Tax Law Update:
The Devil is in the details
The new tax law enacted in the spring of 2025 is an improvement over the old, but alas, once again they failed to consult me, so it isn’t as great as it could be. When will they learn?
I want to give you some of the highlights most of us are interested in so I will keep this short. As always if you have any questions for me about it, let me know. I have read the bill, and again it was a miserable experience. It was enlightening in some ways, but I don’t recommend it. Though I read it all, and I did download the PDF for reference, at my advanced age I no longer commit new tax laws in their entirety to my memory banks. (OK, I never did, but I know where to find stuff)
The particular sections of the new law I outline here will be graded. If you don’t like the grades I give each section, submit a reason why and I may alter it. (probably not). If you respond by reasoning that the law is wonderful because it benefits you greatly in a particularly specific area, I will give you and “F” for your response. I am the only one on this website to offer selfish reasons for approval of a particular portion of the new law.
The grades will be tough because the only way I could give an "A" is if the tax law were completely scrapped. The entire code would have to be eliminated including all income and payroll tax. It would be replaced with a combination of the new foreign tariffs and a small consumer national sales tax. So, no "A" grades will be found here.
Grading Guidelines:
An “A” would be the best grade. Since we still have the income and payroll tax, you won't see one here. You will likely encoutner a flying pink unicorn in Neverland before I give an income tax law a grade of "A".
“B” grade indicates that it is good for most of us, but a fair amount of people won’t benefit. It hurts no one, but many people can benefit even if by only a small amount.
A grade of “C” indicates it is not good for most but doesn’t hurt them and only benefits a clear minority.
A “D” grade indicates it doesn’t make any difference to most people, so is mostly a waste of time, paper and reading skills.
An “F” indicates it would have been better off dead. I hate it.
Here we go...
The basics everyone seems to know about is the “No tax on tips” and “No tax on overtime pay”. Neither of these statements are true. There are limits on the exclusions resulting in many likely to experience disappointing resulting benefits. Those on the lower end of the income tier are favored, and so will enjoy a greater benefit.
No Tax on Overtime
Overtime deduction is limited to a maximum of $25,000 for married, and $12,500 for single and others for the receipt of “Qualified Overtime”. This means that only the first $25,000 (or $12.5K) gets the exclusion. It is also limited to only taxpayers whose total modified adjusted gross income is below $150K single, or $300K married.
Grade > C : Target benefits only a relatively few employees.
No Tax on Tips
Here again, there is a limit. There is an allowance for $25,000 received as “Qualified Tips”, this $25K limit does not distinguish between filing status, but the income limitation does. “Qualified tip” means it is a gratuity received by a service provider in a business that would normally be expected to receive tips, like waiters, bartenders, taxi drivers. You can’t arrange your plumbing business to charge $10 for the water heater install and another $1,000 for the tip. And here again, we have the similar limit of $300K and $150K depending on filing status.
Grade > C - : – Target benefits only a very specific few, favors a sector of worker unfairly while others earning similar total income do not benefit. Though it harms no one, it seems unfair to offer benefit to one and not another at the same income range.
Charitable Contributions
Will be allowable without itemizing (filing Schedule A) up to $2,000 for married filers and $1,000 for others. So this deduction is in addition to the standard deduction most use today. This is kind of a “gimme” in that I wouldn’t expect too many IRS agents’ radar looking out to nab people for taking this deduction when maybe they don’t have it well-documented. Like the qualified teacher deduction, this is a safe gimme.
Grade > B - : Can benefit all who paytax and use the standard deduction a little, but won’t change many lives.
SALT (State And Local Tax) deduction increase
The deduction for state and local tax paid to localities and states was cut drastically in 2017 to just $10,000. Reasoning being that those of us in low tax states should not have to subsidize those paying high state income and property taxes. I agreed with that. This has been softened so that taxpayers can now deduct up to $40,000 of state and local taxes ($20,000 if not filing jointly) as long as their income is below the threshold of $500K.
This deduction is limited 30% of the excess of income when income (joint) exceeds $500K in 2025, and this threshold increases slightly for the next few years. For 2026 the threshold amount will be $505K and increase at a rate of 1% thereafter. Though this can reduce the benefit for higher earners, the reduction stops when it reaches a deduction of $10,000 enabling taxpayer to continue to deduct the amount as he would have prior to the new tax law.
Grade > C + : Can benefit many in high tax states, but at the expense of those not residing in those states. Receives better than a C because there are a lot of high tax states and so, many taxpayers likely to benefit who earn under $500K.
No tax on Social Security - NOT
The final passage of this law was not even close to what was promised us, but again, it is better than nothing. What they came up with is a higher standard deduction for seniors (over 65) – for some. This additional deduction could be as high as $12,000 if married filing joint – BUT again there is an income limitation, so those in a position to save the most won’t get to use it. Better – but not great.
We didn’t get “No tax on Social Security”. What we did get was an increased standard deduction for those of us over 65 – UNLESS you make too much money. How much is too much? Well, if you are single, and earn over $75,000, the $6,000 additional benefit starts to decline by 6% of the amount over $75K and disappears at $175,000. If you are married, your $12,000 bonus deduction erodes at the same rate and beginning at $150,000 and is completely worthless pixie dust at $250K. Good for some, not for many. Those who will benefit do not pay much tax.
Grade > D+: Benefits only some as with lower income comes lower tax. Those who would have won most with the no tax on Social Security proposal can’t even play this game. Thought about a D on this, but clearly some will benefit while those who do not benefit are not hurt.
Bonus Depreciation
In my practice, the sliding scale of reduction to the deducting of 100% of five or seven year property mostly impacted real estate investors. For example, if you pay $3,500 for new appliances in a rental property, typically you deduct it over 5 years, deducting some each year. The new rule allows for the full $3,500 deduction in the year paid and this is a permanent change, it does not sunset after a few years as the last one did. Now in an active business, say contracting, you could usually deduct this in the year purchased by using the Section 179 rule – expensing equipment. So to me, this alteration of depreciation mostly impacts real estate. You still can’t buy a rental property and just deduct it, you must use longer 27 1/2 years for residential rental property.
Grade > B: Deducting more faster encourages more investors to buy more stuff. Those not in business don’t benefit directly, so again not everyone can benefit from every section of a tax law. I selfishly like it, so I give it a better grade.
Automobile Interest deduction up to $10,000
Like the charitable contribution, this deduction will be allowed WITHOUT itemizing the deduction on Schedule A. Here again, this perk phases out when income is higher, in fact at $250K it is gone completely for joint filers.
Lets face it, this is a waste of pen and paper. Who pays $10,000 in interest on a new car loan in a year? In over 40 years in business I haven’t seen it yet. Additionally, if you do, you probably bought a $250,000 car, and to qualify for the loan you must have been over the income limit to be able to deduct the interest.
This benefit will generate a small deduction for some. If you have a $60K loan and pay 5% interest you will pay about $3,000 a year in auto loan interest at first. This might save you $500 in tax or so until it expires in 2028.
Grade > F + : Not a great benefit even for those who use it. The auto manufacturers will probably be able to charge more for their vehicles, so is there a benefit at all to the consumer? Not sure, but don’t see a big benefit here for anyone.
Trump Accounts
A new tax deferred account is being established for minors. Trump Accounts for American citizen newborns will be seeded with a one-time government contribution of $1,000 for the next three years. The accounts will track a stock index and allow for additional private contributions of up to $5,000 per year.
Afterwards, a donor can place up to $5,000 annually into a “Trump Account”. Now before you go saying what an egomaniac, naming it after himself – well ever hear of the Roth IRA? William V. Roth, Jr. a US Senator from Delaware proposed the idea for the Roth IRA. He was the primary legislative sponsor of the Taxpayer Relief Act of 1997, which established the Roth IRA. That said, I believe it would get better traction if it were named something else because it is more versatile than education accounts.
A Trump Account is tax deferred like an educational plan, but the contribution limits are lower, investment choice is relatively specific, and the account can be used for far more things tax free than education accounts.
Distributions:
No distribution shall be allowed before the first day of the calendar year in which the account beneficiary attains age 18.
These Accounts are not just for college. They can be used tax free not only for education, but also for workforce training, a first-home purchase, or small-busi-ness development. There are restrictions as all tax deferred plans have, but if used before age 31 for one of the intended purposes, is a pretty good deal for those who want to help their younger ones but are not sure college is the right road for them. A Trump Account can offer a leg up in business or home purchase.
Grade > C+: The restrictions on investment are actually good, hard to go wrong, with non-leveraged index funds, but many won’t like that. The idea is sound, why only be allowed to save tax free for college? Why not for opening a business or buying a house? Colleges won’t like this, it creates competition because it allows us to save for the next generation without forcing all kids to attend the college or pay the tax. They may not want college, but they all can appreciate tax free money for some productive use.
Overall Tax law grade > C+
The above summary represents only part of the law, but I believe the areas we are most interested in.
Note the reason the overall grade is as high as it is is because though many of the laws target groups, many different groups are benefiting from the overall law. Maybe they don’t benefit with overtime pay or tips, but they might with the higher (though limited) senior standard deduction or the return of bonus depreciation.
The whole of the tax law is greater than the sum of its parts.
There you have it. Once again, I nailed it.
Christopher M. Barra, MS, EA
Barra Tax Service