Understanding the 2025 US Tax Code Changes: A Guide for Average Americans 🇺🇸

The year 2025 brings significant changes to the US federal tax code, primarily due to the passage of the "One Big Beautiful Bill" (OBBB) in July 2025.2 This legislation made permanent many expiring provisions from the 2017 Tax Cuts and Jobs Act (TCJA) and introduced new, temporary deductions aimed at specific groups.

Here is a guide to the key changes that will affect most average Americans when filing their 2025 tax returns.

1. Income Tax Rates and Brackets (Permanent Changes)

The individual income tax rates originally set by the TCJA and scheduled to expire were made permanent.4 The tax structure retains seven brackets, but the income thresholds are adjusted annually for inflation.

• Tax Rates: The current marginal tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37% are preserved.

• Bracket Adjustments: The income thresholds for each tax bracket have been adjusted for inflation.

(Note: Brackets for 32%, 35%, and 37% continue above these thresholds.)

2. The Standard Deduction (Permanent Increase & Indexing)9

The nearly doubled standard deduction amounts created under the TCJA were made permanent and increased slightly for 2025.10 This means most taxpayers will continue to find it more beneficial to take the standard deduction than to itemize.

• Single Filers: $15,750 (Up from $15,000 in 2024)

• Married Filing Jointly: $31,500 (Up from $30,000 in 2024)

• Head of Household: $23,625 (Up from $22,500 in 2024)

Personal Exemptions Elimination

The elimination of the personal and dependent exemptions (originally set to return in 2026) is also made permanent, maintaining the status quo since 2018.

3. Key Deductions and Credits (Notable Changes)

The 2025 law includes several significant changes to popular credits and deductions, including new temporary deductions for workers.

A. Child Tax Credit (CTC)

The CTC is permanently increased to $2,200 per child for tax year 2025 and is subject to annual inflation adjustments thereafter.

• Refundable Portion: The maximum refundable portion (the amount you can get back as a refund even if you owe no tax) remains at $1,700 per child.

B. State and Local Tax (SALT) Deduction Cap

The limit on deducting State and Local Taxes (property, income, or sales taxes) was temporarily quadrupled.

• New Cap: The SALT deduction limit is raised from $10,000 to $40,000 for all filers (Married Filing Separately limit is $20,000).

• Sunset Clause: This higher cap is temporary, increasing by 1% annually but reverting back to the $10,000 cap beginning in 2030.

• Income Phase-out: The deduction is phased out for taxpayers with Modified Adjusted Gross Income (MAGI) above $500,000 ($250,000 for Married Filing Separately).

C. New Temporary Deductions (2025-2028)

The OBBB introduces new, temporary above-the-line deductions (meaning you can claim them even if you take the standard deduction) that expire after 2028:

• Tips Income Deduction: A deduction of up to $25,000 for qualified cash tips.21 It phases out for taxpayers with MAGI over $150,000 (Single) or $300,000 (Married Filing Jointly).

• Overtime Income Deduction: A deduction for qualified overtime compensation (pay above the regular rate of pay, like the "half" portion of time-and-a-half) up to $12,500 ($25,000 for MFJ). 23It has the same phase-out thresholds as the tips deduction.

• Seniors Deduction: Individuals aged 65 and older may claim an additional deduction of $6,000 (up to $12,000 for a married couple where both are 65+). 24This also phases out for Single filers with MAGI over $75,000 ($150,000 for MFJ).

4. Other Key Provisions to Note

• Auto Loan Interest Deduction: A temporary deduction for up to $10,000 in interest paid on a loan for a new, US-assembled vehicle (for personal use) purchased after 2024.

• Elimination of Certain Energy Credits: Certain energy-efficient credits, including some for electric vehicles (EVs), hybrids, and energy-efficient home improvements, are scheduled to sunset or be eliminated starting in late 2025.27

• Gift Tax Exclusion: The annual exclusion for gifts increases to $19,000 per recipient for 2025.

Action Steps for Taxpayers:

1. Re-evaluate Itemizing: The temporary increase in the SALT cap to $40,000 may make itemizing worthwhile again for some homeowners, especially those in high-tax states, even with the permanently higher standard deduction.

2. Monitor New Deductions: If you receive significant tips or overtime pay, ensure you have proper records to claim the new, temporary deductions for 2025.

3. Review Withholdings: With permanent changes to the tax brackets and standard deduction, review your W-4 with your employer to ensure your federal tax withholding is accurate.

The information in this guide reflects the current understanding of the "One Big Beautiful Bill" (OBBB) signed in July 2025. Always consult with a qualified tax professional for personalized advice.