2025 Tax Law Wrap-Up: What Matters for the 2026 Filing Season

As tax professionals gear up for the 2025 filing season, staying ahead of the latest changes is essential. This year’s wrap-up brings together the inflation-adjusted amounts you’ll rely on most, along with the critical updates introduced in the One Big Beautiful Bill Act (OBBBA; H.R.1). Here you’ll find the practical details you need to brief clients with confidence and refresh your organizers, checklists and workpapers before the season hits full stride.

2025 tax rates

There are seven federal individual income tax rates for 2025: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Rates apply based on filing status and taxable income.

Capital gains and qualified dividends tax rates

Long-term capital gain and qualified dividend rates remain at 0%, 15% and 20%, with a 3.8% net investment income tax (NIIT) where applicable. Unrecaptured §1250 gain remains capped at 25%; collectibles gain remains capped at 28%.

Personal exemption and standard deduction

Personal exemption deductions were suspended for 2018–2025 by the Tax Cuts and Jobs Act and are now permanently extended under OBBBA. The standard deduction amounts for 2025 are increased by OBBBA §70102 and apply to tax years beginning after Dec. 31, 2024. 2025 amounts are shown in the following table. Additional 2025 standard deduction amounts are from Rev. Proc. 2024-40.

While the dependency exemption deduction under §151 has been permanently reduced to zero by OBBBA, this reduction isn’t considered for other purposes of the tax code, such as determining a qualifying relative for family credit purposes or for head of household (HOH) status. This amount is $5,200 for 2025.

Senior deduction (2025–2028)

For 2025, the senior deduction is $6,000 per qualified individual (taxpayer and, on a joint return, spouse) aged 65 or older on or before Dec. 31, 2025. This deduction is in addition to the standard deduction or itemized deductions. It applies to tax years beginning after Dec. 31, 2024, and before Jan. 1, 2029.

To claim the senior deduction in 2025, each qualifying individual must provide a valid Social Security number (SSN); on a joint return, each spouse must have a SSN to claim their respective amount. Missing or incorrect SSNs related to the §151(d)(5)(C) senior deduction are treated as math/clerical error items under §6213(g)(2).

On a joint return, a separate $6,000 amount is allowed for each spouse who is age 65+ on or before year-end.

Phase-out: The deduction is reduced by 6% of modified adjusted gross income (MAGI) over $75,000 ($150,000 MFJ). MAGI for this purpose adds back income excluded under §§911, 931 and 933.

Reminder: Document age-65 status and SSNs in the workpapers, verify MFJ where applicable and monitor MAGI near the $75,000/$150,000 thresholds when planning 2025 year-end income and deductions.

This deduction is claimed on Schedule 1-A (Form 1040), Additional Deductions, Part V, and carried to Form 1040/1040-SR, Line 13b (Form 1040-NR, Line 13c).

Child tax credit, additional child tax credit and other dependents credit

For 2025, the child tax credit (CTC) is $2,200 per qualifying child (under age 17). The refundable additional child tax credit (ACTC) is up to $1,700 per child for 2025; beginning after 2024, the $1,400 refundable base is indexed annually under §24(i). These changes apply to tax years beginning after Dec. 31, 2024.

To claim the CTC/ACTC in 2025, each qualifying child must have a valid SSN, and the taxpayer must include their own valid SSN (on a joint return, the valid SSN of at least one spouse is sufficient). Missing or incorrect SSNs related to §24 are treated as math/clerical error items.

In the case of divorced or separated parents, if the child is treated as the qualifying child of the noncustodial parent under the rules for children of divorced or separated parents, only the noncustodial parent can claim the CTC for that child.

The CTC is also available for married filing separately (MFS) returns.

MAGI phaseouts for the CTC are unchanged in 2025 and not indexed for inflation; they begin at $200,000 ($400,000 MFJ).

Dependents not eligible for the CTC may be eligible for the other dependents credit (ODC) of $500. Dependents qualifying for the ODC include qualifying children age 17 and older, dependents without an SSN and qualifying relatives.

Reminder: The CTC, ACTC and ODC are subject to the due diligence requirements for filing Form 8867, Paid Preparer’s Due Diligence Checklist, each year.

2025 Tax Law Wrap-Up: What Matters for the 2026 Filing Season

Itemized deductions

Medical expenses

Medical expenses are subject to 7.5% of AGI [§213(a)].

State and local income tax deduction (SALT)

For 2025, the itemized deduction for state and local taxes (SALT), the aggregate of state and local income taxes (or general sales taxes, if elected), real property taxes and personal property taxes based on value is limited to $40,000 ($20,000 MFS). These changes apply to tax years beginning after Dec. 31, 2024.

For 2025 through 2029, apply an additional phase-down by reducing the applicable limit by 30% of the amount by which the taxpayer’s modified AGI exceeds the threshold amount. The threshold amounts are $500,000 ($250,000 MFS) for 2025, $505,000 ($252,500 MFS) for 2026, and increase 1% over the previous year’s amounts in 2027–2029. The phase-down may not reduce the limit below $10,000 ($5,000 MFS). MAGI adds back amounts excluded under §§911, 931 and 933.

Mortgage interest

The allowable ceiling for qualified mortgage interest on a taxpayer’s acquisition indebtedness is $750,000 ($375,000 MFS) unless the mortgage was incurred on or before Dec. 15, 2017. Mortgages obtained prior to this date are considered grandfathered debt under the $1 million indebtedness limit. The deduction for interest on home equity debt is also suspended for tax years 2018–2025. The suspension has been made permanent under OBBBA (H.R.1). Because of this suspension, the only way for home equity indebtedness to be qualified debt is for it to be secured by the home, be used to buy, build or substantially improve the property and be within the acquisition debt limitations.

Charitable contribution deduction

The amount of the deduction for charitable contributions of cash to 50% charities is limited to 60% of AGI through 2025. Depending on the type of property given and the type of organization it is given to, the charitable deduction may be limited to 50%, 30% or 20% of AGI. A higher limit applies to certain qualified conservation contributions.

Casualty and theft loss

Personal casualty and theft losses an individual sustains are deductible only to the extent that the losses are attributable to a federally declared disaster.

For casualty losses in a federally declared disaster that occurred in an area warranting public or individual assistance (or both), taxpayers can choose to treat the casualty loss as having occurred in the year immediately preceding the tax year in which the disaster loss was sustained. The loss can be claimed as a deduction on the current-year return or an amended return for the preceding tax year.

If the loss deduction is more than the taxpayer’s income, the result may be a net operating loss (NOL).

OBBBA refreshed the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA) 2020 framework so special casualty loss and retirement plan relief applies only when FEMA declares a major disaster on or after July 4, 2025, and the IRS designates your client’s locality. For year end, confirm the specific IRS disaster notice (eligible counties and incident dates) and consider a §165(i) election to claim a qualified disaster loss on the prior-year return if it’s more favorable.

Employee business expenses

The deduction for employee business expenses reported on Form 2106, Employee Business Expenses, is only available to Armed Forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with impairment-related work expenses. This change was made permanent under OBBBA.

Gambling losses and expenses

Gambling losses of recreational gamblers are deductible on Schedule A (Form 1040), Itemized Deductions, but only to the extent of winnings, which are included in taxable income on Schedule 1 (Form 1040), Additional Income and Adjustments to Income, Part I, Line 8b. The IRS requires taxpayers to maintain a log of winnings and losses as documentation.

2025 Tax Law Wrap-Up: What Matters for the 2026 Filing Season

Moving expenses

The moving expense deduction on Form 3903, Moving Expenses, has been suspended for all taxpayers except active members of the Armed Forces who move due to a change in military orders. The moving expense deduction, which was suspended through 2025 for any other taxpayers receiving reimbursement for what would have been otherwise qualified moving expenses, was made permanent by the OBBBA.

Alimony

Effective for any divorce or separation instrument executed after Dec. 31, 2018, alimony received is not taxable and alimony paid is not deductible. This also applies to pre-2019 divorce decrees amended after Dec. 31, 2018, if the new agreement expressly provides that the Tax Cuts and Jobs Act (TCJA) rules apply.

For divorces executed and finalized before 2019, alimony received is taxable and alimony paid is deductible.

When filing Form 1040, taxpayers receiving taxable alimony must include the amount received and the date of the divorce on Schedule 1 (Form 1040), Part I, Lines 2a and 2b. Those paying deductible alimony report the amount paid, the recipient’s SSN and the date of the original divorce on Schedule 1 (Form 1040), Part II, Lines 19a, 19b and 19c.

Alternative minimum tax (AMT)

The AMT exemption amounts for 2025 are shown below.

§529 plan distributions

Distributions from qualified tuition plans (QTPs) under §529 consist of two components: (1) return of investment or basis and (2) earnings. Earnings on distributions used to pay for post-secondary education are nontaxable to the extent they are used for qualified higher education expenses. Distributions in excess of the student’s qualified higher education expenses are taxable to the extent of earnings distributed.

Taxpayers may also take distributions of up to $10,000 each year from §529 plans to pay for education costs, such as tuition and related fees, paid to a public, private, or religious elementary or secondary educational institution. For tax year 2025, H.R.1 expands what counts as qualified K-12 expenses for distributions made after July 4, 2025, to include curriculum and materials, books and instructional materials, online educational materials, certain tutoring, standardized/placement test fees, dual-enrollment fees, and licensed educational therapies (cap remains $10,000 for 2025).

Plan holders can use distributions to pay for tuition and qualified expenses of apprenticeship programs and can withdraw a lifetime maximum of $10,000 to pay down qualified student loan debt of the designated beneficiary.

Qualified higher education expenses now also include certain postsecondary credentialing expenses (e.g., required testing and continuing education for maintaining a recognized credential) for distributions made after July 4, 2025.

Taxpayers may roll over, within 60 days, funds from a §529 plan to an ABLE account for the same designated beneficiary or a member of the beneficiary’s family. The rollover counts toward the ABLE account’s annual contribution limit. For 2025, that limit is $19,000 (equal to the 2025 annual gift tax exclusion), plus the lesser of (1) their compensation includible in gross income for the tax year, or (2) the federal poverty line for a one-person household. Any amount that would put total ABLE contributions over the annual limit is an excess contribution and is subject to a 6% excise tax each year until corrected (generally by having the program return the excess and any earnings).

Discharged student loan debt

Under §108(f)(5), gross income does not include any amount that would be taxable cancellation of debt income from the discharge of certain student loans in 2021–2025.

These loans include:

– Loans for postsecondary educational expenses if loans were made, insured or guaranteed by the U.S., a state or an eligible educational institution

– Private education loans

– Loans from an educational organization described in §170(b)(1)(A)(ii) that meet certain requirements

– Loans from a tax-exempt organization under §501(a) to refinance a student loan

Note: The exclusion due to a student’s death or total and permanent disability was made permanent under the OBBBA.

Student loan interest

The maximum deduction for 2025 is $2,500.

For 2025, the deduction starts to phase out when MAGI exceed $85,000 ($170,000 if MFJ). A taxpayer cannot take a student loan interest deduction if their MAGI is $100,000 ($200,000 if MFJ) or more.

A student loan interest deduction is not allowed if the student loan interest is paid with the §529 plan distribution.

Estates and gifts

For tax year 2025, the exclusion for decedents is $13,990,000 with an applicable credit of $5,541,800. The FMV date of death basis rules remain in effect.

For 2025, the annual exclusion for gifts is $19,000. However, the annual exclusion for gifts to noncitizen spouses is limited to $190,000, instead of unlimited gifting between U.S. citizen spouses.

For estates not required to file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, the surviving spouse of a deceased taxpayer has nine months, or the last day of the extension period if the return was extended, to make the portability election. This allows the surviving spouse to apply the deceased spousal unused exclusion (DSUE) amount to their own transfers during life and at death.

However, Rev. Proc. 2022-32 extended the date to make the portability election up until the fifth anniversary of the decedent’s date of death, provided certain requirements are met.

No tax on tips (2025–2028)

The OBBBA added a below-the-line deduction for qualified tips received in tax years beginning after Dec. 31, 2024, and before Jan. 1, 2029. The deduction is up to $25,000 per year and is available whether or not the taxpayer itemizes.

The deduction phases out once a taxpayer’s MAGI for the current year exceeds:

– $300,000 (MFJ)

– $150,000 (all other filers)

It phases out by $100 for every $1,000 of MAGI above the threshold amounts.

Qualified tips:

– Must be voluntary amounts (not service charges)

– Must be reported on Form W-2, Form 1099-NEC, Form 1099-K, or Form 4137

– Are limited to occupations the IRS identifies as customarily and regularly tipped

https://www.federalregister.gov/documents/2025/09/22/2025-18278/occupations-that-customarily-and-regularly-received-tips-definition-of-qualified-tips

– The taxpayer receiving the qualified tips must have a valid SSN

The deduction is claimed on Schedule 1-A (Form 1040), Part II, and carried to Form 1040/1040-SR, Line 13b (Form 1040-NR, Line 13c).

No tax on overtime (2025–2028)

The OBBBA adds a below-the-line deduction for the overtime premium (the “½” in time-and-a-half) required under the Fair Labor Standards Act for tax years beginning after Dec. 31, 2024, and before Jan. 1, 2029. The deduction is up to $12,500 ($25,000 MFJ) and is available whether or not the taxpayer itemizes.

The deduction starts to phase out once a taxpayer’s MAGI exceeds:

– $300,000 (MFJ)

– $150,000 (all other filers)

Requirements:

– Employers must separately report total qualified overtime on the W-2

– The taxpayer’s SSN must appear on the return

The qualified overtime deduction is claimed on Schedule 1-A (Form 1040), Part III.

Car loan interest deduction (2025–2028)

The OBBBA added a below-the-line deduction for qualified passenger vehicle loan interest for tax years beginning after Dec. 31, 2024, and before Jan. 1, 2029. Up to $10,000 of interest per year is deductible, whether or not the taxpayer itemizes.

The deduction phases out by $200 for each $1,000 of MAGI over $100,000 ($200,000 MFJ). MAGI adds back the §911, §931 and §933 exclusions.

The deduction is claimed on Schedule 1-A (Form 1040), Part IV.

Qualified business income deduction (QBID)

The QBID under §199A for an eligible taxpayer is the lesser of (1) their combined qualified business income (QBI) or (2) 20% of their taxable income before the QBID less net capital gain for the year.

For 2025, the taxpayer’s QBID is reduced or eliminated if their taxable income exceeds the threshold amounts of $394,600 for those filing MFJ, or $197,300 for those filing S, HOH, MFS or QSS.

Taxpayers at or below the thresholds may be allowed the full 20% deduction. Once a taxpayer’s taxable income exceeds the lower thresholds, the wage and property limitations are phased in. For service trades or businesses, the deduction is not allowed once the taxpayer’s taxable income exceeds the threshold amounts. These phase-in ranges are shown in the table below.

Enhancement of adoption credit update

Up to $5,000 of the adoption credit is refundable for tax years beginning after Dec. 31, 2024. The refundable cap is inflation-indexed starting in 2026. The refundable portion does not carry forward; only the nonrefundable remainder keeps the existing carryforward rule.

For 2025, the maximum adoption credit is $17,280 per child. The income phaseout begins at MAGI of $259,190 (2025) and phases out over the next $40,000 of MAGI (i.e., fully phased out by $299,190). The maximum refundable credit is $5,000 per eligible child.

Tribal determinations for “special needs” (adoption credit)

Indian tribal governments alongside states can make the determination whether a child has special needs for the adoption credit under §23(d)(3). A tribal determination of special needs qualifies the adoption for the full credit regardless of qualified adoption expenses paid.

Key points:

• The OBBBA add “or Indian tribal government” to §23(d)(3)(A)–(B)

• Effect: tribal “special needs” determinations are treated the same as state determinations

• Effective date: tax years beginning after Dec. 31, 2024

Tax professionals need a WISP

Professionals should be aware of the importance of having a written information security plan (WISP) in place. A WISP outlines the procedures and policies for protecting sensitive client information, ensuring compliance with data security regulations and safeguarding against data breaches. In an era where cyber threats are increasingly prevalent, having a well-documented WISP is essential for maintaining client trust and meeting regulatory requirements. Now is an opportune time to review and update your WISP to reflect current practices and emerging threats.

Key points for 2025:

• The WISP requirement applies to all preparers; see Pub. 4557 and the IRS/Security Summit WISP guide (Pub. 5708)

• IRS reiterated the federal mandate to have a WISP (IR-2025-79, July 29, 2025)

Stay vigilant against scams

The IRS urges taxpayers to be on the lookout for unexpected scam phone calls, text messages and emails from anyone claiming to be collecting on behalf of the IRS. Recent news about tax scams and consumer alerts are available at www.irs.gov/uac/tax-scams-consumer-alerts. Tax scams generated by new AI tools are especially troublesome because they look professionally composed and are specifically tailored to trick vulnerable taxpayers.

Due to the continuation of scams involving individuals who impersonate IRS agents and request immediate payment, the IRS will do everything it can to help taxpayers avoid confusion and ensure they understand their rights and tax responsibilities, especially when it assigns cases to a private collection agency. If a case goes to private debt collection, the IRS first sends Notice CP40; the collection agency follows with its own letter. Don’t engage unless you’ve received those letters.

Even with private debt collection, taxpayers shouldn’t receive unexpected phone calls, text messages or emails from the IRS demanding payment. When taxpayers owe tax, the IRS always sends several collection notices through the mail before making phone calls.

Affordable care subsidies

The premium tax credit (PTC) is available to individuals whose household income is between 100% and 400% of the federal poverty line (FPL). However, for 2021–2025, the credit may be allowed when household income exceeds 400% of the federal poverty line. Also, health care costs are limited to 8.5% of family household income for Marketplace-purchased health coverage only [§36B(b)(3)(A)(iii)]. (Separate from the PTC cap, the Affordable Care Act (ACA) employer-coverage “affordability” threshold is 9.02% for 2025 plan years.)

Note: The American Rescue Plan Act expansion of the PTC is a sticking point with budget reconciliations. This may or may not be extended past 2025.

Energy efficient home improvement credit

The energy efficient home improvement credit includes property placed in service after Dec. 31, 2022, and before Jan. 1, 2026 (§25C). The credit amount is 30% of the sum of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during the year, and the amount of the residential energy property expenditures paid or incurred by the taxpayer during that year.

The maximum aggregate annual limit is $1,200 for certain property. In addition, there are separate annual limits of $600 for qualified energy property, $600 for windows and skylights, $250 for each exterior door ($500 in total for all exterior doors) and $150 for home energy audits. A $2,000 annual limit applies in the aggregate to amounts paid for specified heat pumps, heat pump water heaters, and biomass stoves and boilers. The energy efficient home improvement credit is claimed on Form 5695, Residential Energy Credits, Part II.

Residential clean energy credit

The residential clean energy credit includes solar, fuel cell, wind, geothermal and qualified battery storage [§25D(a)]. Under H.R.1, no credit is allowed for expenditures made after Dec. 31, 2025 (the post-2032 step-downs were repealed). The IRS has clarified that an expenditure is treated as made when original installation is completed; if installation (or original use for constructed/reconstructed property) occurs after Dec. 31, 2025, the credit is not allowed even if the taxpayer paid in 2025. (https://www.irs.gov/newsroom/faqs-for-modification-of-sections-25c-25d-25e-30c-30d-45l-45w-and-179d-under-public-law-119-21-139-stat-72-july-4-2025-commonly-known-as-the-one-big-beautiful-bill-act-obbb)

The residential clean energy credit is claimed on Form 5695, Part I.

Clean vehicle credit

The credit for new clean vehicles can be as high as $7,500 (§30D) for vehicles acquired on or before Sept. 30, 2025. A qualified vehicle must have final assembly in North America, meet critical mineral or battery component requirements and have a minimum battery capacity of seven kilowatt hours. The seller must provide a report to the taxpayer and the IRS. The clean vehicle credit is claimed on Form 8936, Clean Vehicle Credit, and Schedule A (Form 8936), Clean Vehicle Credit Amount.

Additionally, the credit stipulates that the manufacturer’s suggested retail price (MSRP) for vans, SUVs and pickup trucks must not exceed $80,000 ($55,000 for any other vehicle).

For 2025 purchases through Sept. 30, 2025, taxpayers may elect to transfer the credit to the dealer to reduce the purchase price. If MAGI exceeds the limit, it must be repaid on reconciliation Schedule A (Form 8936). Request Form 15400, Clean Vehicle Seller Report, from your client.

No credit is allowed if the taxpayer’s MAGI for the current year or preceding year (whichever is less) exceeds the following threshold amounts:

• $300,000 (MFJ, QSS)

• $225,000 (HOH)

• $150,000 (all others)

Credit for previously-owned clean vehicle

This credit is for taxpayers who purchase a previously-owned clean vehicle after Dec. 31, 2022, and before Sept. 30, 2025 (§25E). The credit is the lesser of $4,000 or 30% of the vehicle’s sale price. The sale price cannot exceed $25,000 and the transaction must be through a dealer. The purchasing taxpayer is the first qualified buyer to claim the credit since Aug. 16, 2022, other than its original user. The previously-owned clean vehicle credit is claimed on Form 8936 and Schedule A (Form 8936).

No credit is allowed if the taxpayer’s MAGI for the current year or preceding year (whichever is less) exceeds the following threshold amounts:

• $150,000 (MFJ, QSS)

• $112,500 (HOH)

• $75,000 (all others)

A previously-owned clean vehicle is a motor vehicle:

• With a model year that is at least two years earlier than the calendar year in which the taxpayer acquires it

• That was originally used by someone other than the taxpayer

• Acquired by the taxpayer in a qualified sale

Most of the same requirements apply as the clean vehicle credit, but not all. This credit can also be transferred to the dealer; as such, clients should provide Form 15400 and reconciliation is required on Schedule A (Form 8936).

Mortgage forgiveness debt relief

The maximum amount of discharged debt on a principal residence through foreclosure or debt restructuring that may be excluded from income under §108(a)(1)(E) is $750,000 ($375,000 MFS) through tax year 2025.

Earned income tax credit (EIC)

The maximum EIC and phase-out amounts are shown in the following table.

The disqualified investment income limit for 2025 is $11,950.

Child and dependent care credit

The eligible expense limits are $3,000 for one eligible dependent and $6,000 for two or more eligible dependents. Additionally, the maximum credit rate is 35% for taxpayers whose AGI is $15,000 or less.

The exclusion for employer-provided dependent care assistance is $5,000 ($2,500 MFS).

Flexible spending arrangements (FSA)

For 2025, the health FSA contribution limit is $3,300, with a maximum carryover of $660 if permitted.

Health savings account (HSA)

The HSA contribution limits for calendar year 2025 are $4,300 for a self-only plan and $8,550 for a family plan. The age-55+ catch-up remains $1,000 per eligible individual.

High-deductible health plans (HDHPs) can cover telehealth before the deductible and still be HSA-eligible for plan years starting in 2025.

Other topics

Farmland sales – election to pay tax in installments: The OBBBA added new §1062, allowing installment payment of tax on qualified farmland sales. The election applies to taxable years beginning after July 4, 2025.

Viktoriya Barsukova, EA

CEO | Enrolled Agent | MBA

San Diego Precision Tax Service Inc.

Tax preparation and tax consulting for individuals and small businesses

Serving all 50 states

Phone: +1 (619) 910-1040

Email: viktoriya@sandiegotaxhelp.com

Website: https://www.sandiegotaxhelp.com

Based in San Diego, CA — Nationwide service available

Download your “2026 Tax Resource Guide” now.

Written by NATP Staff.