Important Takeaways from the Big Beautiful Bill
As promised, President Trump and the Republican controlled Congress passed the so-called Big Beautiful Bill that included many of the pledges made during the presidential campaign. There are several key provisions that all taxpayers should take under consideration when initiating their income tax planning.
Much fanfare was generated when President Trump announced his intention to eliminate taxes on tips and overtime. The new law allows those workers who regularly receive tips to deduct up to $25,000. The maximum deduction for overtime pay is $12,500 for individual filers and $25,000 for joint filers with a phase out beginning at $150,000 of Modified Adjusted Gross Income (MAGI) for individuals and $300,000 for joint filers.
While there is no direct exclusion for Social Security benefits, the new bill does provide an additional $6,000 senior tax deduction for taxpayers age 65 and older. This deduction is phased out for individual filers with a MAGI of $75,000 and $150,000 for joint filers. It is estimated that this increase in the deduction will result in the exclusion of income taxes on Social Security benefits for approximately 90% of recipients. Another change in Social Security is that the cap on earned income subject to Social Security payroll taxes has been raised to $250,000 from $176,100 in 2025.
For the first time in more than 20 years, loan interest from the purchase of a car is now deductible. The maximum deductible interest is $10,000 and is phased out for individual taxpayers with MAGI greater than $100,000 and $200,000 for joint filers.
Perhaps the most debated provision of the bill was the sizable increase in the deduction for State and Local Taxes (SALT). The deduction has been raised from $10,000 to $40,000 with increases annually of 1% through 2029. However, a phase out begins for taxpayers with MAGI greater than $500,000. The SALT deduction is reduced by 30% of the amount that the taxpayers MAGI exceeds the threshold but the limit can never go below $10,000. It should be emphasized that the taxpayer must itemize deductions in order to take advantage of this increase rather than applying the standard deduction. Of course, most taxpayers apply the standard deduction rather than the itemized deductions that have been discussed. It has been increased by $1,000 for single filers and $2,000 for joint filers to $15,750 and $31,500 respectively.
The childcare credit has been increased by $200 per child under age 17 with the maximum per child raised to $2,200 from $2,000 and adjusted for inflation starting in 2026. Again, a phase out applies at $200,000 MAGI for individual taxpayers and $400,000 for married filing jointly. Finally, this credit is still partially refundable up to $1,700. As an example, if you owe $500 in taxes and qualify for the $2,200 credit, you will receive $1,700 per child as a tax refund.
The new bill also establishes a new type of account for newborns over the next 4 years. The government will fund an initial $1,000 into this “Trump account” and taxpayers can then contribute up to $5,000 per year. While contributions are not deductible, all funds accumulate tax deferred and the account converts to a traditional IRA when the child reaches age 18. Earnings only and not contributions are taxable when withdrawn.
In my view, there are both positive and negative aspects to this bill. On one hand, exclusions of tips, overtime and Social Security provides tax relief to those who can most benefit. However, employers might abuse these income exclusions by decreasing contracted compensation in lieu of tips and overtime to reduce taxable gross income and thus save on payroll taxes. And quadrupling the SALT deduction essentially benefits primarily high income taxpayers since many states have no state income taxes and low property taxes that keeps them under the former $10,000 limit.
It is likely that future tweaks will be made to this bill as fairness issues arise and constituents complain, but in the meantime, taxpayers should begin their 2025 income tax planning accordingly.
Sincerely,
Clifford L. Caplan, CFP®, AIF®