Tax Year 2025: The One Big Beautiful Bill Act for Individuals

The rule: the current window already tests OBBBA

The One Big Beautiful Bill Act (Public Law 119-21, signed July 4, 2025) is not a problem for some future SEE window. It is in the window you are sitting now. The IRS says the July 1, 2026 – February 28, 2027 exam refers to the Code, forms and publications "as amended through Dec. 31, 2025," and that "all questions relate to the calendar year 2025." Every OBBBA provision effective for 2025 is therefore testable. Provisions that start in 2026 are not, and neither is any legislation or penalty amount after December 31, 2025.

The IRS now calls these provisions the "Working Families Tax Cuts." This chapter teaches the individual changes with their 2025 numbers. The business changes (§179, 100% bonus depreciation, §174A research expensing, the commercial clean-vehicle credit) are taught in Chapter 17.

Sources: IRS FAQ "What tax law is the examination based on?"; IRS, "How to update withholding to account for tax law changes for 2025"; 2025 Instructions for Form 1040 (What's New); 2025 Schedule 1-A; IRS, One Big Beautiful Bill provisions page. All read 2026-09-23.

The rule: the four Schedule 1-A deductions

Tips, overtime, car loan interest and the senior deduction share four features, and the exam tests all four:

1. They are available whether or not the taxpayer itemizes.
2. They do not reduce AGI. Schedule 1-A totals on Form 1040 line 13b, after AGI. Anything keyed to AGI (the medical floor, IRA phase-outs, the NIIT) is unaffected.
3. Married taxpayers must file jointly to claim the tips, overtime or senior deduction, and the person claiming must have an SSN valid for employment.
4. They are temporary: 2025 through 2028.

No tax on tips. Tips stay in gross income and stay subject to Social Security and Medicare tax. The deduction covers up to $25,000 of qualified tips: voluntary cash or charged tips received in an occupation the IRS lists as customarily and regularly receiving tips on or before December 31, 2024. Mandatory service charges are not qualified tips. Neither are tips received in a specified service trade or business. A self-employed person's qualified tips are limited to the net profit of the business that received them. The deduction is reduced by $100 for each full $1,000 of MAGI over $150,000 ($300,000 MFJ); a fraction of $1,000 is rounded down.

No tax on overtime. Only the premium portion counts: the pay above the regular rate that the Fair Labor Standards Act requires. For time-and-a-half, that is the "half." The cap is $12,500 ($25,000 MFJ), and the phase-down works like the tips deduction.

No tax on car loan interest. Interest of up to $10,000 a year on a loan that:

• originated after December 31, 2024;
• was used to buy a vehicle whose original use began with the taxpayer (used vehicles do not qualify);
• is secured by a first lien on the vehicle; and
• financed a car, minivan, van, SUV, pickup or motorcycle under 14,000 pounds, bought for personal use, that had final assembly in the United States.

Leases do not qualify, and the VIN must be reported. The phase-down is $200 for each $1,000 of MAGI over $100,000 ($200,000 MFJ), and here a fraction of $1,000 is rounded up.

Enhanced deduction for seniors. $6,000 for each taxpayer who is 65 or older by year-end, or $12,000 on a joint return if both spouses qualify. It is in addition to the existing additional standard deduction for age ($2,000 single or HoH, $1,600 per married individual). Each $6,000 is reduced by 6% of MAGI over $75,000 ($150,000 MFJ).

Worked example — overtime and tips together

Dana is single, a restaurant server, and her MAGI is $162,400. Her W-2 shows $14,000 of qualified tips. She also worked 200 FLSA overtime hours at $36 an hour when her regular rate is $24.

• Qualified overtime = 200 × (36 − 24) = 200 × $12 = $2,400. The full $7,200 of overtime pay is not the measure.
• MAGI over $150,000 = $12,400. Full thousands = 12, so each deduction is reduced by 12 × $100 = $1,200.
• Tips deduction = 14,000 − 1,200 = $12,800.
• Overtime deduction = 2,400 − 1,200 = $1,200.
• Both go on Schedule 1-A and reduce taxable income. Her AGI stays $162,400.

Worked example — car loan interest and the senior deduction

Mr. and Mrs. Ortiz, both 67, file jointly with MAGI of $212,300. In March 2025 they bought a new U.S.-assembled SUV for personal use and paid $2,900 of interest on the loan that year.

• Car loan: MAGI over $200,000 = $12,300 → 12.3, rounded up to 13 → 13 × $200 = $2,600 reduction. Deduction = 2,900 − 2,600 = $300.
• Senior: MAGI over $150,000 = $62,300; 6% × 62,300 = $3,738. Each spouse gets 6,000 − 3,738 = $2,262, so $4,524 in total.
• Standard deduction: $31,500 + 2 × $1,600 = $34,700, with the Schedule 1-A deductions on top.

The rule: the SALT cap is $40,000, with a phase-down

For 2025 an itemizer may deduct up to $40,000 of state and local income (or sales), real property and personal property taxes, or $20,000 if married filing separately. That is up from $10,000 ($5,000). The limit is reduced by 30% of MAGI over $500,000 ($250,000 MFS), but never below $10,000 ($5,000 MFS). MAGI here is AGI plus certain excluded foreign and territory income.

Worked example — the SALT phase-down

A couple filing jointly has MAGI of $560,000 and paid $45,000 of state income and property tax.

• Excess MAGI = 560,000 − 500,000 = $60,000; 30% × 60,000 = $18,000.
• Limit = 40,000 − 18,000 = $22,000 (above the $10,000 floor).
• SALT deduction = lesser of $45,000 paid or $22,000 = $22,000.

At MAGI of $600,000 or more, 30% of the excess is at least $30,000, and the limit bottoms out at the $10,000 floor.

The rule: credits that changed for 2025

• Child tax credit: $2,200 per qualifying child, of which up to $1,700 is refundable as the ACTC. The $200,000 ($400,000 MFJ) phase-out and the $50-per-$1,000 reduction are unchanged. The taxpayer must have an SSN valid for employment, issued by the return due date, and on a joint return one spouse is enough if the other has an SSN or ITIN. The child must also have a valid SSN. The $500 credit for other dependents is unchanged.
• Adoption credit: the 2025 maximum is $17,280, and up to $5,000 of it is now refundable.
• Clean vehicles: the new (§30D), used (§25E) and commercial (§45W) clean vehicle credits are not allowed for any vehicle acquired after September 30, 2025.
• Home energy: the energy efficient home improvement credit (§25C) ends for property placed in service after December 31, 2025. The residential clean energy credit (§25D, 30%) ends for expenditures made after December 31, 2025. Both are still available for qualifying 2025 work.

The rule: what OBBBA changed that is not on this window

These provisions take effect after 2025. A question about "the current year" means 2025, so answer as though they do not exist yet:

• a charitable deduction for non-itemizers of up to $1,000 ($2,000 MFJ), and a 0.5%-of-AGI floor on itemized charitable gifts, both beginning in 2026;
• a $15,000,000 basic exclusion amount for decedents dying in 2026 (2025 is $13,990,000);
• removal of the repayment cap on excess advance premium tax credit, for tax years beginning after December 31, 2025. For 2025 the cap still applies.

Worked example — putting 2025 together

Leo, 45, single, has wages of $120,000, including $6,000 of qualified overtime premium. He has no other income, so his MAGI is $120,000. He pays $9,000 of state income tax and $7,000 of property tax, and $8,000 of mortgage interest.

• Itemized: SALT $16,000 (under the $40,000 limit, no phase-down) + mortgage $8,000 = $24,000, which beats the $15,750 standard deduction.
• Overtime: $6,000 (MAGI under $150,000, so no reduction).
• Taxable income = 120,000 − 24,000 − 6,000 = $90,000. Under the old $10,000 SALT cap he would have itemized only $18,000, and there would have been no overtime deduction.

Key figures — tax year 2025 (OBBBA) - Standard deduction $15,750 / $31,500 / $23,625; additional for 65+/blind $2,000 (unmarried) / $1,600 (married). - Senior deduction $6,000 per person; −6% of MAGI over $75,000 / $150,000. - Tips $25,000; overtime $12,500 / $25,000 MFJ; both −$100 per full $1,000 over $150,000 / $300,000. - Car loan interest $10,000; −$200 per $1,000 (rounded up) over $100,000 / $200,000. - SALT $40,000 / $20,000 MFS; −30% of MAGI over $500,000 / $250,000 MFS; floor $10,000 / $5,000. - CTC $2,200 (ACTC up to $1,700); ODC $500; adoption credit $17,280, up to $5,000 refundable. - §30D/§25E/§45W: none for vehicles acquired after 9/30/2025. §25C/§25D: end after 12/31/2025.

Common traps

• Calling the tips or overtime deduction an exclusion. The income stays in wages and in FICA. The deduction comes later, below AGI.
• Deducting the whole overtime paycheck. Only the FLSA premium, the "half," is qualified.
• Letting a married-filing-separately taxpayer claim tips, overtime or the senior deduction. A joint return is required.
• Using $10,000 as the 2025 SALT cap, or treating the phase-down as a phase-out to zero. The floor is $10,000.
• Rounding the car loan phase-down the same way as tips. Tips and overtime round the excess down to full thousands; car loan interest rounds up.
• Applying 2026 rules to a 2025 question, such as the non-itemizer charitable deduction or the $15 million estate exclusion.

Practice questions for this chapter

Part I Practice Exam, questions 17, 39–40, 55–56, 74–78 (10 questions).