Today, Optima Tax Relief’s Chief Tax Officer and Lead Tax Attorney, Phil, breaks down three of the most talked-about tax changes in the Big Beautiful Bill and what they could mean for your wallet.
There’s been a lot of buzz around the new tax bill, especially for middle- and low-income taxpayers. While the bill includes several eye-catching provisions, the fine print is very important. Many of the benefits come with income limits, phaseouts, or unclear implementation. If you’re unsure how the changes will affect you, your best bet is to consult a tax professional and wait for formal IRS guidance.
1. Are Tips Taxed Under the Big Beautiful Bill?
It depends. The IRS plans to release a list of jobs where tipping is considered customary. If your job is on that list, you may be eligible to exclude up to $25,000 in tip income from your taxable earnings. That said, if your occupation doesn’t make the cut, you’ll still need to report and pay tax on your tips as usual.
A few things to note:
- This benefit phases out at higher income levels (starting at $150,000 for single filers, $300,000 for joint).
- This exemption does not reduce payroll taxes (Social Security and Medicare) owed on your tips. It only affects your federal income tax liability.
- The deduction is for “qualified tips,” which are voluntary payments from customers. That said, it does not include mandatory service charges, which are treated as wages and subject to regular tax withholding.
- This deduction is temporary and will be in effect from 2025 through 2028.
- You can take this deduction even if you don’t itemize.
2. Is Overtime Taxed Under the Big Beautiful Bill?
Yes, overtime is still taxed under federal law. Your paycheck won’t look any bigger in the moment. But the bill allows qualifying taxpayers to deduct up to $12,500 of overtime income from their taxable income (or up to $25,000 for married filers). This applies to overtime pay earned under the Fair Labor Standards Act (FLSA).
A few more important things to note:
- The deduction covers only the “half‑time premium” portion of your pay. In other words, you can only deduct the “half” in “time-and-a-half.”
- The full deduction is available only to taxpayers with modified AGI below $150,000 (single) or $300,000 (married filing jointly), with a gradual phase-out above those thresholds.
- Overtime wages remain subject to payroll taxes such as Social Security and Medicare.
- The deduction is not available for those using the Married Filing Separately status.
- This deduction is temporary and will be in effect from 2025 through 2028.
- You can take this deduction even if you don’t itemize.
3. Is Social Security Taxed Under the Big Beautiful Bill?
Yes, the Big Beautiful Bill did not eliminate taxes on Social Security. However, if you’re 65 or older, you may qualify for a new $6,000 exemption. This deduction does not eliminate taxes on Social Security benefits, but it can reduce the amount of benefits that are subject to federal income tax by lowering your overall taxable income.
A few more important things to note:
- The deduction begins to phase out at $75,000 MAGI (single filers) and $150,000 (married filers). The deduction is fully phased out at $175,000 and $250,000 respectively.
- This deduction is in addition to the existing extra standard deduction for seniors.
- The deduction is not available for those using the Married Filing Separately status.
- This deduction is temporary and will be in effect from 2025 through 2028.
- You can take this deduction even if you don’t itemize.
Prioritize Your Taxes
These tax changes could save you money, but they don’t erase your current balance. If you already owe, remember that penalties and interest continue to grow until you resolve your tax debt.
If you need tax help, contact us today for a Free Consultation