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By Hugh Cameron
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The beginning of 2026 will see several major changes to the U.S. tax code, with new rules on tips and overtime pay, child tax credits and standard deductions taking effect in January.
Why It Matters
Some of the scheduled changes are routine, but many are intended to reduce the financial burdens on Americans, who have this year been grappling with higher prices, growing debts and a general weakening of employment conditions. The University of Michigan’s latest survey, released on Friday, revealed a modest improvement in consumer sentiment, though this remains at levels nearly 30 percent lower than in December of last year.
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Tax Changes Happening Next Month
1. Tip Income Becomes Tax-Free Up to $25,000
The One Big Beautiful Bill Act (OBBBA), signed into law by President Donald Trump in July, introduced a temporary measure allowing certain workers to exempt as much as $25,000 in tips from their federal income taxes.
The deduction, which is in effect for tax years 2025 through 2028, phases out for higher earners with gross incomes over $150,000 and $300,000 for joint filers. Workers can claim the deduction when filing their 2025 federal tax return in early 2026.
2. Overtime Pay Partially Tax-Free
The OBBBA also creates a first-of-its-kind exemption for overtime pay, excluding up to $12,500 from federal income tax, or $25,000 for joint filers. As with the tip exemption, this benefit phases out for upper-income households—for every $1,000 over the income limit, the deduction is cut by $100.
3. Larger Refunds for 2025 Income
Treasury Secretary Scott Bessent has said that many households should expect "very large refunds" in 2026 compared to previous years. The windfall is from retroactive breaks written into the OBBBA, and Bessent estimated that the refunds could total between $1,000 and $2,000 for most Americans, depending on their income levels and reliance on tips and overtime pay.
4. Higher Standard Deduction
The IRS has raised the standard deduction for the 2026 tax filing season, a result of its annual inflation adjustments as well as OBBBA provisions. The deduction increases to $32,200 for married couples filing together. For single taxpayers and married couples filing separately, this increases to $16,100 for tax year 2026, and to $24,150 for heads of households.
5. Child Tax Credit Rises to $2,200
The maximum child tax credit—which cuts the amount owed by families while occasionally providing refunds—will increase to $2,200 permanently as a result of the OBBBA, up from $2,000. This applies to income earned in 2025, and can be claimed on returns filed in early 2026.
6. New Senior Deduction Worth About $6,000
Also starting in 2026, eligible taxpayers age 65 and older will be entitled to an additional deduction worth $6,000, and up to $12,000 for joint filers. This is on top off existing standard deductions for the elderly.
The deduction phases out for individual taxpayers earning over $75,000, and joint filers earning over $150,000.
7. SALT Cap Temporarily Raised
The federal cap on state and local tax (SALT) deductions—previously set at $10,000—increases to $40,000 for those earning less than $500,000. This cap is set to rise one percent each year—meaning it will be $40,000 for the 2026 tax year—but lasts for only five years in total.
8. New Above-the-Line Charitable Deduction
Coming into effect on January 1, the OBBBA also entitles taxpayers to a permanent preadjustment deduction of $1,000 for charitable donations—$2,000 for joint filers.
9. Green Incentives Expire
After EV tax credits of $7,500 for new cars and $4,000 for used vehicles expired in September, many federal incentives for energy-efficiency house upgrades will be ending at the end of 2025.
The Energy Efficient Home Improvement Credit (EEHIC) and the Residential Clean Energy Credit (RCEC)—both enacted in 2005 and expanded under Joe Biden—will be expiring on January 1 thanks to the passage of the OBBBA.
10. Gambling Loss Deductions Shrink
Starting January 1, the OBBBA means taxpayers gambling loss deductions will be capped at 90 percent of their winnings, down from the 100 percent allowed under current law.
11. Expanded HSA and 529 Plan Benefits
Provisions in the OBBBA will also result in expanded eligibility and contribution limits for Health Savings Accounts. Telehealth coverage and Direct Primary Care arrangements will no longer disqualify contributions as of 2026, with bronze and catastrophic plans now qualifying a high deductible health plan.
529 education plans will also allow higher withdrawals for K-12 expenses beginning in 2026. The annual withdrawal cap is increasing from $10,000 to $20,000, effective January 1.
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