Unless you have been in hiding all summer, you have probably heard that Congress passed, and the President signed, a new tax law last month, the One Big Beautiful Bill.
While much of it kept in place the general framework of the prior law changes in 2018, there are some important changes. These are some of the most relevant for us:
The Standard Deduction is permanently higher and is increased by a bit more than the inflation scheduled amount for 2025, and it increases by inflation each year after.
From 2025 to 2028 there is an additional $6000 increase to the Standard Deduction for Seniors (age 65 or over). There are income phase-outs for income over $75,000 for Single taxpayers and $150,000 for Married Filing Jointly taxpayers. While this will reduce the tax that they pay on their Social Security, it will not usually eliminate it, and if you are a Senior that usually must file a return, plan to continue to do so.
The Child Tax Credit (for dependents aged 16 and under) is permanently increased. It has been $2000 per qualifying child, but that is now set at $2200 per qualifying child in 2025, and it will increase with inflation each year after that. The refundable part is still $1400 per child, but that will also be inflation adjusted going forward.
Day Care Credits have been enhanced. The $3000 expense limit remains the same, but the credit is based on a greater percentage of the expense. Also the amount that can be contributed to an employer sponsored Dependent Care Benefit flexible spending plan for daycare is increased to $7500 per year beginning in 2026.
The “no tax on tips” has everyone talking. In order to qualify for this, you must be employed in a traditional tipped job, such as a server or stylist. The tips must be reported, and then excluded up to $25,000, with income phase-outs of $150,000 for Single taxpayers, and $300,000 for Married Filing Joint taxpayers. We believe that the $25,000 limit is per return, not per taxpayer, but that has not been confirmed yet.
No Tax on Overtime is another hot topic. There is now a deduction for overtime pay (over 40 hours in one week) of up to $12,500 for Single taxpayers and $25,000 for Married Filing Jointly taxpayers. There are again phase-outs for income over $150,000 for Singles and $300,000 for Marrieds. Importantly, this is NOT a deduction of all overtime pay – only the overtime premium. So the half in the time and a half equation is what is deductible, up to the limits.
This is far from the whole list of changes. I will tackle Itemized Deductions next month.
Also, keep in mind that all of these changes come with more details that I don’t have the room here to address. If you have any questions, you can contact me at my office, or ask your tax professional.
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