Your Tax Refund May Be Bigger Than Expected

With most of your tax documents likely in hand, it's time to think about when to file your 2025 return. This year more than most it makes sense to explore filing as soon as possible, as refunds are expected to be larger than average. Why? Last year, when tax cuts for many individuals were enacted as part of the One Big Beautiful Bill Act (OBBBA), there was a timing mismatch: Although most taxpayers will see an overall tax cut for 2025 income, the IRS did not update federal income tax withholding tables to reflect those changes.

The effect of extra withholding could be significant. In fact, some economists project that average refunds may rise by several hundred dollars or more because many taxpayers will have had too much withheld during the year relative to their eventual tax liability. While not everyone will see a higher refund, I recommend that if you work with a tax preparer you get your documents to them as soon as you receive them. Do-it-yourselfers should fire up their tax software early. Once the return is prepped, you'll be able to see whether you're due a refund and can then decide whether to file early.

The OBBBA made some significant changes in the tax code that will affect many Coloradans. Among the most impactful are greater limits on deducting state and local taxes, charitable contribution changes, and new deductions for tips and overtime pay.

State and local tax deductions. Ever since the Tax Cuts and Jobs Act was passed in 2017, taxpayers have been limited in the amount of state and local tax (SALT) that can be deducted on their federal return. The OBBBA has raised the SALT cap for 2025 from $10,000 to $40,000 for most of those who itemize, which can be especially meaningful for higher-income households in Colorado with significant state income and property taxes. My expectation is that we will see a significant increase in the number of taxpayers who itemize as a result.

Charitable deductions — hits and misses. With more people itemizing due to the higher SALT limit, it will be easier for many to deduct their charitable contributions. In addition, the OBBBA created a new above-the-line deduction starting in 2026 for cash donations to qualified charities even if you take the standard deduction — up to $1,000 for single filers and $2,000 for married couples filing jointly. Note that this provision applies only to cash donations; non-cash contributions (like clothing or household goods to thrift stores) generally do not qualify for this deduction.

Charitable donors are also adjusting to a new limitation for itemizers for 2026. Their charitable deduction is reduced by 0.5% of AGI. So, for example, if your AGI is $250,000 and you itemize, you would reduce your allowable charitable deduction by $1,250 when figuring your tax.

No tax on qualified tips and overtime. Beginning with the 2025 tax year, employed and self-employed workers who receive qualifying tip income may be able to deduct up to $12,500 of that income if single, or up to $25,000 if married filing jointly. A similar deduction applies to the overtime premium — generally, the portion of your pay that exceeds your regular rate of pay. These deductions begin to phase out once AGI exceeds $150,000 for single filers or $300,000 for married couples. Importantly, even if you can deduct your qualified tip and overtime income for federal income tax purposes, they remain subject to Social Security and Medicare tax.

The OBBBA has shifted the tax landscape, making 2025 a unique year for itemizers and hourly workers alike. While the rules are more complex than before, the potential for a significantly lower tax bill makes this a year where being early could pay off.

David Gardner is a certified financial planner in Boulder County and is admitted to practice before the IRS. He can be reached at entreewealth.com. As financial planning is only possible after knowing the client, the column is not intended to be personal financial or tax advice. Data presented is believed to be accurate at the time of writing.