IS A PUZZLEMENT!

 

As a “senior citizen” (age 65 or older) I am entitled to the new $6,000 “Senior Deduction” on my 2025 Form 1040-SR.  Married seniors are entitled to a maximum deduction of $12,000 on a joint return (the deduction is not allowed if you are filing separately).

The deduction is phased out at 6% of the amount MAGI (AGI plus foreign income excluded) exceeds $75,000 for unmarried filers or $150,000 if married filing a joint return.

So, if a single filer has a MAGI of $80,000 his/her deduction is reduced by $300 ($5,000 x 6%).  He/she can deduct $5,700.

Looking at a real-life example, one would think that a married couple, both of whom are seniors, with a MAGI of $322,030 would reduce the allowable deduction by $10,322 ($172,030 x 6%) and be able to claim $1,678 ($12,000 less $10,322).  But that is not the case.

If you follow the form – Schedule 1-A Part V – the couple gets no Senior Deduction.

Line 31 – Enter the amount from Line 3 (MAGI)             322,030

Line 32 – Enter 150,000 if married filing jointly              150,000

Line 33 – Subtract 32 from 31                                      172,030

Line 34 – Multiply line 33 x 6%                                       10,322

Line 35 – Subtract line 34 from $6,000                      0

For some strange reason the phase-out amount is subtracted from $6,000 and not $12,000.  If there had been a positive number on Line 35 it would have been doubled to get the total allowable deduction.  So, this married couple is screwed out of a $1,678 deduction.

I have no idea why the calculation is done this way.  Is this what Congress intended?  But then the members of Congress who voted on this new tax deduction never actually read the bill but - they voted as they were told to by their Party.

Is a puzzlement. 

TTFN

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 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

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 

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

THE BIG BUT NOT SO BEAUTIFUL BILL (aka GOP TAX ACT 2)

 

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 -

* 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.

* 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. 

* 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.

* 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.

* 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.

* Restores the itemized deduction for mortgage insurance premiums (PMI) as qualified residence interest beginning in 2026.

* Allows only 90% of gambling losses to be deductible, to the extent of reported gambling winnings, beginning in 2026.

* 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).

* Reduces the total amount of itemized deductions allowed for taxpayers in the 37% tax beginning in 2026.

* 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.

* 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.

* 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).

* Increases the Section 199a “Qualified Business Income” deduction from 20% to 23%.

* 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.

* 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.

* 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.

* 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.

* 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