As you may have heard by now, on July 4th the “Big Beautiful Bill” was signed into law. The bill is about 1,000 pages long, and about 400 of those pages relate to tax law changes. While all of you were out enjoying your holiday weekends, I was reading those 400 pages so I could provide you with a nice little summary that less than half of you will actually read. Oh the things I do for you.
Here are the highlights of the bill that you should be aware of. Lots of these require more in depth interpretation and regulation/guidance from the IRS. We won’t get that for at least a few more weeks, but these are the things you should know are changing this year and next year. The sections are separate by individuals and business tax changes.
Changes for Individuals
Income Tax Rates Extended
Back in 2017, tax rates decreased substantially with the passage of the Tax Cuts and Jobs Act. However, most of the changes made were set to expire at the end of 2025 or 2026. This law makes most of those changes permanent. This is more of a “business as usual” type of change, but had this not passed we would have seen tax rates increase substantially for many taxpayers.
Standard Deduction Increased
For 2025, the standard deduction will be $15,750 for individuals and $31,500 for married couples. This is not a huge change from last year, where the standard deductions for singles and married couples were $14,600 and $29,200 respectively. The standard deduction is the deduction that most people receive if you don’t itemize your deductions. This amount is subtracted from your income before we calculate your tax liability. So an increase in this deduction will result in lower tax liability. If you’re married and in the 22% marginal bracket, this $2,300 increase in the standard deduction would save you $506 in taxes.
New $6,000 Senior Deduction
If you have trouble with QR codes at restaurants, you are going to love this new deduction. If you’re over the age of 65, you get to subtract an additional $6,000 from your income prior to calculating your tax liability. If you’re married and your spouse is also over 65, it’ll be $12,000. This is effective for the 2025 tax year and technically expires at the end of 2028. However, be aware of the phaseouts. If you’re single and over 65, the deduction starts to phase out at $75,000 of modified adjusted gross income. Once you reach $150,000, it’s completely phased out. For married couples, this threshold is $150,000-$350,000. If you’re over $350,000 in MAGI, you are completely phased out of this deduction.
For visual learners, here’s my understanding of how this works: Video Overview
Child Tax Credit Increased
If you have children, you’ll receive an extra $200 per child in child tax credits this year. In previous years, the child tax credit was $2,000 per child. This law change increased the amount to $2,200 per child effective for the 2025 tax year. The change is permanent, so we shouldn’t expect it to change much unless there is another overhaul of the tax code. The same income phaseouts exist as with prior laws, so if you’re over $400,000 or so in income, you may end up phasing out of some of this credit. If you are under the phaseout threshold, expect an extra $200 per child in dollar for dollar credits on your tax return this year.
Estate Tax Limits Increased & Made Permanent
Are you rich? If not, go ahead and skip this one. If you are, the good news is that when you die, your heirs may not have to give as much of your money to the federal government. The estate tax limit is now $15,000,000 per individual, so $30,000,000 for a married couple. That basically just means that if you die with an estate valued at less than those limits, you won’t be subject to federal estate taxes. The state that you live in likely still has lower thresholds, but federally you won’t have to pay anything. If your estate is valued at more than those dollar amounts, you’ll still get to subtract those figures from your taxable estate prior to calculating your estate tax due. This is not much different from previous tax law, but it was set to expire in 2026. Now it’s been made permanent.
Home Equity Interest Now Deductible
If you have a home equity loan or line of credit, you generally had to exclude it from your itemized deductions unless the home equity loan was used to purchase or improve your main residence. Now you’ll be able to include the interest paid on these loans as part of your itemized deductions, which is beneficial for those with this kind of debt.
State and Local Tax Cap Raised to $40,000
This is a huge change for all of my Illinois residents that own property and pay an ungodly amount of real estate taxes. Since 2017, there has been a cap of $10,000 for the state and local income tax deduction on schedule A for itemized deductions. The state and local tax deduction is made up of your property taxes paid and any state or local income taxes that you paid in the current year. In Illinois, many residents have property taxes alone that exceed this threshold. Now, the cap has been moved from $10,000 to $40,000. That means that many more people will itemize their deductions than did previously. This $40,000 cap is lowered for any individuals with very high income. If you’re single and have income of over $500,000, you’ll start to phase out of this increased cap. If you’re married and have income over $1,000,000, you’ll also start to phase out.
For my visual learners, here’s how this works: Video Overview
New Itemized Deduction Limitation
This is another change that impacts the itemized deductions calculation. This only impacts individuals who are in the 37% marginal tax bracket, which is not most people. If you are in the 37% marginal tax bracket, your itemized deductions will be reduced by 2/37ths of the amount of your income that is taxed in the 37% bracket. I know that sounds extremely straightforward and we all understand this perfectly without further explanation, but let me break it down in a simpler way to make sure you understand. The purpose of this limitation is to make sure your itemized deductions (mortgage interest, charitable contributions, taxes, etc.) don’t reduce your tax liability by more than 35%. Introducing this limitation will ensure that all itemized deductions cannot save you more than 35% in federal taxes.
New Gambling Loss Deduction Limitation
If this one significantly impacts your life, I’ll recommend that you call 1-800-GAMBLER. If you gamble, this does impact your tax situation in a very negative way. The deduction for gambling losses has always been limited to your gambling winnings. The idea behind this is that if you win big at the casino one night and lose the rest of the year, you shouldn’t have to pay tax on those winnings since you had losses for the year in aggregate. However, you weren’t allowed to take losses that exceeded your winnings in any scenario.
Now, you can only deduct losses equal to 90% of your gambling winnings. For example, if I play slot machines constantly, I probably have a lot of W-2G’s each year that show my gambling winnings for any substantial cash-outs I had throughout the year. However, I may also have a players card for that casino that shows all my losses, and the losses exceed my total winnings for the year. On my taxes, I have to report my total winnings from my W-2G’s. Let’s say that number is $100,000. I had losses totalling $120,000 for the year, so net of everything I lost about $20,000 gambling. Under this new law, I can now only deduct $90,000 of losses, which means I’m paying tax on $10,000 of gambling income. You can see how this is an unfavorable outcome for someone that already lost $20,000 gambling. Previously, you’d just wipe out all your winnings with losses equal to the winnings, so it wouldn’t impact your tax situation.
No Tax On Tips (sort of)
If you’re a tipped worker, this is most likely good news for you and will save you some money. However, there are lots of misconceptions surrounding this area of the law change. First of all, as of right now, the tips are still subject to state taxation and FICA taxes (social security and Medicare). The second misconception is that for right now, your net pay on your paycheck will NOT increase. This deduction is claimed on your personal income tax return, and it’s capped at $25,000 per tax return. There are also income phaseouts, so if you make more than $150,000 if single ($300,000 if married), you’ll start to phase out of this deduction. So not all tips are free of income taxes – it’ll likely just be $25,000 of tips that are free of income taxes.
Another important note – if you’re self-employed and receive tips, you need to make sure that you are diligently tracking separately any tips that you receive. If you don’t have good records, your deduction for tip income may be disallowed. An example of this is a self-employed hair-dresser. You likely receive both payment for services and a tip. Make sure to create a ledger of all tips received and ensure that this is accounted for separately.
For my visual learners, here’s how this should work: Video Overview
Here’s a question I’m going to get a lot of – “So can I just reduce my prices in my business and start having my customers tip me instead so that I can get this deduction?” The answer to this is most likely going to be a no. The law already specifically excludes some industries (lawyers, accountants, etc.) from taking advantage of this deduction right away. However, the law instructs the treasury to create a list of industries that commonly receive tip income. Those industries will be allowed to claim the deduction, and others will not. This will be their way of limiting the gaming of this deduction so that people aren’t trying to reclassify normal income as tip income.
No Tax On Overtime (sort of)
The name of this should really be “some tax on overtime”, but I understand that’s not quite as catchy. This part of the legislation establishes a deduction similar to the one for tips, but for overtime pay received by employees. The deduction is $12,500 per year, or $25,000 for a joint return if both spouses receive overtime pay. This deduction also starts to phase out in a similar fashion that the tip deduction phases out. If you have income of more than $150,000 ($300,000 for joint returns), the deduction will start to phase out over the next $125,000 of earnings ($250,000 for joint returns).
Again, for right now, having overtime pay will not mean that your employer stops withholding tax on the overtime pay and you get an increased net check. Instead, you’ll take the deduction on your personal income tax return when you file at the end of the year if you’re eligible.
For a video summary of how this will work, you can watch here: Video Overview
Car Loan Interest Deduction
This one is pretty wild. This is effective for the 2025 tax year and expires in 2028. It allows for a $10,000 above-the-line deduction of car loan interest paid for qualifying auto loans originated after 2024. In other words, it’s only for cars purchased 01/01/25 and after, and the vehicles have to meet certain other criteria to qualify. The vehicle must be less than 14,000 pounds, and it must be assembled in the United States. We expect more guidance around these issues to be released, but for right now it’s for American manufactured cars purchased in 2025 or after.
In addition to that, there are income limits that are pretty steep. If your modified adjusted gross income is $100,000 or more ($200,000 if married filing jointly), then your deduction starts to phase out. It’s fully phased out by $150,000 for single filers ($250,000 for married filers). If you’re over this income threshold, your tax situation won’t change. However, if you’re below those thresholds and purchased an American vehicle in 2025 or after, you may be eligible for this deduction. Above-the-line deduction means that we subtract the car loan interest that you paid prior to calculating your taxable income. To be specific, if you are in the 22% marginal tax bracket, this deduction could save you up to $2,200 in tax assuming you paid $10,000 or more in vehicle loan interest throughout the year.
Termination of Energy Credit Subsidies
This is an unfavorable change if you were planning on making energy efficient changes in 2025 or future years. This change impacts electric vehicles AND residential energy credits for things like solar panels or air conditioning units. Here’s the schedule of changes for this:
- Energy efficient home improvements: Will terminate on 12/31/25
- Residential clean energy credit: Will terminate on 12/31/25
- Clean vehicle credits: Will terminate on 09/30/25
If you’re planning on purchasing an EV this year and claiming a credit, you need to take delivery of the vehicle by 09/30/25 assuming no future guidance is issued that says otherwise. If you’re installing solar panels, these need to be fully installed and operational before year-end to claim the 30% tax credit associated with them.
Trump Accounts
Again, this one is pretty wild. Trump accounts are tax-advantaged savings accounts for children under the age of 18, and they operate similar to IRA’s for tax purposes. If you had a child in 2025 or after, your child may be eligible for a free $1,000 tax credit that gets funded directly into this account. The funds are invested in the S&P 500 and aren’t available to the child until they reach age 18. Parents can also contribute up to $5,000 into these accounts annually. The contributions aren’t deductible by the parents or the child, but the growth is meant to be tax-deferred. Lots more guidance is needed on these accounts, but it’s an interesting new opportunity to put money away for your dependent children. Unlike IRA’s, there are no earned income requirements associated with these accounts, so you can start contributing prior to them earning any money. Unlike 529 accounts, these funds are not restricted for certain purposes. The only difference is that the funds cannot be accessed prior to them turning 18.
Dependent Care FSA Changes
If you have children in daycare and your employer offers a dependent care FSA, you may be able to increase the amount of benefit that you take from this starting in 2026. The dependent care FSA limits have been increased from $5,000 to $7,500 for joint filers. That means that you can defer more of your wages into these types of accounts that are specific for dependent care benefits. Although it still doesn’t come remotely close to the full cost of dependent care each year, it’s at least a step in the right direction! The wages that you defer into these accounts are free of income taxes AND payroll taxes, so it’s a valuable increase in the deduction for 2026 and beyond.
Charitable Contribution Above-the-line Deduction
This is a much-needed change and incentive for many taxpayers. Under current law, you can’t take a deduction for charitable contributions unless you itemize deductions. You can really only itemize deductions when you own a home in most scenarios, so folks who didn’t own houses had very little incentive to donate. Since 2017, this has been making it more difficult on non-profits.
This law change adds a $1,000 deduction ($2,000 if filing jointly) for anyone that doesn’t itemize their deductions but still gives to charity. This only applies to cash contributions (no Goodwill donations). If you donate but you still take the standard deduction, this could save you some money in tax starting in 2025. There was a similar law during the pandemic, but this expired in 2021 and the amounts were much lower.
0.5% AGI Floor for Charitable Contributions
If you do itemize your deductions, this is an unfavorable change. This does not impact the above-the-line charitable deduction mentioned above – that will be a separate item from this for non-itemizers. For those that do itemize, you essentially have to meet this AGI floor before your charitable contributions start to matter. This is similar to how medical expenses operate. If you have $100,000 in adjusted gross income, your first $500 in charitable contributions will just go towards getting you above the AGI floor. After that, they will be added to your itemized deductions like before.
Dependent Care Tax Credit Enhancement
This one sounds more exciting than it is, but it may offer an increase for lower income families that pay for dependent care. Under current law, you can claim a credit for up to 20% of daycare costs paid for your dependent child, but there is a cap of $600 for this credit if you have one child ($1,200 total if you have more than 1 child). Under the new law, the credit will increase to $1,500 for a single child ($3,000 for multiple children) if you have low income. This 50% is reduced by 1 percentage point for each $2,000 of AGI above $15,000, until the rate reaches 35%. (So from $15k to ~$45k AGI, the rate goes 50%→35%.) Then, above $75,000 AGI (joint $150k), the rate is further reduced by 1 point per $2,000 (joint $4,000) until a floor of 20% is reached. In effect: families with AGI $15,000 or less get a 50% credit. The rate decreases to 35% by AGI ~$55k. From $75k ($150k joint) upward it phases down again to 20% at higher incomes. This will not be much of a change for many working families, but for families with lower incomes it’s a much-needed break.
Changes for Businesses
Bonus Depreciation Back to 100%
If you own a business, depreciation is a valuable deduction for you. In previous years, companies were allowed to depreciate 100% of their new assets placed in service by using bonus depreciation. This deduction phased down over the last few years to 80% and 60%. This year, it was set to revert to 40% of the value of the asset. However, the new law reverts back to 100% bonus depreciation. That means that if you purchase a new qualifying asset in your business this year, you may be able to write off the full cost of the asset through bonus depreciation.
R&D Expenses Fully Deductible
This was a much-needed reversal of a law that took effect in 2022 and after. Before 2022, companies were allowed to deduct the full cost of research and development expenses that they incurred while running their businesses. Starting in 2022, part of the Tax Cuts and Jobs Act required those companies to capitalize and amortize those expenses over a period of 5 or more years. This was a very negative change for businesses that invest heavily in research and development.
For example, if I started a software company to build a new software platform, almost all of my initial costs would technically be considered research and development. This includes the payment of wages to my engineers, the rent that I pay allocated to the space for those engineers, and many other costs that you likely wouldn’t expect. So if I pay an engineer $100,000 for services during the tax year, under prior law I would have to spread that cost out and deduct $20,000 per year over 5 years. This didn’t make a lot of sense for these types of companies, as they were incurring tax bills during 2022-2024 based on net income that was completely inflated due to these high R&D costs. This fix was much needed in the eyes of most everyone in the business community.
Paid Family & Medical Leave Credit for Business Owners
This was a pandemic-era credit that had expired. The restoration of this credit is meant to offer an incentive to business owners to offer paid family and medical leave to their employees. Here’s how this works logistically:
Option 1: Employer pays for leave directly to employees when they go on leave. The employer must pay them at least 50% of their previous wages while they are on leave. If they pay 50% of their wages, they can receive a credit of up to 12.5% of the wages paid for family or medical leave. If they pay more than that, they can potentially receive up to 25% of the wages paid if they give them 100% of their prior pay. This will make it slightly cheaper for employers to pay leave to employees.
Option 2: Employer sponsored medical or family leave insurance program. If an employer pays for an insurance program (either state-funded or through private insurance) to cover these types of benefits, the employer can claim a credit against the premiums they paid for these policies. The credit calculation is the same – if the policy covers 50% of an employee’s wages, the employer can claim a credit for 12.5% of the policy premiums paid. If it covers more than that, they can recover up to 25% of the premiums paid.
1099 Filing Requirements Updated
Each year, business owners have to file 1099’s to anyone that they pay for services, rent, and other activities throughout the year. Historically, if you pay someone $600 or more, the business was required to issue that person a 1099. Now, the new threshold is set to be $2,000. This doesn’t take effect until 2026, so 2025 remains at $600. In theory this changes nothing for income tax reporting, as you’re required to report your income regardless of if someone gives you a 1099. Although I’m certain compliance with this will be an issue. However, it will reduce the administrative burden on business owners and will require less 1099 filings each year.
There is another change to 1099-K filing requirements. This will revert back to the way it was before. 1099-K’s will only need to be filed if you meet the 200 transaction or $20,000 threshold in gross volume. This is a change that makes sense, as many folks were getting 1099-K’s just for selling a few personal items on Ebay or Venmo.
There are plenty more changes to discuss here, but these are the main highlights. There are many more industry-specific changes, so it’s important to connect with your tax professional and make sure you have the most up-to-date information for planning purposes.
