Getting the full benefit of some tax breaks in President Donald Trump's "One Big Beautiful Bill Act" isn't going to be a slam dunk.
The reason: Many new tax provisions in the OBBBA, such as the $40,000 deduction for state and local taxes (SALT), and new deductions on tips, overtime pay, auto-loan interest and income for seniors over 65, come with limitations. These tax breaks phase out at certain income levels. So, there's a chance taxpayers may end up with a smaller tax break than they thought or no tax benefit at all.
Some changes to the tax code, many dating to Trump's 2017 tax bill, are now permanent. But many new provisions have expiration dates. Some new tax rules, for example, are only in effect from 2025 through 2028. All these moving parts mean tax planning will be key.
"The biggest thing to look at is the income limitations that are placed on a lot of these (tax breaks)," said Andy Swanson, partner at RSM's Washington National Tax Group.
Extending TCJA Tax Breaks
The permanent extension of Trump's Tax Cuts and Jobs Act (TCJA) passed in 2017 is important. It means taxpayers won't see tax rates and tax brackets at the end of this year revert to the higher levels in place before the TCJA, says Jeffrey Levine, professor of practice in tax at The American College of Financial Services.
"The biggest news is probably no news," said Levine. "The average person's taxes are not going to look totally different from how they do this year."
Had the scheduled sunset occurred, the tax rate on nearly all levels of income would have increased roughly 1% to 4%, according to the wealth planning department of Baird Private Wealth Management.
The new tax bill also means that most of the tax laws in place for years are permanent, or at least until a new Congress changes the tax code once again. And that provides taxpayers with more certainty when doing their tax planning, says Levine.
One area that benefits from the certainty is Roth conversions. With rates now seen staying lower through 2028, savers thinking of doing a Roth conversion now have more years to take advantage of the lower tax rates and brackets, tax experts say.
"There's no question that someone who is thinking about rushing into making a decision now has a little more time," said Rob Leiphart, vice president of financial planning at RB Capital Management.
There's A Catch To The Tax Breaks
The catch, though, is that many of Trump's popular tax breaks in OBBBA, have restrictions. This could result in smaller tax breaks or none at all. "There are some real danger zones," said Levine.
A big win for taxpayers in states with high taxes was the increase in the deduction for state and local taxes, or SALT, from $10,000 to $40,000. But there's a catch. The extra $30,000 deduction falls once a taxpayer's income tops $500,000. And the deduction reverts back to $10,000 once a filer's modified adjusted gross income, or MAGI, reaches $600,000.
This limitation could prove costly to high-wage earners. "There's some real potential impact there," said Levine.
Let's say a filer's income rises from $500,000 to $600,000 this year. The taxpayer holds an additional $100,000 of income subject to tax. The filer will also lose the extra $30,000 salt deduction.
Levine's takeaway: "Filers must be extremely mindful of not just what tax bracket they're in, but what an additional dollar of income is going to cost them and how do they manage that."
For some people, it could also mean itemizing deductions instead of taking the standard deduction. If it looks like there's a possibility of having enough itemized deductions to hurdle the $31,500 standard deduction (for married filing jointly), now's the time to start organizing records that relate to itemized deductions, such as charitable contributions, mortgage interest, state and local taxes, as well as medical expenses.
The $750,000 deduction for mortgage interest remain unchanged under the new tax rules.
What Taxpayers Need To Know
The same type of tax math applies to newer deductions for tip income, overtime pay, car-loan interest and the extra $6,000 deduction for seniors over 65. This perk aims to shield Social Security benefits from tax. None of these tax perks are permanent, either. They remain in place from 2025 to 2028. And the deductions are available in full only to taxpayers with incomes below a certain level.
Let's take a look at how the $6,000 deduction for each taxpayer over age 65 at the end of the year works. The extra deduction applies to each spouse, so adds to $12,000 in total.
"While Social Security is still taxable, the bill is going to give seniors over 65 an additional $6,000 deduction, which will help more people avoid taxes on Social Security," said Brian Vosberg, president of Vosberg Wealth Management. "But it doesn't eliminate the possibility of a Social Security tax (due to the income limit formula).
Each senior's deduction is reduced by 6% of MAGI over $150,000 for joint filers and $75,000 for single filers. And the $6,000 deduction is fully phased out at income of $250,000 for joint filers and $175,000 for those filing alone. What's more, this deduction is applied after adjusted gross income on Form 1040. It will not reduce income that could help seniors avoid paying increased Medicare premiums under IRMAA, or Income-Related Monthly Adjustment Amount, according to Baird Private Wealth Management.
These income thresholds vex retirees who have been diligent savers and have high account balances in tax-deferred retirement accounts, such as 401(k)s and IRAs. The risk is withdrawals from these retirement accounts, which count as regular income, could push taxpayers over 65 over the phase out income threshold, says Swanson.
How Deduction On Tips And Overtime Works
Here's a big plus. Taxpayers who don't itemize, but take the standard deduction, can get breaks on tip income, overtime pay and auto-loan interest. In 2025, the standard deduction rises to $31,500 for joint filers and $15,750 for singles.
This same so-called "above the line" deduction also applies to charitable contributions. Single filers can now deduct $1,000 and joint filers can deduct $2,000 for qualified charitable contributions. Filers who claim the standard deduction can take the gift deduction.
The deductions on tips and overtime pay will put more money in the paychecks of workers benefiting from the new rules.
"This is going to be a huge benefit to lower- and moderate-income taxpayers," said Swanson. "It's really will be kind of a pay increase for them." Swanson advises beneficiaries of these new deductions to use any freed-up cash and invest the money for their future.
The downside to these new deductions is they don't reduce taxable income. They are only available for 2025 through 2028. And they all come with limitations.
When it comes to tip income, the new bill only allows for a deduction of up to $25,000 in qualified tip income for single or joint filers who work in occupations traditionally associated with receiving tips, such as bartenders and servers at restaurants. However, the deduction starts phasing out for joint filers with MAGI over $300,000 and is fully eliminated when income exceeds $550,000 (and $150,000 and $400,000 for all others). A form provided by the employer must report tip income to the employee.
Overtime Gets Tax Breaks
The new overtime income is limited to $25,000 in qualifying overtime for those filing jointly and $12,500 for single filers. But like tip income there are reduced benefits and phaseouts based on income. For joint filers, the deduction is reduced once income hits $300,000 and is eliminated at $550,000. Single filers will see a reduced deduction when income hits $150,000 and lose the deduction entirely with earnings of $275,000 or more.
This deduction only applies to the overtime income above the worker's normal hourly rate. For example, let's say an employee normally earns $20 an hour. But this employee also earns $30 per hour for working overtime. The deduction will be limited to the extra $10 per hour they got paid. Again, the amount of extra pay that qualifies for the deduction must be reported on the employee's W-2.
Finally, taxpayers who buy (not lease) a car with final assembly done in the U.S. can deduct up to $10,000 in interest on an auto loan used to buy the car. However, the deduction phases out for joint filers with MAGI income between $200,000 and $250,000, and $100,000 and $150,000 for singles.
How High-Net-Worth Taxpayers Benefit
The rich get some perks in the new bill, too. The extension of the 2017 Trump tax cuts means the risk of seeing the estate exemption fall by roughly half from the 2024 exemption of $13.61 million for singles and $27.22 million for married couples is off the table.
In its place for 2025 is an estate tax exemption of $15 million, with the exemption continuing to grow with inflation in future years. This increase and extension of the higher estate tax means high-net-worth folks won't have to scramble this year to make wealth transfer moves to shield their estate from Uncle Sam.
In effect, there is now potentially a four- or five-year window in which the rich can make financial decisions regarding their estate.
But the wealthy should not get complacent. They should still plan ways to transfer their wealth in a tax-efficient way.
Small Business Tax Breaks
Small business owners, such as those running LLCs and other so-called "pass-through businesses, will also see benefits from the new bill. The Qualified Business Income (QBI) remains in place and is now permanent, which means businesses can deduct 20% of their income from taxation.
Investors can also save on capital gains if they reinvest the money into so-called Opportunity Zones. Opportunity Zones offer tax incentives for those who invest in underserved areas. In addition, owners of C Corporations that meet the definition of a "qualified small business" are eligible to exclude some portion of the gain realized when selling their stock, according to Baird Private Wealth Management.
The so-called Trump Savings Account is a new tax perk for parents. Under new rules, accounts are only for those under 18. Contributions cannot top $5,000 per year. They are not tax deductible. A nice perk is a pilot program in which the federal government will make an initial $1,000 contribution to accounts for kids born in 2025 through 2028. Parents should take advantage of this free money, Leiphart says.
And with the new tax bill in place, this year it's all about seeing where income stacks up and how it might affect taking advantage of tax breaks with limitations. "What it means is you have to plan ahead," said Swanson.
