Five Changes For Tax Year 2025

It seems like every year brings on changes for the tax code and 2025 is no different.

The “One Big, Beautiful Bill” Act (OBBBA) signed into law in earlier this year has made

many of the provisions form the Tax Cuts and Jobs Act (TCJA) permanent, as well as

brought about other changes.

1. STANDARD DEDUCTION

If you recall, each individual taxpayer has two options when it comes to the largest singular deduction on Form 1040, the standard deduction on the front of Form 1040, or the itemized deduction found on Schedule A of Form 1040. In 2017, the TCJA signed into law in late 2017 increased the standard deduction from $6,350 as a single taxpayer ($12,700 married filing jointly) to $12,000 as a single taxpayer ($24,000 married filing jointly). This increase caused many people to stop itemizing their deduction and use the standard deduction since the standard became most beneficial. The increase in standard deduction was due to expire in 2025, but the OBBBA made this increase permanent in 2025. Therefore, use of the standard deduction will continue to far outpace that of itemized deductions for the foreseeable future. However, an increase in the state and local tax deduction could boost some use Schedule A.

2. STATE AND LOCAL TAXES (SALT)

For those who operate a business or in other ways pay plenty of state tax, life was good prior to tax year 2018. All state taxes paid could be added to the itemized deduction on Schedule A of Form 1040.  However, the TCJA signed into law a $10,000 cap on such tax deductions back in 2017. Since then, states have been coming up with fancy workarounds (known generally as pass-through entity tax or ‘PTET’) to allow business owners to reduce their federal tax by the amount state taxes paid through their businesses. Well, not everyone can take advantage of PTET and lawmakers were kind enough to increase the SALT cap from $10,000 to $40,000 for 2025. The limit will be $40,400 for 2026 and will increase 101% each tax year until 2030 when it goes back down to $10,000. However, the increase in SALT cap isn’t for everyone as the new law limits the deduction for those who have modified adjusted gross incomes more than $250,000 for single individuals ($500,000 married filing jointly). In this case, the limitation is reduced by 30% of the amount by which the modified adjusted gross income exceeds the threshold.

3. CHILD TAX CREDIT

The Child Tax Credit has largely stayed the same for a while now, however, the OBBBA does increase the nonrefundable credit to $2,200 from $2,000 in 2024. The credit will be subject to adjustment for inflation in multiples of $100. Any increase that is not a multiple of $100 will get rounded down to the nearest multiple. The phaseout for the Child Tax Credit remains the same and has been made permanent. Those threshold amounts are $200,000 for a single individual and $400,000 for married filing jointly.

4. ROTH IRA

Roth IRAs can be both beneficial and tricky. Roth IRAs exist to allow taxpayers to contribute to retirement funds after taxes. This avoids the large tax hit at the time of distributions during retirement. The theory is that taxes go up in the future, and it is better to pay taxes now than pay higher taxes at the time of distribution. The maximum contribution for 2025 is $7,000 plus a $1,000 “catch-up” contribution for those who are aged 50 or older. That said, the maximum contribution to a Roth will be reduced based on the modified adjusted gross income of the taxpayer. The modified adjusted gross income limits for 2025 are $150,000 filing single, up from $146,000 from the previous year. If you are married filing jointly, the limit is $236,000, up from $230,000 in the previous year. For example, if you are a single individual with income of $160,000, your Roth contribution max would be:

($160,000 - $150,000) / $15,000) x $7,000 = $4,667 

So, keep in mind that while a Roth IRA is a great option to potentially pay less taxes in the end by paying the taxes up front, your income may limit you from contributing the maximum.

5. CLEAN VEHICLE CREDIT

The OBBBA eliminates the $ 7,500 tax credit for new clean vehicles purchases after September 30, 2025. So, if you were thinking about getting a new hybrid or fully electric vehicle that qualifies for this credit, you had better hurry up. Used clean vehicles are also subject to the axe as the $4,000 credit also goes away for those vehicles purchased after September 30, 2025.

Please reach out to abs@westhighlandtax.com with any questions regarding this article or any other questions. If you would like to schedule a call to discuss using West Highland’s services, please feel free to schedule here.