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The One Big Beautiful Bill Act (Public Law 119-21), signed July 4, 2025, changes how many people calculate their federal income tax. The first broad effects apply to 2025 income on returns filed in 2026: a larger standard deduction, a higher Child Tax Credit, a temporarily larger state-and-local-tax (SALT) limit, and new deductions for qualifying tips, overtime, seniors and certain vehicle-loan interest.
Some provisions are credits, while others are deductions. A credit reduces tax owed directly; a deduction reduces the income on which tax is calculated. Your filing status, modified adjusted gross income (MAGI), work, age, vehicle and choice between the standard deduction and itemizing determine which changes help you.
At a glance: what changed
| Provision | Who may qualify | Maximum or limit | Income phaseout | Deduction or credit; itemizing | Years and filing records |
|---|---|---|---|---|---|
| Standard deduction | Taxpayers using the standard deduction | 2025: $15,750 single; $23,625 head of household; $31,500 married filing jointly. 2026: $16,100; $24,150; $32,200. | None stated | Deduction; do not itemize | 2025 and 2026 amounts are from IRS guidance |
| Child Tax Credit | Taxpayers with qualifying children and valid employment SSNs | Up to $2,200 per qualifying child for 2025 | Not stated in the cited IRS figures | Credit; itemizing is not required | Made permanent and indexed for inflation after 2025; claim on Form 1040 with required child and taxpayer information |
| SALT deduction | Itemizers paying qualifying state and local income or sales taxes and property taxes | 2025 cap: $40,000; $20,000 for married filing separately | Enhanced cap phases down above $500,000 MAGI ($250,000 married filing separately) but cannot drop below the prior $10,000/$5,000 caps | Deduction; itemizing required | 2025 rules; retain tax bills, payment records and other itemized-deduction documentation |
| Qualified-tip deduction | Employees and self-employed people in occupations the IRS identifies as customarily and regularly tipped | Up to $25,000 | Phases out above $150,000 MAGI ($300,000 joint) | Deduction available to itemizers and non-itemizers | 2025–2028; Schedule 1-A; W-2, 1099 and Form 4137 support where applicable |
| Qualified-overtime deduction | Individuals with overtime premium required by the Fair Labor Standards Act | $12,500 single; $25,000 joint | Income phaseouts apply; use the current IRS instructions for the applicable threshold | Deduction available through Schedule 1-A | 2025–2028; keep employer overtime detail and wage statements |
| Additional senior deduction | Taxpayers age 65 or older | Up to $6,000 per eligible person; $12,000 for two eligible spouses before phaseout | Income phaseout applies; threshold depends on IRS rules | Deduction; Schedule 1-A | 2025 rules; retain age and income records |
| Passenger-vehicle-loan interest | Borrowers financing a qualifying new, U.S.-assembled passenger vehicle | Up to $10,000 annually | Phases out above $100,000 MAGI ($200,000 joint) | Deduction; Schedule 1-A; itemizing is not required | 2025–2028; loan statement, lien information and vehicle VIN |
The IRS published Schedule 1-A and related 2025 Form 1040 instructions on March 2, 2026. That schedule is the main place to claim the new tip, overtime, vehicle-interest and senior deductions.
1. A larger standard deduction and Child Tax Credit
Standard deduction
The higher standard deduction increases the amount of income that is shielded before tax is calculated. For 2025, the amounts are $15,750 for single filers, $23,625 for heads of household and $31,500 for married couples filing jointly. The 2026 amounts rise to $16,100, $24,150 and $32,200.
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Take the standard deduction unless your allowable itemized deductions produce a larger total. Itemizing is discussed below because the temporary SALT expansion can change that comparison for some households.
Child Tax Credit
The maximum Child Tax Credit is $2,200 per qualifying child for 2025, up from $2,000. The expanded amount is permanent and will be indexed for inflation after 2025. The claimant and every qualifying child must have a valid employment Social Security number under IRS rules.
“A tax credit reduces the amount a person owes in income taxes dollar-for-dollar,” the IRS explains in Tax Tip 2026-10.
That dollar-for-dollar feature distinguishes the Child Tax Credit from the deductions described later, which lower taxable income rather than directly reducing the tax bill.
2. A temporarily higher SALT cap
For 2025, an itemizing taxpayer may deduct up to $40,000 of qualifying state and local income or sales taxes plus property taxes. The limit is $20,000 for married taxpayers filing separately. This is a substantial increase from the former $10,000 general cap and $5,000 married-separate cap.
The enhanced limit is targeted at itemizers in high-tax states. It phases down once MAGI exceeds $500,000 ($250,000 for married filing separately), but the reduction cannot push the cap below the old limit.
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How to decide whether to itemize
- Add your allowable SALT deduction, subject to the applicable cap.
- Add other allowable itemized deductions, such as qualifying expenses documented under the normal IRS rules.
- Compare that total with the standard deduction for your filing status and tax year.
- Use the method that produces the larger deduction; a higher SALT ceiling alone does not guarantee that itemizing wins.
3. A deduction for qualified tips
From 2025 through 2028, employees and self-employed individuals may deduct qualified tips earned in occupations the IRS identifies as customarily and regularly tipped. The deduction is available whether or not you itemize and is claimed on Schedule 1-A.
What “no tax on tips” does—and does not—mean
The phrase is shorthand for an income-tax deduction. It does not eliminate Social Security or Medicare taxes, and a payment is not automatically qualified merely because someone calls it a tip. Tips must be reported on required information returns or, when directly reported, on Form 4137.
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The deduction phases out above the applicable MAGI level shown in the table. Keep employer wage statements, Forms 1099 and contemporaneous tip records that support the amount claimed.
4. A deduction for qualified overtime
For 2025 through 2028, an individual may deduct the qualified overtime premium required under the Fair Labor Standards Act. The annual ceiling is $12,500 for a single filer and $25,000 for a joint return, subject to income phaseouts.
Only the premium portion qualifies
For ordinary time-and-a-half pay, the qualifying amount is generally the extra “half,” not all wages earned during the overtime shift. Employer payroll statements or a detailed employer breakdown should distinguish the premium from regular wages. Schedule 1-A carries the deduction, so retain those statements with your tax records.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.5. New deductions for seniors and certain vehicle-loan interest
Additional deduction for people age 65 or older
A taxpayer who is at least 65 may claim an additional deduction of up to $6,000. Two eligible spouses on a joint return can reach $12,000 before the income phaseout applies. The 2025 rules place this deduction on Schedule 1-A; use the current IRS instructions to calculate the phaseout and document eligibility.
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Interest on a qualifying passenger-vehicle loan
For tax years 2025 through 2028, up to $10,000 of interest paid on a qualifying passenger-vehicle loan may be deducted. The loan generally must have been incurred after December 31, 2024, finance a new vehicle whose original use begins with you, be secured by a lien and cover a vehicle finally assembled in the United States.
The deduction phases out above the MAGI levels shown in the table. Leases and used vehicles do not qualify. Keep the lender’s year-end interest statement, loan documents, proof of the lien and the vehicle identification number so the vehicle’s eligibility can be verified.
How to claim the changes on your 2025 return
- Gather your W-2s, 1099s, Form 4137 records, overtime detail, lender statements and vehicle VIN, along with documents supporting age, children and itemized deductions.
- Complete Form 1040 and determine whether the standard deduction or itemizing gives you the larger deduction.
- Complete Schedule 1-A for qualified tips, qualified overtime, qualifying vehicle-loan interest and the additional senior deduction.
- Enter the Child Tax Credit information required for you and each qualifying child, including valid employment SSNs.
- Review MAGI-based phaseouts before finalizing each deduction, and retain the supporting records with your copy of the return.
Publication 17, the 2025 forms and instructions, and the IRS online tools provide the line-by-line eligibility rules. Because several provisions are temporary or subject to phaseouts, use the instructions for the specific tax year being filed.
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