2025 Tax Season Brings Big Changes: How Will They Affect Your Wallet?

As the 2025 tax season gets underway, there are several significant updates to federal and state tax laws that Americans need to know about. From extended provisions under the Tax Cuts and Jobs Act (TCJA) to new inflation adjustments and proposed changes to deductions, these updates could have a big impact on your tax bill. Here’s a breakdown of the most important changes for the year.

1. Tax Cuts and Jobs Act Provisions Extended

Originally set to expire in 2025, many of the tax benefits introduced under the Tax Cuts and Jobs Act (TCJA) are expected to continue. Some highlights include:

• Individual Tax Rates: Lower tax brackets, including the 10%, 12%, and 22% rates, are likely to remain instead of reverting to higher rates in 2026.
• Child Tax Credit: The expanded child tax credit will remain, providing families with increased credits per child, adjusted annually for inflation.

2. Inflation Adjustments to Tax Brackets and Deductions

The IRS has updated tax brackets and deductions for 2025 to account for inflation:

• Standard Deduction: Taxpayers will see higher standard deduction amounts, which vary based on filing status.
• Alternative Minimum Tax (AMT) Exemption: Exemption amounts have increased to $88,100 for single filers and $137,000 for married couples filing jointly.

These adjustments ensure that taxpayers don’t pay higher taxes simply due to rising prices.

3. Proposed Elimination of Taxes on Tips

A proposal backed by former President Donald Trump aims to exclude tips earned by service workers from federal taxation. If passed, this change would provide a significant financial boost to workers in the hospitality and service industries.

4. State-Level Tax Reforms in Effect

Several states are implementing major tax changes beginning in 2025:

• Income Tax Cuts: Nine states, including Iowa, Indiana, and Louisiana, are reducing individual income tax rates.
• Flat Tax Adoption: Iowa and Louisiana are adopting single-rate tax systems, making filing simpler for residents.
• Corporate Tax Reductions: Some states are slashing corporate income tax rates to promote business growth.

5. State and Local Tax (SALT) Deduction Debate

Moderate Republicans are pushing to raise or eliminate the cap on state and local tax (SALT) deductions, a measure that could benefit residents of high-tax states like New York and California. While no changes are finalized yet, any adjustments to the SALT cap would significantly affect itemized deductions for millions of taxpayers.

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6. New Corporate Tax Proposals

There are competing proposals regarding the corporate tax rate in 2025. Some lawmakers are pushing to reduce the rate from 21% to 15% to boost economic growth, while others suggest raising it to 28% to increase revenue. These debates are ongoing, but any changes could have a significant effect on businesses nationwide.

7. IRS Updates for 2025 Filing Season

The IRS has introduced new measures to streamline tax filing and processing:

• Duplicate Dependent Claims: For the first time, the IRS will accept tax returns even if a dependent has already been claimed on another return. Taxpayers must include a valid Identity Protection PIN (IP PIN) to ensure their claims are processed correctly.

What Should Taxpayers Do?

With these changes in play, it’s essential to:

• Stay Informed: Regularly check IRS announcements and state tax websites for updates.
• Seek Professional Advice: Consult with a tax professional to understand how the new rules apply to your situation.
• Plan Ahead: Start preparing your documents early to ensure you maximize deductions and credits available for 2025.