SUMMARY OF CHANGES
This law makes permanent many provisions of the Tax Cuts and Jobs Act (TCJA), including existing tax brackets and the deduction for Qualified Business Income (QBI).
Here are some highlights - some due to expire in 2028 while others are permanent:
*Increases the limit on State and Local Tax (SALT) deductions and introduces new deductions for things like tips, overtime. In lieu of making social security non-taxable, it increases the standard deduction for those over 65 to reduce taxable income.
*Eliminates some clean energy credits and phases out others, including certain clean vehicle credits and residential energy credits.
*Increases Child Tax Credit and Child Dependent Care Credit. Gives a $1000 credit for newborns to add to a government-funded investment account
*Changes requirements for Medicaid.
*Increases Estate Tax Exemption.
*Below is more in-depth detail for the above changes.
MEDICAID WORK REQUIREMENTS:
These new requirements will begin to take effect starting January 1, 2027. The law affects who is eligible to receive Medicaid and Medicare benefits or access Affordable Care Act plans.
Introduces work requirements for certain Medicaid recipients, requiring a minimum of 80 hours of monthly work, school, or community engagement for able-bodied adults aged 19-64.
Requires biannual, instead of annual, eligibility checks for childless adults on Medicaid.
SOCIAL SECURITY TAX REDUCTION:
In lieu of eliminating taxes on social security, there will be an additional standard deduction for seniors age 65 and up, offering an additional $6,000 in deductions for single filers and $12,000 for married couples. This increase reduces taxable income, not taxes. The new deduction can be used by seniors on any income, not just Social Security benefits.
For single filers, the deduction applies to those earning up to $75,000 annually, phasing out thereafter and disappearing entirely at $175,000. For married couples, these thresholds are $150,000 for the start of the phase-out and $250,000 for its complete disappearance. The deduction is only in effect for from 2025 through 2028.
CHILD TAX CREDIT:
$2,200 instead of $2000.The higher refundable portion of up to $1,700 per child got extended too. But individuals with incomes above $200,000, or $400,000 for jointly filing couples, cannot receive the credit.
DEPENDENT CHILD CARE CREDIT:
Dependent care credit expenses will go up to 50% from 35% and retained the current total cap at $3,000 for one kid under the age of 13, or $6,000 for two or more. This means the highest credit you can receive is $1,050 for one child (35% of $3,000) and $2,100 for two or more children (35% of $6,000). However, if your Adjusted Gross Income is above $43,000, your credit will be limited to $600 for one child (20% of $3,000) and $1,200 for two or more children (20% of $6,000).
NEWBORN CREDIT:
Starting in 2025, American newborns will receive a $1,000 government-funded investment account. Parents of newborns will receive $1,000 to open an investment account composed of stock, with annual contributions of up to $5,000 that can include $2,500 from an employer. Investors could begin making some qualified withdrawals from the tax-deferred accounts as early as the account holder's 18th birthday. Approved withdrawals come with taxes at the long-term capital gains rate, while nonqualified ones bring ordinary income and a 10% penalty in some cases.
EDUCATION:
Changes loan limits and repayment. Caps unsubsidized student loans for graduate students at $20,500 per year and $100,000 lifetime. Professional degrees are capped at $50,000 per year and $200,000 lifetime. The bill also eliminates Graduate PLUS loans and establishes a lifetime borrowing limit of $257,000. Repayment programs have also been restructured, and some deferment and low-cost repayment options have been removed, potentially leading to higher loan payments for some students.
SALT TAX (state and local tax deductions):
Sets the deduction for state and local taxes at $40,000, which is four times the maximum available under the 2017 law. However, that deduction is lowered for taxpayers whose income is above $500,000, with those at $600,000 or above limited to the previous deduction cap of $10,000.
ABOVE THE LINE CONTRIBUTION DEDUCTION:
BEGINNING IN 2026, you can claim an above-the-line deduction (even if you don’t itemize) for cash donations to public charities, up to $1,000 for single filers and $2,000 for those married filing jointly.
AUTO LOAN INTEREST DEDUCTION:
This deduction is above the line also. You can deduct up to $10,000 in interest per year.
The vehicle must be new, purchased with a loan originated after December 31, 2024, and its final assembly point must be in the US. The vehicle must be for personal use, not for business or commercial. The loan must be secured by a first lien on the vehicle and may not be from a family member.
The deduction phases out for individuals with a modified adjusted gross income (MAGI) over $100,000 ($200,000 for joint filers). Interest on leased vehicles or loans taken out to buy used cars is not eligible for this deduction. Takes effect January 1, 2025, and is scheduled to expire on December 31, 2028.
TAX ON OVERTIME:
Workers can deduct up to $12,500 in qualified overtime compensation ($25,000 for joint filers) from their federal income taxes.
Only the "premium" portion of overtime pay (the amount above the standard hourly rate) required by the Fair Labor Standards Act (FLSA) is eligible for the deduction. This excludes overtime compensation for certain workers and state-mandated overtime laws like California's.
This deduction phases out for individuals with modified adjusted gross income over $150,000 ($300,000 for joint filers). Federal payroll taxes (Social Security and Medicare) and state and local taxes (if applicable) still apply to overtime pay. Only Federal tax withholding applies.
TIP INCOME DEDUCTION:
Eligible individuals can deduct up to $25,000 in qualified tip income from their federal income taxes.
The deduction applies to tips earned in occupations that "customarily and regularly received tips" before 2025, and the Treasury Department is required to publish a list of eligible occupations by October 2, 2025. Tips must be voluntary and reported on tax forms like W-2s, and 1099s.
The deduction phases out for individuals with modified adjusted gross income over $150,000 ($300,000 for joint filers). Federal payroll taxes (Social Security and Medicare) and state and local income taxes (if applicable) still apply to tip income.
Both deductions on tips and overtime are temporary and are set to expire after the 2028 tax year.
HIGHER ESTATE TAX DEDUCTION:
The exemption amount is $13.99 million per individual and $27.98 million for married couples. For 2026 and beyond, the exemption is set to permanently increase to $15 million per individual ($30 million for married couples).