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Workers, seniors, and families set to benefit from sweeping updates beginning tax year 2025
The IRS has released detailed guidance on a series of major tax deductions set to take effect under President Donald Trump’s newly signed tax reform bill. The sweeping extension and expansion of the 2017 Tax Cuts and Jobs Act (TCJA) includes temporary deductions for tips, overtime pay, senior citizens, and car loan interest, among other provisions.
While the legislation locks in many Trump-era tax cuts and enhances deductions for individuals and families, it also has a significant budget impact. According to the Tax Foundation, the extended and revised tax code is projected to reduce federal revenue by $4.5 trillion over the next decade.
Key Deductions to Take Effect in 2025
The IRS confirmed that the following deductions will apply to tax returns filed in 2026 for the 2025 tax year. Most are set to expire in 2028 unless extended.
1. Tax Deduction for Tips: Up to $25,000
Employees in tipped professions, including restaurant workers, salon staff, and hospitality workers, may deduct up to $25,000 in qualified tip income.
- Applies to both W-2 employees and qualifying self-employed individuals
- Phases out for filers earning over $150,000 (single) or $300,000 (married joint)
- The IRS is expected to release a full list of eligible occupations and updated employer reporting guidelines by October 2, 2025
According to Yale University’s Budget Lab, approximately 4 million workers held tipped roles in 2023, earning a median weekly wage of $538, significantly below the national average.
2. Overtime Pay Deduction: Up to $12,500
Workers who earn qualified overtime compensation can deduct the additional “half portion” of their time-and-a-half pay.
- Annual cap: $12,500 for single filers, $25,000 for joint filers
- Phased out at $150,000 and $300,000 modified AGI thresholds
This deduction does not impact paycheck withholding but must be claimed during tax filing.
3. Senior Tax Deduction: Up to $12,000
Taxpayers aged 65 and older may claim an additional deduction of $6,000 each, or $12,000 per qualifying couple, in addition to the standard deduction.
- Available to itemizers and non-itemizers
- Phased out at $75,000 (single) and $150,000 (joint) AGI
- Expected to reduce taxable Social Security benefits for up to 88% of seniors
While this falls short of Trump’s campaign pledge to eliminate taxation on Social Security, it provides meaningful relief for most middle-income seniors.
4. New Car Loan Interest Deduction: Up to $10,000
Taxpayers may deduct up to $10,000 annually in interest paid on new auto loans if the vehicle meets specific criteria.
- Must be assembled in the United States
- Must be new (not leased or used) and for personal use
- Must have a GVWR under 14,000 pounds
- VIN must be reported on the tax return
This deduction phases out at $100,000 (single) and $200,000 (joint) AGI.
Other Key Changes in the Law
- Standard Deduction (2025):
- $15,750 for single filers
- $31,500 for joint filers
- $23,635 for heads of household
- Child Tax Credit:
- Increased to $2,200 per child
- Made permanent under the new law
- SALT Deduction Cap:
- Increased for homeowners (exact thresholds pending IRS update)
Budgetary and Policy Implications
While the tax relief is expected to benefit tens of millions of taxpayers, critics have pointed to the law’s sharp revenue impact and cuts to federal food and healthcare assistance. The IRS has committed to publishing further regulatory guidance ahead of the 2026 filing season.
Whether these deductions are extended beyond 2028 will likely depend on future Congressional and presidential decisions.
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