This article is for educational purposes only. It reflects publicly available IRS information as of July 2025. Tax laws are complex and may change. Members should consult a qualified tax professional about their individual circumstances before making financial or filing decisions.
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The One Big Beautiful Bill Act (OBBBA) introduces several key tax updates that could affect how you file and what you owe over the next few years. Many of these changes aim to help working families, seniors, and everyday taxpayers keep more of their hard-earned money.
The IRS has published an overview of the new provisions on its website, but tax law can be complex, and it’s always evolving. In this article, we’ll break down the major updates in simple terms so you can better understand what they mean for you and your family. Just remember, it’s always wise to check with a trusted tax professional before making financial or filing decisions.
Tax Deductions vs. Tax Credits: What’s the Difference?
Before we get into the details, we must clear up a very common tax question: What is the difference between a tax deduction and a tax credit?
- A tax deduction reduces the amount of income that is taxed.
Example:
If you and your spouse earn $100,000 and take the 2025 standard deduction of $31,500, you’ll only pay taxes on $68,500 (not the full $100,000 you earned).
- A tax credit directly reduces what you owe to Uncle Sam.
Example:
If your tax bill is $10,000 and you qualify for a $2,000 credit, your final bill will be $8,000.
Both deductions and credits can lower your tax burden, but they work differently.
Key Features of the OBBBA You Should Know
There are a few other features of the One Big Beautiful Bill Act that are critical to understand to ensure you make wise filing and financial decisions.
- The tax changes are in effect from 2025 to 2028. Many of these changes could disappear after 2028, depending on the decisions made by Congress.
- The OBBBA changes discussed only apply to federal income taxes. State income taxes and FICA taxes (Social Security and Medicare) are not affected.
- The following changes are “Above-the-Line Deductions.” This phrase means that you do not have to itemize your deductions to benefit. The following deductions are on top of your normal 2025 Standard Deduction.
- For example, if you and your spouse make $100,000 and file jointly, the 2025 Standard Deduction is $31,500. If you qualify for another $5,000 deduction from the items listed below, your total deduction will be $36,500 – instead of capping at $31,500 as normal.
Tax Benefit #1: No Tax on Tips
Workers who rely on tips, such as servers, bartenders, hairstylists, and delivery drivers, could see one of the biggest benefits from OBBBA. The new “No Tax on Tips” provision allows many tipped employees to deduct part of their reported tip income from their taxable income.
This change means that a portion of the tips you earn could reduce your taxable income – helping you pay less in federal income taxes. For example, a restaurant server who earns $45,000 in wages and $10,000 in reported tips may be able to deduct a portion of those tips if they meet IRS eligibility rules. That could reduce taxable income by several thousand dollars and lower the amount owed at filing time.
The maximum amount you can deduct annually is $25,000, and the deduction phases out if your adjusted gross income exceeds $150,000.
Who benefits most:
- Employees in service industries where tipping is customary, and income is in the modest to middle-income range.
What members can do:
- Report all tips accurately throughout the year on employer-provided tax forms.
- Review the IRS guidelines to see if your occupation qualifies.
- Keep good records of tip reporting to your employer to ensure your figures match theirs.
Tax Benefit #2: No Tax on Overtime
If you often work beyond 40 hours a week, you may benefit from the new overtime pay deduction. Under OBBBA, eligible workers can deduct a portion of their qualified overtime pay – essentially excluding part of those extra earnings from taxation. The deduction applies to the “half” portion of the “time-and-a-half” standard overtime compensation.
For example, if a nurse earns $70,000 in base salary and $10,000 in overtime pay, she may be able to deduct some of that $10,000 depending on her income level and how much qualifies under the new rules. That deduction could lower her taxable income and save hundreds of dollars on her tax bill.
The maximum overtime deduction is set at $12,500 for individuals, and the benefit phases out if your adjusted gross income exceeds $150,000.
Who benefits most:
- Hourly and salaried employees who earn overtime pay and have household incomes under the deduction’s income limits.
What members can do:
- Make sure your employer correctly tracks and reports overtime wages.
- If eligible, review the deduction limits each year on the IRS website.
- Consider adjusting your tax withholding if you expect a lower taxable income to avoid overpaying taxes throughout the year.
Tax Benefit #3: Deduction for Car Loan Interest
This new tax deduction could make buying a car a little easier on your wallet. Under the new rule, taxpayers may be able to deduct interest paid on certain new car loans for personal-use vehicles purchased after 2024.
For example, let’s say you take out a $35,000 loan on a new vehicle assembled in the U.S. and pay $3,000 in interest during 2025. If that interest qualifies under IRS guidelines, your taxable income could be reduced by that $3,000 – potentially saving you hundreds in owed taxes depending on your bracket.
The maximum annual car loan interest deduction is capped at $10,000 for individuals, and the tax benefit phases out for those with adjusted gross incomes over $100,000.
Who benefits most:
- Members purchasing new, non-commercial vehicles with loans that meet IRS criteria.
What members can do:
- Confirm your vehicle’s eligibility (final assembly in the U.S. and a valid VIN on file).
- Keep loan paperwork showing interest paid annually.
- Check the IRS website for the annual deduction caps and income limits.
Tax Benefit #4: Extra Deduction for Seniors
For older taxpayers, the One Big Beautiful Bill Act adds a new layer of financial relief. Starting in 2025, those age 65 or older can take an additional deduction of up to $6,000 per person on top of the regular standard deduction.
For example, a retired couple where both spouses are over 65, that could mean an extra $12,000 reduction in taxable income. If their combined income is $90,000 and they file jointly, applying both the standard deduction ($31,500), the existing age-based additional deduction ($3,200), and the new senior bonus deduction ($12,000), their taxable income could be reduced to around $43,300 – potentially saving thousands in owed taxes.
The tax benefit begins to phase out for individuals earning over $75,000 annually or $150,000 for those filing their taxes jointly.
Who benefits most:
- Retirees and older workers with moderate incomes who file jointly.
What members can do:
- Make sure both spouses’ birthdates are correctly reported on their tax return.
- Keep documentation of any retirement or pension income for accurate filing.
- Consider how the deduction interacts with Social Security and other retirement benefits.
Other Notable Tax Changes
The OBBBA also makes some previously temporary tax provisions permanent:
- The standard deduction remains higher for all taxpayers. In 2017, the standard deduction for individuals was $6,350, and $12,700 for those married filing jointly. In 2025, those figures are $15,750 and $31,500, respectively.
- The Child Tax Credit increases to $2,200 per qualifying child and will adjust annually for inflation.
- The 20% small-business income deduction remains in place for many self-employed individuals and small business owners through 2028.
Together, these updates aim to simplify filing and lower overall tax burdens for a wide range of taxpayers.
We’re Here to Help
Understanding tax laws and new rules can be challenging. It’s always wise to speak with a tax professional, financial advisor, or attorney before making significant decisions that could impact your financial well-being.
If you have questions about how the deduction for car loan interest works or would like to become pre-approved for a new vehicle, we’re happy to help. Please stop by any of our convenient branch locations or call 800.336.6309 to speak with a team member today.
EXTERNAL LINKS:
IRS Website: One, Big, Beautiful Bill Act: Tax deductions for working Americans and seniors
IRS Website: One Big Beautiful Bill provisions
