Q&A – When Do the New Tax Cuts from the BBB Kick In?
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
Social: @brianmuddradio
iHeartRadio: Use the Talkback feature – the microphone button on our station page in the iHeart app.
Today’s Entry: @brianmuddradio It’s a great day for America! When do the new tax cuts kick in? The impact will be huge!
Bottom Line: Yes, it will be huge, and I suppose you could begin to say that yes, it is huge. That’s because the new tax cuts that are in “the Act”, better known as the BBB, that were signed into law by President Trump on Independence Day have already kicked in today. Or actually January 1st, as the case happens to be. Understanding tax law obviously isn’t exactly the easiest thing to do, but it’s also complicated by the different layers of tax policies that were part of the BBB. Those three are these:
- Making the original Trump tax cuts from 2017, the Tax Cut and Jobs Act, permanent
- Establishing new tax cuts and increasing tax deductions
- Making the new tax policy retroactive to January 1st, 2025
The way the law was written, everything in it began immediately unless otherwise specified in the bill (and there’s a lot of that – specifically on the spending side). As mentioned, the new tax breaks in the law were made retroactive to January 1st of this year – meaning that you’ll realize the benefit from the additional tax cuts when you file your taxes next year.
While the focus of the new tax cuts has been on tips, overtime and increased deductions – there are 27 different personal income tax changes in the new tax law. The law is wide reaching, including for example, increasing the total amount of charitable contributions you can deduct using the standard deduction. That seemingly small change alone will lower the tax burden for an estimated 81% of tax filers. In other words, there are bound to be several (likely pleasant) surprises when it comes time to file your taxes next year based on deduction limits if nothing else. But that’s really the key. The benefits of the Trump 2.0 tax cuts will largely be felt when filing taxes, as opposed to the day-to-day when you collect a paycheck. On that note, I’ll focus on the big three categories: Tips, overtime, and Social Security.
The way “no tax on tips” works is like this:
- A deduction of up to $25,000 on tipped income is available when filing taxes
That effectively covers the first $150,000 in tipped income (which accounts for over 99% of tipped employees). Tipped income above $150k would be taxed. So, what this means is that tipped income is still to be reported by employees and employers to the IRS, with the deduction kicking in when it’s time to file taxes.
The way “no tax on overtime” works is like this:
- A deduction of up to $12,500 for overtime pay is available for those earning overtime when filing taxes. Similarly, to tips, this phases out after $150k.
Once again, we see that overtime pay will still need to be reported to the IRS by employers, with the reconciliation taking place when filing taxes.
The way “no tax on Social Security” works is like this:
- Seniors 65 and older receive a new $6,000 deduction
The $6,000 deduction effectively covers taxes on Social Security for total reported income of up to $75,000 per tax filer.
So, the deductions are the key to understanding how this works and when you’ll see the benefit. Technically, you already have been since January 1st but may not notice until tax time next year unless you do what may should be doing right now. Adjusting federal withholding.
With over 80% of Americans having received an additional tax break this year – it would be wise to revisit federal income tax withholding – having less tax deducted from your paycheck throughout the year. That way you feel the benefit right away in every paycheck, and you’re not giving Uncle Sam an interest-free loan throughout the year.