Collin Randall

The highly publicized One Big Beautiful Bill of more than 800 pages that passed into law in July covers many areas of the tax code.

Some of the major highlights include keeping the ordinary income brackets the same with a few minor nuances, raising the limit for state and local taxes deductions, enhanced and extended business deductions, and slight increases to the standard deduction and child tax credits.

But some of the changes making headlines relate to the goals of the current administration: no taxes on overtime, tips and social security. All this income is now tax-free, right? Not exactly …

Taxpayers working overtime will receive a nice deduction for overtime, but there are limitations.

Joint filers can now deduct up to $25,000 of qualifying overtime ($12,500 for single filers). The deduction only applies to the additional pay received above the standard rate and must be reported on the employees’ W-2.

However, this income will still be subject to payroll taxes meaning the employee and employer must still pay Social Security and Medicare taxes on this income.

Service workers who receive tips may also get a new deduction.

The maximum deduction for tips is $25,000 and applies to all tax filers except those who file Married Filing Separately. However, this deduction is phased out as income exceeds $300,000 for joint filers and $150,000 for others.

And again, even though tips are deducted from income, payroll taxes still apply for both the employee and employer.

To be clear, this will only apply to “qualified tips” that are “a normal part of the business.” The IRS will publish a list of the occupations that this will apply to within 90 days. So no, a contractor cannot put in a new fence and receive payment in “tips!”

Perhaps the biggest misconception with the new bill relates to tax on Social Security. There is not a specific provision that excludes Social Security benefits from your income.

However, there is a new enhanced deduction for seniors. Each taxpayer 65 or older gets up to an additional $6,000 deduction effective this year through 2028.

The deduction phases out by 6% of Modified Adjusted Gross Income above $150,000 for joint filers and $75,000 for others. This is the closest the One Big Beautiful Bil gets to the current administration’s goal of “No tax on Social Security.”

While this is not that, with an enhanced deduction, nearly 90% of a senior’s Social Security benefit will be tax-free (up from around 64%).

These new deductions may be welcome relief and lower your overall tax bill, but it is important to understand how each will affect you personally.

Tax laws and their implications are ever changing, and it is important to incorporate these changes into your financial plan. As always, consult with your tax preparer/attorney before making any changes.

Collin Randall, CFA, CFP, is a financial adviser at Bennett Associates Wealth Management in Butler. Bennett Associates is a registered investment adviser and does not provide any legal, accounting or tax advice. The material prepared is the opinion of the author and for informational purposes.