Trump's Big Beautiful Bill and Your Taxes

You may have heard about this bill and are still wondering what it is all about.  Well, here, in abbreviated form, are the new deductions for changes beginning with the 2025 tax return. It is important to note that all of these new changes are for the tax years 2025 through 2028, which basically means they have a sundown clause and may revert to the old rules after 2028 if not extended. We will not know about that change until we hear about the 2029 tax return.

Employees and self-employed individuals may deduct qualified tips received in occupations listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024, and that are reported on a Form W-2, Form 1099, or other specified statement furnished to the individual or reported directly by the individual on Form 4137. That form is used to calculate Social Security and Medicare tax on Unreported Tip Income.  “Qualified tips” are voluntary cash or charged tips received from customers or through tip sharing.  Maximum annual deduction is $25,000; for self-employed, deduction may not exceed the individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned. Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers)

Deduction is available for both itemizing and non-itemizing taxpayers. Taxpayers must include their Social Security number on the return and file jointly if married, to claim the deduction.

There are some requirements for employers and other payors included in the documentation, but that will be left out of this article. And the IRS is required to publish a list of occupations that “customarily and regularly” receive tips on or before December 31, 2024.  The assumption is that if your occupation is not on the published list and you do receive tips, you will not be able to exclude them from your income tax return.

Individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay (such as the “half” portion of “time-and-a-half” compensation) that is required by the Fair Labor Standards Act (FLSA) and reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.  Maximum annual deduction is $12,500 ($25,000 for joint filers). Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).  Maximum annual deduction is $12,500 ($25,000 for joint filers). Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

Individuals may deduct interest paid on a loan used to purchase a qualified vehicle, provided the vehicle is purchased for personal use and meets other eligibility criteria. (Lease payments do not qualify.)  Maximum annual deduction is $10,000; Deduction phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers).
To qualify for the deduction, the interest must be paid on a loan that originated after December 31, 2024.  Used to purchase a vehicle originally used by the taxpayer (used vehicles do not qualify) for a personal use vehicle (not for business or commercial use) and secured by a lien on the vehicle.

If a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount is generally eligible for the deduction.
A qualified vehicle is a car, minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds, and that has undergone final assembly in the United States.

To determine if a vehicle had final assembly in the U.S., check one of these.  The information label attached to the vehicle on a dealer’s premises; the vehicle identification number (VIN); The National Highway Traffic Safety Administration (NHTSA) VIN Decoder
Deduction is available for both itemizing and non-itemizing taxpayers. The taxpayer must include the vehicle identification number (VIN) of the vehicle on the tax return for any year when the deduction is claimed.

Lenders or other recipients of qualified interest must file information returns with the IRS and furnish statements to taxpayers showing the total amount of interest received during the taxable year.

The IRS will provide transition relief for tax year 2025 for interest recipients subject to the new reporting requirements.
 Individuals who are age 65 and older may claim an additional deduction of $6,000. This new deduction is in addition to the current additional standard deduction for seniors under existing law.  The $6,000 senior deduction is per eligible individual (or $12,000 total for a married couple where both spouses qualify).  Deduction phases out for taxpayers with modified adjusted gross income over $75,000 ($150,000 for joint filers).  The taxpayer must attain age 65 on or before the last day of the taxable year.
Deduction is available for both itemizing and non-itemizing taxpayers.

Taxpayers must include the Social Security number of the qualifying individual(s) on the return; File jointly, if married, to claim the deduction. Trump’s Big Beautiful Bill and Your Taxes.

The next reader, MM from Eagle, asked about selling an investment property and claiming the gain on the tax return.  The solution here is simple, or as complicated as it may be.

As a preparer, my first question is what kind of investment property was sold?  Was it blank land, land with a residence on it, or was it commercial property?  Why do I ask this question?  Well, it is because of the formula used to calculate the capital gain or loss. And the formula is as follows.  Part A: add the purchase price plus the cost to purchase plus the improvement costs not previously deducted on a tax return, minus any depreciation taken, equals the Adjusted Purchase Price.  Part B, Sales price minus any cost of sale, equals the adjusted sales price.  Now, to get the capital gain or loss, subtract Part A from Part B.

Back to that question of what kind of property it was.  The adjustment for improvement costs reduces the gain.  Let me give you an example.  Assume the property is a Single single-family residence not held as a rental, it was a vacation property sold by the taxpayer.  The purchase price was $100, 000 and the cost to purchase was $3,500. During the years that the seller held the property, he made improvements that cost him $35,000, and he did not depreciate the property. So the Part A amount in this formula is $138,500, the total of all of the costs.  He sold the property for $175,000; his cost to sell (escrow costs) was $13,125. So his Part B amount is $161,875.  Now, subtract Part A from Part B, and you get $23,375.  This is a gain reportable on the tax return.

With regard to the improvements issue, I have asked clients for the amount they spent on improvements, they stare at the ceiling and give me a number.  Now I know, and so do they, that that number was a guess.  So, I will tell them to go home and search their documents for a better, accurate number.  If they do not have documents, they generally remember what was done and by whom. I will have them call the contractor and get a duplicate invoice.  They will need those in the event of an audit anyway.

One other similar situation of gain included in the tax return was from investments in stockbrokerages.  Those companies, not unlike Prudential or J P Morgan, publish an annual consolidated Form 1099 reporting gains and losses on interest income, dividend income, and the sale of stocks. My reader, the taxpayer, JR in Kuna, wrote, he forgot to add the sale of the stock to his income, and the IRS sent him a letter saying he owed tax on the whole gain of $27,555.  He wanted to know if that was correct.  My answer?  No, it was not.  The IRS typically forgets to subtract what we, in the business, call the basis.  That figure is printed on the consolidated 1099 from the Brokerage, but the IRS ignores that number and just sends a letter based on the tax calculated on the gross sales price.  The basis is generally the cost you paid to purchase the stock. JR’s question was, How do I correct that amount?  Amend the return, was my answer.  Include the gain AND the basis, calculate a lower taxable amount due, and pay it.  Even paying it with the amended return will not abate penalty assessments and interest.  And don’t forget, if you live in a state that has a state tax, you should amend for the state as well.