How the New Tax Law Could Affect Your 2025 Return

With tax season approaching, you might be wondering how the new tax law that Congress passed last July will affect your personal return. The law, known as the One Big Beautiful Bill Act, or OBBBA, will indeed impact the 2025 tax returns filed by nearly all Americans—affecting everything from overtime pay to car loans and tip income.

However, many provisions of the bill don’t go into effect until the 2026 tax year. Here we’ll focus on what matters right now, as you’re preparing to file your 2025 taxes.

No tax on many tips

If you have income earned from tips, you can deduct up to $25,000 of that amount on your 2025 tax return. The benefit begins to phase out for single filers with modified adjusted gross income (MAGI) over $150,000 and married joint filers with MAGI over $300,000. Taxpayers claiming the standard deduction can also claim the tip deduction. If you have tip income that is not reported by your employer on your W2 form, you’ll need to submit IRS Form 4137 detailing those tips—and then pay Social Security and Medicare tax (FICA) on those earnings.

The IRS has provided preliminary guidance on occupations that qualify for the tip deduction, such as those in hospitality and personal services. The list is long and includes workers not always associated with tip income, such as plumbers and electricians. If you received tips but don’t work in one of the listed occupations, consult your tax professional.

No tax on overtime pay

People who earn overtime are eligible to deduct up to $12,500 ($25,000 for married joint filers) of the overtime portion of their income, with the same phaseouts as for tips. And just like with tips, taxpayers claiming the standard deduction can also claim the overtime deduction.

New deduction for seniors

The OBBBA created a new $6,000 deduction for taxpayers age 65 and older, or $12,000 for married joint filers if both people are eligible. The deduction begins to phase out for taxpayers with a MAGI of $75,000 (single) or $150,000 (married filing jointly) and ends completely at MAGI of $175,000 or $250,000, respectively. If you expect your income will be close to the phaseout level, you may want to consult a tax advisor to discuss potential ways to reduce your MAGI.

Although initially pitched as “no tax on Social Security,” the new deduction is unrelated to Social Security income tax, which has not changed. In fact, seniors do not need to be enrolled in Social Security to claim it—though the law ensures that most seniors who receive Social Security will not have to pay federal tax on their benefits. The reason is simply that the new deduction lowers taxable income for seniors enrolled in Social Security. Whereas historically about half of seniors paid income tax on some of their Social Security benefits, the US Council of Economic Advisors now estimates that about 12 percent will do so.

Note that the new deduction is in addition to the existing extra standard deduction for seniors, which in 2025 has increased to $2,000 for single filers or $3,200 for married joint filers if both are at least 65.

New deduction for car loan interest

New—not used—cars purchased in 2025 may qualify for a tax deduction on loan interest, up to $10,000. The car must be for personal use by the taxpayer and meet standards of final assembly in the United States. Eligible loans must have originated after December 31, 2024, and include a lien on the vehicle. The deduction begins to phase out at MAGI of $100,000 (single) and $200,000 (joint filers), ending completely at $150,000 and $250,000, respectively. You can claim the deduction even if you use the standard deduction.

To determine a car’s country of manufacture, check the VIN, which should begin with the numbers 1, 4 or 5 if made in the U.S. In addition, the manufacturer’s label in the door jamb will state the country of final assembly. If you have a new vehicle, you should check with your tax advisor to confirm that it meets the definition of an “applicable passenger vehicle”, the final assembly of which occurred in the United States.

Note that the new car loan deduction is scheduled to end in three years. That means even for loans initiated during 2025 to 2028, you’ll no longer be able to deduct the interest after that period—unless Congress chooses to extend the deduction.

More expenses allowed under 529 plans

The OBBBA has added more expenses eligible for tax-free withdrawal from 529 accounts, including homeschooling expenses, test fees and tutoring for disabled students. At the post-secondary level, 529 funds can now be used for many trade-school expenses for fields such as nursing and welding.

Note that withdrawals must be made in the same calendar year in which you paid for expenses—meaning if you haven’t already done so, it’s too late to withdraw funds for 2025 expenses. Also, not all states recognize the new federal expense categories, so you may owe state tax on newly qualified withdrawals.

End of clean vehicle tax credit

OBBBA eliminates the clean vehicle tax credit, which was a generous tax-bill reduction (not an income deduction) for buyers of electric and some hybrid cars. You can still claim the credit on your 2025 tax return but only for a car bought by September 30.

If you bought a qualifying vehicle in the first nine months of 2025, the same rules apply as before the OBBBA: For used cars, the credit equals 30 percent of the sale price, up to a maximum credit of $4,000. New cars qualify for a credit up to $7,500.

Increased standard tax deduction

The standard deduction, taken by most filers rather than itemizing, increased to $15,750 for single filers and $31,500 for married joint filers.

Increased deduction for state and local taxes

The deduction for state and local taxes (SALT) increased to $40,000—a major jump from the previous $10,000 cap. Taxes qualifying for the SALT deduction generally include property taxes and either state and local income taxes or sales taxes (but not both). As in previous years, you must itemize to claim the SALT deduction.

Increased child tax credit

The child tax credit increased modestly from $2,000 per eligible child to $2,200.

Changes to watch for in 2026

One last note: Many of the new rules in the OBBBA do not take effect until tax year 2026. Among them are the new tax-advantaged accounts for kids (similar to an IRA for children, with a $1,000 pilot contribution from the government for newborns; these accounts become available on July 4, 2026); the ability to deduct some charitable contributions even while claiming the standard deduction; and new tax brackets. You don’t need to worry about these changes until next tax season.

Reach out to your Northwestern Mutual financial advisor to review your financial goals and ensure your plan takes the latest changes into account.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.