If you’re familiar with my writing, you know I’m a staunch defender of a profession Congress carelessly works to destroy.  You understand that the primary function of your annual income tax return is no longer income tax collection; it’s managing an ever-expanding array of social assistance programs (daycare, welfare, adoption, education, and health insurance, to name a few) and manufacturer rebates (certain cars, solar, appliances, etc.).  This repurposing delegates two responsibilities to tax professionals: 1) Being an expert in each welfare assistance and rebate program, and 2) Ensuring no clients partake in the rampant fraud that accompanies each.

Proficient tax-collecting, benefit-dispensing, and fraud-detecting administration could be a rewarding and scalable business if not for two distinct challenges: First, the April 15 extension deadline (created in 1955 and ridiculous today), and second, Congress’s inexplicable need to scrap and rewrite large swaths of its tax-collecting, benefit-dispensing, and fraud-detecting practice manual (AKA: The Tax Code) every three to six years.  I doubt we’ll ever see movement on the first challenge, but, regarding the second, Congress has outdone itself with the One Big Beautiful Bill (BBB).  It’s a masterclass in erasing and rewriting still-wet ink, which brings us to our topic:

How the Big Beautiful Bill Impacts Your Tax Return

The Big Beautiful Bill will substantially reduce the tax paid by many service employees, hourly workers, and senior citizens.  It also makes many tax-saving initiatives created by the Tax Cuts and Jobs Act of 2017, which were set to expire, permanent.  Other initiatives hasten the sunset (elimination) of credits created or expanded by the 2022 Inflation Reduction Act.   The BBB makes so many tax changes that we’ll need to divide them into two articles.  This one will focus on key individual return changes.  Next time, we’ll focus on business.

So, how will the Big Beautiful Bill affect your finances and taxes?  Let’s take a look.

To make it easier for you, we've added links to individual sections:

• New Big Beautiful Tax-Cut Items
• No Tax on Tips
• No Tax on Overtime
• Bonus Deduction for Seniors
• US-Assembled Car Loan Interest Deduction
• Above-the-Line Charitable Deduction
• Charitable Tax Credit
• Trump Accounts
• Increased State and Local Tax (SALT) Deductions
• Electric Vehicle Credit Eliminated
• Residential Energy Credits Eliminated
• Child Tax Credit Made Permanent
• Tax Brackets Remain the Same
• Standard Deduction Levels Retained
• Mortgage Interest Caps Made Permanent
• Increased 529 Distribution Allowances

New Big Beautiful Tax-Cut Items

Although newscasts and media pundits are reluctant to say it, most individual tax changes made by the Big Beautiful Bill are income-limited and benefit those who are decidedly unrich.  As we discuss the financial impact of the BBB, you may notice me digressing to provide background and mechanical details for several changes.  Providing background (which I generally include when teaching) shares my view on the underlying intent of the legislation, while offering a glimpse into the “tax sausage” manufacturing process.  Mechanical details are essential to professionals as they consider how a provision might be transformed from a law (an idea) into a correctly placed item on your tax return.

Finally, please note that this article shares currently understood generalities.  Many details remain speculative, and several reliable sources contradict one another.  Although many changes are active for 2025, we will not know the precise application of each until the Treasury Department releases regulations in the upcoming months.  Their task will be to define the scope and limits of each change to reduce fraud and unintended application of the law.   The need for limiting details is especially true of our first new deduction, Tip Income.

NEW - No Tax on Tips: 

For the years 2025 to 2028, employees receiving qualified tip income can deduct up to $25,000 of the amount reported on their W-2s.  For married couples, a phaseout (which reduces and eventually eliminates the deduction) begins when income reaches $300,000.  For other filers, the phaseout starts at $150,000.  

Don’t buy into social media posts claiming that No Tax on Tips only applies to cash (which many already view as ‘tax free’ – they’re not).  In the IRS lexicon, “Cash” includes all forms of cash-equivalent payments, including credit and debit cards.

It is important to note that this is a deduction, not an ‘exclusion.’  This means that the tips are first reported as wages and included in Total Income (currently Line 9 of Form 1040).  When the law passed, there were claims that tips were then deducted "Above-the-Line," meaning before arriving at Adjusted Gross Income (AGI).  This is important because AGI is used to limit many other deductions and credits (generally, the lower AGI, the more deductions and credits).  Reducing AGI is also good news for those living in states using the figure as their taxation starting point.  Unfortunately, however, these claims are incorrect.  The law inserts the No Tax on Tips deduction into Internal Revenue Code Section 63(b), which defines deductions taking place after calculating AGI and before taxable income.  There are now quite a few of these 63(b) deductions - meaning, guess what?  We'll probably get a brand new form to complete!

How will we know the amount of deductible tip income?  My initial assumption was that Box 7 of Form W-2, Social Security Tips, would provide this amount.  However, the industry limitations mentioned below make it more likely that a new W2 box or code in Box 12 is afoot.

Expect some thorny rules to emerge as employees petition bosses to convert their existing pay into tips.  The law attempts to rein in abuse by limiting the deduction to industries where tipping is common, and mentions restaurant servers, bartenders, hairstylists, and nail technicians.  These, however, are just examples, indicating that union and industry lobbyists are hard at work “helping” to define precisely what constitutes a qualified tip and eligible employee.  

NEW - No Tax on Overtime: 

From 2025 through 2028, this new deduction is expected to yield a substantial tax cut for workers who regularly work overtime hours.  (Initially, I incorporated the phrase, financial windfall, into this sentence, but replaced it with substantial tax cut after discovering the following detail.) 

Overtime is defined as a pay rate equal to 1.5 times an employee’s regular hourly wage for hours exceeding forty during the workweek.  It is required, for most workers, by federal law.  For many employees, such as those in law enforcement, overtime pay constitutes a substantial portion of their annual income.  So, the phrase No Tax on Overtime, means no tax on overtime, right?  Wrong.

Disappointing Detail: Unfortunately, the law does not define overtime as commonly understood.   The deduction only applies to the 50% increase in regular pay required by the law – the half in time and a half.  

For example, if a worker’s regular hourly wage is $10, the overtime wage rate would be $15.  As the law is written, only the $5 increase is subject to the deduction, making “No Tax on One-third of Overtime” a more accurate, albeit less catchy description. 

Married couples can deduct up to $25,000 in overtime, while other filers can deduct up to $12,500.  As with tips, the income is reported as salaries and wages and then deducted between AGI and Taxable Income.  It also starts to phase out once income on joint returns reaches $300,000 ($150,000 for other filers).

I anticipate a new Box 12 code on Form W-2s to report the deductible amount, as well as additional regulations to prevent sudden changes to the job descriptions and compensation of overtime-exempt employees.

NEW – Bonus Deduction for Seniors: 

Congress was unable to agree on eliminating taxes on Social Security, so they settled on a compromise that will reportedly result in 88% of Social Security recipients paying zero tax on their benefits.  The compromise: Filers who are age 65 and over will receive a temporary bonus deduction of $6,000 from 2025 to 2028.  Here’s a nice detail – Seniors take this $6,000 deduction regardless of whether they itemize or claim the standard deduction, and the deduction is per person, so married seniors filing jointly will deduct an additional $12,000 from taxable income.

Although the bonus deduction serves as a substitute for eliminating the tax on Social Security, it is available to all seniors, not just those receiving Social Security benefits.  

Like the Tip and Overtime Deductions, this one is also income limited.  The phaseout for married filers starts when income exceeds $150,000 ($75,000 for other filers).  In my practice, many seniors are single and have income exceeding this $75,000 threshold.  Unfortunately, their bonus deduction will be reduced or nonexistent. 

Finally, there is a longstanding additional standard deduction for each married senior filing jointly ($1,600 for 2025) as well as those who are single ($2,000 for 2025).  This boost remains, in addition to the $6,000 temporary bonus.  However, as I currently understand it, the $1,600/$2,000 is only available to individuals claiming the standard deduction, not to those who itemize.

New – US-Assembled Car Loan Interest Deduction: 

From 2025 to 2028, taxpayers can deduct up to $10,000 of interest on new, personal-use vehicles assembled in the United States.  This is another above-the-line deduction, meaning itemizing deductions is not necessary.   Yep, you guessed it - this deduction also has income phaseouts, starting at $200,000 for married couples and $100,000 for single filers.  

The deduction applies to interest paid on NEW (meaning the buyer is the first owner), personal use (business interest is already deductible) vehicles purchased AFTER JANUARY 1ST, 2025.  Finance your new ride before this date?  Well, no deduction for you.  

RVs and campers do not qualify; however, it appears that taxpayers with more than one qualifying auto loan can deduct interest on both, up to the limit.  Additionally, the vehicle’s identification number (VIN) must be included on the return, meaning the IRS will likely track each vehicle that qualifies, and tax pros will have another fun-fun form to complete.

As a nod to the marriage penalty, Congress has set this $10,000 deduction limit for each tax return.  So, married couples filing jointly have the same $10,000 limit as single taxpayers.  What about married couples filing separately?   I'm not sure, but planning may become messy if it's allowed.

Another nuanced aspect of the legislation is the distinction between “Assembled in the USA” and “Manufactured in the USA.”  This distinction is intended to maximize domestic activity while (likely) appeasing particular lobby interests.  It will be interesting to learn the tax-code formula (there will be one, I promise) used to determine precisely what constitutes a USA-assembled vehicle and then watch importers scramble to qualify operations.

A Personal Note: As an occasional financial coach, I have witnessed (firsthand for many years) debt, particularly consumer debt, become a significant threat to the economic prosperity of individuals and families – a danger surprisingly uninfluenced by income level.  Yes, the auto interest deduction will stimulate domestic manufacturing.  However, purchasing a high-cost asset that immediately loses 20% of its value, then giving a bank $1,000 extra in interest to save $150-$220 in taxes is a losing financial strategy.   To emphasize this point, consider the following: This deduction isn’t new - taxpayers were allowed to deduct auto and credit card interest until 1986.  Why did Congress abandon it (in addition to increasing tax revenue)?  It incentivized behavior that ultimately harmed those taking it. 

New – Above-the-Line Charitable Deduction:

The Tax Cut and Jobs Act of 2017 increased everyone’s standard deduction, which made itemizing, and, therefore, charitable giving, less advantageous for many taxpayers.  The BBB works to reverse this trend by allowing single filers a $1,000 deduction and married couples a $2,000 deduction for qualified charitable giving.  The deduction is allowed starting in 2026 and is taken before determining Adjusted Gross income (AGI); therefore, itemizing is not required.

New – Charitable Tax Credit:

 Starting in 2027, a new tax credit for making charitable donations to qualified 501(c)(3) organizations that function primarily to grant educational scholarships (Scholarship Granting Organizations – SGOs) to private and religious schools will be available.  The credit is nonrefundable and, from what I gather, equal to 100% of donations up to $1,700.

The credit is only available through 2029.  It is also only available in states that elect to participate.  As usual, complications abound.  I’d expect some form of SGO certification process, and, given that the credit focus is on private and religious schools, as well as constitutional challenges to the law itself.  

New - Trump Accounts:

Trump Accounts are another tax-deferred savings program, administered by the IRS and specifically designed for children.  What makes Trump Accounts unique is that qualifying children born between January 1, 2025, and December 31, 2028, will have accounts automatically created for them (we’ll see if this happens).  Additionally, $1,000 in taxpayer-funded “seed” money will be placed in each account.  

Eligible children (as currently understood) are US citizens or residents under 18 years of age with a valid Social Security number and have at least one parent with a valid Social Security Number.   To receive the $1,000 seed money, both parents must have valid, work-eligible Social Security numbers. 

Contributing Money: Once established, parents and relatives (which relatives? We’ll likely learn that later) can contribute up to $5,000 annually into the child’s account.  Employers can also contribute $2,500 into the child’s account annually (starting in 2027), which will reduce the amount that parents and relatives can contribute – the $5,000 cap still applies. These limits will be indexed for inflation.  There is also wording in the law that allows nonprofits and government entities to contribute. The rules, however, may make this a rarity, as they require non-discriminatory contributions that include all qualifying accounts in a defined state, geographic area, or year of birth.

Contributions are not tax-deductible, but contributions made by employers and others are tax-free (at least income tax-free, not sure about FICA) to the employee and beneficiary.

As mentioned above, children born between 2025 and 2028 should have accounts automatically created and funded with $1,000 seed money.  However, this may prove to be an expensive, error-prone, bureaucratic disaster, so I’m taking the wait-and-see approach on this aspect of the law.

Regardless, parents should be able to establish Trump Accounts for their children at banks and other financial institutions.  Once established, investments are limited (at least for several years) to specified indexed mutual funds where earnings grow tax-free until the owner (child) begins taking withdrawals, which can only occur after the child turns 18. 

 Distributing the Funds: Essentially, the accounts are treated like Traditional IRAs partially funded with after-tax dollars (which, if the same rules apply, will result in an annual reporting requirement), that have multiple exceptions for the 10% non-qualified distribution penalty.  Note: The information in this section is compiled from reputable sources; however, even these contradict one another, which we will clarify as more facts emerge.

No distributions are allowed from Trump Accounts until the beneficiary reaches the age of 18.  Should a distribution occur, any “taxable portion” (see below) therein will be subject to income tax plus a 10% penalty.  When the beneficiary turns 18, the account holder can take distributions (several sources limit this to 50% of the account balance until the beneficiary reaches age 25) to pay for college, vocational training, a house down payment, or even a new business (restrictions apply).  

These distributions, however, are not completely tax-free.  Because parent and relative contributions are made with after-tax dollars (meaning taxes have already been paid on that income and cannot be taxed twice), taxes are due on the untaxed earnings included in any distribution.  Some sources indicate that these earnings are subject to long-term capital gains tax, while others suggest that they are subject to ordinary income tax.  I’m leaning toward ordinary income tax, as those claiming capital gains may be referencing an earlier version of the bill. 

Retirement Planning for Children: Perhaps the best way to describe Trump Accounts is that they’re a Traditional IRA designed for children, with distribution penalty exceptions for education and other purposes.  This may prove to be the most effective tax planning aspect of the legislation – retirement planning for minors – and a game-changer for beneficiaries.  As discussed in my article, "Two Wealth-Building Strategies for Kids and Grandkids," young adults who have $25,000 in an indexed retirement account at age 18 (and are disciplined enough not to touch it) will avoid the retirement-saving panic most of us experience in our 30s and 40s.  Moreover, the magic of compound earnings may provide these young adults with a modest $25,000 investment, a larger nest egg than many older individuals who max out their annual retirement contributions!

The Arriving Reporting Nightmare: This is where things get messy.  As I mentioned above, these accounts are, essentially, Traditional IRAs funded with after-tax dollars.  When contributions are made to most Traditional IRAs, the owners are allowed to deduct the contribution and avoid paying taxes on it.  This makes retirement distributions relatively simple to tax - it’s all taxable.  

However, there are occasions when these deductions are not allowed (primarily due to income levels), and contributions are made with “after-tax” dollars, creating what is called “Basis” in the account.  Basis is (generally) the portion of an investment that is not subject to taxation.  If a traditional IRA contains Basis, it is the taxpayer’s responsibility to track and report it on their tax return every year (at least they’re supposed to) via Form 8606, to avoid being double taxed when it’s time to take distributions.

So, how are these after-tax dollars in Trump Accounts supposed to be tracked?  What about the nontaxable $1,000 seed money and employer contributions?  Who will track the taxed and untaxed balances in each account for the next 60 years?  Will the financial organization assume this responsibility, or will each beneficiary (meaning parents for the first 18 years) be required to file an annual Trump basis return until the account is closed, maybe sixty years later?  I’ll answer these questions with a word that typifies modern tax legislation: “Uh-oh.”  

Other Personal Income Tax Changes

Increased State and Local Tax (SALT) Deductions: 

The Tax Cuts & Jobs Act of 2017 caused quite a stir when it capped the Itemized Deduction for state and local taxes (including state and local income tax, real estate tax, and personal property tax) at $10,000.  The BBB still caps the SALT deduction but increases it to $40,000.  This will enable more taxpayers to further reduce their federal tax liability by itemizing deductions.  The $40,000 limit increases by 1% per year until 2029.  In 2030, the $10,000 SALT limit returns.

The $40,000 SALT deduction also has a phaseout for high earners.  Once income reaches $500,000, the $40,000 cap is reduced by 30% of the amount over $500,000, until it reaches $25,000.

Electric Vehicle Credit Eliminated:

Let me give you the bottom line first: Although this credit was initially intended to last until 2032, the Big Beautiful Bill eliminates the $7,500 new EV credit and the $4,000 Used EV credit for purchases made after September 30, 2025.   

I can’t say I’m upset by the credit’s elimination, as it exemplifies sloppy legislation that the IRS is forced to administer - barely workable laws that the Treasury Department must transform into functional regulations and forms, which tax pros must interpret and utilize to prepare tax returns.

Want a glimpse inside the tax sausage machine?  The EV Credit demonstrates the process.  Read on if you’re interested.

EV Tax Sausage Digression: I taught the Electric Vehicle Credit, formally titled the Clean Vehicle Credit, to tax professionals shortly after the Inflation Reduction Act of 2022 was enacted.  This means I know more about the credit than is healthy for most adults.

Most EV buyers are unaware (and likely uninterested) that the primary goal of the EV credit is to influence critical mineral markets.  Incentivizing eco-friendly purchases is the means of achieving this outcome.

So, how did something as mundane as a tax credit become a tool for manipulating international markets?  Let me explain.  The EV tax credit is comprised of two separate credits.  To qualify for half ($3,750), the law requires that a certain percentage (which has increased over time) of critical minerals contained in the vehicle’s battery be mined in strategically approved US-allied countries (which are very few).  The other half of the credit ($3,750) required sourcing various battery components from similarly approved countries.  A qualified manufacturer must also manufacture the EV, and final assembly must occur in America (America is not the same as the United States).   

Determining which countries qualify as critical mineral and battery component suppliers involved multiple federal agencies (including the Defense and Energy Departments).  The approval process has been as effective and efficient as one might imagine with one exception.  The website created by the Department of Energy to track approved EVs was quite impressive and a lifesaver for buyers and tax pros.  Kudos to the contractors. 

Registration Sausage: Initially, there was no way to certify that a purchased EV qualified for the credit (other than the website).  Then, about a year into the credit, Form 15400 was introduced.  Dealers were required to provide this form to both qualified purchasers and the IRS.  Doing so was vital because it certified the vehicle qualified for the credit and forwarded the vehicle’s VIN to the IRS (and the Department of Energy), who (it seems) matched the VIN to tax returns claiming the credit.  Some dealers provided the form, others did not.  Then, in 2024, regulations started to require dealers to register each qualifying vehicle via a portal at the time of sale and to provide the buyer with certification of registration. 

Income & Refundability Sausage: The EV credit legislation inexplicably retained its ability to influence mineral markets and increase EV adoption rates by limiting the income of qualified EV buyers ($150,000 for singles and $300,000 for joint filers), which excluded the demographic most likely to purchase EVs.   However, somewhat of a workaround and further complication, buyers could use the lower of their current year's or the previous year’s income to qualify.  Worse yet, the EV credit is non-refundable (meaning it cannot generate a refund), and it has no carryover to future years.  The result: Many middle-income EV purchasers, especially those with children (and the child Tax Credit) received no credit at all - ZERO!  

Then, starting in 2024, in what appears to be an attempt to rectify the refundability problem (and the masterclass lobbying effort by EV dealers), buyers were suddenly allowed to transfer their credit to the seller in exchange for a discount at the time of sale.  The dealer would then receive the full credit (generally, $7,500) as a direct transfer into their bank account within 48 hours of the sale.  There is only one catch.  If the buyer’s income turns out to be too high to qualify, the buyer must repay the full amount on their tax return.  The dealer gets to keep it.

Giant Fiasco: Can you imagine being a tax professional trapped in the two-year evolution of this single tax credit, one of dozens you’re expected to master with immediate recall, only to have it disappear on a whim?   Imagine explaining why a buyer, who was told they would receive a $7,500 rebate, gets $0,00 because they “don’t owe enough taxes.”  How about telling a bewildered couple they have a $7,500 tax bill because an incentivized dealer didn’t fully explain the paperwork they were signing?

The Clean Vehicle Credit (including its sudden abandonment) exemplifies the bureaucratic money pit Form 1040 has become.  One can only imagine the cost and man-hours wasted on something as seemingly simple as a purchase rebate running through a tax return.

Residential Energy Credits Eliminated:

The BBB also eliminates two new credits for energy-efficient improvements provided to homeowners.  Specifically, both the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credits will disappear effective December 31st, 2025.  Both credits were created (revamped from less friendly versions) by the Inflation Reduction Act of 2022.

The Energy Efficient Home Improvement Credit offers up to $1,200 in annual non-refundable credits for installing approved doors, windows, skylights, insulation, water heaters, central air conditioners, and furnaces in primary residences and, in some cases, second homes.  The credit also provides a 30% credit (up to $2,000) for installing approved HVAC units.  Several clients have taken advantage of HVAC credit, although determining which models qualify (in part because they change based on where one lives!) proved to be quite a challenge. This issue was to be corrected this year by the introduction of a manufacturer’s certification code.

Residential Clean Energy Credits offer a 30% savings for expenses related to the purchase and installation of solar panels, wind turbines, geothermal heat pumps, and qualified battery storage systems.

The Big Beautiful Bill eliminates both credits effective December 31st, 2025. 

Child Tax Credit Made Permanent (and increased): 

The $2,000 credit for each dependent child under the age of 17 increases to $2,200 and is not adjusted for inflation.  The refundable portion (the credit amount for those who owe zero tax) remains the same, at $1,700.  The income phaseouts stay the same, starting at $400,000 for married couples filing jointly and $200,000 for other filers.

Tax Brackets Remain the Same: 

The lower rates created in 2017 will remain at 10%, 12%, 22%, 24%, 32%, 35% and 37%.  An often-overlooked, tax-cutting aspect of these rates is that the 22% and 24% brackets start at roughly $100,000 taxable income and don’t jump to 32% until income reaches approximately $400,000 for married filers.  If you’re single, cut the income levels in half. 

Standard Deduction Levels Retained (with a little boost): 

2017’s Tax Cuts and Jobs Act reduced the tax liability of many lower-middle & middle-class taxpayers by nearly doubling the Standard Deduction (the amount subtracted from income to arrive at taxable income if not itemizing).  This change remains intact, albeit with a little 2025 boost to $31,500 for married couples and $15,750 for single filers.  After 2025, the deduction gets adjusted annually for inflation. 

Mortgage Interest Caps Made Permanent:  

Since 2017, taxpayers have only been able to deduct mortgage interest on up to $750,000 of principal used to buy, build, or improve their home (the limit is $375,000 for those married and filing separately).  The limit was set at $1,000,000 for mortgages closed before December 15th, 2017.  This single principal cap applies to all mortgages, including second homes.  Also, home equity loan proceeds not used to improve the primary residence (up to the same limits) were no longer deductible.

Increased 529 Distribution Allowances: 

Although the details will eventually be included in the regulations, the BBB expands qualified 529 distributions to include those used for elementary, high, and vocational schooling (including religious and private institutions), books and materials, online learning, tutoring, and many testing fees.  The BBB has also doubled the annual limit that can be used to cover K-12 expenses, from $10,000 to $20,000 per beneficiary.

The End - Thank You!

Wow!  We’ve covered a lot of Form 1040 tax changes made by the One Big Beautiful Bill.  In upcoming articles, we’ll discuss changes the BBB has made to business taxation.   We’ll also share additional details on the items discussed today as they become available.