Your Guide to New Income Tax Changes
August 13, 2025
Big changes are coming to your tax return. With the signing of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, a wide range of income tax updates will take effect—impacting everything from tips and overtime to deductions for families, seniors and small businesses. Whether you're a taxpayer, employer or financial planner, understanding these changes is key to maximizing your benefits and avoiding surprises.
In this guide, we break down the most important updates for 2025 and 2026, including new deductions, expanded credits and permanent adjustments to tax brackets. Let’s explore what’s changing and how it could affect your bottom line.
2025 Changes
- No Tax on Tips
- No Tax on Overtime
- Social Security – Reduced Taxation
- Standard Deduction Increased
- Senior Citizens Standard Deduction Increase Added
- Itemized Deduction – State and Local Property Tax Limit (SALT) Increase
- Child Tax Credit Increased – under age 17
- Child Tax Credit – over age 16
- Vehicle Interest Deduction
- Home Residential Energy Credit – expires Dec 31, 2025
- Home Residential Energy Efficient Home Improvement Credit – expires Dec 31, 2025
- Clean Vehicle Credit – expires Sept 30, 2025
- IRA Limits
- Gift Tax Limits
- Mileage Rate
Business Changes
- Bonus Depreciation
- First Year Depreciation
- Commercial Property Depreciation – interior improvements
- Qualified Business Income (QBI) – new minimum deduction
- Pass Thru Entity Tax (PTET)
- Small Business Stock Sale
- Farm Sale Taxation
- Opportunity Zones – extended
- 1099 Limit Change – effective 2026
2026 Changes
- Tax Brackets – made permanent
- Mortgage Insurance Premium
- Charitable Deduction – no need to itemize
- Miscellaneous Itemized Deductions – permanently ended
- Child Care Credit
- 529 College Savings Plan – expanded expenses it can be used for
- Child Care Deduction – through employer plan
- Adoption Credit
- Federal Estate Tax Exemption
- Disaster Losses – added state disasters
- Marketplace Insurance
- Moving Expenses – permanently repealed
- Gambling Losses – limited
- Baby Boomer Savings Accounts
Below is a brief explanation of each key change mentioned above. Please note, this summary highlights only the most notable updates and does not capture every detail of the new legislation. If you have questions or would like to discuss how these changes may affect your personal or business finances, our team is here to help - reach out anytime for tailored guidance.
2025 Changes
Tips – reported on a W-2 or income tax return qualify for up to $25,000 deduction. Self- employed taxpayers qualify for this deduction. Expires 2028.
Overtime wages reported on a W-2 qualify for up to $12,500 for single or $25,000 for a married couple. Overtime is described as the rate above the regular hourly rate, so the amount paid at regular rate, even paid for hours worked more than 40 in a week, does not qualify for the reduction. See example later. Expires 2028
Social Security – a deduction of $6,000 for single or $12,000 for married couple is allowed if age 65 or over. Expires 2028
Standard Deduction increases to $15,750 for single, $23,625 for head of household and $31,500 for married couple for 2025. These will increase for inflation in the future.
Senior Citizens Standard Deduction has new added $6000 standard deduction for those over age 65. Expires 2028
Itemized Deductions - state and local property tax limit (SALT) increases to $40,000 from $10,000 – applies only to those that itemize. Expires in 2029
Child Tax Credit increased to $2,200 from $2,000, for under age 17 dependent children.
Child Tax credit of $500 is made permanent for children over age 16.
Vehicle loan interest qualifies for a deduction up to $10,000 per year. Qualifying vehicles include new cars, vans, pickups, SUV’s made in the US and purchased after Dec 31, 2024 for personal use, who’s primary purpose is for use on public streets, with at least two wheels, under 14,000 pounds. Campers, RV”s, business vehicles and leased vehicles do not qualify for this deduction. Expires 2028
Home Residential Clean Energy Credit such as solar, wind and geothermal. Expires Dec 31, 2025
Home Residential Energy Efficient Home Improvement Credit, such as windows, doors, insulation and HVAC. Expires Dec 31, 2025. Installation after Dec 31, 2025 does not qualify.
Clean Vehicle Credit. This is for new and used electric vehicles.Expires Sept 30, 2025
IRA Limits (no change at $7000 or $8000 for over age 50).
Gift Tax Limits - $19,000 for 2025.
Mileage rate - $.70 cents for 2025.
Business Changes
Bonus Depreciation increased to 100% on qualified property, generally equipment, purchased after January 19, 2025. Prior to OBBBA, the limit was going to be 40% for 2025.
First year depreciation – also called, Section 179, maximum increased to $2.5M from $1.25M.
Commercial Property interior improvements, qualify for Bonus and First Year depreciation. Exterior commercial, residential and general farm buildings do not qualify. Production Property for manufacturing or refining production also qualifies.
Qualified Business Income (QBI) made permanent and a new $400 minimum deduction for those with an active business that has at least $1000 profit.
Pass Thru Entity Tax (PTET) has not changed as a result of the higher SALT limits. PTET is still a very good tax deduction process for those that are not able to itemize and have ownership in a partnership or S Corporation.
Small Business Stock Exclusion qualifies for exclusion of 50% of gain if stock owned for three years, 75% if owned for four years and 100% if owned for five years.
Farm Land Sale Profit – taxpayer may elect to pay income taxes over four years, if farmed or leased to a farmer for the prior ten years. Effective date for sales after July 4, 2025.
Opportunity zones extended to 2033 from 2027.
1099’s required for amounts paid of $2,000 or more, per year per payee starting in 2026. The $600 limit remains for payments made in 2025.
Note: Most changes include phase out based on Adjusted Gross income (AGI) or Modified Adjusted Gross income (MAGI), so not everyone will qualify for the changes made by OBBBA. Each of the changes listed above has different phase out criteria too detailed to cover in this summary article. MAGI does not appear on the Form 1040 or elsewhere on the federal tax return. Federal tax changes may not affect state income tax returns.
2026 Changes
Tax brackets – that were set to increase Jan 1, 2026, were made permanent at 2025 rates (10, 12, 22, 24, 32, 35 and 37 rather than 10, 15, 25, 28, 33, 35 and 39.6).
Mortgage insurance premium treated as residential interest.
Charitable deduction of $1,000 for single and $2,000 for married allowed even if not itemizing. The documentation requirement remains unchanged. For those that itemize, there is a .5% of income, reduction in charitable itemized deduction. See example at the bottom of the page.
Miscellaneous itemized deductions, such as unreimbursed employer expenses, investment interest, etc, permanently suspended. Applies to those paid by W-2 wages.
Child Care Credit Limit increased to 50% from 35%, phase outs still apply.
529 College Savings Plan allow distributions for tutoring, test preparation, home school materials, online learning, special education expenses, speech and occupational therapy along with alternative learning software.
Employer Dependent Care Limit increased to $7,500 from $5,000 within a cafeteria plan.
Adoption Credit provided for up to $5000 as refundable even if no income tax liability.
Federal Estate Tax Exemption has been increased to $15M for single and $30M for a married couple and made permanent. The amount will be adjusted annually for inflation.
Disaster losses declared by a state can be deducted the same as a federal declared disaster.
Marketplace Insurance repayment cap removed. Those that underestimate income with the marketplace will incur full payback without a maximum CAP that existed thru 2025.
Moving expenses, except for military personnel, permanently repealed.
Gambling losses limited to 90% of losses. The limit continues to be limited to gambling income.
Baby Boomer child savings account established for US citizens born 2025 thru 2028. The US Treasury is to set up the individual fund for each child, beginning July 4, 2026, based on new dependents reported on the parent’s tax return. No withdrawal is allowed until the child reaches age 18. The parents may establish this fund at a bank or qualifying institution earlier, with more details to follow.
Q & A’s with examples
How does limit on Charitable Deduction used as an itemized deduction work?
For example, your adjusted gross income (AGI) is $100,000 and you donate $1,500. You are allowed to deduct only $1,000 as an itemized deduction ($1500 less $500 – ($100,000 X 5% = $500).
If I normally do not need to file a tax return because I don’t make enough money, do I need to file to get the social security tax deduction?
No, the deduction only lowers your taxable income – and If your taxable income is already low to result in no tax bill, no need to file.
I normally pay taxes on my social security benefits. Will that change?
Probably. The formula for taxing social security has not changed, but the extra deduction will probably reduce your overall tax bill, but phase outs may apply.
How does overtime deduction work?
Let’s say you get paid $20 per hour and your overtime (time and a half) rate is $30 per hour. The deduction applies to only the $10 per hour or the half above regular rate, not the entire overtime pay. What does the IRS have to say about all of this? The IRS has not issued any guidance. We expect that info in the coming weeks and months.
Questions? We invite you to fill out this form or email us at customerservice@collinsconsultingservice.com.
About Collins Consulting: Collins Consulting is a full-service tax and accounting firm, started in 1970 by Norm Collins in Treynor, Iowa. In August of 2018, TS Banking Group acquired Collins Consulting as a wholly-owned subsidiary.
Resources:
Basics and Beyond – Income Tax Webinar
Iowa State University – Center for Agricultural Law and Taxation
Forbes
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.