What the 2025 Tax Law Changed for Bay Area Families

The tax law signed on July 4, 2025, often called the One Big Beautiful Bill (the IRS calls it the Working Families Tax Cuts), rewrote several of the numbers Bay Area households rely on most. Some changes already applied to 2025 returns. Others start with the 2026 return you will file in early 2027.

If you read our earlier article on overlooked credits and deductions, several figures in it have changed. Below are the ones that matter most, with the amounts for both years.

1. A Larger Standard Deduction

The standard deduction went up for 2025 and again for 2026.

• Married filing jointly: $31,500 for 2025, $32,200 for 2026
• Single or married filing separately: $15,750 for 2025, $16,100 for 2026
• Head of household: $23,625 for 2025, $24,150 for 2026

2. Child Tax Credit: Now $2,200 per Child

The Child Tax Credit rose from $2,000 to $2,200 per qualifying child for 2025 and 2026. Up to $1,700 per child is refundable as the Additional Child Tax Credit. The phase-out still begins at $400,000 for joint filers ($200,000 for everyone else).

New requirement:

• The child must have a Social Security number that is valid for employment.
• You must have one too. On a joint return, at least one spouse needs a valid SSN; the other may have an SSN or ITIN.

3. The SALT Cap Rose from $10,000 to $40,000

This is the biggest change for California homeowners. The limit on deducting state and local income, sales and property taxes is now:

• $40,000 for 2025 ($20,000 if married filing separately)
• $40,400 for 2026 ($20,200 if married filing separately)

The catch: the limit shrinks for higher incomes. If your modified adjusted gross income is over $500,000 for 2025 or $505,000 for 2026 (half that if married filing separately), the limit is reduced by 30% of the excess, though never below $10,000. The higher cap is scheduled to drop back to $10,000 in 2030.

Bay Area Consideration:
Property tax plus California income tax easily passes $10,000 for most local homeowners. Many households that have taken the standard deduction since 2018 should now itemize again. It is worth running the numbers both ways every year.

4. Four New Deductions Through 2028

For 2025 through 2028 there are new deductions for tips, overtime pay, car loan interest and taxpayers 65 and older. Each has an income limit and its own fine print. We cover them in a separate article: No Tax on Tips, Overtime and Car Loans? Who Actually Qualifies.

5. Child Care: A Bigger Credit and a Bigger FSA in 2026

Two changes start with tax year 2026:

• Child and Dependent Care Credit: the top credit rate rises from 35% to 50% of qualifying expenses. The expense limits stay at $3,000 for one child and $6,000 for two or more.
• Dependent care FSA: the amount you can set aside pre-tax through your employer rises from $5,000 to $7,500 ($3,750 if married filing separately).

Tip:
You cannot use the same dollars for both. Which one saves more depends on your income, so compare them before open enrollment closes.

6. Charitable Giving Changes in 2026

• If you take the standard deduction: starting in 2026 you can still deduct up to $1,000 of cash gifts ($2,000 for joint filers) to qualifying charities. Gifts of clothing, stock or other property do not count, and neither do gifts to donor-advised funds.
• If you itemize: starting in 2026, only the part of your giving that is more than 0.5% of your AGI is deductible.

7. Credits That Ended

Some popular credits are gone, so do not plan around them.

• Home energy credits: the Energy Efficient Home Improvement Credit is not available for property placed in service after December 31, 2025, and the Residential Clean Energy Credit (solar, batteries) is not available for spending after that date.
• Electric vehicle credits: the new, used and commercial clean vehicle credits are not available for vehicles acquired after September 30, 2025.

Tip:
If you installed solar, a heat pump or bought an EV before those dates, you can still claim the credit on that year’s return. Keep the invoices and the manufacturer’s certification.

8. Other Changes Worth Knowing

• Trump accounts: a new savings account for children. Contributions opened on July 4, 2026, with a limit of $5,000 a year. Children born in 2025 through 2028 who are U.S. citizens can receive a one-time $1,000 federal contribution if you elect it.
• Marketplace health insurance: for 2026, the premium tax credit is again limited to households at or below 400% of the federal poverty line, and there is no longer a cap on repaying excess advance credits. If your income jumps mid-year, update Covered California right away.
• Mortgage insurance premiums: beginning in 2026, they are deductible again as mortgage interest for those who itemize.
• Payment apps: the Form 1099-K threshold is back to more than $20,000 and more than 200 transactions.

California Did Not Follow Along

California generally has not adopted these federal changes. Your state return keeps California’s own, much smaller standard deduction and does not allow the new federal deductions for tips, overtime, car loan interest or seniors. See California vs. Federal Taxes: Where the Rules Differ.

Final Thoughts

Most families will see a lower federal bill from these changes, but the savings are not automatic. Itemizing may beat the standard deduction again, a dependent care FSA may now beat the credit, and several credits you may have counted on are gone. If you would like us to rerun your numbers under the new rules, give us a call.

Sources: IRS news release IR-2025-103 and Revenue Procedure 2025-32; 2025 Instructions for Schedule A and Schedule 8812; IRS Publication 505 (2026); IRS “One Big Beautiful Bill provisions” page. Figures are for tax years 2025 and 2026.