Taxpayers should prepare for a complicated 2026 filing season due to a host of retroactive tax changes passed in the One Big Beautiful Bill (OBBB), according to experts at the National Taxpayers Union Foundation (NTUF).
During a February 11 webinar, NTUF Senior Policy Manager Debbie Jennings and Executive Vice President Joe Bishop-Henchman explained that while the new law contains numerous tax breaks, its mid-year passage and retroactive nature will create recordkeeping challenges for those looking to claim them for the 2025 tax year.
Recordkeeping
Many of the new tax deductions in the OBBB are retroactive to the beginning of 2025, meaning income earned since January is eligible for new tax breaks, Jennings explained. “The problem is that taxpayers might not have an adequate record of some of these things going back to January, so it will require a lot of record keeping and double checking if you want to claim any of these deductions,” she warned.
Among the most important new provisions for workers are deductions for income from tips, overtime pay, and interest paid on car loans. Jennings clarified “no tax on” these items does not mean they are tax-free, but rather that a certain percentage can be deducted. The deduction for tip income is capped at $25,000, and the deduction for overtime is up to $12,500 ($25,000 for joint filers). A new deduction is also available for up to $10,000 in car loan interest paid on a new, U.S.-built vehicle.
The legislation provides additional relief for seniors and families with children. Seniors, who currently receive a $2,000 deduction, will get an additional $6,000 deduction. For families, the Child Tax Credit, which was doubled to $2,000 by the Tax Cuts and Jobs Act of 2017, is increased again to $2,200 per qualifying child and will be adjusted for inflation. “Families won’t see the real value of their credit decline over time,” Jennings said. The adoption tax credit was also enhanced, making up to $5,000 of it refundable.
The speakers emphasized that taxpayers must pay close attention to the details and limitations of the new deductions. The tip income deduction, for example, applies only to about 70 specific occupations, while the car loan interest deduction applies only to new, U.S.-built cars. Further, Bishop-Henchman added that all of these new provisions are subject to income limitations. “If you make too much money, you can’t take those provisions,” he said.
Key Administrative and Reporting Changes
Jennings also highlighted a number of changes at the IRS under the new administration. The agency announced it is ending its Direct File program, an in-house tax filing software option started by the previous administration. Jennings said that after study, it was “determined that the program is duplicative and costly,” and that taxpayers can instead use Free File, the IRS’ partnership with tax software providers.
The IRS is also phasing out paper checks for both refunds and tax payments, encouraging taxpayers to use direct deposit and online payment methods. Jennings warned taxpayers who still mail checks to be aware of changes to the “mailbox rule,” as postal closings mean a check may not be postmarked on the day it is dropped off.
The OBBB also reverted the widely unpopular threshold for Form 1099-K, Payment Card and Third Party Network Transactions, which is used to report transactions on payment networks like PayPal or Venmo, to its old standard of 200 transactions and $20,000 in value. The American Rescue Plan Act of 2021 had lowered the threshold to just $600. Jennings said the OBBB reversing course “eases up a lot of time for taxpayers who may have received those forms thinking that they have to report income, which was really just a payment to a friend for coffee or something.”
Bishop-Henchman added that the lower threshold made Form 1099-K a “very nefarious form” because it only provided gross sale amounts from transactions. “But of course, on taxes, you can subtract out your expenses or your basis, and that wasn’t on the form,” he continued. “So it was a …way to try to trick millions of people into paying what they didn’t actually owe.
Bigger Refunds?
During the webinar’s question-and-answer session, the speakers addressed the outlook for the upcoming tax season. While the administration estimates suggest refunds will be larger, Jennings cautioned that it depends on individual circumstances and whether a taxpayer can claim the new deductions.
“It’s really dependent up to you and your personal situation, whether you’ll actually get a bigger refund, or whether it’ll be about on par with last year,” she said. Regarding IRS performance, Bishop-Henchman noted that while the agency was staffed up under the previous administration, it has since been staffed down with buyouts, retirements, and layoffs.
As for future tax reform, the speakers said it is unclear if Congress will pursue another reconciliation package. President Trump has apparently said he would not, but Bishop-Henchman noted this was in response to “an off-the-cuff question” during an interview with Fox Business. “[M]aybe he was intending to make news. Maybe he accidentally made news, but we’ll see.”
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