Bigger Tax Refunds

Dear Dr. Per Cap: 

I’m hearing a lot of people can expect bigger tax refunds this year.  What’s changed from previous years?

Signed, Dreads Taxes

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Dear Dreads Taxes,

There are significant changes to federal income tax for the 2025 filing season that began on January 26^th and extends through April 15^th, 2026.  More than 100 changes to the tax code were included in the federal tax and spending bill that was signed into law last summer.

One of the biggest changes that’s getting a lot of attention impacts homeowners who itemize and claim mortgage interest and property tax deductions.  The previous threshold for these and other State and Local Taxes (SALT) was $10,000.  However, that’s now been raised to $40,000.

However, many homeowners nowadays don’t pay enough mortgage interest and property tax to itemize.  Instead, they just stick with the standard deduction which has increased quite a bit in recent years.  As a result, a person would need some pretty deep pockets and a hefty mortgage to take full advantage of the larger SALT deduction, so let’s focus on other changes that could result in bigger refunds for those of us who don’t live in million-dollar mansions.

A lot of folks are excited about No Tax on Car Loan Interest.  This new deduction applies to brand new cars and trucks purchased in 2025 and assembled in the United States.  Tax filers can claim up to $10,000 in loan interest which for most people will add an extra $300 to $900 in tax savings.  The deduction, which only applies to auto loans not leases, will remain in place through 2028.

If you bought a new vehicle but aren’t sure where it was manufactured you don’t need to be an ASE certified tech to figure it out.  Simply check the 17-character Vehicle Identification Number or VIN located on a small sticker or placard on the driver’s side door jamb near the latch. Or look on the driver’s side dash below the bottom corner of the windshield.  A VIN that begins with a 1, 4, 5, or 7 means made in the U.S.A.

Some service workers might benefit from a new “no tax on tips” deduction which allows them to deduct up to $25,000 of qualified tip income earned in 2025.  Like No Tax on Car Loan Interest, this deduction also extends through 2028.

Hourly employees might also be able to deduct up to $12,500 of qualified overtime compensation which in many states amounts to 1.5 times regular hourly pay.  This is another temporary deduction in place from 2025 through 2028.

As with any deduction, certain restrictions, income limits, and other details will determine which of these deductions you qualify for and their amounts.  You’ll need to file a new tax form called Schedule 1-A to claim auto loan interest, tips, and overtime deductions to make that determination.

Finally, please don’t dread filing your taxes this year.  You’ve got plenty of time to get your records in order and figure out how changes to the tax code could result in a bigger refund this year.  Whether you choose to file your own taxes or take them to a tax preparer, time is on your side before the April 15^th deadline.