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CPA Sample Client Letter: New Deductions for 2025.

(Parker Tax Publishing October 2025)

Dear [Client],

With the end of the tax year approaching, it's a good time to start thinking about ways to keep your 2025 tax bill to a minimum.

One thing to consider is whether you can take advantage of any of the new tax breaks in the One Big Beautiful Bill Act of 2025 ("2025 Tax Act"), which features six new deductions individuals can claim on their 1040s and a major expansion of one other. These include:

1. Deduction for Car Loan Interest (new).

2. Deduction for Overtime Pay (new).

3. Deduction for Tip Income (new).

4. Special Deduction for Seniors (new).

5. State and Local Tax Deduction (expanded).

6. Deduction for Charitable Contributions for Non-Itemizers (new for 2026).

7. Itemized Deduction for Educator Expenses (new for 2026).

Note that the first four deductions listed above are available regardless of whether you itemize or take the standard deduction, but they phase out once your income reaches a certain specified threshold.

If you think any of these might apply to you, see the detailed discussions below that will help you make the most of the new tax breaks. As always, feel free to call or email if you need more information or would like to discuss how the rules apply to your situation.

1. Deduction for Car Loan Interest

The deduction for car loan interest, which is limited to $10,000 per year, is available for loans taken out after December 31, 2024 to buy certain motor vehicles for personal use.

The deduction is allowed regardless of whether you itemize your deductions or take the standard deduction. However, it's phased out if your modified adjusted gross income exceeds $100,000 ($200,000 in the case of a joint return).

Qualifying vehicles. For the interest to be deductible, the loan must be for the purchase of a qualifying motor vehicle (officially, an "applicable passenger vehicle"). Several requirements must be met for a vehicle to qualify. For instance, the vehicle must:

- Be new.

- Be manufactured primarily for use on public streets, roads and highways.

- Be either a car, minivan, van, sport utility vehicle, pickup truck or motorcycle.

- Have a gross vehicle weight rating of less than 14,000 pounds.

- Have its final assembly in the U.S.

To get initial information on whether a vehicle is assembled in the U.S., a good starting point is googling "where is the [car make/model] assembled for the U.S. market." But always confirm the information with the dealer.

Qualifying loans. For car loan interest to be deductible, the loan must have been taken out after December 31, 2024, and be secured by the first lien on the vehicle. The loan cannot be from a related party such as a family member. If a qualifying loan is later refinanced, interest on the new loan is generally deductible, but only to the extent the amount of the new loan does not exceed the old one.

Phaseout details. The deduction for car loan interest is reduced by 20% of the amount by which your modified adjusted gross income exceeds $100,000 ($200,000 in the case of joint filers).

2. Deduction for Overtime Pay

The 2025 Tax Act provides a deduction of up to $12,500 ($25,000 for married taxpayers filing joint returns) for overtime pay. The $25,000 limit for married taxpayers filing a joint return applies to the couple overall. It doesn't matter if the qualified overtime was earned entirely or disproportionately by one of the spouses.

The deduction is allowed regardless of whether you itemize your deductions or take the standard deduction. You must have a Social Security number in order to claim the deduction. In addition, if you're married, you can only claim the deduction if you file a joint return. The deduction is phased out if your modified adjusted gross income exceeds $150,000 ($300,000 in the case of a joint return).

Qualified Overtime. The overtime deduction is allowed for compensation required under the Fair Labor Standards Act (FLSA) that is in excess of the regular rate at which you are paid. In other words, it's available for the "half" portion of "time-and-a-half" pay.

Certain types of additional compensation that aren't required under the FLSA don't qualify for the deduction. For instance, you can't claim the overtime deduction for bonuses, vacation pay, sick pay, tips, reimbursements for business expenses, and the like.

Phaseout details. The deduction for qualified overtime is reduced by $100 for each $1,000 by which your modified adjusted gross income exceeds $150,000 ($300,000 in the case of joint filers).

3. Deduction for Qualified Tips

The 2025 Tax Act provides a deduction of up to $25,000 for qualified tips received by a person in a job where tips are customary and common. The deduction is allowed for:

- Employees receiving a W-2 form reporting qualified tips.

- Independent contractors receiving a 1099 form reporting qualified tips.

- Anyone using Form 4317 to calculate the Social Security and Medicare tax owed on qualified tips not
reported to an employer.

Qualified tips. Qualified tips are defined as cash tips received by an individual in an occupation which customarily and regularly receives tips (the IRS has a long list of occupations that qualify, which I'd be happy to send).

A qualified tip must also be paid voluntarily, not be subject to negotiation, and determined by the payor. Tips received by employees under a tip-sharing arrangement may be considered qualified tips, too.

Amounts received for performing services (as either a business owner or employee) in the fields of health, law, accounting, consulting, financial services, brokerage services, performing arts, athletics, and similar businesses generally aren't qualified tips.

Phaseout details. The deduction for tip income is reduced by $100 for each $1,000 by which your modified adjusted gross income exceeds $150,000 ($300,000 in the case of joint filers).

4. Deduction for Seniors

The 2025 Tax Act provides a new $6,000 deduction for individuals who have attained age 65 by the end of the tax year. On a joint return, you can claim a $6,000 for each spouse who is 65 or older at the end of the tax year.

The deduction is allowed regardless of whether you itemize your deductions or take the standard deduction. The deduction is phased out if your modified adjusted gross income exceeds $75,000 ($150,000 in the case of a joint return).

Observation: Although this tax break was often referred to as "no tax on social security" as the 2025 Tax Act was winding its way through Congress, it has no direct connection with the taxability of social security benefits. But if you qualify, the deduction will reduce your tax bill!

Each qualifying individual must have a social security number. If you are married, you must file a joint return to claim the deduction.

Phaseout details. The deduction for seniors phases out by 6 percent of the amount that your modified adjusted gross income exceeds $75,000 ($150,000 for joint filers).

5. Deduction for State and Local Taxes (SALT)

The SALT deduction is not new, but the limit on it was sharply increased by the 2025 Tax Act, from $10,000 in 2024 to $40,000 in 2025. However, the new limit is phased back down to the old limit if your modified adjusted gross income is over $500,000 ($250,000 for married taxpayers filing separately).

Taxes You Can Deduct. Deductible taxes include state and local income taxes, property taxes on real estate, and personal property taxes (typically on motor vehicles).

Deducting sales taxes instead of income taxes. Sales taxes are deductible only as an alternative to deducting state and local income taxes. You can deduct one or the other, not both. If you chose to deduct your sales taxes - for instance, if you live in a state with no income tax - you can either keep records of the actual sales taxes you pay during the year or let me determine the deductible amount using tables provided by the IRS.

Motor vehicle taxes. Also remember that motor vehicle taxes or fees must be based on value to be deducted. Taxes and fees based on weight, model year, and/or horsepower are not deductible. But taxes or fees that are partly based on value and partly based on other criteria may qualify in part. When in doubt, run it by me and I'll let you know.

Itemizing required. Unlike the other deductions discussed above, the SALT deduction is only available if you itemize. If you haven't itemized in the past, the higher limit on the SALT deduction might make it worthwhile. If you already itemize, your SALT deduction might be much higher.

Phaseout of enhanced limit. The enhanced SALT limit is phased out if your modified adjusted gross income is over $500,000 ($250,000 for married taxpayers filing separately). This is done by reducing the cap (but not below $10,000) by 30% of the excess of your income over the threshold.

6. Charitable Contribution Deduction for Non-Itemizers

Beginning in 2026, the One Big Beautiful Bill provides a new charitable contribution deduction for non-itemizers. The maximum deduction is $1,000 for single filers and $2,000 for married individuals filing jointly.

Eligible contributions must be made in cash to a public charity. Contributions to donor advised funds and private foundations do not qualify. Cash contributions include payments made by cash, check, electronic funds transfer, online payment service, debit card, credit card, payroll deduction, or a transfer of a gift card redeemable for cash.

As with any other cash contribution, no deduction is permitted unless you maintain a record of the contribution.

Tax Planning Idea. If you don't expect to itemize your deductions for 2025 and you're considering making cash contributions toward year's end, you might want to hold off until the beginning of 2026 so that you can get a tax benefit from your contributions. Depending on your tax bracket, the maximum deductible contribution can reduce your tax bill by as much as $370 ($740 for joint filers).

But if you do expect to itemize in 2025, making your charitable contributions before year end may work out better, especially because the charitable contribution deduction for itemizer will be reduced by 0.5% of adjusted gross income beginning in 2026 (feel free to call to discuss).

7. Itemized Deduction for Educator Expenses

Beginning in 2026, the Tax Act provides a new itemized deduction for elementary and secondary school teachers (K-12) to complement the longstanding $300 ($350 after 2025) above-the-line deduction for classroom expenses.

There are two key differences between the above-the-line deduction and the new itemized deduction:

(1) there is no limit on the amount of the itemized deduction; and

(2) educator expenses of interscholastic sports administrators and coaches are allowed, and "nonathletic supplies for courses of instruction in health or physical education" are allowed as eligible expenses.

The deduction is available to any "eligible educator", defined as a kindergarten through grade 12 teacher, instructor, counselor, interscholastic sports administrator or coach, principal, or aide who worked in a school for at least 900 hours during a school year.

Eligible expenses include ordinary and necessary expenses paid or incurred by an eligible educator in connection with:

- books and supplies;

- computer equipment, software, related services, and other equipment;

- supplementary materials used by the eligible educator as part of instructional activity; and

- participation in professional development courses related to curriculum.

Concluding Thoughts

Please let me know if you'd like to discuss any of the new and expanded deductions. Even if none of the new tax breaks apply to you this year, we can discuss other year-end options that may help reduce your tax bill.

Sincerely,

[Your Name, Your Firm]

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