A DEEPER DIVE INTO THE NEW TAX AND SPENDING BILL
You are going to see and hear endless news about the administration’s new “One Big Beautiful Bill Act” (OBBBA). But remember, headlines don’t tell the whole story. You need to read the fine print to understand the true details of this tax act.
So, let’s take a deeper dive into some of the components that affect families:
IT EXTENDS HIGHER STANDARD DEDUCTIONS THAT STARTED WITH THE TAX CUTS AND JOBS ACT
For 2025, standard deductions increased. The standard deduction for married couples who file jointly (MFJ) is $31,500. For single filers, it is $15,750, and for those filing as head of household, it is $23,625.
Under the TCJA, standard deductions have risen each year because of an inflation adjustment. The higher standard deduction rates would have expired at the end of 2025, but with the new bill, they are now in place until 2029.
ADDITIONAL TEMPORARY DEDUCTION FOR SENIORS 65 AND OLDER (Tax Years 2025 – 2028)
One of the bigger changes is the additional $6,000 deduction for qualified taxpayers 65 years or older. The deduction is $12,000 for MFJ, and $6,000 for single or married filing separately. In addition to age, “qualified” in this case means you do not earn more than $75,000 (or $150,000 for MFJ). The deduction phases out above those income levels, disappearing entirely at $175,000 for individuals and $250,000 for joint filers.
SOME SOCIAL SECURITY BENEFITS ARE STILL SUBJECT TO INCOME TAX
While you may see a news headline that says “Social Security benefits are no longer taxed”, that is not true. The additional $6,000 deduction for taxpayers age 65 or older is meant to offset some Social Security income and therefore reduce the amount of taxes paid by this group. It does not eliminate taxes on Social Security benefits.
OVERTIME AND TIP INCOME DEDUCTIONS
Contrary to the headlines that say “No tax on tips or overtime pay”, you may still pay tax on some of your tips or overtime. You can deduct up to $12,500 of your qualified overtime income ($25,000 for joint filers) and potentially up to $25,000 of your qualified tip income from your federal taxable income.
The tips deduction applies to CASH tips only. These include:
- Physical cash tips
- Tips added to a credit or debit card slip
- Tips distributed through a “tip pool” or tip-sharing agreement
To qualify for the deduction, a tip must be voluntary and not a mandatory service charge or auto-gratuity.
You are still responsible for the Social Security and Medicare (FICA) taxes on this income, and may also be responsible for state and local income tax on this income.
Your employers are required to report these tips on your W-2 forms and withhold the appropriate payroll taxes, therefore only tips reported to employers are eligible for the deduction.
If you are a non-employee, such as an independent contractor, the businesses for which you work must report your designated tips and your occupation on Form 1099 for you to qualify for the deduction.
You must be employed in an occupation that customarily and regularly receives tips as of December 31, 2024 to qualify for the deduction. Further, the U.S. Treasury is tasked with publishing a list of qualifying occupations within 90 days of the law’s enactment. Some occupations are already excluded from this deduction.
If your modified adjusted gross income (MAGI) is more than $150,000 ($300,000 for joint filers), the deductions are not available to you.
These are temporary deductions effective for tax years 2025 through 2028.
And hang on, because the IRS is expected to provide further guidance on implementing these provisions, including updates to withholding procedures and tax forms.
CHILD TAX CREDIT INCREASES
For tax year 2026 (the taxes you file in 2027), the bill increases the nonrefundable child tax credit from its previous $2,000 level to $2,200 per child. As before, a portion may be refundable based on your earned income.
SPEAKING OF CHILDREN – “TRUMP ACCOUNTS” FOR NEWBORNS
Available only to U.S. citizens born between January 1, 2025 and December 31, 2028. Each eligible newborn receives a one-time $1,000 deposit into a custodial investment account.
Annual contributions are allowed, both private and employer. Parents, guardians, and others can contribute up to $5,000 annually until the child turns 18. Employers may contribute up to $2,500 annually, subject to program requirements. Contributions are not tax-deductible.
Funds are invested in low-cost index-tracking mutual funds or ETFs focused on U.S. stocks.
Earnings grow tax-deferred. Withdrawals are taxed as income, with penalties for early withdrawals.
When the child reaches 18, partial withdrawals are permitted for specific purposes such as education or home buying. Again, withdrawals are taxed, but qualified deductions have no penalty. At age 25, the child has full access for qualified purchases (withdrawals taxed, no penalties for qualified purchases).
The U.S. Treasury Department oversees the program. There are many other layers of details alluded to in the actual bill, but this gives you an idea of what these accounts are.
Some financial experts suggest that existing savings vehicles like 529 plans offer better tax advantages for education savings since withdrawals are tax-free if used for qualified educational expenses.
STATE AND LOCAL TAX (SALT) DEDUCTION
The bill temporarily raises the cap on the SALT deduction from $10,000 to $40,000 for tax years 2025 through 2029, with built-in inflation adjustments of 1% per year.
The deduction begins to phase out if your modified adjusted gross income (MAGI) exceeds $250,000 ($500,000 for joint filers).
So, if you live in a high tax state (especially for high property tax states) and you itemize on your tax return, this deduction may help reduce your tax liability on your federal tax return.
MADE IN AMERICA AUTO LOAN INTEREST DEDUCTION
For tax years 2025 through 2028, the bill allows you to deduct up to $10,000 annually in car loan interest payments if you purchase a new American-made vehicle. (Qualifying vehicles include cars, SUVs, pickup trucks, vans, and motorcycles.) You will need to report the vehicle’s VIN on your tax return to claim the deduction. Used vehicles do not qualify for the deduction.
The deduction phases out when your income is between $100,000 and $150,000 ($200,000 and $250,000 for joint filers). After $150,000 ($250,000 for joint filers) the deduction is eliminated.
Since this is an above-the-line deduction, it may be available to you whether you itemize or take the standard deduction.
It is not available for fleet purchases, commercial vehicles or leasing.
The OBBBA simultaneously ends the existing $7,500 federal EV tax credit and introduces new annual fees – $250 for EVs and $100 for hybrids.
STUDENT LOAN CHANGES
Student loan plans such as SAVE that were enacted by the previous administration will be phased out. Beginning July 1, 2026 repayment plans of new federally held loans will be covered by only two options. These are:
- Standard Repayment Plan: Fixed monthly payments over a period of 10 to 25 years, depending on the original loan balance.
- Repayment Assistance Plan (RAP): Payments set at 1% to 10% of the borrower’s adjusted gross income, with remaining balances forgiven after 30 years.
Current borrowers can remain on existing repayment plans through July 1, 2028, after which they will be transitioned to RAPs or a revised version of the income-based repayment.
The bill also imposes caps on loans for parents and undergraduate students:
- Undergraduate Student Loans – $20,500 annually, with a lifetime cap of $100,000.
- Graduate Student Loans – $20,500 annually, with a lifetime cap of $100,000.
- Professional Students (e.g., medical or law school) – $50K annually, with a lifetime cap of $200,000.
- Parent PLUS loans – $20,000 per year, with a total limit of $65,000 per student.
The bill eliminated the Grad PLUS loan program which previously allowed graduate and professional students to borrow up to the full cost of attendance.
A total lifetime borrowing cap of $257,500 is established for all federal student loans, including both undergraduate and graduate education.
The changes potentially limit access to advanced education since the new loan caps may not allow for full coverage of cost to attend. Students will have to seek additional funds through private loans or forgo further education.
The bill eliminates unemployment and economic hardship deferment options for student loans taken out after July 1, 2027. Currently, these deferments allow borrowers facing joblessness or financial strain to pause loan payments for up to three years.
The bill does create a new Pell Grant opportunity for workplace training programs.
CHARITABLE CONTRIBUTIONS
The bill reinstates the above-the-line deduction for cash donations to qualified public charities. That means, if you take the standard deduction and don’t itemize, you may take a charitable deduction of up to $1,000 ($2,000 for joint filers). As has been the case in the past, gifts to donor-advised funds are not eligible. This provision goes into effect after 2025.
To read the IRS verbiage and see additional details, see IRS pages here.