WASHINGTON — Americans are poised for sweeping changes when they file their taxes — with President Trump hopeful that the reforms will spur economic growth and tamp down broad public pessimism going into the November midterm elections.
“2025 is setting the table. The feast and the banquet will be in 2026,” Treasury Secretary Scott Bessent argued this month.
Consumer spending accounts for about 70% of the country’s gross domestic product, meaning that more take-home money could increase spending and economic growth.
The nonpartisan Tax Foundation estimates that average after-tax pay will increase by 5.4% as a result of the changes, which could accelerate already booming spending on goods and services.
In the third quarter of 2025, US GDP grew at a surprisingly strong 4.3% annual rate — with an increase in consumer spending accounting for more than half of that growth.
The major tax changes were approved in Trump’s “One Big Beautiful Bill Act,” which he signed on the Fourth of July after strong-arming Republicans to cram his signature campaign promises into a single piece of legislation passed under special rules with no Democratic support.
The legislation’s impact will be felt beginning early this year as taxpayers secure refunds due to its provisions, which apply to the 2025 tax year.
The changes will be felt most heavily by upper-middle income workers in the 60-80% percentiles, who will see a 6.3% boost in after-tax pay, and least so among the bottom 20% of earners, whose income will increase about 2.6%, according to the Tax Foundation.
The law maintained lower individual and business tax rates in Trump’s 2017 tax reform, continued business provisions allowing for 100% write-offs for depreciation, boosted expensing amounts for new equipment, and kept perks for investments in lower-income “opportunity zones.”
The yet-to-be-seen impact of the tax law comes at a moment of political peril for Trump, who could spend the final two years of his presidency blocked and investigated by Congress if Republicans lose the congressional elections in November.
Although the economy is growing and inflation fell to an annual 2.7% in November, Democrats trounced Republicans in off-year elections in New Jersey, Virginia and New York City campaigning on “affordability” and 55.5% of Americans disapprove of Trump’s job on the economy, according to the RealClearPolitics average of recent polls.
SALT cap increasing to $40K
One of the biggest changes will increasing the state and local tax cap to $40,000 — up from the much lower $10,000 rate under the 2017 tax law.
This could amount to hundreds or thousands of dollars in savings to middle-class people in high-tax jurisdictions like California and New York.
Tax filers who choose the SALT deduction must forgo the standard deduction — which the new law raises by $750 for tax-year 2025 to $15,750 for single filers, by $1,500 to $31,500 for married couples and by $1,125 to $23,625 for heads of households with dependents.
If a tax-filer has paid more than the standard deduction on state and local income, property and sales taxes, they can take advantage of the much higher SALT cap.
For example, if a single filer has paid $6,000 in property taxes and $12,000 in state income tax, they would be able to deduct an additional $2,250 — or more if they saved receipts from purchases.
No tax on tips
Trump’s pledge to eliminate taxes on tips — which he says was inspired by an unidentified Las Vegas waitress — will have a significant impact on waiters, bartenders, casino dealers, hairdressers, entertainers, strippers and tour guides.
Tips, which in many cases are paid electronically and therefore easily tracked by the government, will be exempt from taxation up to $25,000 per individual, meaning a potential windfall for beneficiaries.
The new tax break phases out for taxpayers with a modified adjusted gross income above $150,000 or $300,000 for married joint filers, according to Treasury Department guidance.
A Bipartisan Policy Center interactive chart demonstrates how the phase-out works — with gradual reductions in the max deduction for filers earning above the threshold.
Under the phase-out, a single filer with a modified adjusted gross income of $200,000 would remain eligible to deduct $20,000 in tips.
No tax on overtime
Trump’s campaign pledge to slash taxes on workers paid overtime also is poised to boost tax refunds — allowing office workers, tradesmen, police and others to significantly lower their tax bills.
The bill allows deductions for the “premium portion” of overtime pay — meaning that if a worker is paid time-and-a-half for working more than 40 hours in a week, the additional 50% hourly rate is deductible.
That means that if a worker scored $30,000 in overtime pay last year, they could deduct $10,000 in premium pay from their tax liability, resulting in thousands in savings.
As with tips, there is a limit to the deduction amount and a phase-out for higher incomes.
The maximum deduction is $12,500 for single filers and $25,000 for couples filing jointly.
People with modified adjusted gross income above $150,000 for individuals or $300,000 for married joint filers would have a gradual phase-out.
If workers earn double-time on federal holidays, they will be able to deduct only half the extra pay, according to an AFL-CIO fact sheet, because of the fact that the Fair Labor Standards Act doesn’t mandate double pay.
‘No tax on Social Security’
Another item in Trump’s array of campaign pledges was to eliminate taxes on Social Security benefits. However, due to the special and restrictive legislative process used to pay the Beautiful Bill, Republicans Congress chose to accomplish the goal by indirect means.
Now, seniors are eligible for an additional $6,000 deduction per individual or $12,000 per married couple — which like the tips and overtime policies can be stacked on top of the standard or SALT deductions.
According to the Internal Revenue Service, people eligible for the new deduction “must be age 65 on or before the last day of the tax year” — meaning that they would have had to turn 65 in 2025 in order to claim in the perk in their upcoming tax filings.
“It’s really the middle- and lower-middle-income taxpayers that are going to be seeing the largest benefit from this additional deduction,” Alex Durante, senior economist at the Tax Foundation, told CNBC.
“It does effectively wipe away tax liabilities for most elderly taxpayers.”
A single filer can claim the full $6,000 deduction if their income is up to $75,000 — with a $150,000 rate for couples — and the amount tapers to zero for individual incomes over $175,000, or $250,000 for joint filers, meaning that people who are still working high-paying jobs into their golden years won’t qualify.
Older adults are eligible to receive Social Security retirement benefits as early as 62, though they will earn more if they wait until their full retirement age of about 67, and stand to make even more per month if they delay until age 70, according to the Social Security Administration.
Domestic car loan deduction
Trump marveled as a candidate that nobody had pushed for deductions for car loans — noting that mortgage loan interest is deductible — and the policy was incorporated into the massive tax law.
The policy applies to vehicles assembled in the US — with a max annual deduction of $10,000 in interest per year.
Bloomberg reports that 14 of the 25 most popular new car models in 2024 were assembled in the US; the Bipartisan Policy Center assesses that roughly 4 million of the 7 million vehicles sold that year would have qualified under the policy.
According to the IRS, vehicles that qualify include motorcycles — in addition to sedans, SUVs and pickup trucks.
The deduction serves a dual purpose — with consumers saving money on their tax bill, but also gaining a significant new incentive to buy American-made cars, boosting domestic manufacturing.
Trump last year imposed sweeping 25% tariffs on most foreign-made cars to boost US competitiveness in the high-wage industry, though Canada and Mexico were exempt under the USMCA pact. He later reduced rates to 15% on Japan, South Korea and the European Union, and to 10% on most UK-made cars, in exchange for agreements to break down those countries’ trade barriers.
The Beautiful Bill ended a Biden-era $7,500 tax credit specifically for electric cars, with vehicles purchased after Sept. 30, 2025, no longer eligible.
Charitable deduction
A lesser-known provision in the tax overhaul also could save taxpayers hundreds — by allowing people to claim up to $1,000 per filer in charitable donations, even if they are among the great majority of fliers who chose the standard deduction.
This means that a married couple can write off up to $2,000 in donations to tax-exempt groups, including churches.
In another major innovation, children born between 2025 and 2028 will be given $1,000 in seed funding for new “Trump accounts” that act similarly to 401(k) accounts for retirement.
The funds, into which parents can put up to $5,000 per year, won’t be eligible for withdrawal under the children turn 18 and could help boost the overall stock market.
The Beautiful Bill increases taxes on the endowments of elite colleges, replacing a flat 1.4% tax with a tiered system of up to 8% for schools with more than $2 million in the bank per pupil — which is likely to hit only a handful of institutions, such as Harvard, MIT, Princeton, Stanford and Yale.
There’s also a new 1% tax on remittances sent by immigrants to their home countries and an expansion of a 21% tax on non-profits that pay executives more than $1 million in compensation.
