The Tax Impacts of a Singularly Yuge Statute

Pardon the parody, but I’ve read a thousand “what’s in the big beautiful bill” headlines in the last few days, and I had to give myself some mental respite. But, as the header implies, this week we’re reviewing the tax ramifications of the “one big beautiful bill” passed by Congress last week, as well as a few “trivia items” buried in the notes. Before we go on, let me just state the political nonsense right now:

• The bill is largely made of partisan nonsense.
• Most bills are made of partisan nonsense.
• Don’t hate the players, hate the game. This is the government we’ve apparently voted for. Don’t like it? Write your congressman or something. I just work here.

With that in mind, let’s talk taxes.

Tax Impacts to Your Ordinary Income Tax Rates

After the passage of the Tax Cuts and Jobs Act in 2017 (“TCJA”), our tax brackets dropped slightly, and the ranges changed dramatically to the 10%-12%-22%-24%-32%-35%-37% rates that we recognize at the federal level, not including Colorado state income tax at 4.4% or other state and local taxes. The brackets themselves remain relatively unchanged, though there are some minor adjustments for the 10% and 12% brackets to better adjust to inflation than those brackets had previously.

Standard deductions have also been bumped slightly, with the previous $15,000 for Single and $30,000 for Married Filing Jointly bumped up by $750 and $1500 respectively, not counting the additional standard deduction available to seniors.

Now, these are both notable from a financial planning perspective. Since 2017, we’ve had a toggle for the assumption in planning about whether the tax brackets created in the TCJA would expire at the end of 2025 as scheduled or whether they’d be continued in some manner. As a point of conservative financial planning, we’ve built plans for the past eight years under the assumption that the TCJA tax brackets would expire and we’d return to the prior brackets; however, that assumption has been falsified with the passage of this bill, so all of our financial plans just spontaneously started looking better. Not a bad thing, all things considered.

In turn, the standard deductions increase the general exemption of taxable income, which generates a preferable treatment for those with both lower income but also for those taking advantage of things like 0% long-term capital gains taxes, as the increase gives them that much more tax-free money potential.

Tax Impacts on Social Security

If you’re on social security or have an SSA.gov login, you got an email stating that social security is no longer taxed. Well, that’s not true, strictly speaking. Rather, everyone over the age of 65 now gets an additional $6k deduction above and beyond the existing deductions for seniors, except the extra portion phases out if your income is greater than $75,000 single or $150,000 as a household. So, to some extent, this does eliminate a large amount of potential tax on those with low retirement income who are largely living on social security benefits. This deduction also only lasts from 2025 through 2028.

Itemized Tax Shenanigans

This is the zone where, perhaps, the tax policy gets a bit squiffy. While the vast majority of Americans don’t itemize their taxes, in a state like Colorado where the TCJA’s cap on state and local tax deductions made itemizing more prohibitive, the tweaks in the new statute to SALT and other items open up the door to itemized claims being potentially more valuable. Let’s look at some examples:

• No change to the deductibility of mortgage interest for itemized claimers other than making the $750,000 of deductible value permanent (e.g., you borrow less than $750k for your home and it’s all deductible, you borrow more and it’s only deductible as a ratio of the liability). This means as home values appreciate in the future and borrowers have to borrow more, the mortgage interest deduction will become smaller and smaller; at least until Congress changes its mind in the future. Remember, the mortgage and Realtor lobbies are quite influential!
• Itemized Deductions and personal exemption deductions are permanently removed. These used to be a bigger deal, such as unreimbursed mileage for employees, moving expenses, or school teachers’ deductions for class supplies, but many of these things were already capped or otherwise eliminated in the original TCJA in 2017. They’ve essentially done away with all of this.
• The maximum SALT deduction has been increased to $40,000 from its previous limit of $10,000, whether you were filing Single or Married Filing Jointly, or $5,000 if you tried to file Married Separately (no loopholes!) This represents a win for states with higher local tax schemes (whether those be state income or property taxes), which is generally somewhat favorable to blue states. However, there are some catches:
  • The limit is only increased from 2025-2029, after which it will turn into a pumpkin at midnight on New Year’s Eve and revert back to $10,000. Still, this can represent enormous tax savings for some, with those in the higher tax brackets getting close to being able to save $10,000 in additional income taxes due to the increased tax deductibility (depending on state and local income taxes; however:
  • The additional deduction rapidly phases out at $500,000-$600,000 of AGI, which means taxable income can be $130,000 more or less for federal income tax purposes depending on whether someone is earning no more than $500,000 and up to $600,000, which turns the prior $10,000 in tax savings into a potential tax bill of up to $50,000 or so (again, depending on state income taxes.)
  • Oh, and the prior $5,000 for Married Filing Single is still carried over, with married filing single folks getting capped at $20,000. Still no loophole.
  • Oh, and and: The $500,000-$600,000 phaseout is for Single, Head of Household, and Married Filing Jointly only. Married Filing Single? Cut in half to $250,000. Really, no loopholes here at all.
  • Oh, and and and: The $40,000 and $500,000 are indexed at 1% a year through the expiration in 2029. So in 2029, you can earn a whopping $20,302~ more and not lose the full then-$41,624~ of deductible state and local taxes.

Tax Impacts on Businesses

There’s a statement made about essentially every tax bill that involves cutting taxes: “Businesses and the wealthy greatest beneficiaries of tax cuts.” And, to be frank, “no shit.” High-income Americans, businesses, and business owners pay the vast majority of the dollar-based measurement of taxes in the United States. This doesn’t mean that they pay the most as a percentage of their respective income or revenue, since the wealthy and businesses also have access to great financial and tax planners to help moderate their taxable income and tax burden, but that’s a separate conversation to be had, and definitely not one to look pointedly at your nearest CFP® Professional about.

But, with that in mind, the bill does provide a great deal of targeted tax modification and relief to businesses. For example:

• Pass-through entity tax schemes at the state level, or “PTETs”, are still permitted. This is the provision that was invented by the states with high income taxes after the TCJA passed to let corporate pass-through entity owners (corporations, not individuals) pay their state income taxes directly from the business as a deductible business expense to get around the SALT cap. This is only remarkable insofar as this was explicitly targeted for removal in earlier drafts of the bill, so that it survived means someone somewhere lobbied hard.
• Section 179, or the ability to expense in the current year rather than having to deduct the cost of assets over time, allows for up to $2.5 million to be deducted in 2025 annually, and the phase-out for property begins at $4 million instead of $2.5 million. Essentially, this just means businesses can write off a lot more expenses and equipment in the current year than having to track depreciation over time. Bonus depreciation, which was steadily disappearing, is also extended indefinitely for new assets purchased after January 20^th of 2025.

Miscellaneous Perks and Tax Impacts

There are some provisions of the bill that aren’t really tax items so much as tax-affecting items. Some examples here:

• Employers can now permanently pay $5,250 toward employee student loans and exclude those payments from income. So, if you have student loans, there’s a great reason to talk to your employer about shifting some of your income from salary or hourly rate to education reimbursement, since that will save your employer and you on taxes. The $5,250 has been used a lot over the past few years for education expenses and whatnot, but the good news is that this figure is now also going to be indexed for inflation. (Great news for you and your future student loans, Emily!)
• Above the Line & Below the Line Shenanigans. This gets its own sub-bullet list because until the TCJA, there were only above-the-line deductions that reduced your AGI such as IRA and 401(k) contributions and below-the-line deductions when you itemized your taxes. The TCJA created the “qualified business income deduction” as its own line (line 13 on your Form 1040) that was neither above-the-line or below-the-line. With that in mind, here are things now included:
  • No Tax on Overtime: For those with overtime wages as defined by the Fair Labor Standards Act of 1938where taxes are customary, those filing single, head of household, or married filing jointly can deduct up to $25,000 in tip income if the household income is less than $300,000 for married filers or $150,000 for single filers, with 10% of income above those thresholds reducing the $25,000 (e.g., if a married couple makes $550,000 combined, no tip tax deduction). Married filing single filers are just left out entirely, which is a big bummer for the married philosophy major with large student loans working as a barista. Note that employment taxes (Social Security and Medicare) are still applicable, so the deduction is just for state and federal income taxes. Oh, and this deduction starts this year and ends in 2028.
  • No Tax on Tips: For those in identified occupations (to be announced) where taxes are customary, those filing single, head of household, or married filing jointly can deduct up to $25,000 in tip income if the household income is less than $300,000 for married filers or $150,000 for single filers, with 10% of income above those thresholds reducing the $25,000 (e.g., if a married couple makes $550,000 combined, no tip tax deduction). Married filing single filers are just left out entirely, which is a big bummer for the married philosophy major with large student loans working as a barista. Note that employment taxes (Social Security and Medicare) are still applicable, so the deduction is just for state and federal income taxes. Oh, and this deduction starts this year and ends in 2028. Huh, did I just repeat myself?
  • Charitable donations for those who don’t itemize: Normally, to get the benefits of charitable donations, you have to itemize your taxes. Now you can deduct either $1,000/year if you’re single, head of household, or married filing separately, or $2,000/year filing jointly. However, there’s a catch… This doesn’t take effect until 2026.
  • For itemized deduction filers: Charitable deductions must now exceed 0.5% of your adjusted gross income to be deductible at all. So if your household earns $100,000 a year, you have to donate at least $1,500 if single or $2,500 if married filing jointly to claim the full $1,000 or $2,000 deduction. This also takes effect in 2026.
  • Finally, car interest loans have deductible interest up to $10,000 annually if:
    • Your modified adjusted gross income is less than $200,000 for married filing jointly or $100,000 for everyone else. The deduction phases out at 20% of the excess above those levels. So a single filer loses the deduction entirely if their income exceeds $150,000, and a married filer loses it over $250,000.
    • Only applies on loans issued from 2025-2028.
    • The car must be new and purchased, not leased.
    • The car must be built in the United States (or at least assembly must be completed here.)
  • The child tax credit jumps 10% from $2,000 to $2,200 and now will be inflation-adjusted going forward (permanently, insofar as any of this stuff is permanent!) and is effective in 2025.
  • $5,000 of the existing child adoption credit is now refundable, whereas previously you had to owe on your taxes to benefit from the tax credit, though the limit was still north of $16,800 so you could offset quite a bit of tax liability! Now, if you’re a tax-paying citizen, you can deduct from your taxes and get up to $5,000 back, which is a huge boon to those interested in adopting children. No sign of a tax credit to pay for maternity and delivery costs, but that’s a different discussion.
  • The estate and gift tax exemptions were already enormous ($13.9+ million per person), but now they’re even more enormous at $15 million per person, effective in 2026. So, if you have more than $15 million or if you’re married and you and your spouse have more than $30 million, do your best to stay alive until at least next year.
  • TRUMP Accounts: Other than being blatant political pandering, these accounts are for children and will become effective and available in one year. Here are the terms and conditions:
    • Contributions are allowed up until the beneficiary turns 18 (so, minors only).
    • $5,000 contribution limit.
    • Distributions prohibited until age 18.
    • Tax-advantaged, meaning it will grow tax-deferred, but not tax-free.
    • No deduction for contributions; so it gets IRA-type treatment once invested, but no write-offs for funding the account.
    • Employers can fund up to $2,500 of the $5,000 annual limit and exclude it from the employee’s (parent’s) income. So, like the student loan reimbursements mentioned above, this could be another thing to bring up to your employer in 2026.
    • The government is going to kick $1k into these for any child born between 2025-2028, so there’s some “free money” being handed out. (Ironic, given the politics of the parties involved, but I digress.)
    • Must be invested in Mutual Funds or Exchange Traded Funds that are:
      • Tracks the returns of a qualified index.
        • Explicitly: The S&P 500 index or any other equity index that is primarily investing in US equities, e.g. the DJIA, US Large Cap/Mid Cap/Small Cap indexes, etc.
      • Does not use leverage (e.g., no borrowing to juice returns).
      • <0.1% annually in product fees.
      • Meets other criteria that the government can specify at a later date.
    • Bottom line: This is a modestly tax-advantaged way to save for your kids in a manner other than UTMA or 529 plans. This seems to function somewhere in the space between those two options, though a personally titled brokerage account and making gifts to your kids later might still be the optimal mix of control and tax efficiency that many parents are seeking. You’re going to end up buying low cost index funds from companies like Vanguard or Blackrock.
  • No more electric vehicle tax credits after September 30^th, 2025.
  • No more energy-efficient home credits after December 31^st, 2025.
  • No more residential clean energy credits after December 31^st, 2025.

The Tax Impacts’ Winners and Losers

Who are the winners and losers of the “big beautiful bill”? Well, succinctly, the winners are those who were already advantaged by the TCJA in 2017 and the losers are those who were explicitly carved out of the TCJA in 2017. While there are some positive modifications to the tax code for individual taxpayers vis-à-vis the increase to the SALT limit, the ability to deduct some charity when not itemizing, and otherwise buffing up some assorted tax credits and deductions, there really aren’t that many genuinely material changes. There are still some deeply disfavored groups, such as “specified service businesses,” i.e., white collar professionals such as doctors, realtors, accountants, and financial planners (womp womp), but otherwise the tax impacts of the bill are largely rounding off the edges of the TCJA.

Is that a good thing? See above. But the incremental passage and duration of tax policy on a going basis does mean that there is going to be plenty of job security for your favorite tax preparer and fee-only CFP® Professional financial planners in Longmont.