December 18, 2025 — As the year closes, Americans are getting their first real preview of how the One Big Beautiful Bill Act (often shortened to OBBBA) will reshape the 2025 tax return they’ll file in early 2026. The law (Public Law 119-21) introduced new deductions, lifted familiar limits, and locked in major parts of the 2017-era tax structure—while the IRS continues rolling out guidance and forms designed to make the new rules workable for taxpayers, employers, and lenders. [1]
What’s making this moment feel unusually complicated is timing: many of the most talked-about provisions apply to money earned in 2025, but payroll systems and reporting forms weren’t built for them at the start of the year. That mismatch is one reason some lawmakers and analysts are projecting a larger-than-usual refund season in 2026—though not everyone will qualify, and refund size will vary widely based on income, filing status, and recordkeeping. [2]
Below is what’s new, what’s temporary, and what both households and business owners can do now—before W-2s and 1099s land.
The headline items for most taxpayers: bigger standard deduction, higher child tax credit, higher SALT cap
Standard deduction: higher for 2025 returns (filed in 2026)
The IRS says the 2025 standard deduction is now: $31,500 (married filing jointly), $23,625 (head of household), and $15,750 (single or married filing separately). [3]
Those numbers matter because millions of taxpayers take the standard deduction—and the OBBBA’s newest deductions (tips, overtime, seniors, and certain car loan interest) can apply even if you don’t itemize. [4]
Child Tax Credit: now $2,200 per eligible child (with rules)
For tax year 2025, the maximum Child Tax Credit rises to $2,200 per eligible child, up from $2,000. The IRS also notes a key compliance point: Social Security number requirements apply to claim the credit (and, for joint filers, at least one spouse must have a valid SSN for employment). [5]
SALT deduction cap: lifted (temporarily) for itemizers
If you itemize, the cap on the state and local tax (SALT) deduction increases to $40,000 for 2025 (or $20,000 for married filing separately), up from $10,000/$5,000, and it phases down for higher-income taxpayers. [6]
Congressional text indicates the SALT cap rises again to $40,400 in 2026, then increases by 1% annually through 2029, before reverting back to $10,000 in 2030. [7]
The four new “everybody’s talking about it” deductions — and why paperwork will matter
The IRS makes a blunt point that has been lost in a lot of political shorthand: tips and overtime are still subject to income and payroll taxes—but eligible taxpayers may be able to claim new income tax deductions for certain amounts. [8]
These new deductions are also a major reason you’ll hear about a new IRS form.
A new form is coming: Schedule 1‑A
To claim the new deductions for tips, overtime, car loan interest, and the senior bonus deduction, the IRS has been building Schedule 1‑A (Form 1040). Reporting from the Journal of Accountancy says it consolidates the calculations for all four deductions on a single schedule and then flows the total onto Form 1040/1040‑SR. [9]
That’s the good news. The complicated news: several eligibility rules depend on details that aren’t always obvious on a pay stub or loan statement—especially during a transition year. [10]
“No tax on tips”: a new deduction (up to $25,000) — with limits and exclusions
The IRS says eligible workers (and some self-employed taxpayers) can deduct up to $25,000 of “qualified tips”. The deduction is available to both itemizers and non-itemizers, but it phases out for taxpayers with modified adjusted gross income above $150,000 (or $300,000 for joint filers). [11]
Important details that will surprise a lot of filers:
- “Qualified tips” generally means voluntary cash or charged tips (including through tip-sharing arrangements). [12]
- Mandatory service charges added to a bill are not treated as qualified tips. [13]
- The IRS says tips received in certain specified service trade or business (SSTB) contexts may be excluded, depending on whether you’re self-employed or employed by an SSTB. [14]
The IRS also published guidance in November aimed at helping workers determine their deduction even if their employer’s standard information reporting doesn’t neatly separate what qualifies. [15]
“No tax on overtime”: the deduction is only for the premium portion
This may be the biggest “wait—what?” provision.
The IRS explains that the deduction is tied to the amount of overtime pay that exceeds the regular rate—the “premium” part of time-and-a-half (or similar overtime rules). It is capped at $12,500 (single) or $25,000 (married filing jointly) and phases out above $150,000 MAGI (single) or $300,000 (joint). [16]
A key limitation highlighted by tax professionals: the deductible overtime must generally be overtime required under the Fair Labor Standards Act (FLSA)—which means not all extra pay, premiums, or state-law-only overtime will qualify. [17]
Why 2025 may be messy
Multiple reports say 2025 is effectively a transition year because many payroll systems didn’t track “qualified overtime compensation” in the precise way the new rules require. The IRS issued guidance in November meant to show workers how to determine the deductible premium, even if it isn’t separately broken out on standard forms for 2025. [18]
Practical takeaway for workers: save your final 2025 pay stubs, year-end payroll summaries, and any employer statements that show hours and overtime rates. [19]
“No tax on car loan interest”: up to $10,000 — but only for certain new, U.S.-assembled vehicles
Under IRS guidance, taxpayers may be able to deduct interest paid on a qualifying passenger vehicle loan, with a maximum annual deduction of $10,000, and it phases out at $100,000 MAGI (single) or $200,000 (joint). [20]
The IRS notes several eligibility constraints that can trip up filers:
- The loan must be originated after Dec. 31, 2024 and used to buy a qualifying vehicle for personal use (leases don’t qualify). [21]
- The vehicle must be a qualifying passenger vehicle under weight limits and must have undergone final assembly in the United States. [22]
- The IRS says you generally need to include the VIN on the return for any year you claim the deduction. [23]
Lenders’ reporting: transition relief for 2025
Because this rule created new reporting requirements, Treasury and the IRS issued transition guidance for 2025. The IRS says lenders can meet their 2025 reporting obligations by making the total interest available to borrowers (for example through an online portal, monthly statement, or annual statement), and the IRS describes penalty relief when the notice’s conditions are met. [24]
The senior bonus deduction: $6,000 per eligible person age 65+
Another provision drawing attention is the enhanced deduction for seniors. The IRS says eligible taxpayers age 65+ may claim an additional $6,000 deduction (or $12,000 if both spouses qualify on a joint return). It phases out above $75,000 MAGI (single) or $150,000 (joint). [25]
The IRS also describes this as separate from the existing additional standard deduction for seniors under prior law. [26]
Are bigger refunds coming in 2026? Here’s what’s driving that expectation
Refund talk has become its own storyline. A House Ways and Means Committee release in November claimed tax filers could see an “extra $1,000 bump” on average next year, citing a study tied to Joint Committee on Taxation data and projecting additional refunds during the 2026 filing season. [27]
The “why” comes down to mechanics: when tax benefits change mid-year, payroll withholding tables and taxpayer W‑4 settings don’t always adjust in real time. The IRS itself notes that its Tax Withholding Estimator wasn’t yet updated to account for certain OBBBA deductions (including tips, overtime, car loan interest, and the senior deduction), even though it was updated for the higher standard deduction and child tax credit. [28]
That gap can cut two ways:
- If you don’t adjust withholding, you might get a bigger refund (because less tax benefit was “delivered” through paychecks during 2025).
- If you do adjust withholding, you may see more take-home pay now—and a smaller refund later.
Either way, the IRS emphasizes that withholding should be reviewed again at the start of 2026. [29]
What to do before tax season starts: a practical checklist for 2025 returns
Here are steps tax professionals and IRS guidance repeatedly point to—especially for people who think they may qualify for the new deductions:
- Gather documentation early. Hold onto W‑2s, 1099s, final pay stubs, and any year-end payroll summaries showing overtime and tips. [30]
- Don’t assume “all tips” or “all overtime” qualify. The deductible overtime is generally the premium portion required under federal rules, not every premium or extra payment. [31]
- If claiming the car loan interest deduction, save loan and vehicle details. Expect to need the VIN and a clear record of interest paid. [32]
- Consider updating your W‑4 if you qualify for new deductions. The IRS describes using a deductions worksheet (or working with a professional) rather than relying solely on the estimator for the new OBBBA deductions. [33]
- Itemize vs. standard deduction: recheck the math. SALT’s higher cap changes itemizing calculations for some households—especially in higher-tax areas—but not for everyone. [34]
What business owners are doing differently heading into 2026
While households focus on pay stubs and W‑4s, the business community is looking at a different set of levers: depreciation, entity structure, R&D spending, and long-run exit planning.
A Philadelphia Inquirer column aimed at small-business owners says the July tax-and-spending law is prompting owners to reconsider both how they invest and how their companies are structured. [35]
1) Bonus depreciation is back (and permanent)
The Inquirer reports that bonus depreciation—previously scaling down—is now permanent and can allow businesses to write off qualifying property when it’s placed into service. [36]
Tax advisory analyses add detail: RSM and BDO describe the law as making 100% bonus depreciation permanent for most qualifying property acquired and placed in service after mid-January 2025, with technical acquisition-date rules (including binding contract timing) that can determine eligibility. [37]
2) Manufacturers: a potential 100% deduction for “qualified production property”
The Inquirer notes a 100% deduction concept for qualified production property tied to new facilities used in qualified production activities, subject to requirements like U.S. location and construction timelines. [38]
RSM and BDO provide a more technical frame: “qualified production property” is a new, temporary category that can qualify for full expensing if it meets criteria including U.S. placement in service and construction that begins within specified dates, with exclusions for nonproduction portions (like offices). [39]
3) Cost segregation is getting renewed attention
The Inquirer highlights cost segregation as a strategy that reclassifies components of a building to accelerate depreciation deductions—potentially improving cash flow and lowering taxable income. [40]
4) Entity structure: pass-through vs. C‑corp is back on the table
The same column says the 20% “pass-through” deduction for S corporations, partnerships, and similar entities was made permanent, which could influence how owners think about structure going forward. It also notes the practical comparison business owners wrestle with: individual tax rates can reach 37%, while the corporate rate remains 21%. [41]
5) R&D expensing is restored — and some small businesses can go back to 2022
Another notable point: the Inquirer reports businesses can now fully deduct domestic R&D expenses in the year incurred, and that qualifying small businesses (average annual gross receipts of $31 million or less) may retroactively apply full expensing to 2022–2024 by filing amended returns, with a deadline of July 4, 2026. [42]
6) Planning an exit? Section 1202 gets more attractive for some
For founders and investors, the Inquirer says changes to Qualified Small Business Stock (Section 1202) increase potential exclusions: 50% after three years, 75% after four, and 100% after five or more, depending on eligibility. [43]
Tax help is ramping up — including free consultations advertised by major preparers
As complexity rises, so does marketing from tax prep companies. A Liberty Tax press release says it is offering free OBBBA “Tax Impact Consultations” aimed at helping households, workers, and small business owners understand new deductions and credits—positioning 2026 as a potentially record refund season. [44]
For taxpayers, the best takeaway is less about the brand and more about the trend: whether you use a national chain or a local CPA, expect preparers to ask for more documentation than usual—especially if you’re claiming new deductions that may not be cleanly reported on standard forms during the transition period. [45]
Bottom line for December 18, 2025: treat 2025 as a “documentation year”
If you’re an employee, keep the pay records that show how you were paid (especially overtime). If you’re tipped, keep the records that support what was reported. If you bought a qualifying new vehicle, keep loan statements and VIN details. And if you run a business, revisit capital spending, R&D plans, and entity structure before you assume the old playbook still fits.
References
1. www.irs.gov, 2. waysandmeans.house.gov, 3. www.irs.gov, 4. www.irs.gov, 5. www.irs.gov, 6. www.irs.gov, 7. www.congress.gov, 8. www.irs.gov, 9. www.journalofaccountancy.com, 10. www.spokesman.com, 11. www.irs.gov, 12. www.irs.gov, 13. www.irs.gov, 14. www.irs.gov, 15. www.irs.gov, 16. www.irs.gov, 17. www.irs.gov, 18. www.irs.gov, 19. www.spokesman.com, 20. www.irs.gov, 21. www.irs.gov, 22. www.irs.gov, 23. www.irs.gov, 24. www.irs.gov, 25. www.irs.gov, 26. www.irs.gov, 27. waysandmeans.house.gov, 28. www.irs.gov, 29. www.irs.gov, 30. www.irs.gov, 31. www.irs.gov, 32. www.irs.gov, 33. www.irs.gov, 34. www.irs.gov, 35. www.inquirer.com, 36. www.inquirer.com, 37. rsmus.com, 38. www.inquirer.com, 39. rsmus.com, 40. www.inquirer.com, 41. www.inquirer.com, 42. www.inquirer.com, 43. www.inquirer.com, 44. www.accessnewswire.com, 45. www.spokesman.com
