Personal Finance: Middle class tax changes for the New Year
April 15 will be upon us before we know it, and this year, there are some important changes to the tax code worth noting. Some tax experts anticipate a greater than average year for refunds once the returns start pouring in.
Many of these changes are due to the passage last July of the “one big beautiful bill act,” which permanently extended the 2017 tax cuts that heavily favored the highest income earners. In fact, the administration is attempting to rebrand the legislation as the “working families tax cut act” to counter the negative public perception of the bill.
Yet there are several temporary provisions in the bill that will benefit a swath of middle income Americans. Many of these middle class tax breaks will apply to returns filed in 2026 for the 2025 tax year and are currently set to expire after 2028. Here is a look at some of the most interesting items.
Extra deduction for some seniors. In addition to the standard deduction, individuals aged 65 and over may qualify for an additional $6,000 deduction for tax years 2025 through 2028. The bonus deduction is available regardless of whether taxpayers itemize deductions on their returns. Married couples who are both 65 or over may both claim the deduction for a total of $12,000 per household.
The extra spiff phases out above certain income thresholds. For single taxpayers, the deduction is decreased by $60 for every additional $1,000 of income between $75,000 and $175,000. For married couples filing jointly, the phaseout begins at $150,000 of modified adjusted gross income. That means that a couple aged 65 with income below the threshold could claim the 2025 standard deduction of $31,500, an additional deduction of $3,200 ($1,600 each) for being over 65, and the $12,000 bonus for a total deduction of $46,700 on their 2025 returns.
While certainly welcome to the millions of seniors who will benefit, there is a cost. The Committee for a Responsible Federal Budget has estimated the break add $90 billion to the national debt through 2028 and will accelerate the impending default of the Social Security and Medicare trust funds by one year from 2033 to 2032.
No tax on tips. Employees and self-employed individuals may deduct up to $25,000 per year of income from qualified tips through 2028. They must have worked in occupations the IRS identifies as “customarily and regularly receiving tips” on or before Dec. 31, 2024, to claim the 2025 deduction. Tips are considered qualified only if they are voluntary at the discretion of the customer. For example, additional service charges tacked on to a restaurant tab are not considered qualified unless the customer can refuse to pay the additional surcharge.
The deduction phases out by $100 for every $1,000 in income over $150,000 for individuals and over $300,000 for married couples filing jointly. Also note that tips are still subject to federal payroll taxes like Social Security and Medicare and may also still be taxed at the state level.
No tax on overtime. Subject to limits, certain overtime pay is deductible from federal taxes through 2028. Taxpayers may deduct the share of their compensation that exceeds their regular hourly pay rate. For instance, a worker earning time and a half for working over 40 hours per week may deduct the additional half time pay. To claim the deduction, the overtime pay must be reported on form W-2, 1099, or another statement furnished to the employee.
Individuals may deduct up to $12,500 per year ($25,000 for married couples filing jointly). The income phaseouts begin at $150,000 for individuals and $300,000 for joint filers. Taxpayers do not need to itemize to claim the relief.
No tax on car loan interest. Purchasers of certain qualified vehicles will be able to deduct interest paid on auto loans subject to an annual limit of $10,000. The loan must have been taken out after Dec. 31, 2024, and must be secured by a lien on the vehicle. Only personal vehicles are eligible, and leases do not qualify for the deduction.
The new law defines a qualified vehicle as a car, van, minivan, SUV, pickup truck or motorcycle that underwent final assembly in the United States. Income phaseouts begin at $100,000 for single filers and $200,000 for joint returns.
Lenders are required to file information returns with IRS and must also provide borrowers with an annual statement detailing qualified interest paid during the year. To verify that a specific vehicle was assembled in the U.S., taxpayers can look up the vehicle identification number on the National Highway Traffic Safety Administration website at nhtsa.gov/vin-decoder. The deduction for car loan interest also expires after 2028.
Estimates from the Congressional Budget Office and the Peter G. Peterson Foundation put the total cost of the “one big beautiful bill” at around $4 trillion through 2034. Within that overall framework, the temporary measures mentioned above are small beer, expected to add around $240 billion to the debt assuming they are not made permanent. But for millions of middle class Americans, the relief will be welcome. Consult with your tax preparer or financial advisor to make certain you are taking full advantage of the breaks for which you may qualify.
Christopher A. Hopkins, CFA, is a co-founder of Apogee Wealth Partners in Chattanooga.
