by Dave Horwedel, EA and CEO of Torchlight Tax
A new federal tax law, signed into effect on July 3, 2025, brings a range of changes that impact individuals, businesses, and investors. Some provisions are modest adjustments, while others introduce new opportunities and planning considerations. This article outlines the core features of the law as it applies for tax year 2025.
Income Taxes and Standard Deduction
The federal income tax system continues to use seven brackets. The marginal rates have mostly remained unchanged, with one exception: the top marginal rate has been reduced from 37 percent to 36 percent. All income bracket thresholds have been adjusted for inflation.
The standard deduction has also been adjusted to reflect inflation. For 2025, it is fifteen thousand dollars for single filers, thirty thousand dollars for married couples filing jointly, and twenty-two thousand five hundred dollars for heads of household. These figures are consistent with expected annual indexing and will continue to adjust in future years.
Child Tax Credit
The Child Tax Credit has been increased to two thousand five hundred dollars per qualifying child under age 18. Up to two thousand dollars of the credit is refundable. The phaseout threshold has also been raised: it now begins at three hundred thousand dollars of adjusted gross income for joint filers, providing broader eligibility for middle- and upper-middle-income households.
Tip Income Exclusion
A significant new provision allows workers to exclude up to twenty-five thousand dollars of tip income per year from federal taxable income. This applies to tips that are properly reported to employers and included on W-2 forms. The exclusion phases out for individual taxpayers with income over one hundred fifty thousand dollars and for married couples earning over three hundred thousand. Tip income remains subject to Social Security and Medicare taxes and may still be taxable at the state level.
Overtime Pay Deduction
Employees who receive overtime pay may deduct up to twelve thousand five hundred dollars of that income from federal taxable income annually. For married couples filing jointly, the cap is twenty-five thousand dollars. The deduction phases out at the same income thresholds as the tip exclusion. Like the tip provision, this affects only federal income tax. Payroll and state taxes continue to apply.
Senior Deduction
Taxpayers aged sixty-five and older may now claim an additional deduction of six thousand dollars. Married couples where both spouses are over sixty-five may deduct twelve thousand. This deduction is in addition to the standard deduction and phases out beginning at seventy-five thousand dollars of income for individuals and one hundred fifty thousand dollars for joint filers.
Social Security Taxation
The calculation for including Social Security benefits in taxable income has been revised. A smaller portion of benefits is now subject to tax for middle-income recipients, while high-income recipients remain subject to tax on up to 85 percent of benefits. In addition, the income thresholds that determine the taxability of Social Security will now be indexed for inflation, beginning in 2026.
Qualified Business Income Deduction
The twenty percent deduction for qualified business income (commonly known as the pass-through deduction or Section 199A) has been made permanent. This applies to eligible income from sole proprietorships, partnerships, limited liability companies, and S corporations. The deduction is still subject to income thresholds and restrictions for specified service trades, but those thresholds will now be indexed for inflation going forward.
Depreciation and Expensing
Bonus depreciation at one hundred percent has been extended through the end of 2027. This allows businesses to fully deduct the cost of qualifying property placed in service during the year. Beginning in 2028, the percentage begins a scheduled phase-down: eighty percent in 2028, sixty percent in 2029, and so on, until it phases out after 2031.
Section 179 spending limits have also increased. Businesses may now expense up to one and a half million dollars of qualifying property annually, with a phase-out threshold beginning at three and a half million dollars. These amounts are indexed for inflation.
Corporate and International Provisions
The corporate income tax rate has been lowered to a flat nineteen percent, applicable to all C corporations regardless of income level.
For businesses with international operations, the threshold for including foreign income under the Global Intangible Low-Taxed Income (GILTI) regime has been increased. The deduction for Foreign-Derived Intangible Income (FDII) has been extended through 2035. The minimum tax based on financial statement income now applies only to corporations with book income of two billion dollars or more.
Real Estate and Opportunity Zones
The law increases the deferral limit for like-kind exchanges (Section 1031). Taxpayers may now defer up to twenty million dollars of gain per exchange, with an additional five million allowed for long-term residential property.
The Opportunity Zone program has been extended through the end of 2032. Additional transparency and reporting requirements have been added for fund managers and investors.
IRS Administration and Compliance Rules
Beginning in 2026, taxpayers who file more than five informational returns—such as Forms W-2 or 1099—will be required to file them electronically.
The safe harbor thresholds for avoiding penalties on estimated tax underpayments have been adjusted to align with the new rate structure and standard deduction levels.
The Internal Revenue Service has received additional funding, primarily to enhance enforcement among high-income individuals and large corporations. The law directs the agency to limit audit frequency among lower-income filers.
This law introduces targeted adjustments to the tax system, including new deductions for workers, seniors, and families, while preserving the broader rate structure. The provisions are in effect for the 2025 tax year and may influence filing strategies for a wide range of taxpayers.
There are a number of changes here, and taxpayers are advised to review how these might apply to their 2025 tax bill. There are changes that taxpayers can make, based on these changes. For example,
- S Corporation owners could have an overtime structure that aligns with maximizing their tax free overtime.
- Rideshare drivers could do the same by becoming S Corporations, paying themselves on a payroll, and get their tips and overtime tax free.
- Real Estate Investors could buy a rental property and potentially wipe out their income tax bill for their w2 and active income using bonus depreciation and cost segregation.
There are many opportunities using the new tax law to save tax dollars. More videos and articles will be forthcoming from Torchlight Tax to illuminate strategies for different types of taxpayers. In the meantime, you are welcome to visit our website for tax-saving blog articles or videos at Torchlighttax.com, or visit the Torchlight Tax Youtube channel
For help navigating these changes or applying them to your tax situation, contact Torchlight Tax for a free consultation at 877-758-7797 or email info@torchlighttax.com.
