2025 Tax Law Updates

As we head into the 2025 tax year, several headline changes are now in effect that can reduce federal taxable income for many taxpayers. Below is an in-depth breakdown of four updates we expect to impact a large number of clients—what they are, who qualifies, and how they differ from 2024.

1) Additional $6,000 “Senior Deduction” (Age 65+)

What changed for 2025

Starting in 2025, taxpayers age 65 or older may claim an additional $6,000 deduction. This is in addition to the existing “additional standard deduction” already available for age 65+.

• $6,000 per eligible individual (so $12,000 if both spouses qualify and file jointly).

• Available whether you itemize or take the standard deduction.

• Income phaseout: begins when modified adjusted gross income exceeds $75,000 (Single) or $150,000 (Married Filing Jointly).

• Must be age 65 on or before the last day of the tax year.

• IRS also indicates the return must include the SSN of the qualifying individual(s), and married taxpayers must file jointly to claim it.

  
  

How this differs from 2024

In 2024, there was no separate $6,000 senior deduction. Seniors could still receive the existing additional standard deduction for age/blindness, but the new $6,000 layer begins in 2025.

What we need from you

• We do not need anything. We will know if you qualify based on the eligibility requirements.

2) “No Tax on Tips” (Deduction for Qualified Tip Income)

What changed for 2025

Beginning in 2025, employees and self-employed individuals may deduct qualified tips received in certain qualifying occupations.

Key details:

• Tips must be reported (e.g., on W-2, certain 1099s, or directly on Form 4137) to qualify.

• Qualified tips are generally voluntary cash or charged tips received from customers (including tip sharing).

• Maximum deduction: $25,000 per year.

• Self-employed limitation: the deduction generally can’t exceed the person’s net income from the trade/business in which the tips were earned.

• Income phaseout: begins when MAGI exceeds $150,000 (Single) or $300,000 (MFJ).

• Not everyone qualifies: Specified Service Trade of Business (SSTB) owners under §199A (and employees of an SSTB) are not eligible.

  
  

How this differs from 2024

In 2024, tip income was fully taxable for federal income tax purposes (subject to the normal rules), and there was no special deduction for qualified tips. The 2025 change introduces a new deduction tied to properly reported tip income.

What we need from you

• Your W2 or 1099 associated to the income in which you receive tips.

3) “No Tax on Overtime” (Deduction for Qualified Overtime Compensation)

What changed for 2025

Beginning in 2025, individuals who receive qualified overtime compensation may deduct the portion of overtime pay that exceeds the regular rate—generally the “half” portion of “time-and-a-half” required by the Fair Labor Standards Act (FLSA).

Key details:

• Overtime must be reported on a W-2, 1099, or other specified statement (final paystub).

• Maximum deduction: $12,500 (Single) or $25,000 (MFJ).

• Income phaseout: begins when MAGI exceeds $150,000 (Single) or $300,000 (MFJ).

  
  

How this differs from 2024

In 2024, overtime was taxed like other wages with no special deduction. In 2025, qualifying taxpayers may receive a meaningful reduction in taxable income based on how much qualified overtime they earned and reported.

What we need from you

• Final pay stub of 2025 along with W2/1099 associated to the income in which you worked overtime.

4) Car Loan Interest Deduction (New Vehicles, Personal Use)

What changed for 2025

Beginning in 2025, taxpayers may deduct interest paid on a qualifying vehicle loan—even if they take the standard deduction.

Key details:

• Maximum deduction: $10,000 per year.

• Income phaseout: begins when MAGI exceeds $100,000 (Single) or $200,000 (MFJ).

• Loan must be:

  • Originated after December 31, 2024

  • Used to buy a vehicle where original use begins with the taxpayer (i.e., generally new, not used)

  • For personal use (not business/commercial)

  • Secured by a lien on the vehicle

• Vehicle must meet the definition of a “qualified vehicle” and have undergone final assembly in the United States (with IRS guidance noting the assembly info can be found on the vehicle label or using VIN resources).

• Leases do not qualify.

• The IRS indicates taxpayers must include the VIN on the return for any year the deduction is claimed.

  
  

How this differs from 2024

In 2024, personal car loan interest was generally not deductible for federal income tax purposes (outside limited business use scenarios). The 2025 change creates a new, capped deduction for qualifying personal auto loans.

What we need from you

• Vehicle purchase agreement

• Vehicle loan agreement