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One Big Beautiful Bill (OBBBA): 2025–2026 Individual Tax Updates You Should Know
One Big Beautiful Bill (OBBBA): 2025–2026 Individual Tax Updates You Should Know
Congress has rolled out the One Big Beautiful Bill Act (OBBBA) — a sweeping package of federal tax changes designed to simplify compliance and give relief to working Americans. Several provisions take effect in 2025, with others scheduled for 2026 and beyond. Here’s a straightforward breakdown of what individuals and families should know.
Overtime and Tips Deductions (2025–2028)
Overtime Deduction:
Hourly, non-exempt workers can now deduct the “half” portion of their time-and-a-half overtime pay — up to $12,500 (single) or $25,000 (married filing jointly) per year. The deduction begins phasing out at $150,000 (single) and $300,000 (joint) in modified adjusted gross income (MAGI). Employers will list qualifying overtime on Form W-2, starting in Box 14 for 2025.
Tips Deduction:
Employees who receive tips can deduct up to $25,000 annually, subject to income limits. Keep detailed records of reported tips to stay IRS-compliant and ensure proper documentation.
Extra Deduction for Seniors (2025–2028)
Taxpayers age 65 and older can claim an additional $6,000 deduction on top of their standard or itemized deduction. This benefit helps older taxpayers offset healthcare and living expenses. The extra deduction phases out gradually for higher-income earners and requires a valid Social Security number.
Higher SALT Deduction Cap (Starting 2025)
The state and local tax (SALT) deduction cap rises in 2025, giving relief to taxpayers in high-tax states who were previously limited to $10,000. Updated phase-out details will be published in IRS Publication 4011 (Rev. 10-2025).
Form 1099-K Threshold Restored (2025+)
Starting in 2025, freelancers and online sellers on platforms such as PayPal, Venmo, or Etsy will only receive Form 1099-K if they exceed $20,000 in payments and 200 transactions — restoring the pre-2023 threshold. Implementation guidance is forthcoming from the IRS.
Car Loan Interest Deduction (2025–2028)
Buyers of qualifying new, U.S.-assembled vehicles may deduct up to $10,000 in car-loan interest, with phase-outs for higher earners. Filers should include the VIN and lender information when submitting returns.
529 Plan Expansion (Starting 2026)
Starting in 2026, annual K–12 withdrawals from 529 plans increase to $20,000. Eligible uses now include tutoring, online courses, and professional certifications. Because state rules differ, confirm eligibility with your state’s 529 administrator before making withdrawals.
- Timing and Filing Notes
- 2025 is a transitional year — overtime and tip deductions may appear in W-2 Box 14.
- By 2026, the IRS will update Form 1040 instructions and assign new codes for these deductions.
- Paper refund checks will be phased out after September 30, 2025, so set up direct deposit or IRS Direct Pay to prevent delays.
What You Should Do Now
- Confirm with your employer how overtime and tips will be reported for 2025.
- Track your tips and overtime earnings throughout the year.
- Review whether the new SALT cap makes itemizing more beneficial.
- Keep vehicle and loan records if buying a new car in 2025.
- Monitor the $20,000 / 200-transaction threshold if you have side-income.
- Consult a tax professional before using expanded 529 plan benefits.
Final Thoughts
The OBBBA represents one of the most significant tax updates in recent years. With new deductions for overtime, tips, car loans, and senior taxpayers — plus expanded education benefits — it’s designed to support working families and retirees alike.
To make the most of these opportunities, stay informed, track your income details, and work closely with Associated Accountants, LLC to ensure every available deduction is applied correctly.
