The One Big Beautiful Bill Act, signed into law by President Trump on July 4, 2025, introduces substantial changes to the U.S. tax code that will affect millions of Americans filing 2025 returns. The legislation includes new deductions for tips and overtime pay, increases the Child Tax Credit, and raises the state and local tax deduction cap to levels not seen in years.
The law also makes permanent several provisions from the 2017 Tax Cuts and Jobs Act that were scheduled to expire at the end of 2025, providing long-term certainty for taxpayers and businesses.
New Deductions for Tips and Overtime
Workers who receive tips can now deduct up to $25,000 in tip income on their 2025 returns, provided their modified adjusted gross income falls below $150,000 for single filers or $300,000 for married couples filing jointly. The deduction applies whether taxpayers itemize or take the standard deduction.
However, federal payroll taxes for Social Security and Medicare still apply to all tip income. State and local taxes on tips also remain in place in most jurisdictions. Workers must file IRS Form 4137 if their tips were not fully reported by their employer on their W-2.
Overtime pay also receives new tax treatment under the law. Employees can deduct up to $12,500 in overtime compensation for individual filers, or $25,000 for married couples filing jointly. The deduction covers the premium portion of overtime pay—such as the extra half in time-and-a-half compensation.
Federal officials caution that workers covered by collective bargaining agreements may not qualify for the overtime deduction. Both the tip and overtime deductions phase out at the same income thresholds and are temporary, expiring after tax year 2028.
Standard Deduction and SALT Cap Changes
The standard deduction increased to $15,750 for single filers in 2025, up from $15,000 in 2024. Married couples filing jointly can claim $31,500, while heads of household can deduct $23,625.
For taxpayers who itemize, the state and local tax deduction cap jumped to $40,000 from its previous $10,000 limit. This represents a major shift for residents of high-tax states like California, New York, and New Jersey, where property taxes and state income taxes often exceeded the old cap.
The SALT deduction covers property taxes plus either state and local income taxes or sales taxes, but not both. According to Northwestern Mutual’s tax guidance, this increase particularly benefits taxpayers in states with higher tax rates. However, the expanded SALT deduction is temporary and scheduled to revert to $10,000 in 2030.
Child Tax Credit and Senior Deductions
Families with qualifying children will see a modest increase in the Child Tax Credit, which rises from $2,000 to $2,200 per child for tax year 2025. To qualify, children must be under age 17 at the end of the tax year, live with the taxpayer for more than half the year, and meet dependent status requirements.
The credit phases out for single filers with income over $200,000 or joint filers with income over $400,000.
The law also introduces a new deduction for taxpayers age 65 and older. Single filers can claim $6,000, while married couples filing jointly can claim $12,000 if both spouses qualify. This deduction begins phasing out at modified adjusted gross income of $75,000 for single filers or $150,000 for joint filers.
Vehicle Interest and Made-in-America Provisions
Taxpayers who purchased new vehicles in 2025 that were built or assembled in the United States can deduct up to $10,000 in interest paid on vehicle loans. To qualify, the vehicle must weigh less than 14,000 pounds, be used primarily for personal purposes, and the buyer must have paid at least $600 in interest during the tax year.
The deduction phases out for single filers with modified adjusted gross income over $100,000 or joint filers over $200,000.
Trade-Offs and Revenue Measures
To offset the cost of these tax cuts, the law includes several revenue-raising provisions. Clean energy tax credits, electric vehicle incentives, and advanced manufacturing credits enacted under the Inflation Reduction Act face restrictions and phaseouts.
High-income taxpayers in the 37% federal tax bracket also face a new limitation: the tax benefit of itemized deductions is capped at 35%. This reduces the value of charitable contributions, mortgage interest, and other itemized deductions for the highest earners.
Making TCJA Provisions Permanent
Beyond introducing new deductions, the One Big Beautiful Bill Act makes permanent key provisions from the 2017 Tax Cuts and Jobs Act that were set to expire. These include the increased standard deductions, lower tax brackets, and the elimination of personal and dependent exemptions.
The law also permanently restores 100% bonus depreciation for business equipment purchases and allows immediate expensing for U.S.-based research and development costs. These changes provide businesses with long-term certainty for capital investment and research planning.
Additional Guidance and Filing Information
Federal tax agencies have released guidance explaining how the new deductions apply, including income limits, phaseout thresholds, and documentation requirements. The Internal Revenue Service has published materials outlining the operation of the tip and overtime deductions, as well as information on “Trump Accounts” for children born after January 1, 2025.
Some provisions include income-based phaseouts, which can affect eligibility depending on a filer’s modified adjusted gross income. Federal agencies have indicated that additional clarifications may be issued as implementation continues.
Taxpayers can access official instructions, forms, and updates through IRS.gov as the filing season progresses.
Source
These key tax changes from the ‘big beautiful bill’ could impact your 2025 return | NBC Chicago