Tax update TY25: Navigating the OB3 Act and more

The landscape of federal tax law has undergone a dramatic shift with the introduction of the One, Big Beautiful Bill (OB3) and the permanent extension of several key provisions from the Tax Cuts and Jobs Act (TCJA). For tax year 2025, tax practitioners must navigate new deductions, including those for tips, overtime, car loan interest, and seniors, along with significant changes to reporting requirements for digital assets and retroactive adjustments for R&D expenditures.

Here’s a detailed look at these changes, planning strategies to help your clients, and a look ahead at provisions set to take effect in 2026. I presented this session with Megan Leesley of Dark Horse at the Empower 2025: Tax Season Readiness Virtual Conference.

New deductions for tips and overtime compensation

One of the most publicized changes under OB3 is the introduction of a deduction for qualified tips and overtime compensation, effective 2025 through 2028. For tip income, eligible employees and self-employed individuals in tipped occupations can deduct up to $25,000 annually, provided the tips were reported on their W-2 or Form 4137, Social Security and Medicare Tax on Unreported Income.

However, this deduction is not universal; it is unavailable to individuals working in a specified service trade or business such as accounting, law, or health.

Megan emphasized the need for precision.

“People often get really confused over that generic bucket, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners,” she said.

Similarly, the “no tax on overtime” provision allows workers to deduct the incremental portion of pay that exceeds their regular rate, such as the”half” in a time-and-half calculation. This deduction is capped at $12,500 per individual ($25,000 for joint filers) and phases out for those with modified adjusted gross income (MAGI) exceeding $150,000 ($300,000 for joint filers).

To assist in planning, Megan suggests practitioners, “Look to those pay stubs or within the payroll reporting system to identify cumulative totals. The overtime pay that is deductible is only the incremental piece of pay that’s eligible for the deduction.”

As a result, tax accountants should be aware that, while these amounts reduce taxable income, they remain subject to Social Security and Medicare taxes.

The enhanced $6,000 deduction for seniors

Starting in tax year 2025, the OB3 introduces a new $6,000 deduction for seniors aged 65 and older. This deduction is distinct from the existing additional standard deduction, and requires the taxpayer to be 65 by the last day of the tax year. Similar to many other OB3 provisions, this benefit is subject to a phase-out based on MAGI, and requires married taxpayers to file jointly to claim the credit. This new layer of tax relief provides a significant planning opportunity for clients nearing retirement age.

Leesley points out that this deduction could influence the timing of retirement distributions and Social Security claims. She warns practitioners to, “Keep an eye on this because if that’s going to push your clients into losing out on that $6,000; as a result, they may want to delay that timing even further.”

Proactive income shifting, either accelerating or delaying income to stay below phase-out thresholds, will be a critical service for high-net-worth seniors in the coming years.

Tax relief for American-made car loan interest

For the first time, taxpayers may deduct up to $10,000 in interest paid on qualified car loans for vehicles used for personal purposes. To qualify, the vehicle’s final assembly must have occurred in the United States, a fact that must be verified through the dealer’s label or a Vehicle Identification Number (VIN) decoder. This deduction is restricted to new vehicles with a gross vehicle weight below 14,000 pounds, and applies to loans incurred after December 31, 2024.

Practitioners must ensure they collect the VIN because it is a required field on the new Schedule 1A, Additional Deductions—and buyers of new vehicles should consider the timing to maximize this benefit. Financing a vehicle earlier in the year allows for a full year of deductible interest, compared to a late-year purchase that may provide negligible tax relief. Note the deduction phases out starting at $100,000 for individuals and $200,000 for married couples, reducing the maximum deduction by $200 for every $1,000 over the threshold.

Significant shifts in manufacturing depreciation

Under the new Section 168(n), the OB3 introduces “qualified production property” and “qualified production activity” that grants 100% bonus depreciation for manufacturing facilities. This allows businesses to fully expense the cost of a new facility placed in service between July 5, 2025, and December 31, 2030, a massive acceleration compared to the previous 39-year depreciation schedule for commercial buildings.

However, the deduction is strictly limited to portions of the building directly tied to the manufacturing process; administrative areas, and office spaces do not qualify. Taxpayers must be actively participating in the qualifying activity to claim this deduction, making it a powerful tool for domestic industrial expansion.

Navigating the new digital asset reporting requirements

The IRS is tightening its grip on the cryptocurrency market with the introduction of Form 1099-DA, Digital Asset Proceeds From Broker Transactions. Brokers and digital asset platforms are now required to report proceeds and, in some cases, the cost basis for digital asset dispositions. A digital asset is defined as any digital representation of value recorded on a cryptographically secured distributed ledger, including Bitcoin, stablecoins, and NFTs.

Accountants must now request comprehensive records from clients, including purchase dates, holding periods, and details on any non-custodial transactions. The reporting treatment for these assets will mirror that of traditional stock sales, but the complexity of blockchain transfers adds a layer of compliance difficulty. Practitioners should educate clients on the necessity of maintaining meticulous records for every exchange or transfer to ensure accurate reporting on the updated Form 8949, Sales and Other Dispositions of Capital Assets.

Retroactive R&D changes and Section 179 expansion

One of the most favorable retroactive changes in the OB3 involves domestic R&D expenditures. Previously, these costs had to be amortized over five years; however, OB3 now allows for an immediate deduction of domestic R&D expenses. Small businesses with average gross receipts of $31 million or less can even amend returns back to 2022 to claim these deductions immediately.

In addition to R&D relief, Section 179 expensing limits have been significantly increased. For tax year 2025, the expense limit jumps to $2.5 million, with a phase-out threshold beginning at $4 million. This permanent change, adjusted for inflation, provides businesses with a robust alternative to bonus depreciation.

“This is a great provision for those who maybe can’t take a bonus on something, but can take section 179,” said Leesley.

Permanent individual tax rates and standard deductions

The OB3 provides long-sought stability by making the TCJA individual tax brackets permanent. The rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37% will continue beyond 2025, along with the expanded income ranges that helped eliminate the marriage penalty. This permanency also applies to the brackets for trusts and estates.

The standard deduction has also been made permanent at its increased levels, with a slight additional increase beyond what was originally scheduled under the TCJA. While the personal exemption remains repealed, the stability of these higher deduction amounts simplifies planning for the majority of individual taxpayers.

Adjustments to the SALT cap and child tax credit

The much-debated State and Local Tax (SALT) deduction cap sees a temporary substantial increase. For 2025 through 2029, the cap rises from $10,000 to $40,000 ($20,000 for married filing separately). However, this benefit is subject to a high-income phase-out starting at $500,000 for joint filers. Leesley notes that while this may help more taxpayers itemize, those in high-tax states with very high incomes may still find themselves limited to the $10,000 floor.

The Child Tax Credit (CTC) has also been made permanent at an increased rate of $2,200 per qualifying child, with annual inflation adjustments. A critical change for practitioners to note is the new Social Security Number (SSN) requirement. Taxpayers can no longer claim the CTC using an ITIN for the child. Leesley reminded practitioners that, “Social Security numbers do have to be issued before the return due date to be valid for these credits.”

The end of clean vehicle and residential energy credits

Accountants should warn clients that many “green” tax incentives are nearing their end. The clean vehicle credit for new and used electric vehicles is set to terminate for purchases made after September 30, 2025. Similarly, the residential energy-efficient property credits and the non-business energy property credit expired at the end of 2025.

Leesley advised that while these credits are disappearing at the federal level, practitioners should, “check state benefits. Just because the federal benefit is no longer available does not mean that the state benefit has gone away.”

Future provisions for charitable giving and children’s accounts

Looking into 2026, the OB3 introduces several novel provisions, including the creation of accounts for American children. For children born after January 1, 2025, the government will provide an initial $1,000 deposit into an account that must be invested in stock mutual funds or ETFs. These accounts generally cannot be accessed until the beneficiary turns 18, at which point they convert into a traditional IRA.

In addition, charitable giving rules will change in 2026 to allow non-itemizers to claim a below-the-line deduction of $1,000 ($2,000 for joint filers). On the compliance side, the threshold for filing Forms 1099-NEC and 1099-MISC will rise from $600 to $2,000 for payments made after 2025.

For those dealing with health insurance, Leesley stresses the importance of monitoring Premium Tax Credit repayments, because the OB3 eliminates the repayment cap after 2025.

“Any clients who have any kind of marketplace insurance should be advised to really make sure that they’re being accurate with their income levels to avoid massive, unexpected tax bills.”

Resources for more information

• Treasury, IRS provide penalty relief for tax year 2025 for information reporting on tips and overtime under the One, Big, Beautiful Bill
• 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500
• Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025
• Treasury, IRS provide guidance on new tax benefits for health savings account participants under the One, Big, Beautiful Bill
• Updates to Questions and Answers about the Premium Tax Credit
• IRS sets 2026 business standard mileage rate at 72.5 cents per mile, up 2.5 cents
• Treasury, IRS provide guidance on the new deduction for car loan interest under the One, Big, Beautiful Bill