Good morning & happy Monday!
“Elections should be held on April 16th – the day after we pay our income taxes. That is one of the few things that might discourage politicians from being big spenders.”
– Thomas Sowell, American economist
Well, I know we had such a good time last week outlining the new “Big Beautiful Bill” that I thought we would continue today. 😉 As outlined last week, this is a massive piece of legislation that will affect every person reading this memo.
One of the really interesting things about this bill is how some of its effects are retroactive to January 1, 2025. This is very rare, usually legislation is going forward, but this one actually goes backwards to the beginning of this year for many of the components.
Various provisions of the tax package affect certain segments of the population, but not others (example: no tax on tips, no tax on overtime, tax deductible interest on certain car loans, etc. – see last week’s memo for more details). I’ll spend today’s memo discussing items that will affect all of us: mainly standard deduction and tax brackets.
But, before I jump into this discussion, please allow me to provide the same disclosure I did last week: I am not a CPA (and none of what I discuss here should be interpreted as tax advice, consult a CPA for tax guidance), and I am not a politician (thank God!). I have done my best to gather all the data I could and consolidate it here for your reference, but I cannot promise everything is 100% correct. This is a fluid situation and I’m spending hours doing my best to sort through everything, but I may have inadvertently missed something or oversimplified something. Thank you in advance for your patience and understanding.
Now let’s jump in. 😊
First, I feel the need to define a few key tax terms that are thrown around that I know can be very confusing.
- Deduction = a deduction reduces the income that’s subject to taxation
- Example: If I make $100,000/year and have a $5,000 tax deduction then my taxable income is $95,000 ($100,000 – $5,000) instead of $100,000
- Credit = a credit is a direct reduction of the taxes that you pay
- Example: If I make $100,000/year and owe $8,000 in taxes but have a $5,000 tax credit then my taxes paid goes to $3,000 instead of $8,000 ($8,000 tax bill – $5,000 credit)
- Refundable credit = a refundable credit means you get the tax credit even if you owe no tax
- Example: If I make $100,000/year and owe $8,000 in taxes but have a $10,000 tax credit then I get a refund of $2,000 instead of paying $8,000 in taxes ($8,000 tax bill – $10,000 credit = $2,000 refund)
- Some credits are fully refundable (can result in a tax refund greater than the taxes paid as in the example above), others are partially refundable (which limits the amount of refund you can get), and others are nonrefundable (meaning the credits can only bring your tax paid to $0, but can’t result in a refund beyond your tax liability).
How are we doing? Confused yet 😉
One thing is for sure: this bill will not reduce the need for CPAs 😉
Now, let’s get to the standard deduction, which affects all of us. Fortunately, this one is a little more straight forward. The standard deduction is the first money every US taxpayer makes.
To start this year the standard deduction was $15,000 per person, $30,000 for a couple filing a joint tax return.
Instantly that has changed to $15,750 (single) and $31,500 (joint) for 2025 with the passing of the Big Beautiful Bill.
So, if a married couple filing a joint tax return makes $100,000 their taxable income would be $68,500 ($100,000 – $31,500). Prior to the passing of the bill, it would have been $70,000 of taxable income ($100,000 – $30,000).
One of the big provisions of this new tax package is a “senior bonus deduction” of $6,000 for American’s age 65 and older. (This was in lieu of making Social Security tax free, since doing that requires much for extensive legislation).
So, same example as above: if a married couple, with both ages of 65+, filing a joint tax return makes $100,000 their taxable income would be $56,500 ($100,000 – $31,500 standard deduction – $12,000 senior bonus). Previously it would have be $70,000 of taxable income, so for “seasoned citizens” this is very significant.
Ok, from there we now get into the tax brackets, which have now been made “permanent” (meaning they can’t be changed without new legislation). These will adjust for inflation in future years.
| Single tax filer | |
| 10% | $0-$11,925 |
| 12% | $11,925-$48,475 |
| 22% | $48,475-$103,350 |
| 24% | $103,350-$197,300 |
| 32% | $197,300-$250,525 |
| 35% | $250,525-$626,350 |
| 37% | $626,350+ |
| Joint tax filer | |
| 10% | $0-$23,855 |
| 12% | $23,850-$96,950 |
| 22% | $96,950-$206,700 |
| 24% | $206,700-$394,600 |
| 32% | $394,600-$501,050 |
| 35% | $501,050-$751,600 |
| 37% | $751,600+ |
Let’s just look at a couple of examples to hopefully make this jumbled mess make a little more sense.
Example #1: A single tax filer, under age 65, makes $75,000/year.
- Prior to the passing of the bill:
- $75,000 – $15,000 standard deduction = $60,000 taxable income
- $0 – $11,925 taxed at 10% bracket = $1,192.50 ($11,925 x 10%)
- $11,925 – $48,875 taxed at 12% bracket = $4,434.00 ($36,950 x 12%)
- Remaining $11,125 income taxed at 22% bracket = $2,447.50 ($11,125 x 22%)
- Total tax bill = $8,074 ($1,192.50 + $4,434.00 + $2,447.50)
- After the passing of the bill:
- $75,000 – $15,750 standard deduction = $59,250 taxable income
- $0 – $11,925 taxed at 10% bracket = $1,192.50 ($11,925 x 10%)
- $11,925 – $48,875 taxed at 12% bracket = $4,434.00 ($36,950 x 12%)
- Remaining $10,375 income taxed at 22% bracket = $2,282.50 ($10,375 x 22%)
- Total tax bill = $7,909 ($1,192.50 + $4,434.00 + $2,282.50)
- This results in a $165/year tax savings
Example #2: A single tax filer, under age 65, makes $75,000/year, but $15,000 of that income is from overtime pay.
- Prior to the passing of the bill:
- $75,000 – $15,000 standard deduction = $60,000 taxable income
- $0 – $11,925 taxed at 10% bracket = $1,192.50 ($11,925 x 10%)
- $11,925 – $48,875 taxed at 12% bracket = $4,434.00 ($36,950 x 12%)
- Remaining $11,125 income taxed at 22% bracket = $2,447.50 ($11,125 x 22%)
- Total tax bill = $8,074 ($1,192.50 + $4,434.00 + $2,447.50)
- After the passing of the bill:
- $75,000 – $15,750 standard deduction – $12,500 overtime pay deduction = $46,750 taxable income
- $0 – $11,925 taxed at 10% bracket = $1,192.50 ($11,925 x 10%)
- Remaining $34,825 taxed at 12% bracket = $4,179.00 ($34,825 x 12%)
- Total tax bill = $5,371.50 ($1,192.50 + $4,179.00)
- This results in a $2,702.50/year tax savings
Example #3: A married couple filing a joint tax, under age 65, makes $125,000/year.
- Prior to the passing of the bill:
- $125,000 – $30,000 standard deduction = $95,000 taxable income
- $0 – $23,855 taxed at 10% bracket = $2,385.50 ($23,855 x 10%)
- Remaining $71,145 taxed at 12% bracket = $8,537.40 ($71,145 x 12%)
- Total tax bill = $10,922.90 ($2,385.50 + $8,537.40)
- After the passing of the bill:
- $125,000 – $31,500 standard deduction = $93,500 taxable income
- $0 – $23,855 taxed at 10% bracket = $2,385.50 ($23,855 x 10%)
- Remaining $69,645 taxed at 12% bracket = $8,357.40 ($69,645 x 12%)
- Total tax bill = $10,742.90 ($2,385.50 + $8,537.40)
- This results in a $180/year tax savings
Example #4: A married couple filing a joint tax, both over age 65, makes $125,000/year.
- Prior to the passing of the bill:
- $125,000 – $30,000 standard deduction = $95,000 taxable income
- $0 – $23,855 taxed at 10% bracket = $2,385.50 ($23,855 x 10%)
- Remaining $71,145 taxed at 12% bracket = $8,537.40 ($71,145 x 12%)
- Total tax bill = $10,922.90 ($2,385.50 + $8,537.40)
- After the passing of the bill:
- $125,000 – $31,500 standard deduction – $12,000 senior deduction = $81,500 taxable income
- $0 – $23,855 taxed at 10% bracket = $2,385.50 ($23,855 x 10%)
- Remaining $57,645 taxed at 12% bracket = $6,917.40 ($57,645 x 12%)
- Total tax bill = $9,302.90 ($2,385.50 + $6,917.40)
- This results in a $1,620/year tax savings
As you can see, depending on various factors the tax savings can be more or less, but the federal taxes paid for everyone will be less under this new plan. Everyone saves, some just save more (those aged 65+ and those who earn income via overtime / tips are big winners here).
It is my hope that walking through that math was helpful in better understanding how the tax brackets and standard deductions operate. But I might just be fooling myself … for what it’s worth I had a good time with the calculator 😉
Thanks for your patience, I know that was a lot to absorb. I’m fully aware I lost most of my audience many paragraphs ago. If you made it this far, I applaud you. 😊
Next week I plan on discussing a few big-picture strategies we can deploy to maximize your benefits under these new tax codes.
Thank you for the incredible honor to support you through your financial journey. Please don’t hesitate to reach out if my team and I can do anything to support you further.
Make it a great week ahead.