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Taxpayer Letter – December 2025

Dear Client:

Thank you very much for your continued business. We appreciate the trust and confidence you have placed with our firm and look forward to working with you in 2026.

Congress passed the “One Big Beautiful Bill Act” (the OBBBA) on July 4, 2025, which represents a significant overhaul of the federal tax code. These major legislative changes will make the upcoming filing season one of the most challenging ones in recent memory, so please let this letter serve as a reminder to get your work in early this year. Many of these changes are complex and the full effects and limitations of these provisions will require additional time and analysis on our part when completing your tax returns. Thank you in advance for your patience while we diligently work through these issues.

While some of the changes take effect on January 1, 2026, many are “retroactive” and will impact 2025 tax returns as well. Here is a summary of key highlights that will affect many of our individual clients:

  • Additional Senior Deduction (age 65 or older) – temporarily adds a personal senior deduction of $6,000 ($12,000 for joint filers) that gradually phases out when modified adjusted gross income exceeds $75,000 ($150,000 for joint filers). This additional deduction is available from 2025 through 2028.
  • Increased State and Local Tax (SALT) itemized deductions – temporarily increases the cap on itemized deductions for state and local taxes from $10,000 to $40,000 per household for 2025, then increases the cap by one percent (1%) each year through 2029. This increased deduction is subject to a phaseout for taxpayers with income exceeding $500,000.
  • Increase in the Standard Deduction – makes the previously temporary standard deduction increase permanent and will now be adjusted annually for inflation.
  • No Tax on Tips – temporarily makes up to $25,000 of tip income deductible for individuals in traditionally and customarily tipped industries for tax years 2025 through 2028. This deduction phases out at a 10 percent rate (10%) when adjusted gross income exceeds $150,000 ($300,000 for joint filers). Married taxpayers must file a joint return to claim this deduction.
  • No Tax on Overtime – temporarily makes up to $12,500 ($25,000 for joint filers) of overtime compensation deductible for eligible workers for tax years 2025 through 2028. This deduction phases out at a 10 percent rate (10%) when adjusted gross income exceeds $150,000 ($300,000 for joint filers).
  • New Car Loan Interest on Certain Vehicles Deduction – temporarily makes auto loan interest deductible for both itemizers and non-itemizers for new automobiles purchased with final assembly in the United States for tax years 2025 through 2028. The deduction is limited to $10,000 and phases out at a 20 percent rate (20%) when income exceeds $100,000 ($200,000 for joint filers).
  • Increased Child Tax Credit – makes the previously temporary credit permanent and increases the maximum credit amount to $2,200 per minor child for 2025. This credit will now be increased annually for inflation.

    Please remember that we are here to assist you with any tax and accounting needs year-round, not just during tax season.  All of us at Cole, McIlwain & Company, P.C. hope you had a wonderful holiday season and we look forward to working with you in the New Year!