The Effect of the 2025 Budget Law on Income Tax
The major piece of legislation recently passed by Congress (also known as the “One Big Beautiful Bill Act”) largely extended tax cuts that had already been in place since 2017. The effect of the 2025 budget law on income tax is significant because it made several changes to income tax provisions for certain individuals. You must be prepared and know how the new law may change your own personal income tax situation.
Contact a tax resolution attorney from Dayes Law Firm to learn how the new law may affect you—we take cases all across Arizona.
How Does the New Law Affect Tax Brackets and Deductions?
The 2025 budget law made significant changes to both the standard deduction and itemized income tax deductions. The standard deduction was nearly doubled, making it more advantageous for many taxpayers to claim rather than itemizing. However, fewer people now benefit from deductions such as unreimbursed employee expenses or certain miscellaneous deductions, which were eliminated.
Itemized deductions were also limited, including a cap on state and local tax deductions. While mortgage interest and charitable contributions remain deductible, the higher standard deduction means fewer taxpayers will use them. These modifications simplified the filing process but reduced opportunities for some taxpayers to lower their taxable income.
Specific New Deductions in the 2025 Budget Law
The following new deductions in the 2025 budget law may affect your income tax payments:
- Employees and self-employed people can deduct qualified tips received in jobs that regularly receive tips (as of December 31, 2024)
- The portion of overtime pay that exceeds the regular rate (such as the half-time portion of time-and-a-half) may be deductible, up to $12,500 for single filers ($25,000 for joint filers), with income limits
- Interest on loans used to purchase qualifying new vehicles (assembled in the U.S., for personal use) may be deductible, up to $10,000 annually, subject to phase-outs, but lease payments are excluded
- Individuals aged 65 and over can claim an additional $6,000 deduction, available through 2028, subject to income limits
These deductions are available whether you itemize or take the standard deduction. You should be aware of income phase-outs to know whether you can qualify for these new deductions.
Effects of the New Law on Self-Employed Individuals
The One Big Beautiful Bill Act introduces significant income tax changes in 2025 for self-employed individuals. One key provision is the permanent extension of the Qualified Business Income deduction, allowing eligible taxpayers to deduct up to 20% of their qualified business income. The Act also introduces a new deduction for qualified tips, capped at $25,000, though limited to the net income from the activity. Additionally, reporting thresholds for certain income forms have been raised, reducing paperwork burdens.
Contact Us To Learn How the 2025 Budget Act Affects Your Income Tax
While there are some short-term gains for certain taxpayers, Yale research shows that long-term effects of the law may be more complicated, and it’s likely that not all of these changes will be permanent. To learn more about how your personal financial situation may be impacted by the new law as it stands now, reach out to our seasoned attorney at the Dayes Law Firm—you can message us online or call us today.
