Decoding the One Big Beautiful Bill Act: Tax Changes You Need to Know

Navigating the tax maze just got a little more interesting with the passage of the One Big Beautiful Bill Act. Despite headlines suggesting "tax-free Social Security," the reality offers different but substantial benefits for various groups of Americans.

Seniors aged 65 and older can now claim an additional $6,000 deduction ($12,000 for married couples) regardless of whether they itemize or take the standard deduction. This benefit applies even if you haven't started taking Social Security yet, though it phases out for higher-income households. Meanwhile, service industry workers rejoice – tip income can now be excluded from taxable income below certain thresholds, potentially saving servers and other tipped professionals thousands in taxes annually. The SALT deduction cap jumps from $10,000 to $40,000 for most taxpayers, though the marriage penalty remains firmly in place with couples limited to the same $40,000 cap as singles.

Car buyers will appreciate the new deduction for up to $10,000 in auto loan interest, while charitable givers face a mixed bag of changes – non-itemizers can deduct $1,000-$2,000 in donations starting next year, but itemizers lose deductibility on their first 0.5% of income donated. Each provision comes with different income limitations based on adjusted gross income, creating planning opportunities for those near these thresholds. Consider strategies like increased retirement contributions or qualified charitable distributions to optimize your position under these new rules.

Most Americans will see lower tax bills in the coming three years, but remember – in taxation, "permanent" rarely means forever. As administrations and priorities shift, so too will the tax landscape. Listen now to understand how these changes affect your financial picture and what proactive steps might save you money before filing season arrives.

Breaking Down The “One Big Beautiful Bill Act”: Impact Of New Laws On Tax Planning Summary

https://www.kitces.com/blog/obbba-one-big-beautiful-bill-act-tax-planning-salt-cap-senior-deduction-qbi-deduction-tax-cut-and-jobs-act-tcja-amt-trump-accounts/

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Chapters

• 0:00 Introduction to Tax Bill Misconceptions
• 0:43 Senior Deduction and Tip Income Changes
• 2:29 SALT Tax Updates and Car Loan Interest
• 4:33 Charitable Giving and Income Limitations
• 8:01 Planning Considerations and Conclusion

Transcript

Speaker 1: 0:00

Hi, I'm Stacey Hyde and I'm back for another episode of Better Financial Health in 15 minutes or less, and today I'd like to talk about the One Big Beautiful Bill Act. Unless you've been under a rock, you know that it passed, and what's been a little bit surprising to me is some of the misconceptions around the bill, because it did do a lot, but then there's some things that it didn't do. You know tax-free Social Security. That's not exactly what the bill did. What it did was to provide an extra standard. It's actually an extra deduction for anyone 65 years and older of $6,000. So for a married couple, that's an extra deduction of $12,000, whether you itemize or whether you take the standard deduction, and that's huge, although it does phase out if your income as a couple is over $150,000. And it completely phases out by the time your income hits $250. So you really have a window there that you're looking at and you don't even have to be taking Social Security to get this. So if you're still working or you've decided you're going to delay your Social Security to $67, you still get this extra standard deduction, which is pretty cool. That's a big one. The other is you can exclude income from tips from your income, if your income is below certain levels, and those levels are quite high. So if you're a server or if you are a cosmetologist or do something like that and you have tip income, your taxes are likely going to be a lot lower. One key thing to remember is that if you are a server and your employer for large parties puts a mandatory tip on there, that doesn't really count as a tip, because that wasn't somebody choosing to add that. So I think you're going to see a lot less of those get. On the larger checks, there can be a lot of discretion because, yes, you run the risk of not being tipped properly, but if you don't, then it won't be tax-free like it would be otherwise. So that's a key point there.

Speaker 1: 2:29

One other one that comes up is the increase on what are known as SALT taxes state and local government taxes. So property taxes, state income taxes. That was capped at $10,000. It's now up to 40, unless you are a high income taxpayer, and then it's still at 10. The key thing here is the marriage penalty is still alive and well. A single person can take up to 40, but a married couple is also limited to 40. So that's a big planning consideration there. So more people will be able to deduct their state and local taxes, particularly if you pay property taxes and also live in an income tax state, that's something to consider. That is an itemized deduction, but if you live in a state where you are paying a lot in taxes, this will really really if you live in a state where you are paying a lot in taxes, this will really really help you. I know I've run some projections for some of our clients, particularly our single clients, and it's made a huge difference in their tax burden projected for 2025.

Speaker 1: 3:37

The other thing that's a little bit strange is that up to $10,000 of car loan interest is deductible and to have that level of car loan interest, that's a lot. So a lot more people will be able to get some help if they're needing to buy a new car. But like most things you know mortgage interest and things like that you still you're paying interest and a deduction only offsets whatever percentage of that interest that coincides with your tax rate. So if you're in the 22% tax bracket, being able to deduct that interest is only going to save you 22 cents on the dollar of that interest. So don't think, hey, it's deductible, I'm going to go out and buy a car, although I'm sure the car salesman would love to tell you that. So those are kind of the key things. The child tax credit has also gone up a little bit. We're going to see more inflation indexing of this.

Speaker 1: 4:42

And also, starting next year, if you give to charity but don't itemize, you're going to. If you think back during COVID, people were able to deduct $300 or $600 from their tax return for charitable giving, even if they didn't itemize. Well, they brought back a version of that. Starting next year it's $1,000 or $2,000, even if you don't itemize to charity, which will be great. The downside is is if you're very charitably inclined and you give a lot of money away, starting next year, if you itemize the first half percent of your AGI. So if you made $100,000, the first $500 that you give away is not going to be deductible, even if you itemize Now above that amount, you can deduct it, but you're going to lose that first half percent, which I think that was a revenue generator for that. That is not true of this year. So if you are a big charitable giver, you may want to go ahead and accelerate some charitable deductions into this year.

Speaker 1: 5:53

The key thing to remember is most of these um options do have income caps on them. So you want to really look at it and they're based on your adjusted gross income, not your taxable income. Your adjusted gross income is all of your income that comes in. So if you're on Social Security, it's the taxable portion of your Social Security, it's your IRA distributions, it's your pension, it's your salary Whatever it shows on your W-2 is your taxable income. So you want to pay real close attention to that because it could have an impact. That might be a reason if you're and some of these are absolute like if you're over a certain amount, your state and local taxes are capped at 10, not 40. So it's real important that you fall where you expect to fall if you are a higher income taxpayer.

Speaker 1: 6:55

Same thing with tips. The tax-free portion of tips is $25,000. There's also some starting next year's tax-free portion of overtime, which is also going to help out a lot of people. But the tax-free overtime is just it's not the base pay that you get paid for those extra hours, it's that 50% or 100% that you get paid for the extra hours and there's some income caps on those as well. But the crazy thing to remember is all these income caps are different. It would be so easy if everything was the same.

Speaker 1: 7:36

That said, if you make less than $100,000 as a single and $200,000 is a couple, these are the rules. No, the rules are different for every single item in these, which is why I'm not going through and saying them. We will include a link on our website to a good summary of these so that if you want to look at them, you can and get the see if different ones apply to you and if you need to pay attention. But just remember, most all of these are tied to adjusted gross income, so that's your income before you take any deductions away, and so that's the number that you want to look at and potentially manage. If you can make more pre-tax 401k contributions or if you're older and can contribute to charity through your IRA as a qualified charitable distribution, those kind of things actually hold down your adjusted gross income.

Speaker 1: 8:38

A lot of things can pull down your taxable income, but that's not going to help you qualify for some of these, for example, the extra senior deduction. So be mindful of that and I do think for most people they will pay less in taxes next April and in the next three years next April and in the next three years, but beyond that we will see what happens. And because they did say that the tax rates were permanent. But the thing you have to remember about our tax system is many things are permanent. It means it's permanent for the next, probably through the end of this administration, because then there'll be a new Congress, there'll be a new president and they will have different goals and priorities. So I think the only thing we can plan on is change. But that doesn't mean that you shouldn't spend a little bit of time seeing whether any of these apply to you and if you can save a little money by being proactive. Thanks for tuning in. This has been another episode of Better Financial Health in 15 Minutes or Less.