The One Big Beautiful Bill Act: Federal Tax Law Changes for Tax Year 2025

In an effort to help taxpayers with US tax obligations, we wrote this article to provide a clear, structured overview of how the OBBB (Public Law 119-21) affects taxpayers preparing their 2025 federal tax returns. This legislation is sweeping, combining individual relief provisions with business incentives and international tax reforms. Below is a detailed breakdown.

1. Individual Income Tax Changes

• No Tax on Tips (Sec. 70201):

Taxpayers may deduct tip income against taxable wages, reducing taxable income rather than fully excluding tips. For tax year 2025, single taxpayers may deduct up to $20,000 of tip income against taxable wages while taxpayers that are filing joint returns with their spouses may deduct up to $40,000. The deduction phases out for higher‑income taxpayers, beginning at $150,000 of adjusted gross income (AGI) for single filers and $300,000 AGI for joint filers. So, if you earn $8,000 in tips and fall below the phaseout threshold, you can deduct the full $8,000. If you earn $25,000 in tips, only $20,000 is deductible.

This distinction is important: tips are still reported as income, but the deduction reduces taxable wages, rather than excluding tips entirely.

• Overtime Deduction (Sec. 70202):

Taxpayers can deduct up to $12,500 in overtime pay ($25,000 for joint filers). The deduction phases out at incomes above $150,000 ($300,000 joint).

• Auto Loan Interest Deduction (Sec. 70203):

Deductible interest on loans for new U.S.-assembled vehicles, capped at $10,000, with income phaseouts. The deduction begins to phase-out for single filers with an adjusted gross income $100,000 and $150,000 and is fully eliminated above $150,000. For married couples filing joint returns, the phase-out begins at an adjusted gross income of $200,000 and is fully eliminated above $300,000.

• State and Local Tax (SALT) Deduction Expansion:

Cap raised from $10,000 to $40,000 for 2025, with phaseouts above $500,000 income.

• Child and Family Credits:

Child Tax Credit remains at $2,000 per child for 2025, rising to $2,200 in 2026.

• Trump Accounts (New Retirement Savings for Children):

Parents can contribute up to $5,000 annually post-tax, converting to IRAs at age 18. Accounts convert to IRAs at age 18, with a one-time $1,000 federal match for some families.

• Charitable Contributions Without Itemizing:

Starting with 2025 returns, non-itemizers may claim an above-the-line deduction of up to $1,000 (single) or $2,000 (joint) for cash gifts to public charities. Contributions to donor-advised funds or private foundations do not qualify

2. Business Tax Provisions

• Qualified Business Income (QBI) Deduction Made Permanent:

Small businesses can deduct 20% of qualified income, though service businesses face limitations.

• Bonus Depreciation & Section 179 Expensing:

100% bonus depreciation and immediate expensing of R&D costs are now permanent, encouraging investment.

• Qualified Small Business Stock (QSBS) Exclusion Expanded:

Gains from sales of C corporation stock may qualify for 100% exclusion, incentivizing corporate formation.

• Opportunity Zones:

Permanently renewed and expanded, with special incentives for rural investments.

3. International Tax Changes

The IRS has issued proposed regulations clarifying OBBB’s international provisions:

• Foreign Tax Credit Limitation (Sec. 960(d)(4)):

Disallows 10% of foreign tax credits tied to income excluded under Subpart F and GILTI rules.

• Transition Rules for Controlled Foreign Corporations (CFCs):

Special rules apply for dividends paid in tax years spanning mid-2025.

• Deduction-Eligible Income Definitions:

New guidance on intangible property and deemed dispositions under Sec. 250.

These changes affect multinational taxpayers and require careful compliance planning.

4. Estate and Gift Tax

• Estate Tax Exemption Increase:

The lifetime exemption rises to $15 million per person ($30 million per couple) beginning January 1, 2026, indexed for inflation. For 2025 returns, planning opportunities exist to leverage the higher thresholds.

• Charitable Giving Adjustments:

Starting in 2026, itemizers face a 0.5% AGI floor and a cap on deduction effectiveness (limited to 35%). For 2025, taxpayers may want to accelerate charitable contributions.

5. Energy and Environmental Provisions

• Expiration of Clean Energy Credits:

Home energy efficiency credits (windows, doors, insulation) end for property placed in service after December 31, 2025.

• Electric Vehicle (EV) Credit Termination:

EV credits expire in late 2025, meaning purchases must be completed before year-end to qualify.

6. Inflation Adjustments and Permanence of TCJA Provisions

• Tax Brackets & Standard Deduction:

Inflation adjustments continue, but OBBB locks in the seven-bracket system and expanded standard deduction from the 2017 Tax Cuts and Jobs Act (TCJA).

• Personal Exemptions:

Permanently eliminated, as under TCJA.

7. Compliance and Transition Relief

• IRS Guidance for 2025 Returns:

Transition relief applies to reporting tip and overtime deductions, auto loan interest, and third-party network transactions (Form 1099-K threshold reverts to $20,000).

• Penalty Relief:

IRS has announced penalty relief for certain information reporting obligations in 2025.

Risks and Trade-Offs

• Complexity: Many “no tax on” provisions are deductions, not exclusions, leading to confusion.

• Phaseouts: High-income taxpayers may see reduced benefits.

• Expiration Dates: Energy credits and EV incentives vanish after 2025.

• Deficit Impact: The Congressional Budget Office projects a $4.1 trillion increase in deficits over the next decade.

• International Compliance: Multinationals face new FTC disallowances and dividend transition rules.

Conclusion

For taxpayers filing 2025 federal returns, the OBBB introduces both opportunities and pitfalls. Hourly workers benefit from tip and overtime deductions, homeowners lose energy credits, high-income taxpayers gain from expanded SALT and estate exemptions, and businesses enjoy permanent expensing.

Taxpayers should carefully review eligibility, income phaseouts, and timing requirements. Strategic planning—accelerating charitable gifts, purchasing EVs before year-end, or restructuring business entities—can maximize benefits under the new law. If you need help navigating these changes, please call us. We can help!