Tax Changes Offer Opportunities and Complexities

Tax season is not over yet, and there are a couple of new items which could save some taxpayers some money this year. It never hurts to do a last-minute review for procrastinators like myself.

With the 2025 standard deduction for a single filer now at $15,750, head of household at $23,625 and $31,500 for joint filers, tracking and itemizing expenses like mortgage interest, property taxes and charitable contributions for tax purposes simply is not necessary for many households anymore. Remember, if itemized deductions do not exceed the standard deduction amount, then itemizing is not needed. But as the government cannot let anything stay simple for long, the OBBA instituted a number of new deductions, some of which phased in for the 2025 tax year, that taxpayers should be aware of.

President Trump's way of communicating can sometimes be confusing, as actual government policy rarely fits cleanly into a social media post. What was finally negotiated and implemented based on the rhetoric of "no more tax on tips," "no more tax on overtime" and "no more tax on Social Security" were actually a set of new tax deductions, which in a way re-complicate tax filing for many. Let's go over some of the reality of these policies.

The tax deduction for tip income is claimed by using a new form (Schedule 1-A) and does not require the taxpayer to itemize total deductions. Said simply, you can still claim the standard deduction and also claim a deduction of up to $12,500 single and $25,000 jointly for tip income. Of course, from there it gets complicated again, as most W-2 programs were not ready for this mid-year tax change, and tip income is not cleanly identified on 2025 W-2s.

This new deduction also phases out if Adjusted Gross Income (AGI) exceeds $150,000, and while the tip deduction can reduce taxes, it does not factor into calculating AGI. Also, please note, married taxpayers must file a joint tax return to claim this new deduction.

If the tip tax deduction sounds complicated, the overtime deduction is the cherry on the sundae. The tax deduction for overtime pay is also claimed on the new Schedule 1-A, and once again, many W-2 programs were not ready for this new rule last year, so overtime pay is not clearly delineated on many W-2 forms. This means taxpayers are left to calculate the "overtime premium" compensation eligible for this deduction, then apply a government formula to determine the final deduction amount.

The overtime pay deduction is up to $12,500 for single filers and $25,000 for married filing jointly. Once again, married filers must file a joint return and the deduction phases out at $150,000 AGI.

Then we have the "no tax on Social Security," which in effect became a tax deduction of $6,000 for single filers and $12,000 for joint filers. This deduction is also determined using Schedule 1-A. It is important to note, only filers age 65 or older in 2025 are eligible for this deduction, so for those claiming early Social Security (age 62-65) or receiving Social Security Disability, the deduction does not apply. This deduction begins to phase out at $75,000 income for single filers and $150,000 for joint filers. The deduction is completely phased out at $175,000 single and $250,000 joint, but does not require joint filing for married taxpayers.

Despite my attempt to simplify some of these new rules, the OBBA resulted in the more straightforward tax filing process instituted during the first Trump administration becoming once again more difficult to navigate. In the end, however, certain taxpayers should experience some meaningful tax relief in 2025, and now with more time to digest some of these new rules, I think tax planning for 2026 offers a number of opportunities to save money.

I do strongly suggest engaging a tax prep professional, as getting a little advice and filing correctly is particularly important during years like 2025, when changes are being integrated into the process.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.