Exploring the 2025 Personal Income Tax Changes

The One Big Beautiful Bill passed for 2025 brings significant changes to personal income tax rules that will affect many taxpayers. Among the most notable updates are the removal of taxes on qualified tips and overtime pay, as well as a new deduction for car loan interest. These changes aim to ease the tax burden on workers and provide new opportunities for deductions that can save money. Understanding these updates is essential for planning your finances in the coming year.

Calculating personal income tax changes for 2025

Deduction for Seniors Starting in 2025 (through 2028)

Deduction Overview

• Individuals age 65 and older may claim an additional $6,000 deduction (in addition to the standard deduction already in place)

• Applies per qualified individual ($12,000 for a married couple if both spouses qualify)

• Phases out for Single taxpayers with a Modified Adjusted Gross Income (MAGI) over $75,000 (over $150,000 for joint filers)

• Deduction does not apply to Married Filing Separately filers

Taxpayer Requirements to Claim Deduction

• No additional info required. If you meet the qualifications, the deduction will be included on your federal tax return.

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No Tax on Tips Starting in 2025 (through 2028)

One of the most welcomed changes in the bill is the elimination of income tax on tips. Previously, tips were considered taxable income, which meant workers had to report and pay taxes on all tips received. This often created confusion and additional paperwork, especially for those in service industries like restaurants, hospitality, and personal care.

Deduction Overview

• Deduction of up to $25,000 per taxpayer on qualified tip income

• Phases out for Single taxpayers with a Modified Adjusted Gross Income (MAGI) over $150,000 (over $300,000 for joint filers)

• Deduction does not apply to Married Filing Separately filers

Taxpayer Requirements to Claim Deduction

• W-2 should include any reported tip income in Box 7

• For self-employed individuals, report amount of qualified tips included in your gross income separately.

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No Tax on Overtime Starting in 2025 (through 2028)

The bill also removes income tax on "qualified" overtime pay. Overtime wages, which are paid at a higher rate for hours worked beyond the standard workweek, have traditionally been taxed like regular income. This change recognizes the extra effort employees put in and allows them to keep more of their earnings.

Deduction Overview

• Deduction of up to $12,500 per taxpayer ($25,000 for joint filers)

• Only applicable to overtime pay that exceeds your regular rate of pay (for example, the "half" portion of "time-and-a-half") and exceeds 40 hours per week

• Phases out for Single taxpayers with a Modified Adjusted Gross Income (MAGI) over $150,000 (over $300,000 for Married Filing Jointly filers)

• Deduction does not apply to Married Filing Separately filers

Taxpayer Requirements to Claim Deduction

• You must inform your tax preparer if you received overtime pay in 2025. Unless your payroll company has adopted the reporting requirements (not required until 2026), we will not have any indication that you received overtime pay or qualify.

• Your final 2025 paystub will be required to identify if you received qualified overtime pay, but it will be the taxpayers' responsibility to let us know the overtime rate and # of overtime hours worked in 2025. Additionally, you should reach out to your employer for calculation assistance.

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New Deduction for Car Loan Interest (2025 through 2028)

Another important update is the introduction of a deduction for new car loan interest. Until now, interest paid on car loans was not deductible on personal income tax returns. The new rule allows taxpayers to deduct a portion of the interest paid on loans for personal vehicles.

How the Deduction Works

• Eligible vehicles: Vehicles purchased after 12/31/24, applies to loans on new vehicles used for personal use, weighs under 14,000 lbs., and underwent final assembly in the United States

• Deduction limits: Taxpayers can deduct up to $10,000 of interest paid.

• Claiming the deduction: Requires documentation of purchase, interest paid during the tax year.

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Practical Tips for Taxpayers

To make the most of these changes, consider the following:

• Keep detailed records: Track tips received, overtime hours worked, and car loan interest payments.

• Update payroll information: Inform your employer about the tax exemption on tips and overtime to ensure accurate withholding.

• Consult a tax professional: These changes may affect your tax planning and filing strategy.

• Review your budget: With more take-home pay, you might adjust savings or spending plans.

  
  

What to Watch for in 2025

While these changes offer clear benefits, taxpayers should stay informed about any additional rules or limits that may apply. The IRS will likely provide guidance on how to report these changes on tax returns. Also, state tax laws may differ, so check local regulations.

The One Big Beautiful Bill’s updates reflect a shift toward reducing tax burdens on everyday workers and providing new deductions that recognize common expenses like car loans. These changes can improve financial well-being for many Americans.

By understanding and preparing for these updates, taxpayers can maximize their benefits and avoid surprises during tax season.