~ Tax Talk ~
Legislation Regarding Tax on Tips
The recently passed "One Big Beautiful Bill Act" includes a provision that creates a temporary tax deduction of $25,000 on qualified tips taking effect in 2025 and lasting through 2028. This provision in the bill does not completely eliminate tax on tips but does offer temporary relief on the first $25,000.
Income Limits: This deduction starts to phase out for taxpayers with modified adjusted gross income (MAGI) exceeding $150,000 ($300,000 if married filing jointly).
In summary, while tips remain subject to payroll taxes and must still be reported, the new law allows eligible tipped workers to deduct up to $25,000 of their tips from their federal income tax liability, effective for the years 2025 through 2028. Itemizing deductions (going long form) is not required to claim this deduction.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Tax on Social Security Benefits
Increased Standard Deduction: The OBBA increases the standard deduction for seniors aged 65 and older. This can result in a reduction or elimination of federal income taxes on Social Security benefits for some retirees.
Targeted Deduction for Seniors: A key feature is a temporary deduction of up to $6,000 per person for individuals 65 and older who have a valid Social Security number. This deduction begins to phase out at certain income levels.
More Beneficiaries May Pay No Taxes: According to the White House, the OBBA will significantly increase the percentage of Social Security beneficiaries who pay no federal income tax on their benefits.
Important Notes:
Temporary Provision: The senior deduction is temporary and in effect for tax years 2025 through 2028, unless future legislation extends it.
Not a Complete Elimination of Taxes: The OBBA does not eliminate taxes on Social Security benefits for everyone. Higher income beneficiaries may still have a portion of their benefits taxed, while others in the low to moderate income range aged 65 or older could benefit.
Indirect Impact: While the OBBA does not directly alter the Social Security program, it may indirectly impact the program's finances by reducing the revenue generated from the taxation of benefits according to the Committee for a Responsible Federal Budget.
In summary, the OBBA provides a tax break for many Social Security beneficiaries aged 65 and older through an increased standard deduction and a specific senior deduction. It does not make Social Security benefits entirely tax-free for everyone as the current administration had promised.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Tax on Overtime Pay
Here's what the "One Big Beautiful Bill" does regarding overtime pay:
Creates a temporary, limited tax deduction: Eligible workers can deduct a certain amount of their overtime pay from their federal taxable income.
Deduction limit: This deduction is capped at $12,500 for individuals and $25,000 for couples filing jointly.
Income phase-out: The deduction starts to phase out for individuals with modified adjusted gross income over $150,000 and joint filers over $300,000.
Effective dates: This deduction applies to tax years 2025 through 2028.
Above-the-line deduction: This deduction can be claimed even if you don't itemize, meaning it is subtracted from your gross income when calculating your adjusted gross income.
Important to note: This is a federal income tax deduction and does not affect the other payroll taxes (Social Security, Medicare, state, and local taxes).
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~