2025-2026 Tax Law Changes: What You Need to Know Before Filing

The big picture: What tax law changes were made in 2025?

For individuals:

• Seven federal income tax rates (10%, 12%, 22%, 24%, 32%, 35%, 37%) are now permanent.
• The standard deduction increased.
• “No tax on tips” provision lets taxpayers deduct up to $25,000 in reported tip income (phases out at higher income levels).
• “No tax on overtime” deduction allows taxpayers to deduct up to $12,500 of qualified overtime wages.
• New deduction lets individuals deduct up to $10,000 of auto loan interest on personal vehicles.
• A senior bonus deduction gives taxpayers aged 65+ an extra $6,000 deduction ($12,000 for married filing jointly).
• The Child Tax Credit for 2025 is increased from $2,000 to $2,200 per qualifying child.
• Trump accounts, or new baby accounts, offers $1,000 into individual investment accounts for children born after January 1, 2025.
• The State and Local Tax (SALT) deduction cap increased to $40,000 (but phases out if your modified adjusted gross income exceeds $500K).
• Clean vehicles acquired after September 30, 2025 no longer qualify for the clean energy credit.
• The home improvement credit expires after December 31, 2025.
• If you traded cryptocurrency on major exchanges like Coinbase, those transactions are now reported to the IRS. 

For businesses:

• The 20% qualified business income (QBI) deduction is made permanent for eligible business owners.
• 100% bonus depreciation was made permanent for qualified property investments acquired and placed in service after January 19, 2025.
• Section 179 deduction limits have increased from $1.25 million to $2.5 million.

2025 tax brackets

Every year the IRS adjusts tax brackets to account for inflation. For the 2025 tax year, these brackets have shifted upwards. Woohoo! That means you pay less tax on the same income compared to last year.

What this means for you: If you made the same income last year and this year, you might fall into a lower tax bracket this year! That could mean more money stays in your pocket.

The standard deduction increased

The standard deduction is a fixed dollar amount that reduces your taxable income. You subtract it from your total income before calculating how much you owe in taxes. When it increases, that means you pay taxes on a smaller amount of income, meaning you owe less in taxes.

The following represents the standard deduction for the 2025 tax year:

• Single / Married Filing Separately: $15,750 (up from $15,000)
• Married Filing Jointly: $31,500 (up from $30,000)
• Head of Household: $23,625 (up from $21,900)

Here's an example: let's say you made $60,000 in 2024 and 2025.

• In 2024, you'd pay taxes on $45,400 ($60,000 - $14,600)
• In 2025, you'd pay taxes on $44,250 of income ($60,000 -$15,750).

No tax on tips

Starting in tax year 2025, if you work in a job where tipping is customary (see a list of qualifying jobs here), you can now deduct up to $25,000 in tips you received. That lowers your taxable income, thus lowering your tax bill! This benefit starts phasing out if you make over $150,000 (single) or $300,000 (married filing jointly).

Let's see an example: let's say you're a server who earned $30,000 in wages and $18,000 in tips.

• Under the 2024 rules, all $48,000 would be taxed.
• Under the 2025 rules, you can deduct $18,000 in tips, meaning you'd only be taxed on $30,000 of wages!

Does this mean I don't have to report my tips on my tax return? Be careful! ALL income earned must be reported to the IRS. The deduction gets automatically applied for qualified tips!

No tax on overtime

Do you work an hourly job? When you work overtime and get time-and-a-half pay, you can deduct the extra “half” portion on your taxes! The maximum deduction is $12,500 per person ($25,000 if married filing jointly). This benefit starts phasing out if you make over $150,000 (single) or $300,000 (married filing jointly).

Here are some things to be aware of:

• This only applies for W2 earnings
• Only over time pay qualifies - not your regular wages
• Your employer must report overtime separately in Box 12 of your W-2 using new code "OT"
• FICA (Social Security and Medicare) taxes still apply!

Deduct up to $10,000 in car loan interest

Did you buy a new American-made car in 2025? You can deduct up to $10,000 of your loan interest! And yes, you can get this even if you don't itemize your deductions!

Here's what to know:

• The loan must be used to purchase a car for personal use
• The loan must have originated after December 31, 2024
• The vehicle must be American-made (...or gone through final assembly in the United States)

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Bonus deduction for seniors 65+

Taxpayers aged 65 or older may claim a special tax deduction of up to $6,000 on top of the regular standard deduction. If both spouses qualify with a married filing jointly return, that goes up to $12,000! The benefit phases out for higher earners: $75,000 single, $150,000 married filing jointly.

The child tax credit increased

The child tax credit increased from $2,000 to $2,200 per child for 2025. To get the credit for each child, you must claim a child under the age of 17, and he/she must have lived with you for more than half the year. The child must also be a US citizen or resident with a valid Social Security number.

Get $1,000 for having a baby between 2025 and 2028

The federal government will put $1,000 into individual investment accounts for babies born between January 1, 2025 and December 31, 2028. These are tax-advantaged savings accounts (also known as the American Future Fund Accounts).

While the federal government deposits $1,000, parents can contribute up to $5,000 per year. Contributions are made post-tax, but grow tax-free. The funds are locked until the child reaches the age of 18, with penalties for early withdrawals.

SALT deduction cap increased to $40,000

From 2018 to 2024, the SALT (state and local taxes) deduction was capped at $10,000. The limit is temporarily increased to $40,000 for married couples filing jointly. But this benefit starts to phase out if your modified adjusted gross income (MAGI) exceeds $500,000.

This deduction generally benefits higher income homeowners in high-tax states like California, New York, New Jersey, Illinois, etc.

Note: you must itemize your deductions to claim it!

Bye bye clean energy tax credits

Previously, homeowners could claim 30% federal tax credit for solar panels, battery storage, and other home improvement costs. This credit has now expired as of December 31, 2025. After 2025, there's no federal residential clean energy tax credit. So if you installed solar panels after December 31, 2025, you're out of luck!

The New Clean Vehicle Credit also offered a $7,500 tax break for many electric vehicles. This expired on September 30, 2025. Credits for used clean vehicles and commercial clean vehicles also expired in 2025.

The IRS now knows about your crypto transactions

In prior years, crypto reporting was largely self-reported. Now, a new IRS tax form (1099-DA) is being introduced to report crypto and other digital asset transactions. That means if you traded crypto on a major exchange like Coinbase or Kraken, those transactions are now reported to the IRS, and you should expect to receive a 1099-DA. However, even if you don't receive a 1099-DA, it's on you to report all crypto taxable transactions on your tax return!

Note: gross proceeds will be reported, but cost basis may not be included. You need to rely on your own records to compute your gains/losses.

20% QBI deduction is here to stay

Are you a business owner? If you have US-based qualified business income (QBI), you can deduct up to 20% of your QBI from your personal taxable income., thus reducing the amount of taxes you owe.

That means if you earned $100,000 net from your LLC, you can apply the 20% QBI deduction ($100,000 * 20% = $80,000), so you're taxed as if you made $80,000 instead of $100,000. Nice!

One thing to note: The deduction is limited or phased out for Specified Service Trades or Businesses (SSTBs). An SSTB includes businesses where the principal asset is the reputation or skill of one or more employees or owners. That includes doctors, therapists, lawyers, CPAs, consultants, pro athletes, etc. You can read more here.

100% bonus depreciation remains for qualified property

If you acquired or placed qualified property in service (for business use!) after January 19, 2025, you could deduct the full cost of those assets upfront, rather than depreciating them over time.

Note: If you acquired the property BEFORE January 19, 2025, you might still be eligible for bonus depreciation. It's best to consult a Keeper tax pro.

Section 179 deduction has increased

Section 179 allows business owners to immediately deduct the full cost of qualifying business property in the year it's placed in service instead of depreciating it over time. Under the One Big Beautiful Bill, the maximum Section 179 deduction limit doubled from $1.25 million to $2.5 million, with a new phase-out threshold of $4 million (up from $2.5 million).

That means equipment-heavy businesses can get massive upfront write-offs. Pair this with 100% bonus depreciation, and watch those tax savings skyrocket.

How will the OBBB tax law changes impact your taxes?

The One Big Beautiful Bill (OBBB) introduced sweeping tax law changes for 2025, from new deductions and credits to expanded reporting rules. If you're feeling unsure on how these changes impact your taxes, we can help. Get instant help from our AI-powered accountant (trained on thousands of pages of tax law), or book a call with one of our tax pros for personalized guidance and peace of mind.

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