The recently passed big but not so beautiful bill makes permanent most of the Form 1040 (and 1040-SR) changes enacted in the original GOP Tax Act, with the following enhancements and modifications -
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Allows an “above the line” deduction for up to $25,000 of cash tips received by
taxpayers in “an occupation that customarily and regularly received tips” for
2025 to 2028, phased out for taxpayers with MAGI over $150,000 ($300,000 on
joint returns). The tips must be
separately reported on Form W-2 or on Form 4137 (for unreported tip
income). All
tips are still subject to federal payroll taxes (FICA and FUTA) – this does not
change employer payroll tax filings.
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Allows an “above the line” deduction for up to $12,500 ($25,000 on a joint
return) of “qualified” overtime pay for 2025 to 2028, phased out for taxpayers
with MAGI over $150,000 ($300,000 on joint returns). The amount of qualified overtime pay must be
separately reported on Form W-2. All overtime pay is still subject to federal
payroll taxes (FICA and FUTA) – this does not change employer payroll tax
filings.
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Allows an “above the line” deduction of up to $10,000 in interest on loans used
to purchase a new car, minivan, van, SUV, pick-up truck, or motorcycle
assembled in the United States for 2025 to 2028, phased out for taxpayers with
MAGI over $100,000 ($200,000 on joint returns).
The vehicle must be for personal use, and the loan must be secured by a
first lien on the vehicle. The VIN must
be reported on the tax return. Interest
paid on leased vehicles is not deductible.
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Increases the limit on the itemized deduction for state and local taxes from
$10,000 to $40,000 for 2025 and 2026, and increased by 1% annually from 2027 to
2029, phased down (to $10,000) for taxpayers with modified AGI (MAGI) over
$500,000 ($250,000 on separate returns), increased by
1% each year for 2026 to 2029.
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Creates an exclusion of 0.5% of AGI for the allowable itemized deduction for
charitable contributions (similar to the 7.5% of AGI medical expense exclusion)
beginning in 2026.
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Restores the itemized deduction for mortgage insurance premiums (PMI) as qualified
residence interest beginning in 2026.
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Allows only 90% of gambling losses to be deductible, to the extent of reported
gambling winnings, beginning in 2026.
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Removes unreimbursed employee business expenses of educators (those eligible
for the $300 Adjustment to Income deduction) from the list of Miscellaneous itemized
deductions subject to the 2% of AGI exclusion that are now permanently no
longer deductible and expands the expenses available for deduction, and persons
eligible, beginning in 2026. It is
unclear whether qualified expenses in excess of the $300 educator deduction
will be allowed as a Miscellaneous deduction on Schedule A (not subject to any
AGI exclusion).
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Reduces the total amount of itemized deductions allowed for taxpayers in the
37% tax beginning in 2026.
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Increases the 2025 Standard Deduction to $31,500 for joint filers, $23,625 for
head of household, and $15,750 for single and separate filers, adjusted for inflation
thereafter.
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Creates a deduction of $1,000 per taxpayer ($2,000 on joint returns) for cash
contributions to qualified charities made during the year for taxpayers who do
not itemize deductions on Schedule A beginning in 2026.
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Creates a deduction of $6,000 for every taxpayer age 65 and older ($12,000 on a
joint return) for 2025 to 2028, available whether or not the taxpayer itemizes
deductions on Schedule A, phased out for taxpayers with MAGI of over $75,000
($150,000 on joint returns).
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Increases the Section 199a “Qualified Business Income” deduction from 20% to
23%.
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Increases the Child Tax Credit from $2,000 to $2,200, the amount indexed for
inflation in subsequent years and makes permanent and indexes for inflation
the $1,400 refundable maximum.
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Increases the maximum credit for qualified child and dependent care expenses
from 35% to 50% and modifies the phase-down of the credit percentage to 20% beginning
in 2026.
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Increases the maximum allowable annual distribution from a Section 529
Qualified Tuition Program used for elementary and secondary education costs from
$10,000 to $20,000 beginning in 2026 and expands qualified post-secondary
education costs to include costs related to “obtaining industry-recognized
post-secondary credentials” beginning with distributions made after July 4,
2025.
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Increases the annual limit for employee contributions to an employer-provided
dependent care assistance flexible spending account from $5,000 to $7,500
beginning in 2026.
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Requires all taxpayers who receive excess advance premium tax credits to
repay the entire amount of the overpayment, regardless of their level of income,
beginning in 2026.
Married
taxpayers must file a joint return to claim the new deductions for
seniors, tip income, and overtime pay. For
married retired senior NJ residents who saw substantial state tax savings from
filing separate returns in the past, the new $6,000 per senior deduction, not
available on separate returns, means they will probably be filing joint returns
for 2025 through 2028.
The
Act also creates despicably named “Trump Accounts” (an example of equally
despicable Republicans kissing the moron wannabe king’s ring and arse) for
children, based on a concept originally proposed by Hillary Clinton in 2007
(see my post “Where Have I Heard That Before”).
These accounts do not affect the 2025 income tax return as contributions
are not deductible. I will be posting in
more detail about this good but truly deplorably named account in the
future.
Continuing with the Trump and
Republican war on progress and disregard for the environment the Act repeals the
energy credits, but most are still available for tax year 2025 purchases.
There are additional changes to unique
and obscure tax situations included in the Act that are not discussed here.
The
Act continues the erroneous practice of using the Tax Code to distribute the
benefits of government social welfare programs and continues to add complexity
to the Code with its multiple phase-out calculations.
Hopefully
for the future of American democracy (and I mean that very sincerely) the
Democrats will take control of both houses of Congress by a comfortable margin
in the 2026 mid-term elections – so there may be substantial tax legislation
passed in 2027 which will make changes to much of what is discussed above.
TTFN
