA deadlines further down the line.
