Many taxpayers will be in for a pleasant surprise when they prepare their federal income tax returns for 2025. Last July’s big budget bill made a number of changes to the tax code. The five biggest include an increase in the standard deduction, a new deduction for taxpayers 65 and older, significant deductions for cash tips and overtime pay, an interest deduction on new vehicle loans and increased limit on the deduction for state and local taxes.
MORE INFORMATION:
The foregoing changes for 2025 were included in the budget bill (dubbed "One Big Beautiful Bill") that was signed into law on July 4th.
Higher Standard Deduction
The first involves the standard deduction. In addition to the inflation adjustment that’s made every year, the budget bill added an extra 5 percent increase. That means that the standard deduction jumps from $29,200 to $31,500 for married taxpayers filing jointly, from $14,600 to $15,750 for single filers and from $21,900 to $23,625 for heads of household.
New Deduction for Taxpayers 65 and Older
There’s a new deduction for taxpayers who are 65 or older by Dec. 31.
Married taxpayers who are both 65 or older and whose adjusted gross income is $150,000 or less can now claim a $12,000 deduction whether or not they itemize or claim the standard deduction.
That amount is $6,000 for single filers 65 and older whose adjusted gross income is $75,000 or less.
If adjusted gross income exceeds those limitations, the deduction is reduced by 6 percent and is completely phased out for joint filers whose adjusted gross income exceeds $250,000 and for single filers with adjusted gross income in excess of $175,000. [Note that this deduction expires in 2029.]
Tips and Overtime
Certain taxpayers may be eligible to deduct up to $25,000 in cash tips they received in 2025 while performing a job that “customarily and regularly” involved tipping before 2025, such as a waiter, bartender, hairdresser, ride-share driver or hotel maid. The IRS has promulgated a list of qualifying jobs on its website.
But people who receive cash tips must nevertheless exercise caution because even if their job is on the list, they cannot claim the deduction if they work for a “specified service trade or business” or SSTB, such as a theater or other performing arts venue.
The deduction is reduced for single filers whose adjusted gross income exceeds $150,000 and joint filers whose AGI exceeds $300,000. The deduction is phased out when AGI exceeds $400,000 for single filers and $550,000 for joint filers.
Taxpayers can claim the deduction whether or not they itemize, but married taxpayers qualify for the deduction only if they file jointly.
There is also a deduction of up to $12,500 for single filers and $25,000 for joint filers for overtime pay. Here, too, there are adjusted gross income limitations, and like the deduction for tips, the deduction for overtime is available to both itemizers and those who claim the standard deduction and denied to married taxpayers who file separately.
New Vehicle Interest Deduction
There’s also a new deduction for interest on car loans.
With this one, there’s a number of tricky preconditions. The loan had to be taken out in 2025. The vehicle has to be a new (not used) car, van, SUV, pickup truck or motorcycle. The vehicle’s final assembly had to take place in the U.S., and the vehicle cannot weigh more than 14,000 pounds.
Up to $10,000 of interest paid on the loan can be deducted, although the deduction is gradually phased out for single taxpayers whose adjusted gross income exceeds $100,000 and married filers whose AGI exceeds $200,000.
As with the new deduction for people 65 and older, taxpayers can claim the car loan interest deduction whether or not they itemize, but the deduction is available only for the 2025 through 2028 tax years.
With respect to this deduction:
- Taxpayers can find out where their vehicle was assembled by entering its VIN or vehicle identification number in the VIN Decoder on the National Highway Traffic Safety Administration website (the assembly location is provided under “Other Information”); and
- Lenders are required to provide a statement by Jan. 31, 2026, indicating the total amount of interest paid on auto loans in 2025.
Increased Limit on State and Local Taxes for Itemizers
Taxpayers who itemize were able to deduct certain state and local taxes, such as sales and real estate taxes, up to $10,000 in 2024. The budget bill increases the limit for 2025 to $40,000 for single filers and married taxpayers filing jointly whose adjusted gross income is $500,000 or less. That limit is reduced by 30 percent on every dollar of AGI over $500,000.
The information provided above is not intended as either legal or tax advice. Please check with your tax return preparer or other advisors for the ap[plicability of these tax law changes to you.
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