The One Big Beautiful Bill Act (OBBBA) ushers in major federal tax updates for 2025 and beyond. From expanded deductions to new savings incentives, the law introduces powerful changes aimed at helping middle-income taxpayers and streamlining return preparation.

This Q&A highlights key provisions you’re likely to field questions about, including the OBBBA SALT cap increase, the new tip and overtime deductions and the expanded OBBBA standard deduction increase.

Let’s look more closely at what you need to know about the OBBBA tax changes for 2025.

What is the One Big Beautiful Bill Act?

Signed into law on July 4, 2025, OBBBA permanently extends provisions from the 2017 Tax Cuts and Jobs Act (TCJA) and adds new deductions, credits and taxpayer-friendly changes. Most changes take effect starting with 2025 tax returns.

How does the OBBBA SALT cap increase work?

The OBBBA SALT cap increase raises the deduction limit for state and local taxes (SALT) from $10,000 to $40,000 for joint filers (and $20,000 for all others) starting in 2025.

• Applies only to itemizing taxpayers
• Phased out for high-income filers (MAGI over $500,000; $250,000 MFS)
• Indexed for inflation through 2029, then reverts in 2030

This change could lead more clients to itemize again, especially when combined with other deductible expenses. Tax pros may want to revisit bunching strategies, encouraging clients to group expenses like charitable donations or medical costs into a single year to maximize itemized benefits.

Example:
In 2024, Ava and Leo (married filing jointly) paid $18,000 in state and local taxes but were limited to a $10,000 SALT deduction. Starting in 2025, OBBBA raises the cap to $40,000. That allows them to deduct the full $18,000, an $8,000 increase, making itemizing worthwhile again.

How does the new tip deduction work?

The OBBBA tip deduction allows each qualifying employee or self-employed worker to deduct up to $25,000 of eligible tips per person from taxable income.

• Applies to tips reported on Forms W-2s, 1099s or 4137s
• Must come from occupations that customarily receive tips (list to be published by the IRS)
• Phases out above $150,000 (single)/$300,000 (joint) MAGI
• Available for 2025 through 2028
• Requires valid SSNs and accurate reporting
• Limit is per return, not per individual

What about the new overtime deduction?

Separate from tips, the OBBBA overtime deduction allows taxpayers to deduct qualified overtime pay, up to $12,500 for single filers or $25,000 per return for joint filers, per year.

• Overtime must be reported separately on Form W-2s or 1099s
• Applies to the premium portion of overtime pay under the Fair Labor Standards Act
• Same income-based phaseout as the tip deduction
• Must include SSN on the return
• Available from 2025 through 2028
• Applies to non-itemizers as an above-the-line deduction
• Limit is per person, not per return

Tax pros should ensure clients comply with documentation and filing requirements in order to claim these deductions.

What’s changing with the standard deduction?

The OBBBA standard deduction increase builds on TCJA’s enhancements by locking in those levels and boosting them further in 2025. For context, the 2024 standard deduction was $27,700 for MFJ and $13,850 for single filers. OBBBA increases those to:

• $31,500 for MFJ filers
• $15,750 for single filers
• Indexed for inflation
• Available to all filers with no phaseouts

This expansion reduces taxable income for most households and may discourage itemizing even with the higher SALT cap.

What’s the deal with the auto loan interest deduction?

The OBBBA auto loan interest deduction allows taxpayers to deduct up to $10,000 per tax return per year in interest on qualifying car loans for personal vehicles.

• Applies to loans originated after Dec. 31, 2024
• The vehicle must be used for personal or commuting purposes (not business)
• VIN must be included on the tax return
• Phased out above $100,000 (single)/$200,000 (joint) MAGI
• Available from 2025 through 2028
• Above-the-line deduction, available to non-itemizers
• Maximum deduction is $10,000 per return, not per taxpayer

This new personal interest deduction may impact car-buying decisions in 2025.

NATP is here to lead you through

From the OBBBA SALT cap increase to the tip deduction, overtime deduction, standard deduction increase and auto loan interest deduction, this legislation brings one of the most comprehensive significant shifts to personal income tax planning in years.

As always, NATP will continue to provide support and guidance to help you understand new rules, stay IRS-compliant and provide proactive advice to your clients.

Utilize NATP’s resources, including webinars, checklists and member Q&As, for more tools to thrive in the 2025 season and beyond.

Tax professionals increasingly encounter clients who earn income abroad through employment, consulting or investments. Understanding how to classify and treat that income under U.S. tax law is vital for minimizing double taxation and ensuring compliance with tax requirements.

The global scope of U.S. tax obligations

The U.S. applies a worldwide taxation system; all income of U.S. persons (citizens, green card holders and those meeting the substantial presence test) must be reported, regardless of where it is earned. This creates potential double taxation in cases where foreign jurisdictions and the U.S. both tax the same income.

To mitigate this, two primary tools are available:

• The foreign tax credit (FTC), claimed on Form 1116, Foreign Tax Credit (Individual, Estate, or Trust)
• The foreign earned income exclusion (FEIE), claimed on Form 2555, Foreign Earned Income

FTC principles

The FTC allows a dollar-for-dollar credit for foreign income taxes paid, but only for taxes imposed on foreign-source income. Not all foreign levies qualify. To be eligible for the credit, the tax must meet certain conditions, including being an income tax imposed on net gain and attributable to the foreign jurisdiction.

Key limitations include:

• Per-country basket rules: Income is categorized into baskets such as passive, general, branch and GILTI. Credits can offset U.S. tax only within the same basket.
• An overall limitation formula caps the credit based on the ratio of foreign-source taxable income to total taxable income.

FEIE eligibility and pitfalls

The FEIE allows up to $130,000 (2025) of earned income to be excluded from taxable income. This applies to earned income only; wages or professional fees qualify, while passive income such as dividends or interest do not.

To claim the exclusion, a taxpayer must:

1. Establish a tax home in a foreign country, and
2. Meet either:

• The bona fide residence test, which considers intent, integration into the community and duration of stay (typically an entire year)
• The physical presence test, requiring at least 330 full days of presence in a foreign country during a flexible 12-consecutive-month period

Tax practitioners must recognize situations where a taxpayer, despite living abroad, cannot claim the FEIE if their abode remains in the U.S.

Foreign housing exclusion

The foreign housing exclusion allows certain taxpayers to exclude qualifying housing costs above a statutory floor (16% of the FEIE limit) and below a ceiling (30% of the FEIE limit). For example, the 2025 housing cost ceiling for Paris is $180 per day.

Only employer-provided amounts qualify for the foreign housing exclusion; self-employed individuals may claim a deduction instead. Common eligible expenses include rent, utilities, insurance and parking, but not furniture or capital expenditures.

Example scenario

Consider Jake, a U.S. citizen who has worked in France for over a year. Jake pays rent, utilities and parking and receives both wages and dividends.

In Jake’s case:

• He likely qualifies under the physical presence test but not the bona fide residence test
• Most housing costs would qualify for exclusion, excluding furniture
• Dividends would not qualify for FEIE but may be eligible for FTC under the passive basket

Properly applying these rules ensures accuracy and reduces client liability.

Learn more about foreign tax planning

To find out which of these options your clients will qualify for, and which may be most beneficial for their tax situation, check out our upcoming webinar, Credits & Exclusions for Foreign-Sourced Income. Gain practical insights on when to claim Form 2555 versus Form 1116, navigate basket limitations and help clients minimize double taxation while remaining compliant.

IRS Commissioner Billy Long anticipates a delayed start to the 2026 tax filing season, likely beginning around Presidents Day (Feb. 17), citing the time needed to implement a newly enacted tax package. The fate of the IRS’s Direct File tool is also confirmed: it has been effectively discontinued.

Filing season delay explained

Long disclosed during a recent speech that the filing season will likely not open until mid-February, rather than the typical late-January start. The delay stems from the IRS needing time to integrate tax changes from the OBBBA, which makes permanent several provisions of the Tax Cuts and Jobs Act and introduces deductions for tips, overtime, and Social Security benefits for seniors.

The last time the IRS opened the season in February was in 2021, due to pandemic-related tax changes and stimulus payments.

Operational challenges at the IRS

Since the start of the year, the IRS has lost approximately 25% of its workforce, primarily due to a deferred resignation program initiated under the Trump administration. The IT division has been hit hardest, losing over 2,000 staff. This shortage has raised concerns from the National Taxpayer Advocate about potential disruptions in the absence of technology upgrades.

Demise of Direct File

Long confirmed Direct File, piloted in 2024, is no longer under consideration. The focus has shifted to “direct audit,” with no indication of reviving the program.

To note, the Republican reconciliation bill originally proposed eliminating Direct File, but the Senate stripped that provision. The Treasury is now tasked with evaluating a public-private alternative to any IRS-run e-filing programs. The CIO of Treasury, Sam Corcos, previously recommended discontinuing the tool.

Internal support for Direct File has evaporated, with staffing reduced from 27 to 5. An FOIA-released report noted user growth, though it failed to meet projections partly due to public misinformation.