NO TAX ON SOCIAL SECURITY? NO WAY, RAY!

 

The so-called “One Big Beautiful Act” does not make any change to the way Social Security benefits are taxed.  Depending on the extent of your other income, up to 85% of your gross Social Security benefits (before any Medicare deduction) continue to be taxed as ordinary income on the Form 1040 (or 1040-SR).

What the legislation does is create a deduction of $6,000 for every taxpayer age 65 or older at year-end for 2025 to 2028.  The deduction is per taxpayer, so if both spouses on a joint return are 65 or older they can deduct $12,000.  This deduction is available whether or not you are collecting Social Security.  

The amount of the deduction is reduced by 6% of the amount your Modified Adjusted Gross Income (MAGI) exceeds $75,000, or $150,000 if you are married and filing a joint return with your spouse.  For this deduction MAGI is your Adjusted Gross Income plus any exclusion for foreign income or income from Puerto Rico, Guam, American Samoa, and the Northern Mariana Islands.

You can claim the deduction for overtime pay whether or not you itemize your deductions on Schedule A.  The deduction is in addition to the extra Standard Deduction amount for senior taxpayers who do not itemize.  For married individuals the deduction is only available if you file a joint return.  This new deduction is not available on “Married Filing Separately” returns.   

So, there is a tax on your Social Security benefits, calculated in the same manner as it has been in the past.

FYI, I oppose the current method of calculating taxable Social Security benefits.  Social Security should be taxed in the same way as any other contributory pension.

TTFN

NO TAX ON OVERTIME?

 

Like “No Tax on Tips” the statement “No Tax on Overtime” in relation to the recently passed tax legislation is misleading.

The so-called “One Big Beautiful Act”, signed into law on July 4^th, did not exempt all overtime pay from all federal taxes.  The Act created a federal income tax deduction for up to $12,500 ($25,000 on a joint return) in overtime pay received for tax years 2025 (all of 2025) through 2028, phased out based on your “Modified” Adjusted Gross Income (MAGI).  For this deduction MAGI is your Adjusted Gross Income plus any exclusion for foreign income or income from Puerto Rico, Guam, American Samoa, and the Northern Mariana Islands.

There is no change to how overtime pay is reported.  The employer must still withhold, and match, the 7.65% FICA (Social Security and Medicare) tax and pay FUTA (federal unemployment) tax on overtime pay.  Employers received no tax benefit related to overtime pay in the new law.

As in the past, employers will include overtime pay in the amount reported as “wages, tips, other compensation” in Box 1, Social Security wages” in Box 3, and “Medicare wages and tips” in Box 5 of your 2025 Form W-2.  Overtime pay that qualifies for the deduction will be separately reported in Box 12 or Box 14.

And, also as in the past, you will report the amount from Box 1 of all W-2s on Line 1a of your 2025 Form 1040 (or 1040-SR).  What you will now be able to do is claim a deduction for up to $12,500, or $25,000, of qualified overtime (as identified on your Form W-2), which reduces your federal net taxable income. 

The amount of the maximum deduction you can claim for qualified tips is reduced by $100 for every $1,000 (or fraction thereof) that your MAGI exceeds $150,000, or $300,000 if you are married and filing a joint return with your spouse. 

What qualifies as overtime pay is pay for hours worked in excess of the standard 40-hour workweek, calculated at a rate above the employee’s regular hourly rate.  Only the “premium portion” of overtime pay qualifies for the deduction – the “half” portion of “time and a half”.  If an employee’s regular hourly rate is $20.00 and he/she is paid $30.00 per hour for overtime work only $10.00 of the overtime pay qualifies for the deduction.

This is not an itemized deduction.  You can claim the deduction for overtime pay whether or not you itemize your deductions on Schedule A.  For married individuals the deduction is only available if you file a joint return.  This new deduction is not available on “Married Filing Separately” returns.   

The Act does not change the state tax treatment of overtime pay.  Your overtime pay will still be subject to any state income tax and state payroll tax.

So, you could be paying no federal income tax on a portion of your overtime pay.

The amount that qualifies for the overtime pay deduction, and also the tip deduction, does not have to be calculated by the taxpayer, or tax preparer.  The amount of qualified overtime pay or tips will be separately reported on the employee’s Form W-2.

As with the new tip deduction – as a taxpayer and citizen I oppose the deduction for overtime pay as being unfair to W-2 employees who do not receive time and a half pay if they work more than 40 hours in a week.

TTFN

THIS I KNOW TO BE TRUE BEYOND ANY DOUBT

 

Donald J. “The Man Who Would Be King” Trump, the current President of the United States, is a totally worthless piece of garbage, completely devoid of intelligence, competence, character, integrity, honor, humanity, sympathy, and empathy who does not possess a single redeeming positive human quality or value.  He does not care one ounce about anyone or anything but himself and has never performed a single totally unselfish act in his entire adult life. 

Trump is a convicted felon, an indicted traitor who instigated an armed assault on the Capital and stole boxes of top-secret documents for personal use and gain upon leaving office.  A civil court determined Trump to be a rapist.  And he was impeached twice by Congress.

The legacy of the first Trump Presidency was the “legitimization” of racism, bigotry, and white supremacism.  The top priority of the current Trump Presidency is destroying the safeguards and programs that protect the safety, security, health, and finances of Americans.  His only agenda as President is to feed his ego, line his pockets, and gain for himself the total control of government of a medieval monarch.

Today the checks and balances of the separation of power so wisely created in the Constitution by our founding fathers no longer exists.  Trump currently controls all three branches of the federal government.

In our country’s history no one single individual has done more damage to America, the American people, American freedom and democracy, and true American values than Donald J “Little Mushroom” Trump.

The only Americans who could possibly support Trump and his Administration are either morons, racists, without a conscience, or, like Trump himself, someone who is all three.

It is vital for the future of America and Americans that every intelligent and patriotic American vocally and aggressively oppose and denounce Trump and his Administration and work to end his “reign”.

It is equally vital that every intelligent and patriotic American vote against EVERY candidate of today’s Trump-embracing Republican Party in EVERY election for EVERY office at EVERY level in 2025 and 2026.

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 

* More details on the effects of the despicable Trump Administration’s staffing and funding cuts to the IRS from Michael Cohn at ACCOUNTING TODAY –

“IRS reassesses service improvement projects amid layoffs”, 

“IRS enforcement efforts hit by cutbacks”, and 

“IRS workforce reductions accelerate”

From the 3^rd listed article (highlight is mine) –

“The Internal Revenue Service is continuing to shed employees, with over 25% of its workforce now gone since the beginning of the year, according to a new report, and more employees are expected to depart after the Supreme Court cleared the way.”

Government efficiency my arse!  

* Kay Bell continues the conversation in “2026 filing season could be problematic due to cuts in IRS funding and staff” at DON’T MESS WITH TAXES -  

“Finally, the third thing that could make filing season 2026 problematic is that in addition to working with fewer staff, the agency’s overall budget is going to be cut.”

* Kay also tells us “13 sales tax holidays are scheduled for August”.

* There has been much written about Trump’s recent tax cuts (the big but not so beautiful bill) – but what about the new Trump tax?  Alex Durante and Rebecca Walker explain “Trump Tariffs Will Raise the Cost of Food for Americans” at THE TAX FOUNDATION website.

TTFN

NO TAX ON TIPS?

The statement “No Tax on Tips” in relation to the recently passed tax legislation is misleading.

The so-called “One Big Beautiful Act”, signed into law on July 4th, did not exempt all tips from all federal taxes.  The Act created a federal income tax deduction for up to $25,000 in tips received for tax years 2025 through 2028, phased out based on your “Modified” Adjusted Gross Income (MAGI).  For this deduction MAGI is your Adjusted Gross Income plus any exclusion for foreign income or income from Puerto Rico, Guam, American Samoa, and the Northern Mariana Islands.

There is no change to how tips are reported.  Employees must still report tips received to their employer and the employer must still withhold, and match, the 7.65% FICA (Social Security and Medicare) tax and pay FUTA (federal unemployment) tax on the tip income.  Employers received no tax benefit related to tip income in the new law.

As in the past, employers will include tip income in the amount reported as “wages, tips, other compensation” in Box 1 and “Medicare wages and tips” in Box 5 of your 2025 Form W-2.  Tips will be separately reported as “Social Security tips” in Box 7.  Qualified tips will probably also be separately reported in Box 12 or Box 14 (tips that qualify for the deduction may be different from reported “Social Security tips”) and your occupation will probably be reported in Box 14.

And, also as in the past, you will report the amount from Box 1 of all W-2s on Line 1a of your 2025 Form 1040 (or 1040-SR).  What you will now be able to do is claim a deduction for up to $25,000 of qualified tips (as identified on your Form W-2), which reduces your federal net taxable income. 

The amount of the maximum deduction you can claim for qualified tips is reduced by $100 for every $1,000 (or fraction thereof) that your MAGI exceeds $150,000, or $300,000 if you are married and filing a joint return with your spouse. 

Qualified tips are cash or credit card tips voluntarily paid by the customer or distributed through tip-sharing arrangements for voluntary tips.  Mandatory service charges or automatic gratuities for large parties do not qualify.  Only tips received in “an occupation that customarily and regularly received tips on or before December 31, 2024” qualify for the deduction.  The IRS will be issuing a list of qualified occupations by October 2nd – but restaurant and tavern and hotel and motel service staff will certainly be on the list.  Tips you report on Form 4137 (Social Security and Medicare Tax on Unreported Tip Income) may also qualify for the deduction.

This is not an itemized deduction.  You can claim the deduction for tips whether or not you itemize your deductions on Schedule A.  For married individuals the deduction is only available if you file a joint return.  This new deduction is not available on “Married Filing Separately” returns.  It appears the $25,000 maximum is per return and not per taxpayer.

The Act does not change the state tax treatment of tip income.  Your tips will still be subject to any state income tax and state payroll tax.

So, you could be paying no federal income tax on your tips.

My personal opinion –

As I have posted in the past, from a financial, economic, and “tax fairness” point of view the “No Tax on Tips” and “No Tax on Overtime” deductions make absolutely no sense. 

Tip and overtime income is W-2 earned income.  Why do restaurant and tavern and hotel and motel service employees deserve a special tax deduction and secretaries and clerks do not?

Promises of these new special deductions were “gimmicks” that were used to “buy” votes in the 2024 Presidential election – made by a candidate known for not keeping his campaign promises.  I am truly surprised that these promises were actually made law. 

To be honest, when Trump proposed especially the “no tax on tips” deduction I very seriously believe he intended a total exemption from all federal tax on tip income – including an exemption from payroll taxes.  In such a case the big winner would not be tipped employees but resort owners like Trump who hire tipped employees – allowing Trump and friends to save millions on the FICA tax match.  But if federal payroll taxes were exempt the beneficiary tipped employees would lose out in the long run from reduced Social Security income at retirement.  Thankfully the tax writers created a federal income tax deduction – and did not make any changes to how tips are reported by employers and kept the FICA employee withholding and employer match.

If Congresscritters believed low-income employees deserved a tax break it should have created a deduction for all service employees (i.e. not professional employees) with a MAGI phase-out.

TTFN 

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 

* The NSTP BLOG warns “Beware of Offer in Compromise Mills” –

“Offer in compromise mills aggressively promote offers in compromise in misleading ways to people who clearly do not meet the qualifications, often costing taxpayers thousands of dollars.” 

* “Taxgirl” Kelly Phillips Erb provides “Answers To Your Individual Tax Questions About The One Big Beautiful Bill Act” at her FORBES.COM blog.  This is a paid subscription site – so you may or may not be able to access this post.

* For more on OBBBA, Kate Schubel suggests we “Save More with Tax Credits for Energy-Efficient Home Improvements While You Still Can” at KIPLINGER.COM (highlight is hers) -

“If you're planning a few home improvements that will boost the energy efficiency of your house, you'll want to call your contractor soon.

A new GOP tax bill known as the ‘One Big Beautiful Bill’ (OBBB) ends a slew of tax provisions for many ‘clean energy’ tax incentives, including the electric vehicle tax credit, a tax break for home EV charging equipment, and yes, those for energy-efficient home improvements.

In other words, several ‘green energy’ tax incentives are coming to an end.”

* In an earlier BUZZ I quoted ACCOUNTING TODAY editor Dan Hill as suggesting now was a good time to cheat on taxes.

Well Michael Cohn reinforces this idea, reporting “IRS high-income taxpayer audits in doubt after layoffs", also at ACCOUNTING TODAY -

“The Internal Revenue Service's plan under the Biden administration to audit high-income taxpayers appears less likely after staffing and budget cuts under the Trump administration, according to a new report.”

* According to an item in the latest TAXBOOK News email, National Taxpayer Advocate Erin M. Collins’ recent Fiscal Year 2026 Objectives Report to Congress indicates she is worried about the Trump Administration’s reduction in IRS staffing (highlights are mine) -

“Collins warned that without improved technology in place, IRS staffing cuts could jeopardize the success of next year’s filing season. To deliver a successful filing season, the IRS needs a sufficient number of trained employees to program its processing systems, develop and disseminate timely and clear guidance on tax law changes, answer telephone calls and process correspondence, among other things. 

Between the start of the 2025 filing season and June, the IRS workforce decreased from about 102,000 employees to fewer than 76,000, a drop of about 26% (after taking into account employees who accepted an early resignation offer but will remain on rolls through September 30).” 

* The NTA’s report also includes the following statistics on the 2025 filing season (for 2024 returns) –

“Individual Returns Received 140,633,000

Individual Returns Processed 138,057,000

Refunds Issued 86,021,000

Average Refund Amount $2,942

Refunds Issued by Direct Deposit 81,032,000”

It is good to see the high use of direct deposit.  And we are told “over 95% of processed returns were filed electronically” – so about 5% of returns were still filed manually.

THE LAST WORD

Did you know Trump also suffers from "Chronic Intelligence Insufficiency"?

TTFN

THE NOT SO BEAUTIFUL PART OF OBBA

 

The big but not so beautiful bill continues to increase the unfairness and complexity of the Tax Code.

As I said in an earlier post, the deduction for tip income and overtime pay is just plain stupid and makes no logical sense.  Tip income and overtime pay is earned W-2 income.  Why should these types of W-2 income be deductible (exempt from federal income tax) and not other W-2 income.  Why do waitresses, for example, deserve a deduction not available to secretaries or clerks?  Truly unfair.

FYI – I have always said the $300 above the line educator deduction is also unfair.  Why just teachers and not also police, fire fighters, EMTs, nurses, and other municipal employees who also incur unreimbursed out of pocket expenses.

“No tax on tips” and “no tax on overtime pay” were basically election-year “gimmicks” used by Trump to buy votes.  To be honest, I am surprised that these promises are actually being honored via legislation – Trump has already been elected President and cannot run again.

At least making the “no tax on tips” and “no tax on overtime pay” deductions at the 1040 level and not reductions at the payroll tax filing level does not screw applicable employees out of eventual Social Security benefits and apparently does not affect the available Earned Income Credit.

The reduction of gambling losses available for deduction against gambling winnings to 90% of the total losses also makes no logical sense.  It will increase the amount of “non-income” being taxed by casual casino and lottery gamblers and increase the unfairness of how gambling activity is taxed (see my post “TAXES AIN’T FAIR”).

Much of the complexity in the Tax Code comes from the erroneous distribution of government social welfare benefits through the tax return and the variety of phase-outs and reductions of deductions and credits based on AGI or Modified AGI (MAGI).  The OBBA contains continuation of and additions to these areas of complexity – especially with many additional AGI/MAGI phase-outs and calculations.

It will clearly take tax professionals more time to prepare returns, and they will need more extensive education on and research of the new items, for 2025 and beyond, and will therefore increase the cost of tax preparation as well as the potential for error and fraud.

TTFN