What to Know About the New Tax Law
The “One Big, Beautiful Bill” finally made it through Congress and was signed by the President during a Fourth of July ceremony, officially making its many complex tax changes the law of the land.
At the center of the bill is an extension of the current federal tax brackets, which were scheduled to expire at the end of the year. Most taxpayers will continue to take the standard deduction, $15,000 for single filers and $30,000 for joint filers. Many high-income taxpayers are likely to itemize their deductions anyway, so this may not impact them directly. However, people in the top tax bracket will face a new rule: for every dollar they deduct above the amount they earn over the top bracket’s income threshold, they must subtract 2/37th of its value from their tax benefit. In other words, for every dollar they deduct after their income goes over the top tax bracket threshold, they lose 2 cents out of every 37 cents in tax savings.
Another change allows taxpayers who take the standard deduction to also claim an extra charitable deduction, $1,000 for single filers or $2,000 for joint filers. Seniors will receive an additional standard deduction of $2,000 if single or $3,600 if married and filing jointly. A separate $6,000 tax deduction per person was also added for seniors with incomes up to $75,000 if single (or $150,000 for joint filers). This deduction is meant to help offset taxes some lower- and middle-income seniors pay on their Social Security benefits.
The law also extends the current estate and gift tax provisions. The lifetime estate and gift tax exemption have been raised to $15 million per person. It keeps the rule that allows a surviving spouse to inherit any unused portion of their deceased spouse’s exemption, which is known as “portability.”
People living in high-tax states will benefit from an increase in the amount of state and local taxes they can deduct on their federal tax returns (known as SALT). Previously, the deduction was capped at $10,000 for all taxpayers. Under the new law, families making under $500,000 a year can now deduct up to $40,000 in SALT.
One provision likely to be popular with service workers eliminates federal income tax on tips. Tipped workers will still need to report that income and pay state and payroll taxes on it, but they will no longer owe federal income tax on those earnings. This tax elimination is only applicable to $25,000 worth of tips and phases out after certain income thresholds.
Businesses also received several new tax breaks. Manufacturers will be allowed to fully and immediately deduct the cost of building new manufacturing facilities as long as construction starts before January 1, 2029. Companies can also now deduct the full cost of research and development expenses in the year they occur.
Not all the changes in the bill offer tax cuts. The law ends a number of tax credits and incentives that encouraged investment in clean energy, electric vehicles, and energy-efficiency improvements. It also includes measures that tighten access to food stamps and Medicaid. At the same time, the bill sets aside more than $120 billion in funding for immigration enforcement, including building more border walls, expanding detention space for immigrants in custody, and hiring and training more agents for U.S. Immigration and Customs Enforcement.
According to an estimate from the nonpartisan Congressional Budget Office, the bill would add $3.4 trillion to the federal deficit over the next ten years. Republican lawmakers strongly disagreed with that figure but still included a provision in the bill that raises the federal debt ceiling by $5 trillion. It’s still unclear whether this big new law will bring the long-term benefits its supporters hope for or the financial problems its critics fear.
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