The following blog was written by Nancy Lottridge Anderson, Ph.D., CFA
Do we register negatives?
If we DON’T crash the car today, do we consider that a win? If the plane DOESN’T go down, does it make headlines? If your boss does NOT cut your salary, do you call home with the good news?
Most of the time, negatives are not registered in the win column. They can be “whew” moments or near misses, but they don’t really feel like we have moved the ball forward. We just haven’t gone backward.
So, the big win out of the One Big Beautiful Bill is a “negative.” The temporary tax cuts that were enacted in President Trump’s first term were set to expire at the end of the year. The hammer hanging over the Republican Party was the bounce back of old tax rates and the accusation that they had allowed taxes to go UP. But how much will the public notice that this did NOT happen?
Our tax rates remain the same, and most take home pay won’t change. Expanded standard deductions will also remain in place. For many, this will not show up until they file taxes next year. So, what positive news can we look forward to?
· Additional bonus deduction for seniors. This is NOT relief from tax on Social Security benefits. In fact, it has nothing to do with SS benefits. It’s all about your age and your income. A bonus deduction of $6000 is allowed per person for those over 65. If you’re younger than 65, you don’t get the bonus relief. Also, about 64% already pay no tax on SS benefits because of the high standard deduction and the formula for including SS benefits. Having a bonus deduction won’t help these recipients. The extra deduction phases out for singles above $75,000 in income and couples making more than $150,000 in income. To top it off, the bonus is temporary and will end in 2028. Cue the hammer for whoever is in charge then.
· Deduction for tip income. This is only for those occupations that are typically reliant on tips (mostly the hospitality industry), and the IRS is set to release a list of those eligible by October 2nd. General service charges don’t count. The tip must be reported, and the employer and employee must pay FICA tax on the tip. It’s an “above the line” deduction so it adds to the standard deduction. No itemization is necessary. It is limited to $25,000 and phases out at incomes of $150,000 (single filers) and $300,000 (joint filers). It also sunsets in 2028.
· Deduction for overtime. This is another “above the line” deduction, making it unnecessary to itemize. For “approved” overtime, filers may deduct $12,500 (single filers) and $25,000 (joint filers). It also sunsets in 2028 and phases out at the same income levels as tips. FICA taxes still apply.
· SALT deduction. Those living in high property tax areas have been screaming for the last 10 years about the $10,000 limit on this deduction. OBBB increases this deduction to $40,000. Those living in high property tax areas will see relief only if their total itemized deductions (including the higher tax provision) exceed the standard deduction. The higher itemized deduction on property tax phases out in 2029.
· Car Loan Interest Deduction. This deduction is only for new cars whose final assembly is in the US. Single filers with up to $100,000 of income and joint filers with up to $200,000 of income may deduct up to $10,000 in car loan interest each year. Again, this provision is temporary.
· Baby bonds/Trump Account. Babies born in the next four years can receive $1000 as a starter savings accounts. Annual contributions of $5000 are allowed, and the accounts grow tax-free until the child hits 18.
Keep in mind that these are all limited to certain income ranges, making planning more complicated, and making the deduction less valuable. However, some of these changes will be a real benefit to some taxpayers.
There may also be some good news for business in the OBBB. CPAs will be combing the new provisions for ways to lower the tax bills of small business owners. Meanwhile, the IRS and the US Treasury will have its hands full putting the bill into action with new forms, new regulations, and new definitions.
When all is said and done, will we see this as a win? For most, the difference will be minimal. Taxes did NOT go up, so “meh?” For a slice of the population, taxes will be lower, but the effect will be deferred until after filing. So, is this a win, or just a big “negative”?
