By Fred Pfeil, Esq. - Director of LITC
If you file a federal income tax return — even if you don't expect to owe anything — there's good news: tax year 2025 brings several significant changes that may put money back in your pocket. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, Congress expanded deductions and credits that directly benefit working families, seniors, and lower-income households. Here is what you need to know before you file your 2025 return in early 2026.
1. New $6,000 "Senior Bonus" Deduction for Ages 65 and Older
This is perhaps the most talked-about change for retirees. Beginning with your 2025 tax return, if you are age 65 or older, you may claim an additional $6,000 deduction — on top of your regular standard deduction and the existing extra standard deduction for seniors. A married couple where both spouses are 65 or older can deduct up to $12,000. This deduction is available whether you itemize or take the standard deduction. It phases out if your Modified Adjusted Gross Income (MAGI) exceeds $75,000 (single) or $150,000 (married filing jointly). For many lower-income seniors, this new deduction could reduce or even eliminate your federal tax bill. Note: this provision is temporary — it applies for tax years 2025 through 2028.
2. Higher Standard Deduction for All Filers
The OBBBA permanently increases the standard deduction. For 2025, the amounts are: $15,750 for single filers, $23,625 for heads of household, and $31,500 for married couples filing jointly. For comparison, single filers received a $14,600 standard deduction in 2024. This means many low-income taxpayers will owe even less — or nothing at all — in federal income tax. Seniors age 65 and older also keep their existing extra standard deduction of $2,000 (single) or $1,600 per qualifying spouse (married filing jointly), which stacks on top of the base amount.
3. Social Security Benefits: No New Exemption, But Big Relief for Many Seniors
You may have heard the phrase "no tax on Social Security," but here is the important truth: the OBBBA did not eliminate federal taxes on Social Security income. The existing rules still apply — up to 85% of your benefits may be taxable depending on your income. However, the new $6,000 senior bonus deduction described above effectively reduces the taxable income of many seniors enough to eliminate their Social Security taxes indirectly. If you are a single person age 65 or older with modest income, the combined effect of the increased standard deduction, the existing senior extra deduction, and the new $6,000 senior deduction may bring your taxable income to zero.
4. Child Tax Credit Permanently Raised to $2,200 Per Child
Families with children received a permanent boost. The Child Tax Credit has been permanently increased from $2,000 to $2,200 per qualifying child under age 17, with annual inflation adjustments going forward. The refundable portion (the Additional Child Tax Credit, or ACTC) has also been made permanent and will adjust for inflation each year. This is particularly important for low-income working families who may not owe much tax — the ACTC can still generate a refund even if you owe little or no tax. Income limits remain at $200,000 for single filers and $400,000 for married couples.
5. New Deduction for Tip Income ("No Tax on Tips")
If you work in a tipped occupation — such as a restaurant server, hair stylist, hotel worker, or delivery driver — you may be eligible to deduct up to $25,000 in qualified tip income for tax years 2025 through 2028. The IRS has published a list of qualifying occupations. This deduction is available to both itemizers and non-itemizers, so you do not have to itemize to benefit. It phases out if your MAGI exceeds $150,000 ($300,000 for joint filers). You must have a valid Social Security number and your tips must be reported on your W-2 or 1099. Note: tips are still subject to payroll (Social Security and Medicare) taxes — only income tax is affected.
6. New Deduction for Overtime Pay ("No Tax on Overtime")
Hourly workers who earn overtime pay required by the Fair Labor Standards Act (FLSA) may deduct the extra "half" portion of their time-and-a-half overtime pay. The maximum deduction is $12,500 per year ($25,000 for married filing jointly). Like the tip deduction, this applies from 2025 through 2028 and is available whether you itemize or not. It phases out starting at $150,000 in MAGI ($300,000 for joint filers). Your employer is required to report your qualified overtime separately on your W-2. For 2025, the IRS has granted transition relief as employers adapt to the new reporting rules.
7. New Deduction for Car Loan Interest
For the first time in decades, some taxpayers can deduct interest paid on a personal auto loan. If you purchased a new vehicle in 2025 through 2028 that was finally assembled in the United States, for personal (not business) use, you can deduct up to $10,000 per year in loan interest — again, regardless of whether you itemize. This deduction phases out for individuals with MAGI over $100,000 ($200,000 for joint filers). Leased vehicles and used cars do not qualify. The vehicle's window sticker (Monroney label) must show U.S. final assembly. This provision expires after 2028.
8. Earned Income Tax Credit (EITC) Remains Powerful — Are You Claiming It?
The Earned Income Tax Credit is one of the largest anti-poverty tax tools available to low and moderate-income workers. It was made permanent under the OBBBA along with the other TCJA provisions. For 2025, the maximum credit can reach over $7,800 for a family with three or more children. Even taxpayers without children may qualify for a smaller credit. The EITC is fully refundable — meaning if the credit is larger than the tax you owe, you receive the difference as a refund. Many eligible taxpayers fail to claim the EITC each year because they do not realize they qualify. If you have earned income from a job or self-employment, you should check your eligibility.
Need Help? Contact South Carolina Legal Services - Low Income Taxpayer Clinic
If you have a dispute with the IRS — such as an audit, a notice of balance due, or an issue with your refund — and your income is below certain limits, you may qualify for free representation through a Low Income Taxpayer Clinic (LITC). LITCs are independent organizations funded in part by the IRS that represent low-income taxpayers in federal tax disputes at no cost or low cost to the client. If you reside in South Carolina and need assistance with a tax matter please contact our intake line at 1-888-346-5592.
Disclaimer: This article is for general informational purposes only and does not constitute legal or tax advice. Tax situations vary. Consult a qualified tax professional for guidance specific to your circumstances.
