Changes to Tax Law for the 2025 Filing Season

As we enter the 2026 filing season, it’s clear that numerous adjustments to tax law will impact most taxpayers’ returns significantly, particularly in contrast to last year’s limited inflation adjustments from the IRS.

Passed in July 2025, the so-called “One Big Beautiful Bill” not only extended some expiring tax cuts but also introduced new tax cuts, broadened certain tax credits, and expanded deductions. While many of these changes are effective from January 1, 2026, some are retroactive for returns due by April 15, 2025.

“We anticipate that the significant tax modifications in 2025 will lead to an average tax decrease of about $610,” stated Garrett Watson, director of nonpartisan policy analysis at the tax foundation. “Our projections suggest that the average refund will rise from approximately $3,050 in 2024 to nearly $3,800 in 2025.”

However, Watson cautioned that this might be a “one-off event.” Some taxpayers could receive refunds—even larger ones—this year because their employers didn’t adjust withholdings in accordance with the new tax laws set to take effect in 2025. Starting in January, employers are expected to modify their withholding amounts accordingly.

Changes to Deductions

First off, the standard deduction that most individuals claim has increased with inflation. For 2025, Congress added 5% to the inflation figure, which means married couples filing jointly will see their standard deduction rise by $1,500 to $31,500. Single taxpayers and those filing separately can expect an increase of $750, bringing their deduction to $15,750, while heads of households will have a deduction of $23,625.

For taxpayers who are 65 or older, or visually impaired, there’s a new additional deduction available. Eligible individuals can claim $6,000, while married couples who both qualify can receive $12,000. This additional deduction phases out for individuals with an adjusted gross income (AGI) over $75,000, and for joint filers with an AGI exceeding $150,000.

Tip Income Deduction

A “No Tax on Tips” deduction is now available for employees and self-employed individuals who earn “qualified tips,” provided they work in occupations frequently relying on tips. The maximum deduction for “voluntary cash or paid tips” received will be capped at $25,000 in 2025, or limited to your net income from the relevant trade if you are self-employed. This deduction will be available until 2028 but will phase out for individuals with an adjusted AGI over $150,000 and joint filers over $300,000.

Watson pointed out that for many workers who rely on tips, such as those in the service industry, their tip income is often reported separately from other compensation.

Overtime Allowance Deduction

There’s also a new overtime allowance deduction, which can be up to $12,500 for individuals and $25,000 for joint filers. From 2025 to 2028, this will allow for deductions on overtime pay exceeding regular compensation, whether or not the breakdown is itemized. For example, if your standard hourly rate is $20 and you earn $30 for overtime, the difference of $10 per hour would be the amount eligible for a deduction.

If your W-2 form lacks the necessary breakdown for claiming overtime deductions, it’s advisable to discuss it with your employer, as the IRS mandates that companies provide this information.

Auto Loan Interest Deduction

Beginning in 2025, up to $10,000 of interest paid on new car loans can be deducted, even for those who don’t itemize, as long as the vehicle is for personal use and meets certain criteria. Eligible vehicles include cars, minivans, SUVs, and motorcycles, but not leased vehicles or used cars. Unfortunately, the IRS currently lacks a tool to verify if your auto loan qualifies, but you can use your Vehicle Identification Number (VIN) to determine your vehicle’s assembly location.

Similar to other new deductions, this one phases out for individuals with an adjusted AGI over $100,000 and joint filers over $200,000, remaining available until 2028.

Changes to SALT Deductions

Taxpayers who itemize can now deduct a portion of the state and local taxes (SALT) paid during the year. Previously capped at $10,000, this new law increases the limit to $40,000 for individuals and married couples, and $20,000 for those filing separately. Those with an adjusted AGI over $500,000 will see a reduction of their maximum deduction by $40,000. Watson noted that this primarily targets upper-middle and upper-class individuals who typically pay more in state and local taxes.

The SALT cap is set to revert to $10,000 by 2030.

Updates on Tax Credits

Tax credits, which directly reduce tax liability, have also undergone significant modifications this filing season:

• For the child tax credit, families with qualifying children may now claim $2,200 per eligible dependent child under 17 at the end of 2025.
• The Earned Income Tax Credit helps low- to moderate-income workers, with credits ranging from $629 for those with no qualifying children to $8,046 for families with three or more qualifying children.
• Regarding the adoption credit, individuals who adopted or started the process in 2025 may be eligible for up to $17,280 per child.

Other Notable Changes for 2025 Returns

Several other adjustments have been made to account for inflation:

• Alternative minimum tax: The new exemption amount is $88,100 for individuals and $137,000 for jointly filing couples, with phase-out starting at $626,350 for singles and $1,252,700 for joint filers.
• Foreign earned income exclusion: Increased to $130,000.
• Estate tax: Basic exemption for deaths in 2025 is currently set at $13.99 million.
• Gift disclosure: Annual exclusion has increased to $19,000.

Expecting a Refund?

For those anticipating a refund, the quickest way is to file electronically. The IRS indicates you could receive your funds within 21 calendar days if your submission is error-free. Due to a 2025 executive order from President Trump, paper checks won’t generally be issued anymore, so you’ll need to provide banking information for direct deposit.

However, it’s important to note that refunds for taxpayers claiming the Earned Income Tax Credit or the Supplemental Child Tax Credit won’t be issued before mid-February. By law, the IRS must review these specific credits before processing the entire refund.

You can monitor the status of your refund through the IRS website, usually updated within 24 hours of electronic filing, or four weeks post-paper submission.

If you owe taxes, remember that payment isn’t required until April 15, which could offer some breathing room. If you need more time, you may qualify for an IRS payment plan.

Need Assistance?

Many taxpayers can access free help for preparing and filing returns. A variety of resources are available to prevent fraudulent filings in your name as well. Online tools like the IRS.gov provide plenty of information, including how to prepare for filing, forms, and common tax questions.

Additionally, you can create an IRS Online Account to securely view personal tax information, such as balances and payment history.

Looking Ahead to Next Year

The IRS has already announced inflation adjustments for the 2026 tax year, with a return deadline set for April 2027. The standard deduction will increase again, reaching $32,200 for married couples filing jointly, $16,100 for single taxpayers, and $24,150 for heads of households. Additionally, the contribution limit for Health Flexible Spending Accounts (FSAs) will rise to $3,400, and for cafeteria plans that allow carryover, the maximum amount will be $680.

For Detailed Information

Consider checking resources like Checkbook for free preparation options and identity theft protection associated with tax returns.