What You Need to Know About the New Tax Bill

President Trump signed his new tax bill earlier this month, during a July 4th ceremony. Whether you love it or hate it, this is now the law of the land. It’s time to put aside the debate and start to look at how this bill will impact taxes for middle-income families over the next few years.

Headlines have largely focused on the bill’s permanent tax breaks for corporations and high earners as well as its steep reductions in Medicaid. These are all politically questionable aspects of the tax bill. Up to $1 trillion could be cut from Medicaid in the next decade, scheduled to take effect gradually starting in 2026, which many have pointed out is convenient timing for Republicans facing mid-term elections. Regardless of these potentially hazardous components of the bill, several of its key provisions may be beneficial for middle-class households.

The bill locks in the lower 2018 tax brackets from Trump’s first term’s Tax Cuts and Jobs Act that were to sunset in 2025. That offers some predictability, along with a few modest perks aimed at families and retirees.

Changes to the SALT Deduction

One of the most notable changes is the temporary expansion of the state and local tax (SALT) deduction. Starting in tax year 2025, the deduction cap will increase from $10,000 to $40,000 for households earning up to $500,000. This may be a welcome change for taxpayers in higher-tax states such as Massachusetts and New York, especially for homeowners who pay substantial property taxes. Note that the tax relief is temporary as the increased cap is set to drop back to $10,000 in 2030.

Care for some salt? (Image created with ChatGPT4o)

For many middle-income households, the question is whether the expanded SALT deduction will be worth tracking. It is estimated that in 2024, about 9 in 10 taxpayers took the standard deduction, which was raised substantially in the previous tax legislation (Tax Cuts and Jobs Act in 2017). For single taxpayers, the 2025 standard deduction will rise to $15,750, and for married couples filing jointly, $31,500.

The new SALT deduction will only help if the total of all itemized deductions is greater than these amounts. The benefit of itemizing may be marginal if total itemized deductions are only slightly above the standard deduction.

For example, if your state and local taxes total $20,000, home mortgage interest is $10,000, and charitable contributions are $3,000, you would have an itemized deduction of $33,000. That’s better than the standard deduction, but only marginally better for a married-filing-jointly household. In this example, the relative tax benefit of the increased SALT deduction is small--$1,500 ($33,000 - $31,500).

Nevertheless, it may be time to dust off your spreadsheet app or check in with your tax preparer. Keeping track of your deductible expenses such as state income taxes, property taxes, mortgage interest, charitable contributions, and a new deduction for car loan interest can determine whether itemizing makes sense again for the next few years. But for middle-income families who don’t have significant deductions, the change may not move the needle.

Charitable Gifts

The new bill increases charitable contribution deductions for taxpayers who do not itemize their deductions. The law allows both single and married-filing-jointly taxpayers to deduct up to $1,000 and $2,000, respectively, as an above-the-line deduction for cash contributions made during the year. This should be beneficial for most taxpayers who still won’t be itemizing deductions. It will also hopefully provide a small increase in giving to charities reliant on smaller cash contributions.

Conversely, there was also a small negative adjustment to charitable giving in the bill. Those who itemize starting in tax year 2026 will be able to deduct only charitable contributions that exceed 0.5 percent of their adjusted gross income (AGI). This means if your AGI is $100,000, you will only be able to deduct the portion of your charitable gifts above $500 (0.5 percent of $100,000).

Perks for Families and Seniors

The bill aims to provide some additional tax relief for young families. It increases the Child Tax Credit from $2,000 to $2,200 per child. This amount was only $1,000 prior to the Tax Cuts and Jobs Act in 2017.

In a nod to future savers, the bill also introduces what the administration calls “Trump Accounts”—a type of seed investment fund that would grant $1,000 to each newborn child between 2025 and 2028. These accounts could give young families a small but meaningful financial head start, particularly if the funds can grow tax-free for future education or home purchases.

Low and middle-income seniors also get a break as the standard deduction for those over 65 increases by $6,000 below certain income thresholds ($75k AGI for single and $150k for married filing jointly). This is what the administration meant when it said it would reduce taxes on Social Security. While this is not a direct reduction of taxes on Social Security, it effectively reduces or eliminates the taxes paid on Social Security for some low and middle-income retirees.

Tips and Overtime

The new bill aims to fulfill a Trump campaign pledge to reduce taxes on tips and overtime. The law allows eligible workers to deduct up to $25,000 in reported tip income from their federal taxable income. That portion of their tips won't be subject to federal income tax. Eligible workers include workers in occupations that traditionally and customarily receive tips, as determined by the U.S. Treasury Department and the IRS. This includes servers, bartenders, and hair stylists. The new rule applies in tax years 2025 through 2028. The deduction is phased out for higher-income taxpayers. Note that tips will still be subject to payroll taxes and state and local taxes.

The new law also includes an above-the-line deduction for qualified overtime compensation of up to $12,500 per taxpayer, subject to the same income limitations as the deduction for tip income. This provision is also scheduled to expire after 2028.

Something for the Rest of Us

Although many of the benefits of this bill accrue to corporations and high-income taxpayers, there are still some perks for us regular folks. In the short term, this law offers modest tax relief to families who track their deductions. It will be important to track expenses carefully and stay informed about eligibility requirements.

Now is a good time to reevaluate whether you might benefit from itemizing in 2025 and beyond. Take time this fall to meet with a tax advisor and review your projected credits and deductions. It may not be life-changing for most people, but the new tax bill offers a little something for many taxpayers.