What’s Changing for 2025 Returns?

Individual Provisions

• The current tax brackets created under the 2017 tax law are here to stay and will not expire after 2025.

• Tax brackets will continue to increase each year for inflation, helping prevent “bracket creep” as wages rise.

• In 2025, the 10% and 12% tax brackets are slightly bigger than they otherwise would have been.

  
  

🔑Key Takeaway: More income stays taxed at the lowest rates, especially for lower- and middle-income taxpayers, instead of being pushed into higher brackets just because of inflation.

Effective Dates for Tax Law Changes (OBBBA – Signed July 4, 2025)

Time Period	Provision	Details / Notes
Pre-2025 (Retroactive Provisions)	§174 Research & Experimentation (R&E)	Small businesses may make a retroactive election for 2022–2024 (per Sec. 448(c)). Election must be made within one year of July 4, 2025. Amended returns are required for each affected year.
	ERC Claims Limitation	No ERC credit or refund allowed for Q3 or Q4 of 2021 unless claims were filed by January 31, 2024.
	ERC Statute of Limitations Extension	Assessment period extended from 3 years to 5 years for Q3/Q4 2021 claims (through Jan. 31, 2030).
		6-year period for assessment of ERC-related amounts (generally from claim filing date).
		6-year period to claim a credit or refund tied to ERC wage deductions.
Tax Year 2025 (Permanent Changes)	Personal Exemptions	Personal exemptions permanently eliminated.
	Itemized Deductions	New overall limitation on itemized deductions.
	Bonus Depreciation	100% bonus depreciation restored for qualifying property acquired after January 19, 2025.
	1099 Reporting	Reporting threshold restored to $20,000 and 200 transactions.
	Standard Deduction	Standard deduction amounts increased.
	Section 179	Higher expensing limits available.
	§174A Domestic R&E	Full expensing allowed for U.S.-based R&E costs.
	Business Interest Deduction	Modification to limitation using EBITDA add-back.
	Child Tax Credit	$2,000 per child, with $1,400 refundable (indexed for inflation).
Effective for 2025–2028	Cash Tips Deduction	Up to $25,000 deduction, subject to income phase-outs.
	Overtime Pay Deduction	Up to $12,500 deduction, subject to income phase-outs.
	Auto Loan Interest Deduction	Up to $10,000 for interest on new vehicles assembled in the U.S., subject to income phase-outs.
	Senior Deduction (Age 65+)	$6,000 deduction per qualifying taxpayer, subject to income phase-outs.
2025–2029 (SALT)	SALT Deduction Cap	$40,000 cap, adjusted for inflation after 2025. Subject to phase-out, but not below $10,000.
2030 and Later	SALT Cap Reversion	SALT deduction cap returns to $10,000.

Electronic Payment Mandate

• The federal government is stopping the use of paper checks.

• By September 30, 2025, the IRS will no longer issue refund checks to individuals.

• Refunds will be sent only by direct deposit or other electronic payment methods.

• The IRS also strongly encourages (and is moving toward requiring) electronic tax payments instead of mailing checks.

• Acceptable electronic options include:

  • Direct Pay from a bank account

  • Debit or credit card

  • Digital wallets

  • IRS online account payments

    
    

🔑Key Takeaway: Taxpayers should make sure they have a bank account or electronic payment method set up—paper checks are going away.

Form 1099-K Reporting Threshold

• The IRS is bringing back the old, higher reporting threshold for payment apps and online marketplaces.

• Platforms like PayPal, Venmo, and similar services only issue a Form 1099-K if both of the following are true:

  • Total payments exceed $20,000, and

  • There are more than 200 transactions in the year.

    
    

🔑Key Takeaway: Casual sellers and people who occasionally use payment apps are much less likely to receive a 1099-K.

Temporary Deductions (2025–2028)

• From 2025 through 2028, certain deductions are available even if you don’t itemize.

• These deductions reduce your taxable income, meaning you pay tax on less money.

• They apply to:

  • Seniors

  • Car loan interest

  • Tips

  • Overtime pay

• These benefits expire after 2028 unless Congress extends them.

🔑Key Takeaway: These deductions can lower your taxes for the next few years, but timing & income levels matter.

Planning Theme

• Manage your income level so you don’t lose the deduction to phase-outs.

• Start documenting early (tips, overtime, interest).

• Sequence income wisely (when income hits matters).

🔑Key Takeaway: Good records and smart timing help you keep these temporary tax breaks.

Tips Deduction (2025–2028)

• There’s a new deduction specifically for qualified tips, available even if you don’t itemize.

• You claim it on a new Schedule 1-A.

• Maximum deduction: $25,000 per tax return.

• The deduction phases out as income rises:

  • Reduction starts above $150,000 (single) or $300,000 (married filing jointly).

• Married taxpayers must file jointly to claim it.

• Social Security numbers of tipped workers must be included.

• Self-employed individuals can claim it, but only up to their business income.

🔑Key Takeaway: Tip income can reduce your taxable income—but only within set limits.

What Counts as “Qualified Tips”?

• Tips must be voluntary.

• Can be:

  • Cash

  • Electronic payments

  • App-based tips

• Service charges do not count as tips.

  
  

🔑Key Takeaway: Only true, voluntary tips qualify—automatic fees don’t.

Payroll Taxes Still Apply

• These deductions do not reduce payroll taxes.

• Social Security and Medicare taxes still apply to tips and overtime.

🔑Key Takeaway: You may save on income taxes, but payroll taxes aren’t affected.

How to Figure Out Your Tip Amount (If Employer Doesn’t Break It Out)

Employees can use reasonable records such as:

• Social Security tips reported on Form W-2 (Box 7)

• Tip reports submitted to employers (Form 4070 or similar)

• Tip amounts shown in Box 14 of Form W-2 (if provided)

• Form 4137 (unreported tips included in income)

  
  

Self-employed individuals can use:

• Earnings statements

• Tip logs

• Third-party payment records

🔑Key Takeaway: Reasonable documentation is enough—keep good records.

Employer Relief for 2025 (Transition Year)

• For 2025 only, the IRS will not penalize employers who can’t yet separately report:

  • Cash tips

  • Tip recipient occupations

  • Qualified overtime amounts

• Employers are encouraged (but not required) to share tip and overtime details voluntarily.

🔑Key Takeaway: 2025 is a transition year—expect stricter reporting later.

W-2 Reporting Changes Starting in 2026

• Beginning in 2026, qualified tip income will be clearly reported on Form W-2.

• Tips will appear:

  • Box 12 (code TP)

  • Box 14 with a new IRS occupation code

• Employers should use 2025 to update systems and policies.

• Only voluntary tips qualify—service charges still don’t count.

🔑Key Takeaway: Reporting gets more formal in 2026—both employers and employees should prepare now.

Overtime Deduction — How to Figure It Out (2025 Only)

• In 2025, some employers may not separately list overtime pay on W-2s or pay statements.

• The IRS says that’s okay—for 2025, there’s extra flexibility.

• If overtime isn’t clearly broken out, employees can use any reasonable method to figure out their overtime pay, as long as they have supporting records.

What counts as acceptable proof?

You can use things like:

• Pay stubs showing overtime hours and higher overtime pay

• Employer payroll reports or internal payroll records

• Invoices or third-party payment statements (common for gig workers or contractors)

• Personal logs or timesheets where overtime hours were tracked

• Any other records that clearly and reasonably show overtime pay

🔑Key Takeaway: For 2025, the IRS is being flexible—if your calculation makes sense and you have documentation, it’s acceptable.

Why this matters?

• This is a transition year, while employers update payroll systems.

• Starting later years, overtime will likely be more clearly reported, but for 2025, good records are enough.

  
  

🔑Bottom Line: Keep your pay stubs, logs, and records now so you can claim the deduction later without issues.

Senior Deduction (Age 65+)

• If you are 65 or older, you can deduct $6,000 from your taxable income.

• If both spouses are 65+, the deduction doubles to $12,000.

• You qualify as long as you turn 65 by the end of the tax year.

• This deduction is on top of the extra standard deduction already allowed for people over 65.

• The benefit is reduced as income increases:

  • Starts phasing out above $75,000 (single)

  • Fully phased out by $175,000

  • Married couples phase out between $150,000 and $250,000

• You can claim it even if you don’t itemize.

🔑Key Takeaway: Seniors can reduce taxable income significantly, especially if their income stays below the phase-out range.

Car-Loan Interest Deduction — What Counts?

• You can deduct up to $10,000 per year of interest paid on a new car loan.

• The vehicle must be:

  • For personal use (not business)

  • New, not used

  • Assembled in the U.S.

• The loan must start after December 31, 2024.

• Leases and used cars do not qualify.

• The vehicle’s VIN must be reported on your tax return.

• The deduction starts phasing out once income exceeds:

  • $100,000 (single)

  • $200,000 (married filing jointly)

• You can claim it even if you don’t itemize.

🔑Key Takeaway: New-car buyers may get a tax break on loan interest—but only if the vehicle and income limits are met.

Car-Loan Interest — Smart Planning Moves

• Time your purchase so more interest falls in years you qualify.

• Some loans front-load interest early—this can increase the deduction (within lender rules).

• Confirm U.S. assembly before buying and keep lender statements showing:

  • Interest paid

  • Vehicle VIN

• Watch your income:

  • Coordinate bonuses, equity payouts, or Roth conversions so you stay under $100k / $200k.

  • Avoid refinancing into terms that disqualify the deduction (used cars or leases).

    
    

🔑Key Takeaway: The deduction is valuable but easy to lose—timing, documentation, and income control are critical. These new deductions reward seniors and new-car buyers—but only if income is managed carefully and the rules are followed.

Draft Form W-4 for 2026 — What’s Changing? The IRS is updating Form W-4 (the form that controls how much tax is withheld from your paycheck).

• Starting in 2026, the W-4 will reflect new and expanded tax deductions created by recent tax law changes.

• A new or updated deductions worksheet lets employees account for these deductions upfront, so withholding is more accurate during the year.

  
  

New or Expanded Deductions Included on the W-4

Employees can factor in:

• Tip income deduction

• Overtime pay deduction

• Interest on new car loans

• Senior deduction (age 65+)

• Higher SALT deduction (up to $40,400)

• Cash charitable gifts, even for people who don’t itemize

🔑Key Takeaway: The 2026 W-4 is designed to better match paycheck withholding to real tax bills—especially for workers who qualify for these new deductions.

Digital Asset Updates — Form 1099-DAs Are Coming

• Buying, selling, or using crypto and other digital assets is becoming more common.

• Starting with certain 2025 transactions, the IRS will receive new reporting forms called Form 1099-DA.

• Tracking what you paid for digital assets (your “basis”) is complicated—but very important.

• Every individual, business, and trust tax return already asks a yes/no question about digital asset activity—and it must be answered truthfully.

• Using digital assets to:

  • Sell or trade,

  • Pay for goods or services, or

  • Receive as payment

    usually creates taxable income.

🔑Key Takeaway: Crypto isn’t “off the radar” anymore—transactions will be reported & poor records can lead to tax problems.

Personal Casualty Losses — What’s Deductible?

• Personal casualty losses (fires, floods, storms, etc.) are only deductible if they happen during a federally declared disaster.

• This rule, originally temporary, is now permanent starting in 2026.

• The law also recognizes certain state-declared disasters, but federal approval is still required.

• “State” includes:

  • All U.S. states

  • DC

  • Puerto Rico

  • U.S. territories

🔑Key Takeaway: Personal losses are only deductible for major, officially declared disasters—not everyday accidents.

Qualified Disaster Losses — Special Relief

• Some disasters qualify for extra-favorable tax treatment:

  • Losses may be deductible even if you don’t itemize

  • Not subject to the normal 10% of AGI limit

• These rules are often found in public laws, not directly in the tax code, which makes them harder to track.

• The IRS is expected to update guidance listing qualified disasters.

• Current guidance should make the January 2025 Los Angeles wildfires a qualified disaster.

🔑Key Takeaway: Not all disasters are treated the same—qualified disasters can unlock better tax relief.

Trump Accounts — New Child Savings Accounts

• A Trump Account is a new long-term savings account for children under age 18.

• It works somewhat like an IRA, but:

  • It is not a Roth

  • Contributions are not deductible

  • Money generally can’t be withdrawn until age 18

• The account must be clearly designated as a Trump Account and follow specific rules.

• Only low-cost, simple index-type investments are allowed.

🔑Key Takeaway: This is a new way to save for a child’s future—but with strict rules and limited investment options.

Trump Accounts — Contributions & Free $1,000

• Annual contributions:

  • Up to $5,000 per year total from family, friends, and employers

  • Employer contributions capped at $2,500 (details may still be clarified)

• Contribution limits will increase with inflation starting in 2028.

• No tax deduction for contributions.

• Pilot program:

  • Children born 2025–2028 can receive a one-time $1,000 government contribution.

• Accounts are effective for tax years after December 31, 2025, but:

  • No contributions accepted until July 4, 2026.

🔑Key Takeaway: If a child is born between 2025 and 2028, families should strongly consider opening an account to get the free $1,000.

Trump Accounts — Practical Observations

• These accounts are complex and lengthy in the law.

• Families should compare them with 529 college savings plans—you can use both.

• Estate and gift tax limits should be considered.

• Rules may still be clarified, especially for employer contributions.

🔑Key Takeaway: Trump Accounts can be useful, but they shouldn’t automatically replace 529 plans.

QSBS (Qualified Small Business Stock) Expansion

• The tax break for selling qualified startup stock is expanded:

  • Higher company size limit ($75M instead of $50M)

  • Larger tax-free gain limit ($15M per company, up from $10M)

• Full tax-free treatment still generally requires holding the stock more than 5 years.

• The extra AMT tax on QSBS gains no longer applies to newer stock.

🔑Key Takeaway: Startup founders and early investors may be able to exclude more gains—but holding period and timing still matter.

🔑Reporting is expanding, disaster loss rules are stricter, new child savings accounts are emerging, and business owners/investors may see bigger tax breaks—but only with careful planning and documentation.

R&D (Research & Development) Costs — What Changed?

• Businesses can once again deduct U.S.-based R&D costs right away instead of spreading them out over several years.

• This applies to domestic R&D costs incurred after 2024.

• The old rule that forced businesses to spread (amortize) these costs over 5 years is gone for U.S. research.

• Foreign R&D costs are different and must still be spread out over 15 years.

🔑Key Takeaway: U.S. R&D spending gets an immediate tax benefit again.

Options for How to Deduct R&D

• Businesses can choose to:

  • Deduct all domestic R&D costs immediately, or

  • Spread them out over 5 or 10 years, if that works better for planning.

• If a business claims the R&D tax credit, the R&D deduction must be reduced by the credit amount (no double tax benefit).

🔑Key Takeaway: You can choose the timing of the deduction—but you can’t double-dip with the credit.

Catch-Up Relief for 2022–2024

• Businesses still carrying unwritten (unamortized) R&D costs from 2022–2024 get relief.

• Starting in 2025, those remaining costs can be deducted:

  • All at once, or

  • Spread evenly over two years.

🔑Key Takeaway: Prior-year R&D costs don’t stay stuck—there’s a clean way to catch up.

Special Relief for Small Businesses

• Businesses with average annual revenue under $31 million get extra flexibility.

• They can amend tax returns back to 2022 to immediately deduct U.S. R&D costs from those years.

• This requires making a special election, but the IRS has provided guidance.

🔑Key Takeaway: Small businesses may be able to reclaim refunds by revisiting prior returns.

Accounting Method Change

• Choosing full expensing counts as a change in accounting method, but:

  • There’s no complicated catch-up adjustment

  • No extra tax calculation required for past years

  • 
    

🔑Bottom Line: The rule is simpler, more flexible, and much more favorable—especially for U.S.-based R&D.

Business Interest Deduction (Section 163(j))

• There’s a rule that can limit how much interest expense a business is allowed to deduct.

• That limit is based on a measure of income called Adjusted Taxable Income (ATI).

What changed over time?

• Before 2022:

  • ATI was calculated before depreciation and amortization, which meant a higher ATI and a larger allowed interest deduction.

• 2022–2024:

  • Depreciation and amortization were excluded, which lowered ATI and tightened the interest deduction limit.

• Starting in 2025 (permanent change):

  • Depreciation, amortization, and depletion are added back again when calculating ATI.

    
    

🔑Key Takeaway: Starting in 2025, many businesses can deduct more interest expense than they could from 2022–2024.

Foreign Income Change Starting in 2026

• Beginning in 2026, certain foreign-related income items will no longer count when calculating ATI.

• This mainly affects businesses with international operations.

• For those companies, the interest deduction limit may become more restrictive again.

🔑Key Takeaway: U.S.-only businesses benefit the most; international companies may see tighter limits starting in 2026.

State Tax Impact

Federal changes likely to affect state taxes

Some federal tax changes may flow through to state tax returns, depending on the state:

• R&D cost deductions

• Bonus depreciation

• Interest expense limits

• Certain foreign income rules

• 
  

Federal changes less likely to affect state taxes

These provisions mostly affect federal returns only:

• SALT deduction cap

• No tax on tips or overtime

• Car loan interest deduction

• Senior deduction

🔑Key Takeaway: Your federal tax bill may change immediately, but your state tax bill might not.

Why State Conformity Matters:

• States decide whether to follow (conform to) federal tax law changes.

• When states conform:

  • Filing is simpler

  • Multi-state taxpayers benefit

• When states don’t conform:

  • Separate calculations may be required

  • State taxes may increase or decrease independently

What to expect next:

• Many states must balance their budgets every year.

• Federal changes under H.R. 1 and reduced federal funding (like Medicaid) may push states to:

  • Reject certain federal tax breaks

  • Delay or limit conformity

🔑Bottom Line: Federal tax cuts don’t automatically mean state tax cuts—state rules may move in a different direction.

Employee Retention Credit (ERC) — Recent Update

• In March 2025, the IRS released new guidance to address common ERC issues.

• The guidance focuses on three situations:

1) You claimed the ERC but didn’t reduce wages on your original tax return

• The IRS explains how to fix the mismatch so income and deductions line up correctly.

2) You received ERC money but never adjusted your wage deduction

• The IRS expects wages to be reduced by the credit amount.

• If they weren’t, the return may need to be corrected.

3) You reduced wages but the ERC claim was later denied

• The IRS explains how to restore the wage deduction if the credit is disallowed.

🔑Key Takeaway: ERC claims and wage deductions must match—if they don’t, corrections are required.

IRS Audit Activity — What to Expect?

• Starting August 2025, the IRS began sending Letter 6612.

• This letter asks businesses to prove their ERC eligibility.

• Businesses must provide documentation showing:

  • Eligibility

  • Qualified wages

  • Proper calculations

🔑Key Takeaway: ERC claims are under active IRS review—strong documentation is critical. If you claimed the ERC, double-check that wage deductions were handled correctly and be prepared to respond to IRS letters.

Business Loss Limits (Section 461(l))

• There is a cap on how much business loss you can use to reduce other income in a year.

• For 2025, the maximum loss you can deduct is $626,000 (higher for married couples filing jointly).

• This limit will increase with inflation over time.

• This rule is now permanent (it was previously set to expire after 2028).

🔑Key Takeaway: Even if your business loses more money, you can only use a capped amount each year to offset other income.

How Business Losses Are Limited

Before you can deduct a business loss, it must pass multiple filters:

1. Basis limitation

• You can’t deduct more than you have invested in the business.

2. At-risk limitation

• You can only deduct losses you are financially on the hook for.

3. Passive activity loss rules

• Losses from passive investments usually can’t offset wages or active business income.

4. Overall loss cap (Section 461(l))

• Even after passing all other rules, the annual dollar cap still applies.

  
  

🔑Key Takeaway: Business losses are tested multiple times before they’re allowed—passing one rule doesn’t guarantee the deduction.

What Happens to Disallowed Losses?

• Losses above the limit are not lost forever.

• They are generally carried forward and may be used in future years when income allows.

🔑Bottom Line: Big losses may take several years to fully deduct.

MATH Act — What It Means for Taxpayers

The MATH Act improves how the IRS communicates math and clerical errors.

What’s changing:

• IRS notices must clearly explain what the error is in plain language.

• Notices must show exact dollar calculations for any changes.

• The 60-day response deadline must be clearly displayed in large, bold text.

• The IRS can no longer send vague or generic error notices—each notice must explain your specific issue.

🔑Key Takeaway: IRS math-error letters should finally make sense.

Additional MATH Act Improvements

• If the IRS corrects a return and later changes its position, it must send clear follow-up explanations.

• A certified mail pilot program will test better delivery tracking for IRS notices.

• The law takes effect December 1, 2026.

🔑Fewer surprises, clearer explanations & more time to respond. Business losses are now permanently capped each year & when the IRS says there’s an error, they’ll have to clearly explain exactly what went wrong & how they fixed it.