As you have no doubt heard, Congress passed a new tax bill last week and the President signed it into law on July 4th. I had wrote back in the winter Here that I expected the new tax law to be somewhat of an extension of the previous law (TCJA of 2017) with some new sweeteners mixed in for good measure. That is more or less what happened.
So let’s dive right in with this new law and how some of these changes might impact you:
TCJA Permanency
A large portion of this bill was making some of the key components of TCJA permanent (and permanent just means it doesn’t expire. A future Congress could change any feature of TCJA). So what key items were made permanent?:
- Tax rates and brackets are now permanent
- The higher standard deduction methodology is now permanent (2025 for Married Filing Joint is increased to $31,500)
- The Child Tax Credit is now permanent and given a slight bump to $2,200 per child from $2,000 in 2024
- The mortgage interest deduction remains with a max loan amount of $750k
- Miscellaneous itemized deductions remain non deductible (the most notable of these were employee job related expenses which used to be deductible)
The Biggest Change
Without question the biggest change is to the so-called SALT deduction. As you may recall, SALT (state and local taxes) used to be fully deductible pre TCJA. TCJA limited that deduction to $10k/year. A lot of our clients, particularly in high tax states, saw a considerable tax increase due to the SALT limitation.
The new law increases the SALT deduction to $40k from $10k starting in 2025. SALT includes state and local income taxes but also real estate taxes. So we expect far more clients to itemize their deduction in 2025 as compared to 2024 and prior years. This will be a big change that will impact many of our clients. (note: This increased deduction starts to phase out at $500k of income and fully phases out at $600k)
Changed Tax Law
There is a ton of misinformation and disinformation surrounding what is in this bill. Let’s dive in with a little Q&A:
I heard Social Security is no longer taxable? Untrue. Nothing has changed with respect to taxation of social security benefits. What did change is that there is now an additional $6,000 deduction for taxpayers 65 and over. The effect may be that some (or all) social security isn’t taxed for some taxpayers but there is no change to social security taxation per se.
I heard there is no tax on tips? True. This won’t likely impact many of our clients but taxpayers that receive tips can effectively exclude up to $25k of tips received. There is some regulation to follow on this and the provisions will be for jobs that traditionally involve tips (service industries primarily).
I heard there is no tax on overtime pay? True…sort of. Qualified overtime pay will be non-taxable for taxpayers that receive it. But not the entire payment. An example might help: A is paid $30/hour and receives $45 in OT pay (i.e. time and a half). The extra $15 per hour received MAY be non-taxable. The base rate of $30 will still be taxable. A lot more to come out on this.
I heard I can deduct interest on an auto loan? True for cars with final assembly in the USA. The maximum allowable interest deduction is $10k/year but the reality is very few car loans have that much interest associated with them. Nevertheless, if an auto qualifies then a deduction for car loan interest will be available.
I heard the Residential Clean Energy Credits are no longer available? True as of 1/1/26. If you were considering solar paneling and taking advantage of the 30% tax credit available that work will have to be INSTALLED by 12/31/25. After that date the credit expires.
*ALL OF THE ABOVE ITEMS HAVE INCOME LIMITS AND PHASE OUTS THAT REDUCE OR ELIMINATE THE DEDUCTIONS FOR THOSE WITH INCOMES ABOVE ~$250K