Personal Tax Updates 2025: What You Need to Know
As of July 4, 2025, significant federal tax changes have been passed. These updates are designed to address budget challenges and adjust several existing tax rules, with impacts on personal income, estate planning, and everyday purchases. Be aware that there could be changes and possibly challenges as the legislation is interpreted by IRS and incorporated into the tax forms. There may need to be new forms to handle new deductions.
Federal Tax Legislation Updates: One Big Beautiful Bill Act (OBBBA)
The OBBBA, signed into law on July 4, 2025, makes many Tax Cuts and Jobs Act (TCJA) provisions permanent, introduces new deductions, and changes existing credits. Some changes for individuals, effective for the 2025 tax year unless stated otherwise, include:
- Tax Rates and Brackets: The seven TCJA tax rates (10%, 12%, 22%, 24%, 32%, 35%, 37%) are made permanent. Inflation adjustments for the first two brackets start in 2026. The top 37% rate applies to singles with taxable income over $626,350 and joint filers over $751,600.
- Standard Deduction: For 2025, the standard deduction increases to $15,000 for singles (up $400), $30,000 for joint filers (up $800), and $22,500 for heads of household (up $600).
- Seniors over 65 may claim an extra $6,000 deduction (2025–2029), which phases out for single filers with Modified Adjusted Gross Income (MAGI) over $75,000 and joint filers over $150,000.
- State and Local Tax (SALT) Deduction: If you can itemize, the SALT deduction cap rises to $40,000 (2025–2029) for incomes under $500,000 ($250,000 if married filing separately). The benefit phases down by 30% for higher incomes and reverts to $10,000 in 2030 and if completely phased out.
- Tips and Overtime Deductions: A temporary deduction (2025–2028) allows up to $25,000 in tip income to be excluded from taxable income, phasing out at 10% for AGI over $150,000 (single) or $300,000 (joint). Tip income must be reported on a W-2 or Schedule C. Overtime pay is also exempt from income tax up to $12,500 (2025–2028) and will require new employer record keeping and reporting. Overtime pay is still subject to payroll tax.
- Auto Loan Interest Deduction: A new deduction (2025–2028) allows up to $10,000 in interest on auto loans for vehicles assembled in the U.S., phasing out at 20% for MAGI over $100,000 (single) or $200,000 (joint). Vehicle Identification Numbers must be reported.
- Deductions for auto interest, seniors, tips and overtime are a separate class of deductions and do not decrease adjusted gross income (AGI).
- Child Tax Credit (CTC): The maximum CTC remains $2,000 per child, with up to $1,700 refundable. The adoption credit is partly refundable up to $5,000 (2025, inflation-adjusted after 2026).
- Charitable Contributions: Beginning in 2026 charitable deductions are allowed up to 60% of AGI. There will be a new 5% floor on the deduction, similar to the medical deduction. The first 5% deduction is excluded. New this year is a charitable deduction for non-itemizers, $1000 single, $2000 joint. Receipts are required.
- Credits: Many credits are ending as a result of this legislation. Many of those relate to energy efficient assets and improvements: Electric vehicles, 9/30/25; energy efficient home improvements like solar must be completed by 12/31/25; New energy efficient homes must be completed by 6/30/26. If you have plans, do not delay.
- Estate and Gift Tax: The federal estate tax exemption is permanently raised to $15 million per person, indexed for inflation. Gift tax exclusions rise to $19,000 per person.
Implications and Planning Tips
Changes in the standard deduction make it more difficult to itemize deductions. Many middle-income taxpayers do not have sufficient itemized deductions to exceed the standard deduction to be able to use items like SALT. Phaseout limits also make deductions less useful and complicate tax planning. If you are close enough to itemizing you may want to consider bundling 2026 payments with 2025 to get over the standard deduction. If that is an option, bundling charitable contributions into 2025 will allow you to miss the 5% floor that begins next year. It is going to be very important to pay attention to the details of the changes, how they interact with each other and how they apply to your tax situation.
Washington State Tax Legislation Updates
- Capital Gains Tax Increase: Starting January 1, 2025, Washington will implement a tiered capital gains tax. Long-term capital gains up to $1 million (after a $270,000, inflation-adjusted deduction) will be taxed at 7%, while amounts over $1 million will be taxed at 9.9%. This applies to non-retirement assets, such as stocks and bonds, but excludes real estate and certain small business sales. Only capital losses from 2022 onwards can be used to offset gains.
- Estate Tax Changes: Beginning July 1, 2025, the state estate tax exclusion increases to $3 million, with annual adjustments for inflation. At the same time, the top marginal rate will rise from 20% to 35% for estates over $9 million. Combined with federal estate taxes (up to 40%), very large estates could face a marginal rate near 61%.
Given the difference between federal and Washington State exemption amounts, estate planning is becoming significantly more important. Having a plan which will minimize estate tax liability is very important.