The One Big Beautiful Bill Act (OBBBA) Part 2

In our previous article, we provided a summary of the major changes in the Republicans’ One Big Beautiful Bill Act. In this follow-up article, we delve a little deeper into some of the major changes from the OBBBA.

We take a look at how some of these provisions will work in practice, the actual benefit taxpayers will receive, and who qualifies. Some of these provisions are only for a limited time, can only be claimed by taxpayers who meet certain criteria, and some phase out above certain income levels.

TAX DEDUCTION FOR SENIORS

First, let us look at the deduction for Social Security income as outlined in the OBBBA. Taxpayers aged sixty-five and older can deduct up to $6,000 ($12,000 for taxpayers who are married and file joint returns) on their Social Security benefits. This deduction is in addition to the existing regular standard deduction and the additional standard deduction for seniors already allowed under tax laws.

While this is a great benefit for seniors, it phases out, beginning at $75,000 for individual filers and $150,000 for joint filers. It phases out completely for individuals at $175,000 and for joint filers at $250,000. High-income seniors may get a reduced benefit if their income exceeds the phase-out threshold. The benefit is temporary, expiring in 2028.

The phase out of this deduction at $175,000 for single filers and at $250,000 for joint filers means there is a so-called marriage penalty. Because the complete phase out limit for single filers is $175,000 and $250,000 for a joint filer, an unmarried couple filing separate returns has a complete phase out at $350,000 while a married couple filing joint returns has a phase out at $250,000. The lower phase out limit for joint filers means they will get a smaller benefit if their combined income is at or above the upper limit.

STATE AND LOCAL TAX DEDUCTIONS (SALT)

The SALT deduction was one of the most fought-for provisions in the OBBBA. This provision allows taxpayers to deduct a portion of taxes paid to state and local governments on their federal returns. The amount was reduced to $10,000 in the Tax Cuts and Jobs Act signed by President Trump in 2017. After Blue-state Republicans fought for it to be increased, it was raised to $40,000 in the OBBBA for single and married taxpayers filing joint returns. For married taxpayers filing separate returns, the deduction is limited to $20,000. The deduction will increase by 1% annually but reverts to $10,000 in 2030.

While this is no doubt a significant benefit for taxpayers who qualify, it will start to phase out once income exceeds $500,000 and reduces to $10,000 for incomes of $600,000 and above. Many high-income taxpayers will see their benefit reduced.

There is a marriage penalty for this one as well. The $40,000 deduction is for each return, not each person. Therefore, a married couple filing a joint return can only claim a maximum of $40,000, while an unmarried couple filing separate returns can each claim $40,000. Married couples cannot offset this by filing separate returns. Couples married filing separate returns can only claim half of the deduction, or $20,000.

TIPS DEDUCTION

The OBBBA introduces tips deduction of up to $25,000 for joint and single filers. The deduction is for both employees and self-employed persons and is effective for 2025 to 2028.

LET US LOOK AT WHAT THE FINE PRINT SAYS.

For self-employed workers, the deduction cannot exceed their net income (without taking into account the deduction). A self-employed worker could therefore receive $25,000 or more in tips but is unable to deduct the full amount because their net income is less than $25,000.

Only workers in occupations listed by the IRS as “customarily and regularly” receiving tips on or before December 31, 2024, qualify for the deduction. The IRS is required to publish a list of such occupations by October 2, 2025. Presumably, this will include workers such as waiters, taxi drivers, hospitality workers and workers in similar industries.

Workers in a Specified Service Trade or Business cannot claim the deduction. This includes workers in industries such as health, law, accounting, actuarial science, performing arts, consulting, athletics, and financial services.

The deduction phases out at $150,000 to $400,000 for single filers and at $300,000 to $550,000 for joint filers.

OVERTIME DEDUCTION

From 2025 to 2028, the bill allows workers to deduct a portion of overtime pay, up to a maximum of $12,500 for single filers and $25,000 for joint filers. The deduction phases out for taxpayers with incomes over $150,000 ($300,000 for joint filers). For single filers it phases out completely at $275,000 and for joint filers at $550,000. Married couples must file jointly to claim the overtime deduction.

However, not all overtime pay can be deducted – only the portion that exceeds a worker’s regular rate of pay. For example, a person who is paid time-and-a-half in overtime can only deduct the “half” and not the “time.”

NO TAX ON CAR LOAN INTEREST

Another new deduction under the OBBBA is one for interest used to purchase a new vehicle for personal use. The vehicle must be assembled in the US. This is also effective from 2025 to 2028.

The deduction is allowed on interest for loans up to $10,000, and it phases out for single filers between incomes of $100,000 to $150,000, and between $200,000 to $250,000 for joint filers.

The loan must be originated after December 31, 2024, the original use of the vehicle must start with the taxpayer, and the loan must be secured by a lien on the vehicle.

A qualified vehicle is a car, minivan, van, SUV, pick-up truck, or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds, that has undergone final assembly in the United States.

As you can see, the tax provisions are not as straightforward as they seem. Many taxpayers will be surprised to find they do not qualify for some of the tax breaks, or they can only benefit partially. Before you start planning on how you are going to spend the extra refund you expect, you might want to talk with your tax specialist. Your tax specialist can walk you through the changes and help you quantify how you might benefit from these tax breaks.

Whether you’re an individual or a business, now’s the time to take control of your 2025 tax strategy. Partner with Mirror Accounting Services to tailor your 2025 tax strategy and ensure you’re making the most out of these changes.