OBBBA Provisions Affecting 1040 Returns for Tax Year 2025
Here we discuss highlights of some of the more popular provisions of the One Big Beautiful Bill Act (OBBBA).
If you have questions on the Bill and how it might personally impact your tax situation, as your trusted tax advisor we are happy to help!
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Tax Credits Expiring in 2025
These require immediate attention if you are considering making any energy improvements or acquiring a electric or hybrid vehicle.
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All tax credits for Clean Vehicles are repealed for vehicles acquired after September 30, 2025. This includes new and used electric vehicles for either personal or business use. 2025 will be the last tax year to take these credits.
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Both the Home Solar Credit and the Energy Efficient Home Improvement Credit are repealed for property put into service after December 31, 2025. Be careful on this one. If you pay for the improvement in 2025, but the project is not complete until 2026 or later, the project will not qualify.
Potential Tax Savings -
Improvements to Existing Provisions
Some of these provisions were set to expire at the end of 2025. The OBBBA instead made them permanent in addition to making some enhancements.
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The lower tax brackets introduced in 2018 are now permanent. The progressive rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
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The increased standard deduction that went into effect in 2018 is now permanent, and in 2025 is increased to $15,750 single, $31,500 Married Filing Joing (MFJ).
The additional deduction for 65+ and/or blind is $2,000 single, $1,600 for a married person. (see NEW 65+ Exemption below)
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The higher Child Tax Credit (CTC) that went into effect in 2018 is now permanent, and in 2025 will be $2,200 per qualifying child under age 17. Subject to income phaseout.
The $500 Other Dependent Credit for dependents not covered by the CTC is also now permanent.
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The SALT deduction limit is increased to $40,000 in 2025 with 1% increases each year until it reverts back to $10,000 in 2030. The increased SALT limit begins phaseout at income levels of $250,000 single, $500,000 MFJ.
This will bring many taxpayers back to itemizing their deductions who migrated to the standard deduction in the past 7 years. SALT tends to be the largest, most common itemized deduction especially for taxpayers in CA. For some taxpayers this is a big win.
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Qualifying Higher Education Expenses are broadened to include a variety of additional expenses incurred in association with a public, private or religious K-12 school. It appears that homeschooling falls within this new definition. Up to $10,000 of post-July 4, 2025 distributions may be withdrawn tax-free for not only tuition of such schools, but also curriculum and materials, certain tutoring, testing fees, dual enrollment fees and educational therapies for students with disabilities.
For Californians, however, the state does not conform and therefore distributions for K-12 purposes will be deemed non-qualified. The earnings portion of such distributions will be subject to state tax plus a 2.5% penalty.
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The 20% QBI deduction is made permanent. This is great news for the self-employed and owners of pass through entities. QBI provisions are enhanced for tax years beginning 2026 which we'll cover in a future blog post.
CA does not offer a QBI deduction.
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All the drama since 2021 regarding the implementation of the lower $600 threshold for 1099-K reporting by payment processors (Venmo, Paypal, etc) has ended - to the joy of small businesses. The OBBBA states that a 1099-K informational return does not need to be issued unless the taxpayer earned > $20,000 and had more than 200 separate transactions.
Note this is regarding a 1099-K, not the 1099-NEC or -MISC which still has a $600 threshold for 2025.
Potential Tax Savings -
NEW “Above-the-Line” Deductions
Here is where much of the hype centered around during the presidential campaign and while pushing the Bill through Congress. There is a lot of fine print on these final provisions - so be careful to understand what is covered before banking on any anticipated tax savings.
First, let’s be clear on what is meant by “Above-the-Line” deduction. It is NOT a dollar-for-dollar tax credit. Rather, like all deductions, they reduce your taxable income before calculating tax, with an added benefit of being deducted above-the-line. The “line” refers to Adjusted Gross Income (AGI). AGI is a critical figure used throughout a 1040 tax return. A lower AGI can be beneficial because it can increase your eligibility for various tax credits and deductions that have income limitations. For example, itemized medical expenses or the SALT deduction - both have limitations based on AGI. Above-the-line deductions are also available to more taxpayers compared to below-the-line deductions because you do not have to itemize in order to benefit.
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NEW for 2025-2028, taxpayers aged 65+ can claim a $6,000 exemption deduction ($12,000 for married taxpayers who are both 65+.) Subject to phaseout at income levels beginning $75,000 single, $150,000 married.
This provision is aimed to offset some of the taxes on Social Security benefits, though you do not need to collect Social Security in order to qualify for the deduction.
It's not quite the "no tax on Social Security" that was touted, but it's something.
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NEW for 2025-2028, taxpayers who receive monetary tips in customarily-tipped professions* may deduct up to $25,000 of qualified tips reported on a W-2 or 1099-NEC/K. Excluded tips are still subject to social security & medicare taxes.
This deduction contains multiple limitations that we should discuss if you receive tip income. Subject to phaseout at income levels beginning $150,000 single, $300,000 MFJ. CA does not offer a similar deduction.
The IRS has announced that they will not change the 2025 tax year’s W-2 or 1099 for the new law. The IRS is preparing additional guidance to employers and taxpayers on the reporting of tips and overtime to enable taxpayers to claim OBBBA-related tax benefits when they file their returns.
*IRS to provide list of customarily-tipped professions.
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NEW for 2025-2028, taxpayers earning overtime may deduct up to $12,500 ($25,000 MFJ) of "qualified compensation" reported separately on a W-2 or 1099-NEC. Only overtime as defined by the Fair Labor Standards Act qualifies (aka hours above 40 hours per week for nonexempt employees working on an hourly basis.) The excluded OT is only the portion in excess of the regular hourly rate (i.e. the "half" in "time & a half".) Excluded amounts are still subject to social security & medicare taxes.
This deduction contains multiple limitations that we should discuss if you receive overtime. Subject to phaseout at income levels beginning $150,000 single, $300,000 MFJ. CA does not offer a similar deduction.
The IRS has announced that they will not change the 2025 tax year’s W-2 or 1099 for the new law. The IRS is preparing additional guidance to employers and taxpayers on the reporting of tips and overtime to enable taxpayers to claim OBBBA-related tax benefits when they file their returns.
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NEW for 2025-2028, taxpayers may deduct up to $10,000 of qualified car loan interest. The loan must be secured by a new personal-use passenger vehicle acquired 1/1/2025 or later with a final assembly point in the US. Motorcycles included. No leases.
Taxpayers can rely on either the window sticker for the final assembly point, or the plant of manufacture as reported on the VIN at the US Dept. of Transportation website.
This deduction contains multiple limitations that we should discuss if this applies. Subject to phaseout at income levels beginning $100,000 single, $200,000 MFJ. CA does not offer a similar deduction.
Not in the Taxpayer’s Favor -
Reduced Deductions
These limitations, originally put in place in 2018 by Trump 1.0’s Tax Cuts and Jobs Act (TCJA), were set to expire at the end of 2025. However, the OBBBA made them permanent instead.
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For loans taken out after December 15, 2017, the interest deduction is capped at the interest on a max of $750,000* qualified residence mortgage. This limitation is now permanent.
The elimination of home equity interest deduction for non-acquisition loans is permanent.
CA does not limit mortgage interest in this way.
*$375,000 limit for married filing separate.
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The elimination of 2% miscellaneous itemized deductions is made permanent. Some of the key deductions no longer available for most taxpayers include unreimbursed employee expenses, union dues, tax prep fees, investment expenses and hobby losses.
CA still allows for the majority of these deductions.
Enda Accounting provides the information in our blog posts for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
