IRS Announces Significant Changes to Tax Deductions After New Law

Over the next few months, millions of Americans across the country will begin their annual preparations for filing their taxes in April. Ahead of tax season, the Internal Revenue Service (IRS) has unveiled some significant updates to federal tax deduction rules for individuals, families, and businesses that are worth noting.

The latest changes come after the passage of the One, Big, Beautiful Bill Act (OBBB), which was signed into law on July 4, 2025. The new law brings several high-profile changes that are designed to provide tax relief across a broad range of categories, impacting nearly everyone who will file taxes this year.

Since the passing of the OBBB, the IRS and the United States Treasury Department have begun rolling out guidance on the various new tax deductions and credits that will be available or expanded under the new law.

Given that the law goes into effect this year and is one of the most significant rewrites of tax law in the United States recent years, it's important to know what has changed before you plan to file your taxes.

Increased Standard Deduction

For the 2024 tax year, the standard deductions were $14,600 for singles and married couples filing separately, and $29,200 for married couples filing jointly, and $21,900 for heads of households.

All of those numbers will increase for the 2025 tax year.

For the 2025 Tax year, filed this year, the standard deductions will be $15,750 for singles and married couples filing separately, $31,500 for married couples filing jointly, and $23,625 for heads of households.

For tax year 2026, which will not be filed until 2027, the standard deduction rises to $32,200 for married couples filing jointly; $16,100 for singles and married filing separately; and $24,150 for heads of households.

No Tax on Tips

One of the biggest promises of the OBBB was "no tax on tips." That provision will go into effect this year. It's a significant change, but there are limits.

Employees and self-employed individuals in IRS-listed tipped occupations can deduct up to $25,000 per year in qualified tips that they've received from 2025 through 2028. The IRS defines "qualified tips" as "voluntary cash or charged tips received from customers or through tip sharing."

The deduction phases out for individuals earning above $150,000 (or $300,000 for joint filers), and self-employed individuals may not deduct more than the individual’s net income.

No Tax on Overtime

Another significant promise under the OBBB is the "no tax on overtime provision." Like the "no tax on tips" promise, it will be rolling out this year, as well, but it also has limitations.

From 2025 to 2028, individuals who receive qualified overtime compensation will now be able to deduct the pay that exceeds their regular rate of pay. This means the “half” portion of “time-and-a-half” compensation that is required by the Fair Labor Standards Act (FLSA).

The maximum annual deduction in this category is $12,500 for those filing individually and $25,000 for joint filers. Deduction phases out for taxpayers with an income over $150,000 ($300,000 for joint filers).

No Tax on Car Loan Interest

Effective for 2025 through 2028, individuals may now deduct interest paid on a loan used to purchase a new, American-made vehicle.

To qualify for the deduction, the interest must be paid on a loan that originated after December 31, 2024, and was used to purchase a new American-made vehicle for personal use.

It's worth noting that this does not apply to used vehicles or commercial vehicles and is limited to vehicles that are made in the United States.

"The location of final assembly will be listed on the vehicle information label attached to each vehicle on a dealer's premises," the IRS states. "Alternatively, taxpayers may rely on the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN) to determine whether a vehicle has undergone final assembly in the United States."

The maximum annual deduction in this category is $10,000.

Deductions For Seniors

Under the new law, individuals who are age 65 and older may claim an additional deduction of $6,000 beginning in 2025 through 2028. This new deduction is in addition to the current additional standard deduction for seniors under existing law.

The $6,000 senior deduction is per eligible individual, which means that married couples could deduct $12,000 total if both spouses qualify.

The deduction phases out for taxpayers with an income over $75,000 if filing individually or $150,000 for those filing jointly.