A significant federal law enacted last year might influence the tax returns of many Americans in 2025.
This extensive legislation, often referred to as the “big, beautiful bill,” introduces various adjustments to the U.S. tax code, with some provisions taking effect for returns filed for the 2025 tax year, as detailed by the IRS and related agencies.
Below are some key changes in the bill that could impact taxpayers during their return preparations.
Tax on Tips
Former President Donald Trump campaigned on the promise to do away with taxes on tips for American workers. While this hasn’t fully materialized, there are now notable deductions applicable to returns.
The IRS states that taxpayers can deduct up to $25,000 in tips, provided their modified adjusted gross income for the 2025 tax year is below $150,000 for individuals and $300,000 for couples filing jointly.
This deduction is available to both those who itemize their deductions and those who opt for the standard deduction.
It’s worth noting, however, that some payroll taxes may still apply to tips, and state or local taxes might also be a factor based on your residency.
Overtime Tax Deduction
Changes in the bill also affect the taxation of overtime pay. Federal authorities caution that workers whose overtime pay is governed by a collective bargaining agreement might find they are ineligible for the deduction. Again, it’s advisable to consult with a tax professional for specifics.
For eligible taxpayers, overtime pay can be deducted up to $12,500, with the phaseout beginning at modified adjusted gross income of $150,000 for singles and $300,000 for joint filers.
This alteration, like that for tips, is intended to be temporary.
Child Tax Credit Increase
The child tax credit has risen from $2,000 to $2,200 per qualifying child for the 2025 tax year, according to the IRS.
To be eligible, a child must be under 17 at the end of the tax year and a dependent of the taxpayer, living with their parent or guardian for over half the year.
This credit will phase out for those with annual incomes surpassing $200,000 for individuals and $400,000 for joint filers.
Increase in Standard Deduction
For the 2025 tax year, the standard deduction for single taxpayers has risen to $15,750, while heads of household can claim $23,625. Joint filers will see it go up to $31,500.
Increased State and Local Tax (SALT) Deduction
For those who itemize deductions, the SALT deduction has been boosted to $40,000 from its previous limit of $10,000.
This change may significantly benefit taxpayers residing in high-tax states.
Deduction for Interest Paid on “American-Made” Cars
The new bill also introduces a deduction for the purchase of vehicles that were manufactured or assembled in the United States.
According to federal guidelines, if a vehicle weighs under 14,000 pounds and is primarily meant for personal use, it qualifies as a “Target passenger car.”
Taxpayers who purchased a new car during the 2025 tax year and paid at least $600 in interest can claim a deduction up to $10,000.
Detailed Information
For further details on other tax benefits, including options for setting up a “Trump Account” for children born after January 1, 2025, visit the IRS website.
