Perhaps the most important aspect of the 2025 Tax Act is to permanently enact into law various provisions from the Tax Cuts and Jobs Act of 2017 that otherwise would have expired at the end of year 2025 (and which otherwise would have resulted in a tax increase for many taxpayers). Among these specific provisions are:

• There are 7 individual income tax rate brackets, with rates of 10% (with an inflation adjustment in 2026), 12% (with an inflation adjustment in 2026), 22%, 24%, 32%, 35%, and a maximum rate of 37%;
• The standard deduction (increased from the amount provided by the Tax Cuts and Jobs Act of 2017) is $15,750 for single filers and $31,500 for married filers; and
• The child tax credit (increased from the amount provided by the Tax Cuts and Jobs Act of 2017) is $2,200 per child.

One issue which the Tax Cuts and Jobs Act of 2017 addressed which was adverse to many taxpayers was the establishment of a $10,000 cap on the deduction of state and local taxes (the “SALT deduction”). However, the 2025 Tax Act raises this “SALT deduction” cap to $40,000 in year 2025, provides for it to increase by 1% each year from year 2026 to year 2029, and then returns this cap to $10,000 in year 2030 and beyond. In addition, this “SALT deduction” cap is reduced by 30% of “modified adjusted gross income” in excess of $500,000 (this “$500,000” threshold increases by 1% per year through year 2029), but this cap cannot be reduced below $10,000. Please also review the “itemized deduction” limitation described below in considering any “SALT deduction” issue.

Tips, Overtime, Cars & ages 65+

Four groups of taxpayers – persons who earn tips, persons who earn overtime, persons who purchase certain cars, and persons age 65 and older – can receive certain beneficial treatment under the 2025 Tax Act.

First, effective for years 2025 through 2028, employees and self-employed individuals may deduct “qualified tips” received in occupations that are listed by the Internal Revenue Service as customarily and regularly receiving tips on or before December 31, 2024 (the Internal Revenue Service is to publish such list of occupations by October 2, 2025). “Qualified tips” are generally voluntary cash or charged tips received from customers or through tip sharing. The maximum annual “tip” deduction is $25,000, and for self-employed individuals, the “tip” deduction may not exceed the individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned. In addition, the “tip” deduction phases out (at a rate of $100 per $1,000 of excess income) for taxpayers with “modified adjusted gross income” over $150,000 for single filers and over $300,000 for married filers.

Second, effective for years 2025 through 2028, individuals may deduct “qualified overtime compensation”. “Qualified overtime compensation” is generally the compensation paid to an individual that exceeds such individual’s regular rate of pay that is required by the Fair Labor Standards Act (for example, the “half” portion of “time-and-a-half” compensation). The maximum annual “overtime” deduction is $12,500 for single filers and $25,000 for joint filers, and the “overtime” deduction phases out (at a rate of $100 per $1,000 of excess income) for taxpayers with “modified adjusted gross income” over $150,000 for single filers and over $300,000 for married filers.

Third, effective for years 2025 through 2028, individuals may deduct “qualified interest” paid on a loan used to purchase a “qualified vehicle”. “Qualified interest” is generally interest paid on a loan that is originated after December 31, 2024, used to purchase a vehicle for which the original use starts with the taxpayer (used vehicles do not qualify), for a personal use vehicle (not for business or commercial use), and secured by a lien on the vehicle. A “qualified vehicle” is generally a car, minivan, van, SUV, pick-up truck, or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds, and that has undergone final assembly in the United States. The maximum annual “qualified vehicle interest” deduction is $10,000, and the “qualified vehicle interest” deduction phases out (at a rate of $200 per $1,000 of excess income) for taxpayers with “modified adjusted gross income” over $100,000 for single filers and over $200,000 for married filers.

Fourth, effective for years 2025 through 2028, individuals who are age 65 and older (determined on or before the last day of the taxable year) may claim an additional deduction of $6,000. This “$6,000” deduction is in addition to the amount of standard deduction otherwise available to persons age 65 and older. This “$6,000” deduction phases out (at a rate of 6% of excess income) for taxpayers with “modified adjusted gross income” over $75,000 for single filers and over $150,000 for married filers.

Gamblers

On the other hand, the 2025 Tax Act is not so favorable to another group of taxpayers – gamblers. Beginning in 2026, only 90% of wagering losses will be deductible against wagering gains (previously you could deduct 100% of wagering losses against wagering gains).

There are various important changes made to the deduction of individual charitable contributions under the 2025 Tax Act. One change (beginning in year 2026) is that taxpayers, regardless of whether they itemize deductions or take the standard deduction, may take a charitable deduction of up to $1,000 for single filers and $2,000 for joint filers. This change is beneficial to “non itemizing” taxpayers who otherwise would not be able to claim a charitable contribution deduction. A second change (beginning in year 2026) is that “itemizing” taxpayers will need to exceed a “0.5% of adjusted gross income” floor before they can claim an itemized deduction for charitable contributions.

The itemized deduction for charitable contributions and the SALT deduction described above (also an itemized deduction) are also subject to a new rule under the 2025 Tax Act that applies generally to itemized deductions. Specifically, beginning in year 2026, the amount of otherwise allowable itemized deductions is reduced by 2/37 of the lesser of the taxpayer’s total itemized deductions, or the amount by which the taxpayer’s taxable income plus total itemized deductions exceeds the 37% bracket threshold (before applying the limitation). Thus, this limitation on itemized deductions in effect only applies to taxpayers whose income is in the maximum 37% rate bracket. Concerning itemized deductions, the 2025 Tax Act also eliminates the concept of “miscellaneous itemized deductions” and establishes (beginning in year 2026) a new itemized deduction for “educator expenses”.

Trump Accounts

The 2025 Tax Act introduces the concept of “Trump accounts”. A “Trump account” is a “quasi-IRA” (but not “Roth IRA”) account for the exclusive benefit of individuals under age 18 (i.e., established by a parent for a child). Contributions (beginning in July, 2026 and initially capped at $5,000 per year, but then indexed to inflation) can only be made in calendar years before the beneficiary is age 18, and distributions can only be made in calendar years after the beneficiary is age 18. There is also a $1,000 tax credit (payable to the “Trump account”) available for opening a “Trump account” for a child born between January 1, 2025 and December 31, 2028.

Qualified education expenses for a “Section 529” plan are expanded under the 2025 Tax Act for “K-12” expenses to cover not only tuition, but also to include textbooks, materials, testing fees, dual enrollment fees, educational therapy costs, and tutoring costs. In addition, the total limit for all “K-12” expenses as qualified education expenses for a “Section 529” plan is increased to $20,000 per year beginning in year 2026.

The 2025 Tax Act also accelerates the repeal of various “green energy” tax credits for individuals. Specifically, the clean vehicle tax credit is terminated for vehicles acquired after September 30, 2025, the alternative fuel vehicle refueling property tax credit is terminated for property placed in service after June 30, 2026, the energy efficient home improvement tax credit is terminated for property placed in service after December 31, 2025, and the residential clean energy tax credit is terminated for expenditures made after December 31, 2025.

There are host of other individual income tax provisions under the 2025 Tax Act that can impact individual income tax liability, including without limitation, with respect to such issues as the alternative minimum tax, the mortgage interest deduction, moving expenses, casualty losses, student loan debt, sales of farmland, overseas remittances, adoption tax credits, and child and dependent care tax credits.

If you have any questions concerning any individual income tax provisions under the 2025 Tax Act, please discuss this issue with your advisers.

Note – Estate Tax and Gift Tax Exemption Under 2025 Tax Act

Another provision that the 2025 Tax Act permanently enacted into law which was initially included in the Tax Cuts and Jobs Act of 2017 and otherwise would have expired at the end of year 2025 (and otherwise would have resulted in a tax increase for many taxpayers) concerns the amount of the estate tax and gift tax exemption. Specifically, the amount of the estate tax and gift tax exemption is set at $15 million per person beginning in year 2026 (reflecting an expansion even beyond the estate tax and gift tax exemption of $13.99 million per person in 2025 based on the Tax Cuts and Jobs Act of 2017). The amount of the estate tax and gift tax exemption is then subject to inflation adjustments beginning in year 2027. Continuing an issue that has become more relevant as the amount of the estate tax and gift tax exemption has significantly increased, taxpayers may want to consider a strategy of “reverse” gifting (i.e., transferring assets previously gifted to a donee back to the donor). Unless if the gifting was for some other reason (such as asset protection), gifting that was completed to reduce potential estate tax liability may no longer be necessary (except perhaps if state estate tax liability is applicable) and, if not “reversed”, would result in a loss of “stepped-up” tax basis on death, and additional “post-death” income tax liability. Any person who has completed significant gifting in prior years should at least consider this “reverse gifting” strategy.

If you have any questions concerning the estate tax and gift tax exemption provisions under the 2025 Tax Act, please discuss this issue with your advisers.

If you wish to discuss any of the above, find Pen Pal Gary’s contact info here.

Disclaimer: please note that nothing in this article is intended to be, or should be relied on as, legal advice of any kind. Neither LHBR Consulting, LLC nor Gary Stern provides legal services of any kind.