No Tax on Tips
From 2025 to 2028, employees and self-employed individuals in certain occupations may deduct qualified tips on their personal 1040s, even without itemizing. Maximum annual deduction is $25,000, or for self-employed individuals, limited to net income from the business where the tips were earned. Married couples must file jointly to claim the deduction.
No Tax on Overtime
Effective 2025–2028, individuals may deduct qualified overtime pay above their regular rate (e.g., the “half” portion of “time-and-a-half”). Maximum annual deduction is $12,500 ($25,000 for joint filers).
No Tax on Car Loan Interest
Allows deduction for up to $10,000 of interest on new personal car loans through 2028. Applies only to vehicles under 14,000 pounds with final assembly in the US, secured by a lien. Lease payments and used cars do not qualify. Deduction phases out for taxpayers with modified AGI over $100,000 ($200,000 joint).
Trump Accounts
The federal government will contribute $1,000 to an investment account for every American baby born between Jan. 1, 2025, and Dec. 31, 2028. Parents, employers, or other private entities may contribute an additional $5,000 annually.
Electronic Payment Mandate
Refund checks for individuals ended Sept. 30, 2025. Additional e-payment guidance will be issued for the 2026 filing season.
Adjustments to Old Laws
Permanent Tax Brackets
The seven-rate federal income tax system (10%, 12%, 22%, 24%, 32%, 35%, 37%) is now permanent and will continue to adjust for inflation.
Individual Retirement Accounts (IRA) and 401(k)
2025 IRA contribution limit is $7,000, with an additional $1,000 catch-up for those 50+. 2026 limits increase to $7,500 and $8,500 for those over 50. The 401(k) limit increases to $23,500 in 2025, with additional catch-ups of $7,500 (or $11,250 for ages 60–63, if plan allows).
Required Minimum Distributions (RMDs)
First RMD for those turning 73 in 2025 is due April 1, 2026. Rules for inherited IRAs changed for account owners who died after Dec. 31, 2019. Planning is especially important for first-year RMDs.
Qualified Charitable Distributions (QCDs)
A one-time $54,000 QCD is allowed to fund a charitable trust from IRAs in 2025 as part of the $108,000 annual limit.
IRA to HSA one-time transfer
IRA funds may also be transferred directly to an HSA without tax or penalty.
It’s a good idea to contribute to your HSA as much as possible to maximize your tax benefits. The contribution limits are $4,300 for individuals and $8,550 for family in 2025 and $4,400 for individuals and $8,750 for family in 2026. If you are 55 or older by the end of 2025.
Washington State Capital Gains Tax
Applies only if long-term capital gains exceed $278,000 in 2025 and the gains allocated to Washington State. Rates are 7% for the first $1,000,000 of taxable gains and 9.9% for amounts above $1,000,000. The cap on the Charitable Donation Deduction for 2025 has increased to $111,000.
Standard Deduction
Seniors 65+ may claim an additional deduction of $6,000 ($12,000 joint), which phases out at MAGI $75,000 (single) / $150,000 (joint).
Itemized Deductions
State and local tax deduction capped at $40,000, phasing to $10,000 for high-income filers. Mortgage interest limited to $750,000 of indebtedness. Medical expenses deductible only above 7.5% of AGI. Charitable contributions capped at 30% of AGI for non-cash gifts and 60% for cash.
Credits and Other Updates
- Child tax credit: up to $2,200 per qualifying child, with refundable portion $1,400.
- Adoption credit: up to $5,000 refundable.
- Clean vehicle credits: up to $7,500, for purchases through Sept. 30, 2025.
- Earned Income Tax Credit (EITC) eligibility without qualifying child: income < $19,104 ($26,214 MFJ), age 25–64.
- Energy Efficient Home Improvement Credit: 30% credit ends after 2025, max $1,200/year ($2,000 for heat pumps, biomass stoves/boilers).
- Residential Clean Energy Credit: 30% of qualifying expenses through 2032, no annual or lifetime limit.
Consider for 2026 Tax Year
Charitable deductions for itemizers are limited to contributions above 0.5% of AGI. Non-itemizers may claim an above-the-line deduction of $1,000 (single) / $2,000 (MFJ). 1099 reporting thresholds increase to $2,000. K-12 529 withdrawals double to $20,000, and 529-to-Roth rollovers remain ($35,000 lifetime).
