In 2025, taxpayers are bracing for one of the largest tax changes in recent years. Knowing the tax brackets, rates, eligibility criteria, and deadlines for 2025 will help you maximize savings and minimize taxes during the final days of the year. Our Pasquesi Sheppard team is here to review the 2025 tax updates.
What's New in 2025 Tax Exemptions and Deductions
The new tax exemptions for 2025 result in expanded benefits for taxpayers. Several provisions of the One Big Beautiful Bill Act are now applicable, providing tax relief for workers, families, and retirees.
Standard Deduction Increases for 2025
The IRS has confirmed an increase in the standard deduction for 2025, continuing a trend of annual inflation adjustments:
- Single filers: After the increase, the total deduction is $15,000.
- Married couples filing jointly: Increased to $30,000. These changes will give taxpayers greater flexibility, particularly in determining whether to itemize or take the standard deduction.
Personal Exemption Status Remains Unchanged
The Alternative Minimum Tax exemption thresholds will be subject to inflation adjustments in 2025. The exemption for individuals will be $88,100, which will begin to phase out at $626,350. For married individuals filing jointly, the exemption will be $137,000, which will phase out for married couples filing jointly at an income of $1,252,700.receive personal exemptions, either for themselves or for their dependents, for tax year 2025. However, the expanded Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) will continue to provide benefits to families.
Alternative Minimum Tax (AMT) Exemption Adjustments
The Alternative Minimum Tax exemption thresholds will be subject to inflation adjustments in 2025. The exemption for individuals will be $88,100, which will begin to phase out at $626,350. For married individuals filing jointly, the exemption will be $137,000, which will phase out for married couples filing jointly at an income of $1,252,700.
Major Tax Policy Changes Taking Effect in 2025
A key aspect of the One Big Beautiful Bill Act is a collection of tax cuts targeted at working-class Americans. Starting in 2025, deductions will be available for qualified tips and the premium part of overtime pay, in order to reduce taxable income. However, these deductions do not make those wages entirely tax-free.
No Tax on Tips Policy Implementation
Workers in sectors where tips make up a significant share of their wages will benefit the most. The employer will continue reporting tips to the IRS, but these amounts will no longer be taxed at the federal level. Employees will still need to carefully document and report all tips, as failure to do so could result in fines.
No Tax on Overtime Pay Rules
Taxpayers can deduct the premium portion of their overtime from their taxable income. Key rules and limits:
- The deduction is available for hourly and salaried workers who qualify for overtime pay.
- The maximum deduction is $12,500 for single filers and $25,000 for married filers.
- There will still be normal withholding during the year, and taxpayers will take the deduction when they file their federal return in 2026.
- Employers will still report overtime wages on Form W-2 as usual, and employees must maintain an accurate record of overtime hours and overtime pay to support the deduction.
Enhanced Senior Tax Deduction
Seniors aged 65 and over are now eligible for an additional $6,000 deduction from taxable income for the years 2025 through 2028. This benefit phases out at a Modified Adjusted Gross Income of $75,000 for individuals and $150,000 for couples filing jointly.
This deduction is combined with the standard deduction, resulting in a significantly lower taxable income for many retirees. It is important to plan appropriately, however, as it could directly impact how Social Security is taxed and how Medicare premiums are calculated.
Updated Tax Brackets and Rate Changes for 2025
The 2025 income tax brackets have risen due to inflation indexing, which is particularly significant for investors and small businesses. As a result, the highest rate of 37% will apply when a single filer earns over $626,350 or when married couples filing jointly earn over $751,600.
Additional important updates:
- Long-term capital gains rates remain the same, but a higher income threshold will be applied.
- The Qualified Business Income (QBI) deduction remains in effect and is indexed for inflation, with updates above the phase-out thresholds.
Family and Child-Related Tax Benefits for 2025
Families will receive increased benefits through the following credits and deductions:
- Earned Income Tax Credit (EITC): The maximum credit for three or more dependents will continue to increase, from $7,830 to $8,046 in 2024, with future increases tied to inflation.
- Dependent Care Credit: Continues to provide some relief for childcare expenses, also with minor inflationary adjustments. Credits are a way to reduce a family's tax liability related to its dependents.
Vehicle and Home-Related Tax Exemptions
A new provision introduces an above-the-line deduction for personal auto loan interest on qualifying new vehicles, capped at $10,000 per year, offering benefits to car buyers as well as those refinancing existing auto loans. This deduction pertains to eligible vehicles financed through traditional lenders or credit unions, and taxpayers must retain accurate and complete documentation of the loan agreement to meet verification requirements.
Moreover, alterations to the SALT deduction and home improvement energy credits could affect planning whether to itemize deductions or just take the standard deduction.
Business and Self-Employment Tax Updates
Self-employed individuals and small businesses will see updates to deductions and tax rules in 2025:
- Section 199A QBI deduction thresholds are increased to reflect inflation.
- Certain business deductions for expenses have increased, particularly for transportation and health benefits. However, with self-employed taxes, the rules have not changed significantly, but the IRS remains focused on reporting compliance.
Gift and Estate Tax Exemption Adjustments
The estate tax exemption for 2025 sees a significant increase, providing greater flexibility in wealth transfer planning. The annual gift tax exclusion rises to $19,000, while the estate tax exemption limit increases to $13,990,000. The changes allow advanced gifting and inheritance considerations in case things change again in 2026.
What to Expect Beyond 2025
Many 2025 updates are routine inflation adjustments, but several high-profile OBBB provisions are explicitly temporary. This includes the tips deduction, overtime-premium deduction, senior deduction, SALT changes, and car-loan interest deduction. Plan your timing accordingly and watch for potential post-2028 changes or extensions. Our Pasquesi Sheppard team would like to help everyone understand changes in 2025, to ensure you receive maximum refunds and minimum liabilities, as well as make financial decisions every year.