On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law, introducing some of the most significant tax changes in recent years. These changes affect individuals, families, and small business owners, particularly in how they plan and prepare taxes for the coming years. While the law covers a broad range of provisions, this summary focuses on the most important changes for personal and business tax planning.
Key Changes at a Glance
- Tips and overtime pay excluded from federal income tax for eligible workers (2025–2028)
- New $6,000 deduction for seniors aged 65 and older (temporary)
- Car loan interest deduction of up to $10,000 for U.S.-assembled vehicles (temporary)
- Permanent extension of individual tax cuts from the 2017 Tax Cuts and Jobs Act
- 20% qualified business income deduction for pass-through entities made permanent
- SALT deduction cap raised to $40,000, phased down over five years
- Child tax credit increased to $2,200 per child, with $1,400 refundable (permanent)
- Elimination of federal tax credits for electric vehicles and clean energy systems
- Expanded FICA tip credit for beauty service businesses
Temporary Tax Changes (2025–2028)
Exclusion of Tips from Federal Income Tax
Workers in hospitality and service industries—such as restaurants, salons, and spas—can deduct up to $25,000 per year in tips from their federal taxable income. To qualify, tips must be reported on official forms such as W-2, 1099, or IRS Form 4137. The deduction phases out for individuals with modified adjusted gross income (MAGI) above $150,000 (single) and $300,000 (joint). This benefit applies only to federal income tax and does not eliminate Social Security or Medicare taxes.
Overtime Pay Deduction
Employees can deduct up to $12,500 (single) or $25,000 (joint) of overtime wages from federal taxable income each year. This deduction also phases out at MAGI of $150,000 (single) and $300,000 (joint) and applies only for tax years 2025–2028.
Additional Deduction for Seniors
Individuals aged 65 and older may claim a new annual deduction of $6,000, helping to reduce their taxable income. The deduction phases out for single filers with MAGI above $75,000 and joint filers with MAGI above $150,000.
Car Loan Interest Deduction
For the first time in many years, taxpayers can deduct up to $10,000 annually in interest paid on car loans—but only if the vehicle is assembled in the United States. The deduction phases out at MAGI of $100,000 (single) and $200,000 (joint). It is intended to support domestic auto manufacturing and is available through the 2028 tax year.
Permanent Tax Changes
Child Tax Credit
Beginning in 2025, the Child Tax Credit increases to $2,200 per qualifying child, with both the credit amount and refundable portion indexed for inflation. Up to $1,400 is refundable. The Act also makes permanent the income phaseout thresholds of $200,000 for single filers and $400,000 for joint filers, along with the $500 nonrefundable credit for other dependents.
2017 Tax Cuts Made Permanent
The Act locks in the individual tax cuts originally enacted under the 2017 Tax Cuts and Jobs Act. These include lower income tax brackets, a higher standard deduction, and an expanded child tax credit. These provisions were originally set to expire in 2026 but will now remain in effect unless changed by future legislation.
Higher SALT Deduction Cap
The SALT deduction cap rises from $10,000 to $40,000 starting in 2025. The cap will increase by 1% annually through 2029 (e.g., $40,400 in 2026) and revert to $10,000 in 2030 unless extended. Taxpayers with MAGI above $500,000 in 2025 will see their deduction reduced by 30% of the excess amount, with the threshold indexed for inflation. The deduction cannot fall below $10,000.
20% Qualified Business Income Deduction Made Permanent
The 20% Qualified Business Income (QBI) deduction, originally introduced in 2017, is now permanent. This benefit allows owners of sole proprietorships, partnerships, S-corporations, and LLCs to deduct up to 20% of business income.
Elimination of Clean Energy and EV Tax Credits
Starting in 2025, federal tax credits for electric vehicles, solar panel installations, and other clean energy projects are no longer available. These credits, which were originally introduced under the Inflation Reduction Act, have been eliminated at the federal level—though some state-level incentives may still apply.
Expanded FICA Tip Credit
The Act permanently expands the Section 45B FICA tip credit to include beauty service businesses such as nail salons and spas. This credit offsets the employer’s share of Social Security and Medicare taxes on reported tips.
What This Means for Your Tax Preparation
Whether you earn tips, work overtime, run a small business, or are planning for retirement, these changes may significantly impact your tax situation starting in 2025. Temporary deductions for tips, overtime, car loan interest, and seniors apply through 2028, while permanent provisions like the expanded Child Tax Credit, lower tax rates, and the QBI deduction offer long-term benefits.
Employers should also note the new reporting requirements for tips and overtime, as compliance will be essential to avoid penalties and ensure employees benefit from these changes.
As these changes begin to roll out, understanding how the new rules apply to your specific situation will be key to effective planning. For assistance with your 2024 tax filings or long-term strategies under the new law, contact our tax professionals at The Wisebook. We’re here to guide you through these updates with clarity and confidence.
