LEARNING CENTER
Decoding the 2025 Tax Overhaul: Essential Insights for Individuals and Businesses
As tax season approaches, individuals and businesses nationwide face a landscape reshaped by the 2025 tax reforms. At the forefront of these adjustments is the One Big Beautiful Bill Act (OBBBA), a sweeping tax reform initiative. This landmark legislation brings forth significant changes impacting tax returns for individuals, families, and small business owners alike. From revisions in child tax credits to updated deduction guidelines, OBBBA seeks to streamline tax preparation and enhance financial opportunities for many Americans. This article will delve into the pivotal components of the OBBBA and associated updates, equipping you with the knowledge to navigate these changes effectively and ensure readiness for the tax season. Whether your goal is to maximize deductions or ensure accurate and timely filing, staying informed is crucial as you collaborate with tax professionals or accountants. 
Before diving into the myriad changes for 2025, understanding Adjusted Gross Income (AGI) is essential, as it significantly influences many new tax provisions. AGI is a key figure in the U.S. tax system, representing a taxpayer’s total income after factoring in specific deductions, such as retirement contributions or student loan interest. AGI serves as a base for determining taxable income and eligibility for various credits and deductions. Modified Adjusted Gross Income (MAGI) extends AGI by reintegrating certain deductions and exclusions like foreign income or tax-exempt interest, depending on specific tax provisions. MAGI often decides eligibility for income-sensitive benefits or credits, being broader than AGI. When a tax benefit phases out, it decreases as income exceeds a stipulated threshold, eventually ceasing at higher income levels, thereby targeting benefits towards lower-income groups.
Here’s an overview of notable changes beginning in 2025, with some being permanent and others temporary:
Senior Deduction: Between 2025 and 2028, seniors aged 65 or older can each claim a $6,000 deduction, which phases out for unmarried individuals with a MAGI over $75,000 and married couples filing jointly over $150,000. Both itemizers and standard deduction filers are eligible.
On Tips: From 2025 to 2028, a deduction of up to $25,000 annually is permitted for qualified cash tips in customary tipped occupations, excluding certain trades. The IRS lists qualifying occupations in IR-2025-92. It phases out when AGI surpasses $150,000 for singles or $300,000 for joint filers. Employers will report qualifying tips on the employee’s W-2.
On Qualified Overtime: Also from 2025 to 2028, a deduction up to $12,500 ($25,000 for joint filers) is available for overtime pay exceeding the standard rate, phasing out for MAGI beyond $150,000 (singles) and $300,000 (joint filers). Employers can estimate the deductible amount of overtime using a reasonable method, as the IRS finalizes its guidance post-2025. 
Vehicle Loan Interest Deduction: Individuals may deduct up to $10,000 annually in interest on loans for new personal-use vehicles built in the U.S. and weighing less than 14,000 pounds. It excludes family loans and non-personal vehicles, phasing out for incomes between $100,000-$150,000 (single) and $200,000-$250,000 (joint filers).
Adoption Credit: OBBBA introduces a refundable amount, with the credit set at $17,280 for 2025 and a new $5,000 refundable sum. These amounts are inflation-adjusted annually.
Child Tax Credit: OBBBA increases the credit to $2,200 ($1,700 refundable) for dependents under 17, applicable from 2025 to 2028. The credit phases out at $400,000 MAGI for joint filers and $200,000 for others.
Environmental Tax Credits: OBBBA terminates most environmental credits early, with electric vehicle credits ending after September 30, 2025, and residential clean energy credits concluding on December 31, 2025.
SALT Deduction Limit: For 2025, the OBBBA elevates the SALT deduction limit to $40,000, but it de-escalates for higher-income taxpayers starting at $500,000 MAGI.
Retirement Plan Catch-Up Contributions: From 2025, contribution limits significantly rise for individuals aged 60-63, allowing them the greater of $10,000 or 50% more than the standard catch-up contribution to plans like 401(k)s. 
Third Party Network Transaction Reporting (1099-K): OBBBA reinstates the original $20,000 and 200 transactions reporting threshold for Form 1099-K, undoing previous phased-in thresholds.
Sec 529 Plans Qualified Funds Usage: Effective post-July 4, 2025, OBBBA allows Section 529 funds to cover costs related to secondary and postsecondary education, enhancing their flexibility for educational investments.
Qualified Small Business Stock (QSBS): For QSBS acquired post-July 4, 2025, exclusion rates for gains on stock sales vary, with an exclusion cap raised to $15 million and accompanying conditions.
Business Research or Experimental Expenditures: Starting in 2025, domestic expenditures become immediately deductible, while foreign incurred expenses face 15-year amortization.
Business Interest Deduction: Post-2024, limits are set using EBITDA rather than EBIT, benefiting many businesses with increased deductible amounts.
It's crucial for taxpayers at every level to remain vigilant of these changes that significantly affect their financial circumstances. At Cherokee CPA, led by Hope St. Clair, a seasoned CPA adept in strategizing tax efficiencies through careful credit and deduction utilization, we are committed to ensuring our clients are prepared. Our goal is to help you navigate these complexities while focusing on achieving financial security and peace of mind. Let us partner with you to develop a tax strategy that aligns with the latest regulations and optimizes your economic outcomes.
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