Big Beautiful Tax Bill
Does it benefit the common man?
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The “One Big Beautiful Bill Act” has passed the House by a very thin margin, and it’s now moving on to the Senate. If you stay in the US and make any amount of money at all, this new tax bill might give you some unbelievable opportunities. The original bill is 1,100 pages long, and it’s very unlikely that you’ll spend your time digging through the fine print and understanding it.
So if you’re wondering how you could get no tax on tips, no tax on overtime pay, $1000 for every child, tax write-offs on car loans, and massive $40,000 state tax deductions, among a variety of other initiatives, here’s everything you need to know.
No tax on tips
Since tips are paid separately from wages, a lot of people were excited about this part assuming they could pay themselves a low wage and label the rest as tips. But this bill is carefully worded as to what qualifies as tips. For a payment to qualify as a tip:
Tipping should be customary in your industry (such as being a server, bartender, hair stylist, or taxi driver). If you have an office job that you file a W9 for, or work as a real estate agent, then you wouldn’t qualify.
Tips must be paid voluntarily and can’t be included as a service charge.
Highly compensated individuals won’t qualify. You would have to earn less than $150,000 a year.
The tip must be in cash — credit card tips will not count (Although, after double-checking, there’s a loophole in the IRS’s definition which states that tips paid through credit cards could also qualify).
Anything beyond $25,000 is not tax-free.
From a financial perspective, this part of the bill is worthless. Most people getting tips aren’t reporting it anyway. Reporting it might help them get approved for a higher loan amount if they show it on their tax report, but could disqualify them from some government subsidies, so it’s a tradeoff.
But the next part could be useful to a lot of people:
No tax on overtime pay
Similar to the tips rule, a lot of people thought they could restructure their work hours to qualify for an absurd amount of overtime – which would subsequently be tax-free. But again, it’s worded in a very precise manner:
If you work for more than 40 hours a week, the overtime pay that you earn can be deducted from your taxable income. This makes it ‘federal tax free’ even if you take a standard deduction.
Again, if you earn more than $150,000 a year, you’re a highly compensated individual and wouldn’t qualify.
If this bill passes, it would apply to all income made in 2025, and would be valid till December 31st, 2028.
The most attractive part is that it appears as if the entire amount of overtime is tax free, not just the 50% “bonus” that you receive. If that’s the case, it’s great.
I’m impressed with this one and I think it could save a lot of money — if you are among the 8% of hourly workers and 4% of salaried workers who are eligible for overtime pay. This next one also promises similar savings…
The $40,000 SALT deduction
Prior to the 2017 Jobs act, State and Local Taxes (SALT) could be completely written off and deducted from your salary before you paid Federal Taxes. If you paid $30,000 in state taxes and $20,000 in local property taxes, you could write off that $50,000 and save up to $18,000. After 2018, this changed — the new tax plan imposed a cap on how much could be deducted.
The plan put a cap of just $10,000 total on the amount that could be deducted, regardless of the state in which you lived and without adjusting for inflation. Residents in California, New Jersey, and New York were the hardest hit (if you were one of these, let me know your experience in the comments).
However, the new bill would raise the SALT deductions cap to $40,000 – if your adjusted gross annual income doesn’t exceed $500,000 per year. If you make more than that, the limit will still be the original $10,000 that was put in place back in 2018. This is meant to prevent wealthy people in high income tax states from receiving most of the benefit.
The catch is that to get this benefit, you must itemize your deductions, which is a bit of work. The standard deduction of $30,000 is large enough, so that most people won’t take this unless they live in a high income tax state where they pay a lot of property taxes and want to write off mortgage interest payments. But if the $10,000 does make a difference, it’s an improvement because I honestly wasn’t expecting anything.
But this next one is fantastic:
Car loan deduction
The average car payment in the United States is $742 per month, at an average loan size of $41,572, and an average interest rate of 6.35%. Unless you count it as a business expense, a car payment is typically not something you can deduct from your taxes, but with the new tax bill, that could change. If this bill passes in its current form, you could deduct up to $10,000 in interest payments on your car loans per year, on top of your standard deductions, valid from 2025 to 2028 at least — but only if your vehicle is made in the USA.
Once you start to make over $100,000 as an individual and $200,000 as a married couple, this deduction starts to phase out. The deduction is reduced by $200 for every $1,000 you make over that limit. So if you make even $150,000 single or $300,000 married, the benefit no longer applies to you.
I think this is a fantastic benefit for people who already buy American made cars. I do have one worry though – that people might take on loans larger than they can afford because they consider the interest a “write-off,” which would end up nullifying the benefits. So my word of caution is to not take a loan just for the sake of the write-off, but if you already have a loan and qualify, that’s great. Although, while we’re on the topic of cars, there’s one benefit that’s going away that you need to be aware of:
The Clean Vehicle Tax Credit
The $7,500 EV tax grant is going away. For the last few years, electric vehicles were eligible for a $7,500 tax credit if you make under $150,000 single or $300,000 married. If you owed more than $7,500 in Federal taxes, you got $7,500 off your tax bill to incentivize you to buy electric vehicles as part of the “clean energy mandate.” It looks like this will be coming to an end by 2026. Other clean energy methods like solar energy and residential clean energy are also being phased out. If you want to claim any of the expiring benefits and deductions, you better act soon because they’re going away this year if the bill passes.
$1,000 for every child
This is the most controversial part of the bill simply because of its name. Initially it was called the MAGA account and later “The Trump Account,” but the idea is simple – children born between 2025 and 2028 in the United States with a valid Social Security number will receive a one-time tax credit of $1,000, funded by the IRS, into an account that could then be invested. The goal is to grow that initial $1,000 through the power of compounding into a much larger amount that could then be used toward expenses in the future of the child like education, healthcare, starting a business, buying a home for the first time, and so on. All of these would be taxed as long term capital gains.
Any non-qualifying expenses (like say, Coachella) would be fined with a 10% penalty, and if the amount is not used by the age of 31, it would automatically cash out. At that point, it would just be treated like ordinary income.
How much could this actually grow to? At a compound interest of 9%, that $1,000 could grow to $13,000 in 31 years. That isn’t so bad, considering it’s free money and could give children a bit of a head start, especially for families that don’t have extra money. Having said that, this $1,000 isn’t very different from a family creating an account for a child and depositing money in it regularly — those gains would be completely tax-free, and there wouldn’t be any penalties for taking early distributions when your kid wants to blow $1,500 at EDC. Just contributing to a Roth IRA is a viable plan too – the accumulated gains become completely tax free by the age of 59.5.
But that’s not to say that all of these couldn’t be done independently, and $1000 is still $1000 – so why look a gift horse in the mouth?
Extending the Tax Cuts and Jobs act
The Tax Cuts and Jobs act was implemented in 2018 which moved the top tax bracket to 37% compared to the previous 39.6%. This was set to expire in 2025, but it now looks like it’s be continued. This could be really good for business owners:
It provides a 20% pass-through deduction for business owners who operate an LLC or Corporation.
It doubles the estate tax exemption to $28 million.
It allows 100% bonus depreciation in the first year for business use. If you bought a plane or any piece of machinery, you could write 100% of the cost off your taxes putting only 10% down.
All of this leaves over a lot of money for anyone who runs their own company. Honestly, this is the largest “tax write-off” in the entire plan for high income earners. If you fall into the right category, this could potentially save you a lot of money on business-use cars that weigh more than 6,000 pounds (you could write off the entire cost of the car), airplanes, bitcoin mining rigs, and other equipment. Most people complain that this tax plan mainly benefits high income earners — though this is the category that already pays the vast majority of taxes, they’re also the category who benefit the most due to seemingly small changes. If that sounds appealing, it might make sense to invest in your own business over the next few years.
You know what’s not included in the bill though?
No tax on social security
This was a popular clause, but it was left out likely because most of the benefits would go to people who already had a high net-worth. Instead, they added $4,000 to the standard deduction for those collecting social security, provided that their annual income is below $75,000 (single) or $150,000 (married).
The benefits here are a bit hard to understand — not all social security is taxed, but depending on how much they earn, some or all of their earnings could be shielded from being taxed.
Since the entire bill is over 1,100 pages long, there are many other items I can’t cover. But these are the ones getting the most attention that will apply to the vast majority of people watching this video. In terms of what I think about the overall plan, I don’t have that many complaints. My biggest concern is that it will add to the federal deficit, which I wrote about here:
But in terms of what it does for ordinary people, I think it will save them a little more money than it did before. I believe that tax money is better spent in the hands of individuals than the government. That’s a topic for another day though.
If you’re a self-employed worker, or a business owner, this bill could give you massive benefits. There’s one big caveat to keep in mind though: The bill has passed the house on a very thin margin and there’s a good chance that it’ll pass the Senate, but it might need to go through some modifications to pass the Senate – and whether that will take away some of the power of this bill is yet to be seen. What might change?
How aggressively it targets green energy incentives
The $40,000 SALT deduction
Cuts to Medicaid and other health programs
So right now, we have a framework for what will go through – but there will surely be some changes to get it to the final form that will pass into law. To stay updated on these changes, make sure to subscribe so you don’t miss anything.
That’s all for this week! I’ll see you next week with another update. If you enjoyed reading, forward this to a friend who needs to see this, and don’t forget to check out today’s sponsor, Belay.
Graham, did the $5000 per year contributed by friends, family and/or "franchises" from ages 1-18 get deleted or omitted in the current version of the bill?