'Big Beautiful Bill' offers tax savings
After what seemed like a larger than usual level of political drama, the Trump administration's "Big Beautiful Bill" was signed into law on July 4th by the President. Now, I know, just saying the word "Trump" triggers a large percentage of the population one way or the other, but at this point opinions on the man are not relevant. The bill has become law and it has a number of very important provisions and resolves some lingering questions from a personal finance perspective. So, let's dig in a bit.
First, my bias disclosure. I see Donald Trump as neither a superhero nor the anti-Christ. In my view, he is a populist politician, neither conservative nor libertarian, and clearly not progressive. His policy approach tends to be a direct descendent of his political rhetoric, which is based mostly on pragmatism and instinct rather than ideology.
I also don't want to talk about this new law in the context of projected deficits, because in my view the modeling used for such proclamations is too easily influenced by agendas, one way or the other. Unless there is some sort of explosive growth-based paradigm shift in the next decade, the U.S. government has crossed the threshold of fiscal sustainability. After decades of extreme mismanagement and now rising interest rates, government finances are beyond repair and I just don't want my clients, or myself, to pay for it in taxes -- and in this regard the new law does a pretty good job.
The tax rules contained in the new law are very "tax deduction" based, meaning the rules are designed to exclude certain types and levels of income from Federal taxation. Tax rules based on deductions heavily favor middle income households, which for this discussion we will consider are households earning from $75,000 to $300,000 in various types of income. In my analysis there aren't a lot of "tax cuts" for the rich in the law, but neither is there a great expansion of tax credits, which tend to favor lower income households. The tax provisions of this law seem to be focused on workers and retirees.
First, let's talk about three features of the new rules that are based directly on Trump political rhetoric: no tax on tips, no tax on overtime and no tax on Social Security. None of these features made it into the law by direct definition, but all three made it into the law in some form of deduction.
It's important to note when talking about tax deductions, there are two kinds -- "above" and "below" the line. Above the line tax deductions are added to the standard deduction on a tax return (better), and below the line deductions are only applicable to taxpayers who itemize deductions. With the expansion of the standard deduction in the new law to $15,750 for single taxpayers and $31,500 for joint filers, many American households are no longer itemizing deductions.
The good news is the new tax deductions for tips ($25,000 in tip income), overtime ($12,000 in overtime income) and "Social Security" ($6,000 in any type of income) are above the line, meaning they are added to the standard deduction amounts.
It's important to note, the new deduction for "Social Security" is not actually based on Social Security income -- it's based on age, with individual taxpayers over the age of 65 now eligible for an additional $6,000 deduction, which is doubled for a joint return to $12,000.
All of these new deductions are once again focused on benefiting middle income households and begin phasing out at around $75,000 to $150,000 in income based on the deduction and filing status. This being said, I can see a lot of opportunity for planning in order to reduce tax burdens, especially for retirees using IRA accounts for income, as these households tend to have more control over how their lifestyle needs are funded.
Two other attractive new or expanded tax deductions involve up to a $10,000 above the line deduction for interest paid on auto loans (providing the vehicle was made in the U.S.), and an expansion of the deduction for state and local taxes (SALT) to $40,000. Phase outs for the auto deduction begin at $100,000 income for single filers and $200,000 joint, and the SALT deduction begins to phase out at $500,000 income.
While I haven't seen tax modeling software inclusive of the new rules yet, my gut feeling is the new law could reduce Federal taxes for a "typical" American household with income in the $100,000 to $200,000 range by roughly $2,000 to $10,000 a year, depending on income sources and deductions. There are many more financial provisions in the new law we will continue to explore, and it's also important to note most new rules are retroactive to the beginning of 2025, so tax savings will be fairly immediate now that the Big Beautiful Bill has been signed.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
