November 20, 2025

Tax Deduction Updates and the One Big Beautiful Bill Act

Action Required: Share the following information with all human resources (HR) office employees.

Description: On July 4, 2025, the President signed into law Public Law 119-21, known as the One Big Beautiful Bill Act (OBBBA). This Act introduces several new federal income tax deductions for tax years 2025 through 2028, which may affect employee’s federal income taxes. Please see below important information regarding 2025 tax deduction updates and the OBBBA:

Key Deductions Available (Tax Years 2025-2028):

  • Qualified Overtime Compensation: Employees may be able to deduct the portion of their overtime pay that exceeds the regular rate of pay (the "half" in time-and-a-half pay), up to an annual limit.

  • Qualified Tips: Employees may be able to deduct up to $25,000 in qualified tips received per year.
  • Reporting: Amounts eligible for deduction for qualified overtime compensation and tips will be reported in Box 14 of Form W-2.
  • Other Potential Changes: The OBBBA also includes an increase in the standard deduction and the child tax credit, and an increased limit on the itemized deduction for state and local taxes.

Important Note on 2025 Tax Withholdings:

  • No Change to Tax Withholding: The law does not change the amount of federal income tax, Social Security, Medicare or State Disability Insurance (SDI) taxes required to withhold from your pay this year.
  • Action Required to Adjust Withholding: If employees wish to account for these new deductions in the 2026 tax year to potentially reduce withholding, employees must submit a new STD. 686, Employee Action Request to their HR Office or make the change via Cal Employee Connect.
  • Consult a Professional: Employees are encouraged to use the IRS Tax Withholding Estimator to help determine the correct withholding amount and to consult with a qualified tax professional for personalized advice.