Income Tax News that May Affect You!

It’s tax time again, and many of you are already working on your income tax returns. Here are some of the changes in the 800-page recent tax law that may affect you.

But first a warning…

There’s an avalanche of tax and financial advice on Instagram, TikTok, and Facebook. Most of this advice is mythical and just plain fraud. Exotic trusts, offshore ownership, solar energy projects, and other pitches that claim to turn capital gain or income tax to zero are complex, and can be misleading and dangerous. If you see flashy claims, remember that we are credentialed professionals. Ask us first before you jump into the tax-shelter quicksand!

The One Big Beautiful Bill Tax Act (OBBB) will have an impact on every one of our taxpayer clients. Here’s a quick list of a few of the positives:

1. A lower income tax rate for most income brackets for tax years 2026 through 2032.

Income rate thresholds were widened to reduce inflation-effect income, pushing taxpayers into higher tax brackets.

2. A big boost in the Standard Deduction is effective for the 2025 through 2028 income tax years.

During the most recent tax year, 91% of federal income tax filers used the Standard Deduction rather than itemizing their deductions. The Standard Deduction provides every individual and married taxpayer with a certain amount of income that is federal income tax free.

• Single individuals get a $1,150 increase to $15,750.
• Married filing jointly gets a $2,300 increase to $31,500.
• Head of household gets a $1,725 increase to $22,625.
• Married filing separately gets a $1,150 increase to $15,750.

3. The Senior Bonus!

Individuals and Married Filing Jointly age 65+ are eligible for $6,000 per senior bonus deduction. This bonus can be added above and beyond the standard deduction!

This is a very welcome benefit to most but not all seniors. The senior bonus deduction begins to diminish for single taxpayers with income over $75,000 and diminishes to zero once a single taxpayer reaches an income of $150,000 a year. The senior bonus deduction phaseout for married filing jointly begins at $150,000 of income and diminishes to zero when joint income reaches $250,000 a year.

4. The State and Local Tax (SALT) income reduction is quadrupled.

This deduction covers state and local income taxes, real estate, and property taxes. SALT is a particular benefit to those who itemize their deductions. Starting in 2025, the SALT deduction limit is raised from $10,000 under the prior tax law to $40,000. The higher limit applies for tax years 2025 through 2029. The benefit of the higher $40,000 will be phased down (diminished) for taxpayers with modified adjusted gross income above $500,000 per year. Once taxpayer income exceeds $600,000, the available SALT deduction is effectively limited to $10,000 of income reduction.

5. New Deduction! Car, truck, and motorcycle loan interest on personal use of new vehicles made or final assembly in the United States.

Several conditions must be met to claim this deduction:

• The auto loan must be obtained after December 31, 2024.
• The deduction is limited to new vehicles.
• The vehicle must be for personal use, not business use.
• The car loan must be secured by a lien on the vehicle.
• Qualifying vehicles include cars, vans, SUVs, pickup, and motorcycles with a gross vehicle weight rating of less than 14,000 pounds.
• Interest on lease payments does not qualify.

6. New Deduction! The tip income deduction.

To take this deduction, which makes tip income nontaxable for federal income tax purposes, the tip income must meet the definition of “Qualified Tips,” and must satisfy all these requirements:

• The taxpayer was working in an occupation that customarily and regularly receives tips. There are extensive IRS rules defining these occupations.
• Only voluntary tips from customers qualify. Mandatory service charges are excluded.
• Up to $25,000 of qualified tips per tax year can be deducted.
• The deduction does not exclude the qualified tip from Social Security and Medicare taxes.

7. New Deduction! The overtime income tax deduction.

Effective for the tax years 2025-2028, this new deduction applies only to the overtime premium portion of the worker’s pay.

Here’s an example of how to calculate that overtime premium portion:

• Your regular hourly pay is $20 per hour.
• Your Overtime (under FLSA) pay rate is $30 per hour (time-and-a-half).
• You work 10 hours of overtime during the year.
• Thus, your total overtime pay for the year is $300 ($30 × 10).

Your overtime premium portion (the “extra” 0.5) is calculated as follows:

• Take your overtime rate and subtract your regular rate ($30 – $20), which equals $10;
• Multiply your overtime premium rate ($10) by the number of overtime hours worked (10). In this example, the overtime premium portion ($10 x 10 hours) is $100.

Under OBBBA, only that $100 premium is eligible for the overtime deduction (subject to caps, phase-outs, etc.). If the taxpayer is otherwise eligible and under thresholds, they could claim that $100 as an above-the-line deduction, reducing their AGI by $100 (and thus income tax on that portion).

8. Federal Estate Taxes

For 2025, the maximum exempt dollar amount of an estate is up to $15 million for a single person or $30 million for a couple. This means that anything under the threshold is federal estate income tax-free. Only amounts over the threshold are estate taxable. The estate tax over the threshold is 40% of the estate value.

1. But be warned……Illinois has an estate tax starting at $4,000,000 dollars for an individual!

Your estate may be below the threshold for federal estate taxes, but with increased values of real estate and other accounts, we are seeing more estates over the threshold for Illinois estate tax. Once your estate crosses the $4 million line, the Illinois estate tax kicks in, and the tax rate goes up depending on the value of the estate.

The Illinois estate tax is complicated! For example, the value of an estate for estate tax purposes does not allow an offset for any mortgages against estate property. According to the Illinois Attorney General’s website, an estate with a taxable value of $5 million (all Illinois property) would pay $285,714 in Illinois estate tax.

10. Federal Gift Tax Is the Most Misunderstood Tax!

Many people have heard that you can give away $19,000 per person per year. Gifting above $19,000 per giving person to each individual gift receiver is not ordinarily taxable. Rather, this triggers the need to submit a gift tax return.

If during the 2025 tax year, you gave away more than $19,000 per gift giver and per gift receiver, then you do need to complete a relatively simple gift tax return form.

The U.S. government will keep track of your lifetime gifting based on gift tax returns that you file. The lifetime gift tax-free threshold is $15,000,000 per individual. This means that you could give away up to a total of $15 million during your lifetime, free from both gift tax and estate tax.

The federal gift tax and estate tax are designed to function as two parts of one unified tax concept. A taxpayer could have died with up to $15 million of assets that are estate-tax free. OR a taxpayer could have given gifts of up to $15 million of their assets. But you can’t have it both ways!

11. “Income Tax on IRAs and 401(k)s has replaced the Federal estate tax.” Rick Law, Founder, Law Hesselbaum LLP

With the threshold for federal estate tax at $15 million for a single person and $30 million for a married couple, fewer estates reach the threshold for the federal estate tax. But many of our clients have spent years funding their tax-deferred accounts (“qualified” accounts). Taxes will be due on that money at some point!

Your surviving loved ones who inherit your qualified accounts (401(k), 403b, IRA, ESOP, other deferred compensation) must also pay the income tax due on those accounts. The tax is paid at the beneficiaries’ often higher tax rate.

We focus on tax-centered estate and legacy planning, so let’s work together to tame those often-invisible tax monsters. Please call Robin Spang at 630-585-5200 so that we can meet with you to review your current situation. You are important to us, and your initial meeting will be at no charge to you.

We are here to help you and your family through life’s tough transitions.