We have a new bill coming out of Washington dealing with cutting taxes, investing for a newborn, cuts to specific programs and plenty more. Is it good? Is it bad? Who are the winners and who are the losers? It probably comes down to your perspective and possibly your political tilt. Let's dig in and identify the facts and see how you can use this bill to improve your finances going forward.
The federal income tax brackets have been made permanent (until Congress changes them again in the future). The brackets were set to revert back to the higher rates starting in 2026, but this bill stops that. This means more money going into the workers pocket and less or more going to government based on how you interpret the data. The laffer curve is something to learn about.
There are new tax cuts in the bill and there are temporary cuts running from 2025 thru 2028. A permanent change happening immediately is adding $750 for single people and $1,500 for married filing a joint return to the standard deduction. This takes the standard deduction to $15,750 for singles and $31,500 for joint filers for 2025. We then move to the temporary cuts, which will go away in 2029 unless a new bill changes that.
The first $25,000 of tips and first $12,500 in overtime pay will be tax free for singles who earn less than $150,000 or couples who earn less than $300,000. They go away in 2029. The SALT tax write-off (state and local taxes) goes up to $40,000 and then drops back down to $10,000 in 2029. That will help upper income folks in high tax states. New car buyers can deduct $10,000 for an "American made car" thru 2028.
American made has a lot of rules and there are income limitations that phase out or eliminate the deduction. You do not have to itemize to get the deduction. Read about all the rules here. I have concerns. I fear the unintended consequences involve more people buying more expensive vehicles that they cannot afford, adding more debt to their family balance sheet. It should be a boom for the auto companies.
Those 65 this year and thru 2028 will have an extra $6,000 deduction. That deduction is phased out if you make over $75,000 single and $150,000 for a couple. This was added in to minimize the taxes on Social Security for lower income seniors. They did not to make Social Security not taxable, but it eliminated most people from paying taxes on the benefit. It is estimated only 12% of people will pay tax on their benefit.
You can now pass $15 Million to your heirs tax free. That has been made permanent. It would have reverted to $7 Million without the new bill. People with high net worths will be happy about this. You can still gift $19,000 per person in 2025 without reporting on your tax return. It increased the child tax credit of $2,200 (child must be under 17). This gets phased out if you make $200,000/$400,000 (single/married).
The government will fund a brokerage account for kids with $1,000. They must be born in 2025 thru 2028. There are still many questions on these accounts. It is expected to be available in July 2026. Parents and others (including employer) can fund the accounts up to certain amounts per year. It must be invested in a stock index fund (waiting to hear more on this). It must stay in there until age 18.
There is more. Parents and/or others can put in a total of $5,000 per year into these accounts until age 18. An employer can put in $2,500 per year. There are no income limits. The money will grow tax deferred and can come out tax free after age 18 for many different events like college, a down payment, etc. Employer earnings may have a capital gains attached to them. Parent earnings are tax free.
The Trump account is a bit messy, but for the most part, I like it. About 40% of people do not invest in the stock market. This should help reduce that number. The requirement for an index fund keeps Wall Street away. That is good. Getting started very early is wonderful. Tax deferral and tax free is great. Continued contributions are ideal. Continued education on investing is needed. Stay tuned.
Up to $5,000 in tax credits for families who choose private schools or homeschooling was added to the bill. There are income limitations. I am generally in favor with giving people more options so a child is not stuck in a rotten school, but as always, there can be unintended consequences. How this will affect public schools? How will the schooling be for those who opt out of public schools?.
The new bill repeals the $7,500 tax credit for electric vehicles starting on September 30th, 2025. This will certainly reduce the amount of electric vehicles sold after that date. My intuition tells me hybrid vehicles will become the predominate vehicle sold over the next decade as gas only vehicles gradually goes away. Within 20 years, I would expect to see electric vehicles improve and overtake hybrid with longer battery life.
There are organizations and large sectors of the economy that will benefit or suffer based on many applications of this bill. As always, there will be winners and losers. You may like most of the bill or believe it is poorly constructed. At the end of the day, it is law and it is up to you and me to identify the new rules and make the best decisions with our money based on the new world we live in.
You can see more details on the bill by going here. This is where I ask you to focus on how to improve your situation with this new bill. Complaining will get you nowhere. Take the time to understand the information as best you can and then take the needed action in your life today to enhance your future life and the lives of others. Focus on what you can control and let go of what you can't. Onward!
