One Big Pile of...Stuff

This is a tax post.

The one big beautiful bill, otherwise known as HR 1, has passed. It's a bad bill. Its harms most Americans and thoroughly takes from you to give to the wealthy.

What it comes down to, is what happens next, especially for you?

This is not meant to be comprehensive. Most agencies, such as Treasury, need to digest the bill and decide what it means. How will provisions be interpreted? How will it look for you and for me?

Let's look at some of the most popular provisions.

Something to know before we get started is how income is taxed.

1. You report all your income. This is called total income.
2. You can potentially put some deductions against it, such as the educator deduction or IRA deduction. This leads to your adjusted gross income, or AGI.
3. After your AGI, there is either your standard or itemized deduction. That leads to taxable income.
4. Your taxable income is what is looked at in a tax table to find your tax.

No Tax on Tips

That means you can change your W4 (withholding form) right?

Incorrect.

There are three to five ways in which tax is taken out of your paycheck.

1. Federal income tax
2. State Income tax
3. FICA taxes--Social Security and Medicare
4. Local taxes
5. Any other special provisions

When tips are reported, they are subject to FICA taxes. Your W4 is federal withholding. So yes, every time you report tips, your FICA taxes will be withheld on every paycheck. The deduction relates to your annual filing, or federal income tax.

At tax time, you may be able to take up to $25,000 off your taxable income. That means, if you look above, after your AGI is determined, you get your standard deduction (or itemized), and then a tip deduction.

This is not a paycheck deduction. Its a tax return deduction. Of course, speak to your tax pro, but I wouldn't run out and change your W4.

Now, we don't know how this will affect credits such as child tax credit or earned income tax credit. This is what Treasury needs to figure out.

Additionally, it must be traditionally taxed income. If you're a W2 earner working at Barnes and Noble, you can't decide all your income is tipped to receive this deduction. It does apply to self-employed individuals. Again, we'll see how this shakes out, and hopefully soon as it is supposed to be for 2025 returns (money you earn now that you will report next year).

This provision will expire in 2028.

This is only for the feds, not for a state return. States will need to announce if they conform.

No Tax on Overtime

Same as the tips one, it is a temporary provision up to $12,500 for single, $25,000 for married filing jointly taxpayers. It will reduce taxable income, not AGI, and only on a certain part of the overtime.

Amanda is a clerk. She makes $20/hr as base pay. When she gets OT, she receives $30/hr, a $10/hr difference. Only the amount earned at that $10/hr difference is subject to the deduction. Not the full overtime amount.

So if she works 10 hours of overtime, her overtime totaled wages are $300. But the only amount potentially deductible is $100 ($10 over her base pay x 10 hours of OT). Her taxable income would be reduced by $100.

This phases out (meaning is reduced until 0) if your income exceeds $150,000 0r $300,000 married filing jointly. And it can only be taken by individuals with a valid SSN.

This is only for the federal return. We need to see if states follow.

No Tax on Social Security

This one gets my goat, especially as the Social Security Administration emailed out a total misrepresenting explainer.

This bill does not change Social Security taxation at all. You can, potentially still pay taxes on Social Security pension, all things considered. You will want to talk to your tax pro about this.

This is simply an additional $6,000 deduction for individuals 65 and older. You don't even need to receive Social Security to take advantage of it.

Kelly is 67 and works part time at CVS. She earns $30k in wages and takes her Social Security, of which 85% is taxable (let's say 15k). Her total income is 45k.

Her income is first reduced by her status, lets say, single. So by 15k back down to 30k.

Then she'll get an extra 6k deduction on top of that, reducing her taxable income to 24k. She is still at the 12% tax bracket. Her tax is now $1600 instead of $2200. That can be a big difference, especially for working seniors (I did it on my mom's return and she saves about $500 in tax.)

However, it begins to phase out at $75k for single people, and $150k for married couples. For some older couples, depending on how the stock market does and their other income streams, the difference could be minimal.

It does not, no matter what this admin says, end tax on Social Security. It's also temporary, expiring in 2028 so if you turn 65 in 2029, you're outta luck.

States may not follow. Some states, like California, don't tax Social Security but other states, like Ohio, do.

Caveats

This is my understanding of the tax bill. It agrees with what we are seeing with Tax Girl and Journal of Accountancy. If I learned one thing during the PPP wildness, its that interpretation matter a lot; we may decide the bill says something, but the interpreting agency can go a different direction. So we will see how Treasury decides these should be implemented.

This bill is a terrible bill. It's going to ruin Medicaid for people. It's stripping away provisions to protect the environment. It raises federal debt. It's a trap for any potential future non GOP president as many provisions expire in 2028.

Further, the spending cuts are front loaded while the cuts are back loaded. You may see a reduction in taxes this year. But the Medicaid cuts don't hit until much later--you may forget your ire with Trump by then. Finally, because of Trump's fluctuating tariffs, and the need for states to raise taxes somewhat to offset loss of federal income.

This means that, for about 80% of American taxpayers, these increases offset any tax benefits, resulting in a net negative.

And its ICE provisions are horrific.

There's more to the bill, but I wanted this explainer to go out to address some of the misleading news out there. As always, your tax mileage may vary. But I'd give your tax pro a couple of weeks before reaching out as most classes on it won't be ready until about the end of the 2nd week of July.