How to update withholding to account for tax law changes for 2025

Public Law 119-21, commonly known as the One, Big, Beautiful Bill Act (OBBBA), contains several new or enhanced deductions that individuals can claim. Many of these deductions are available beginning in 2025. If you are an employee and want to account for these deductions in the income tax withheld from the remainder of your paychecks in 2025, you must submit to your employer a new 2025 Form W-4.

You may account for these deductions and update your withholding:

• Manually by using the deductions worksheet PDF and inputting the result in Step 4(b) of the 2025 Form W-4; or
• Consulting a tax professional.

The IRS Tax Withholding Estimator (TWE) is not yet updated to reflect certain provisions of the OBBBA, including most of the deductions listed below. However, the TWE has been updated to account for the increased standard deduction and child tax credit amounts from OBBBA. If you do not have the OBBBA deductions for qualified tips, overtime compensation, qualified passenger vehicle loan interest, or seniors, then you could use the TWE to account for the increased standard deduction and child tax credit. Importantly, you can use either the TWE or the worksheet, but not both, to update your withholding for the remainder of 2025. Use the 2025 Step 4(b)—Deductions Worksheet PDF.

If you update your withholding for the remainder of 2025, you are encouraged to recheck and update your withholding at the beginning of 2026.

The provisions that go into effect starting with tax year 2025 include:

• A new income tax deduction for qualified tips—available to itemizing and non-itemizing taxpayers;
• A new income tax deduction for qualified overtime compensation—available to itemizing and non-itemizing taxpayers;
• A new income tax deduction for qualified passenger vehicle loan interest paid on a loan that you took out in 2025 for the purchase of an applicable passenger vehicle—available to itemizing and non-itemizing taxpayers;
• An enhanced income tax deduction for seniors—available to itemizing and non-itemizing taxpayers;
• An increase in the standard deduction;
• An increase in the limitation on the itemized deduction for state and local taxes paid; and
• Changes to the child tax credit.

“No tax on tips.” Tips are subject to income and payroll taxes. Employees (and the self-employed) may deduct up to $25,000 of qualified tips received in occupations that are listed by the IRS as customarily and regularly receiving tips on or before Dec. 31, 2024, and that are reported to the employer or the IRS. “Qualified tips” are voluntary cash or charged tips received from customers or, in the case of employees, through tip sharing arrangements. (Mandatory service charges added to the bill are not qualified tips.) Tips received as a self-employed individual in a specified service trade or business (SSTB) or as an employee of an employer that is in an SSTB are not qualified tips. If a self-employed individual receives qualified tips, they can deduct up to their net profits (the difference between the gross income from their trade or business minus the sum of their deductions, other than the deduction for qualified tips) for the tax year for the trade or business in which they received the tips. The deduction is available for both itemizing and non-itemizing taxpayers. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers). Each taxpayer claiming the deduction must include his or her social security number valid for employment on the return, and, if the taxpayer is married, the taxpayer and the taxpayer’s spouse must file jointly. By Oct. 2, 2025, the IRS must publish the list of occupations that “customarily and regularly” received tips on or before Dec. 31, 2024. The IRS will provide transition relief for tax year 2025 for taxpayers claiming the deduction and for employers and payors subject to the new reporting requirements.

“No tax on overtime.” Overtime compensation is subject to income and payroll taxes. Individuals (employees and other workers) may deduct up to $12,500 ($25,000 if married filing jointly) of qualified overtime compensation. “Qualified overtime compensation” is overtime compensation that exceeds their regular rate of pay—such as the “and-a-half” portion of time-and-a-half compensation—that is required to be paid to an individual under section 7 of the Fair Labor Standards Act (FLSA) and that is reported to the IRS. The deduction is available for both itemizing and non-itemizing taxpayers. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers). Each taxpayer claiming the deduction must include his or her social security number valid for employment on the return, and, if the taxpayer is married, the taxpayer and the taxpayer’s spouse must file jointly.

“No tax on car loan interest.” Individuals may deduct interest paid on a loan originated after Dec. 31, 2024, and used to purchase an applicable passenger vehicle for personal use, and that meets other eligibility criteria (lease payments do not qualify). The maximum annual deduction is $10,000. To qualify for the deduction, the interest must be paid on a loan that is used to purchase a vehicle originally used by the taxpayer (used vehicles do not qualify) and secured by a lien on the vehicle. An applicable passenger vehicle is a car, minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds, and that has undergone final assembly in the United States. The deduction is available for both itemizing and non-itemizing taxpayers. The deduction phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers). The taxpayer must include the vehicle identification number (VIN) of the applicable passenger vehicle on the tax return for any year in which the deduction is claimed.

The location of final assembly will be listed on the vehicle information label attached to each vehicle on a dealer's premises. Alternatively, taxpayers may rely on the vehicle’s plant of manufacture as reported in the VIN to determine whether a vehicle has undergone final assembly in the United States. The VIN Decoder website for the National Highway Traffic Safety Administration (NHTSA) provides plant of manufacture information. Taxpayers can follow the instructions on that website to determine if the vehicle’s plant of manufacture was located in the United States.

Enhanced deduction for seniors. Individuals who are age 65 and older may claim an additional deduction of $6,000 ($12,000 for married couples if both spouses qualify). This new deduction is a personal exemption that is separate from the current additional standard deduction for seniors under existing law. The deduction is available for both itemizing and non-itemizing taxpayers. The deduction phases out for taxpayers with modified adjusted gross income over $75,000 ($150,000 for joint filers). Each taxpayer claiming the additional deduction must include his or her social security number valid for employment on the return, and, if the taxpayer is married, the taxpayer and the taxpayer’s spouse must file jointly.

An increase in the standard deduction. The standard deduction has increased to the following amounts:

• $31,500 (up from $30,000) for married filing jointly or a qualifying surviving spouse;
• $23,625 (up from $22,500) for head of household; and
• $15,750 (up from $15,000) for single or married filing separately.

An increase to the limitation on the itemized deduction for state and local taxes. Individuals who itemize their deductions can claim up to $40,000 ($20,000 if married filing separately) for state and local taxes paid. This limit was increased from $10,000 ($5,000 if married filing separately). The maximum deduction is reduced for taxpayers with modified adjusted gross income over $500,000 ($250,000 if married filing separately).

Changes to the child tax credit. The maximum child tax credit has increased to $2,200 (up from $2,000) per eligible child. The individual claiming the child tax credit must have a social security number valid for employment. If married filing jointly, at least one spouse must have a social security number valid for employment. The qualifying child must also have a social security number valid for employment.