As you may have seen in the news, the One Big Beautiful Bill was officially signed into law on July 4, 2025, as the 2025 Tax Act (“the Act”). This new law makes the 2017 Tax Cuts and Jobs Act tax cuts permanent. Whether you are a business owner or an individual taxpayer, understanding the implications of this law is critical for tax planning and making informed decisions. Below is an overview of the some of major provisions of the Act that may impact you:
1. Permanently extends current income tax rates and brackets for individuals, estates and trusts
2. Increases the basic standard deduction for tax years beginning after 2025
The standard deduction increases to $31,500 for joint filers and surviving spouses; $23,625 for heads of household; and $15,750 for those filing as single and married filing separately (MFS), and it modifies the inflation adjustment for the basic standard deduction for tax years beginning after 2025.
3. Increases the deduction for state and local tax (SALT) deductions for individuals, estates and trusts
The SALT cap increases to $40,000 ($20,000 for MFS) from the current $10,000 cap. The new SALT cap applies to filers with modified adjusted gross income (MAGI) up to $500,000 ($250,000 for MFS) before phasing down. Both the SALT cap and the MAGI levels increase by 1% annually through 2029. Taxpayers in the 37% tax bracket may have further limitations. This increase is temporary and reverts to the $10,000 limitation in 2030. The final legislation does not include any restrictions to the current pass-through entity tax workaround for state and local tax deduction.
4. Extends and enhances the Child Tax Credit and Credit for Other Dependents
The credit increases to $2,200 per qualifying child and requires the qualifying child’s social security number to be reported on the tax return. The $500 non-refundable credit for other dependents who don’t qualify for the Child Tax Credit, including children aged 17 and over and other qualifying dependents (e.g. parents or siblings), has been made permanent.
5. Increases estate and gift tax exemption
Effective in tax year 2026, the amount a taxpayer can give away in his or her lifetime without paying estate or gift tax increases to $15 million, adjusted annually for inflation.
6. Permanently changes the individual AMT exemption amounts
The exemption phaseout threshold is set at $500,000 (or $1,000,000 for joint returns) in tax year 2026 and is indexed for inflation. The Act also increases the phase-out rate for higher-income taxpayers from 25% to 50%. This provision applies to tax years beginning after December 31, 2025.
7. Eliminates repayment cap on Excess Advance PTC Payments
Taxpayers that elect to have advance payments of their estimated premium tax credit (PTC) made directly by IRS to the insurer must reconcile the advance payments with the actual credit (on Form 8962) when they file their returns. If the advance payments exceed the actual PTC the taxpayer is entitled to for the tax year, the taxpayer owes the excess amount as an additional income tax. Beginning in 2025, the paybacks are $750 if household income is less than 200% of the Federal Poverty Limit (FPL), $1,950 if household income is at least 200% but less than 300% of the FPL, and $3,250 if household income is at least 300% but less than 400% of the FPL. For unmarried individuals other than surviving spouses or heads of household, the applicable dollar amounts are one-half of the above amounts. After December 31, 2025, taxpayers will have to repay their excess advance PTC in its entirety.
8. Terminates personal exemptions other than temporary senior deduction
Personal exemption deductions were suspended from 2018 through 2025, but now have been permanently eliminated for most taxpayers. The 2025 Tax Act introduces a new, temporary deduction specifically for seniors. Taxpayers aged 65 or older, and their spouses, if filing jointly, can claim a $6,000 deduction per qualified individual for tax years beginning before January 1, 2029 (i.e., tax years 2025-2028). This senior deduction is reduced by 6% (but not below zero) for the adjusted gross income that exceeds $75,000 (or $150,000 for joint filers).
9. Introduces new temporary deduction for individual taxpayers for car loan interest
For tax years 2025-2028, individuals can deduct up to $10,000 of car loan interest per year, subject to a phase-out starting at $100,000 MAGI for single filers ($200,000 for joint filers). The VIN of the vehicle must be reported, it must be a new personal use vehicle under 14,000 pounds (with final assembly in the U.S.), and the debt must be incurred after December 31, 2024. Additionally, the lender must report interest paid to the IRS.
10. Changes to other tax credits
The Act enhances the dependent care credit, adds a tax credit for contributions to scholarship-granting organizations, and changes or eliminates various other home energy and clean vehicle tax credits.
11. Extends rules for certain disaster-related personal casualty losses
The Act continues to allow victims of qualified natural disasters to claim personal casualty losses without needing to itemize their deductions. The standard deduction is increased by the amount of the net disaster loss, defined as the excess of qualified disaster-related personal casualty losses over personal casualty gains. Further, the 2025 Act raises the per-casualty floor from $100 to $500. To qualify, the losses must arise in a qualified disaster area on or after the first day of the incident period of the qualified disaster.
12. Extends limitation on deduction for qualified residence interest
The Act permanently lowers the deduction for qualified residence interest to $750,000 in home mortgage acquisition debt. It also permanently treats certain mortgage insurance premiums on acquisition indebtedness as qualified residence interest.
13. Permanently suspends the deductions for Miscellaneous Itemized Deductions
Deductions for unreimbursed employee business expenses, investment advisory fees, safe deposit boxes, and tax preparation fees continue to be disallowed as miscellaneous itemized deductions.
14. Limits gambling losses
Beginning in tax years after December 31, 2025, the gambling loss deduction is 90% of the amount of losses in the tax year, to the extent of the gambling winnings during the tax year.
15. Increases tax benefits for pass-through businesses
The 20% qualified small business deduction (QBI) for partnerships, S Corporations and sole proprietorships has been extended. The Act increases the phase-in threshold for single filers from $50,000 to $75,000 and the joint filer threshold from $100,000 to $150,000. Inflation adjustments apply to the new minimum amounts for tax years beginning after 2026.
16. Restores 100% bonus depreciation and increases Section 179 depreciation
Businesses can fully deduct the cost of certain business property and equipment purchased on or after January 19, 2025. The Act increases Section 179 expense to $2,500,000 with a phase-out threshold on purchases exceeding $4,000,000 starting January 1, 2025.
17. Increases information reporting for non-employees from $600 to $2,000 effective for filings after December 31, 2025 and will be adjusted for inflating beginning in 2027
18. Allows for new reporting rules for tips and overtime
The Act creates a new, temporary deduction for individuals who receive qualified cash tips in occupations where tipping was customary before January 1, 2025. The deduction is up to $25,000 per year per taxpayer, and the deduction phases out by $100 for every $1,000 of MAGI above $150,000 (or $300,000 for joint filers).
The Act also expands the FICA tip credit to include beauty service businesses (barbering, hair care, nail care, esthetics, spa treatments) where tipping is customary, aligning them with food and beverage establishments.
The Act creates a new, temporary deduction for individuals who receive “qualified overtime compensation.” Taxpayers may deduct up to $12,500 per year in qualified overtime compensation ($25,000 for joint filers). The deduction phases out by $100 for every $1,000 of MAGI above $150,000 (single filers) or $300,000 (joint filers). “Qualified overtime compensation” is defined as overtime pay required under section 7 of the FLSA that is in excess of the regular rate. Overtime must be properly reported on IRS forms such as W-2s (for employees) or 1099s (for non-employees). The deduction is only available for overtime compensation, not for regular wages or other forms of compensation.
The new tip deduction and overtime deduction apply to taxable years beginning after December 31, 2024. Both are temporary deductions, expiring for taxable years beginning after December 31, 2028.
19. Renews Qualified Opportunity Zone program (QOZ)
The Act makes the QOZ program permanent, and it updates the timing and structure of the tax deferral and exclusion benefits of investing in a QOZ.
20. Restores full deduction for research and development costs
Beginning in 2025, companies with average annual gross receipts over the previous three years of $31 million or less can fully deduct their research and development expenses, and previously capitalized costs can be deducted in 2025.
This is the time to review the new provisions and plan your income tax strategies for the remainder of 2025 and beyond. Please contact Scharf Pera to schedule some time to go over your questions or review income tax projections.
