I Read the Tax Bill So You Don’t Have To
I hope you all enjoyed a long holiday weekend. While you were grilling and watching fireworks, the President signed the tax bill that we’ve been talking about for over a year (I looked it up – I mentioned extending the 2017 tax bill when we were discussing the presidential election last summer).
Overall, this legislation is actually much less exciting than its 2017 predecessor. That one lowered rates, brought us a new QBI deduction and put a limit on SALT. This new one mostly just extends the current items permanently (which means that in a lot of cases we won’t have to rehash the same fights in a few years; there are exceptions though).
So what’s actually IN this thing?
One Big Beautiful Bill – But a LOT of Details
Not all of these will apply to you, but still good to have a general idea. Let’s walk through some of the major pieces:
Tax rates and Standard Deduction: The bill generally makes the tax rates and higher standard deduction enacted in 2017 permanent (ie, no sunsetting like in the previous version)
SALT cap: The bill temporarily increases the limit on the federal deduction for state and local taxes (the SALT cap) to $40,000 (from the current $10,000) and adjusts it for inflation. Starting in 2030, it will revert back to $10,000. The amount of the deduction available to a taxpayer phases down for taxpayers with income over $500,000 (in 2025).
Senior deduction: Seniors get a temporary $6,000 deduction (on top of the standard or itemized deduction). This senior deduction begins to phase out when a taxpayer’s income exceeds $75,000 ($150,000 in the case of a joint return). It will be in effect for the years 2025 through 2028.
Child tax credit: The bill increases the amount of the nonrefundable child tax credit to $2,200 per child beginning in 2025 and indexes the credit amount for inflation. The bill also makes permanent the $1,400 refundable child tax credit, adjusted for inflation. It in addition makes permanent the increased income phaseout threshold amounts of $200,000 ($400,000 in the case of a joint return), as well as the $500 nonrefundable credit for each dependent of the taxpayer other than a qualifying child.
QBI deduction: The bill makes the Sec. 199A qualified business income (QBI) deduction permanent and keeps the deduction rate at 20%
Estate and gift tax exemption amounts: The bill permanently increases the estate tax exemption and lifetime gift tax exemption amounts to $15 million for single filers ($30 million for married filing jointly) in 2026 and index the exemption amount for inflation after that. This essentially takes the federal estate tax off the table for almost everyone, though please don’t ignore estate planning entirely (things like trusts still avoid probate and make things much easier). There are also still state inheritance taxes.
Mortgage interest deduction: The bill permanently extends the TCJA’s provision limiting the home interest deduction to the first $750,000 in home mortgage acquisition debt.
No tax on tips: The bill provides a temporary deduction of up to $25,000 for qualified tips received by an individual in an occupation that “customarily and regularly receives tips”. The deduction would be an above-the-line deduction and, therefore, available for taxpayers who claim the standard deduction or itemize deductions. This temporary deduction will be available for tax years 2025 through 2028.
No tax on overtime: The bill provides a temporary above-the-line deduction of up to $12,500 ($25,000 in the case of a joint return) for qualified overtime compensation received by an individual during a given tax year. The deduction begins to phase out when the taxpayer’s MAGI exceeds $150,000 ($300,000 in the case of a joint return). This temporary deduction will be available for tax years 2025 through 2028.
Car loan interest: For the years 2025 through 2028, taxpayers can exclude interest paid on car loans. The exclusion is capped at $10,000 per year and will phase out for taxpayers with MAGI in excess of $100,000 ($200,000 for married taxpayers filing jointly). Among other restrictions, the car must have had their final assembly in the United States. Encouraging people to take out more loans is certainly a choice.
Dependent care assistance programs: Maximum eligibility increases to $7,500. (This is still per HOUSEHOLD, so make sure you and your spouse don’t double dip)
Trump accounts: Babies born in 2025 through 2028 will get a new savings account with $1000 deposited automatically; parents can add up to $5000 per year. Savings grow tax deferred until age 18. (Bold political prediction: these are getting re-named next time Democrats control Congress)
529 plans: The bill allows tax-exempt distributions from 529 savings plans to be used for additional educational expenses in connection with enrollment or attendance at an elementary or secondary school. Added flexibility is always nice, but taking money out of these accounts so soon does defeat the purpose of tax-deferred growth.
Charitable contribution deduction: The bill creates a charitable contribution deduction for taxpayers who do not elect to itemize, allowing nonitemizers to claim a deduction of up to $1,000 for single filers or $2,000 for married taxpayers filing jointly for certain charitable contributions. This is similar to the one year during Covid where taxpayers could have a charitable deduction even without itemizing. I’ll remind you to get those checks out in December if you haven’t already.
So Who Benefits?
verall, the new bill is mostly status quo from the old bill. For most taxpayers, extending the tax rates and the bigger standard deduction is the most important part. Business owners will also like the QBI deduction staying around.
Biggest winners are people who make $200-500k and live in New York, New Jersey, California and other high-tax states. The increase in the SALT cap lets them deduct the additional state taxes on their federal return. As you only deduct SALT if you itemize, it also helps people who have expensive houses (and pay a lot of mortgage interest.) Because the deduction phases out with income, its also not helpful to those making millions, but rather a pretty distinct slice of the population. “Handouts to upper-middle-class people with large mortgages” isn’t catchy for cable news pundits but it’s what happens when you have a razor thin majority in Congress in which to get things passed (ie, New York and California congressmen did what was best for them, and had the sway to get it in the bill.)
In second place would be parents – the increase in child tax credits, higher dependent care amounts and more flexibility with the 529 plans are all good. The Trump accounts could also be useful, though I would rather they just consolidate all of the savings vehicles into one – we now have retirement accounts, health savings accounts, education accounts, new baby accounts, accounts for disabled children, children trust accounts, etc.
Not so good? The car loan interest deduction is objectively bad. The senior deduction, no tax on tips, and no tax on overtime are all scheduled to expire in a few years, so we’ll be hearing a lot more about them before you know it. Most of those were included because of campaign promises, and not ideal economic policy (the senior deduction income phaseout is set low enough to phase out basically anyone with more than Social Security and some modest retirement income)