Tax Law Changes for 2025

 Legislation passed by Congress and by the Maryland state legislature in 2025 made significant changes to tax laws.  Here is a rundown of the key items that may affect your bottom line.

Federal Tax Changes

Standard Deduction:

The tax bill provided an extra increase in the federal standard deduction.  For the 2025 tax year, the standard deduction is:

• $15,750 for single taxpayers or if you are married but filing separate returns.  It will be $17,750 if you are 65 or older.

• $23,625 if you are the head of a household supporting another individual.  It goes up to $25,625 if you are 65 or older.

• $31,500 for married couples filing jointly ($34,700 if both are 65; $33,100 if only one is 65 or older) .

• Blind taxpayers get an extra $1,600 on joint returns and $2,000 on single or head-of-household returns

Senior Deduction

    Taxpayers 65 or older get a new $6,000 deduction ($12,000 for married couples filing jointly if  both are 65 or over). This is available whether or not you itemize other deductions.  You must have a Social Security number to claim this deduction and it starts to phase out if your income is over $75,000 ($150,000 for married couples). The senior deduction is designed to help offset the taxes you pay on Social Security but it does not eliminate those taxes. Married couples filing separate returns are not eligible for this deduction.

No Tax on tips:

Up to $25,000 of qualified tip income is deductible per tax return regardless of filing status, but there are several restrictions on this deduction:

• Only voluntary tips paid by customers (not mandatory service charges or automatic gratuities) qualify for the deduction.   

• The deduction is only for workers in jobs that “customarily and regularly received tips” as defined by the IRS.

• The deduction phases out for individuals with incomes above $150,000, or $300,000 for married couples filing jointly.  For every $1,000 of income over the threshold, the deduction is reduced by $100.

• You must have a Social Security number to claim this deduction.

• You must have a record of your tips (this may be on your W-2 if your tips were reported to your employer).

·         Tips are still subject to Social Security and Medicare payroll taxes. Only federal income tax is affected.

·         Married couples filing separate returns are not eligible for this deduction.

Overtime Pay

Up to $12,500 of overtime pay is deductible on single returns ($25,000 for those married filing jointly). Again, there are several restrictions:

·         The deduction is only available for non-exempt employees under the Fair Labor Standards Act (FLSA) who worked overtime (beyond 40 hours in a week) and received pay at least 1.5 times their regular rate.

·         For the purpose of this deduction, overtime is the bonus portion of time and a half…so, for example, if you make $30 an hour and get $45 for an overtime hour, only the $15 premium portion can be deducted.

·         Overtime pay is still subject to Social Security and Medicare taxes.

·         You must get a record of your overtime earned from your employer. This can be on your W-2 or on a separate statement. If you don’t have either of those,  the information may be on the last pay stub you receive in 2025.

·         You must have a Social Security number to get this deduction. Married couples filing separate returns are not eligible for this deduction.

·         The overtime pay deduction begins to phase out when your income exceeds $150,000 ($300,000 on joint returns).

New Car Loan Interest

You can now deduct up to $10,000 of interest that you paid in 2025 on a loan you had to buy a new car, minivan, SUV, pickup truck or motorcycle if it was assembled in the U.S.  Check with your dealer to see if you qualify and bring the Vehicle Identification Number (VIN) with you when you get your taxes prepared.   You will also need a statement from the finance company showing the interest paid. 

The deduction begins to phase out if income exceeds $100,000 for single and head of household taxpayers ($200,000 for joint filers). You do not need a Social Security number for this deduction.

Changes in Itemized Deductions.

The cap on deducting state and local taxes on Schedule A is now $40,000, up from $10,000 in recent years. 

Child Tax Credit

The child tax credit rises to $2,200 per qualifying child…up from $2,000. The refundable part is $1,700.  You must have a Social Security number to claim the child credit. On joint returns, at least one spouse must have a Social Security Number.  The child for whom the credit is claimed must also have an SSN.

Social Security Lump Sum payments

Many federal, state and local government retirees received a lump sum Social Security paymet early in 2025 because of separate legislation passed by Congress.  Be aware that you will likely owe taxes on that income if you did not have taxes withheld.

Maryland Tax Changes

Maryland also enacted a tax bill affecting 2025.

It raised the standard deduction to $3,350 for single taxpapyers and for married people who file separately.  The standard deduction for head of household and married couples filing jointly is $6,7000.

The pension exclusion increased to $41,200 for 2025.

If you itemize deductions, be aware that the new law reduces the amount if you income is over $100,000 (or $200,000 for couples).       

There is a new 2% surtax on capital gains if income is over $350,000.