What's in the "One Big Beautiful Bill"? A tax perspective.

Navigating the Future: Key Tax Legislation Changes in Trump’s 2025 Bill

As the 2025 tax season approaches, the Trump administration has put forward a sweeping tax proposal, often referred to as the “One Big Beautiful Bill,” that aims to reshape the U.S. tax landscape. Building on the foundation of the 2017 Tax Cuts and Jobs Act (TCJA), this legislation seeks to extend expiring provisions, introduce new tax breaks, and implement significant economic policies. With the TCJA’s individual and estate tax provisions set to expire at the end of 2025, the proposed changes could have far-reaching implications for individuals, businesses, and the broader economy. Below, we explore the key highlights of the proposed tax legislation, based on recent analyses, and what they might mean for taxpayers.

1. Extending and Enhancing TCJA Provisions

The cornerstone of the Trump tax bill is the permanent extension of the TCJA’s individual income tax rates, which include brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Without action, these rates would revert to pre-TCJA levels (up to 39.6%) in 2026, increasing taxes for many households. The bill also proposes to maintain the doubled standard deduction, which was significantly increased under the TCJA, ensuring that filers continue to benefit from a simplified tax filing process. For a family of four earning the median income of $80,610, allowing the TCJA cuts to expire could result in a $1,695 tax increase—equivalent to about nine weeks of groceries.

Additionally, the bill aims to make permanent the 20% Qualified Business Income (QBI) deduction for pass-through businesses, such as partnerships and S corporations, and even increase it to 22%. This change would provide ongoing relief to small business owners, though critics argue it disproportionately benefits high-income business owners, with over half of the benefits going to those earning over $1 million annually. The proposal also includes tweaks to the Child Tax Credit, temporarily raising the maximum credit to $2,500 per child from 2025 to 2028, with inflation adjustments thereafter, offering modest relief to families.

What This Means: For individuals and small businesses, these extensions could provide tax certainty and maintain lower tax burdens. However, the benefits may skew toward higher earners, potentially exacerbating income inequality, as households in the top 5% (earning over $461,000) are projected to receive over 45% of the tax cut benefits.

2. New Tax Exemptions: Tips, Overtime, and Social Security

One of the most publicized aspects of the bill is the introduction of tax exemptions for specific types of income, fulfilling campaign promises made by President Trump:

• No Tax on Tips: This provision would exempt tipped income from federal income taxes, potentially benefiting millions of service industry workers. Estimates suggest this could cost $70 billion to $550 billion over ten years, depending on whether it includes payroll taxes and how it’s structured to prevent abuse (e.g., reclassifying income as tips).

• No Tax on Overtime Pay: The bill proposes exempting overtime pay from income taxes, aiming to reward workers who put in extra hours. This could cost between $150 billion and $3 trillion over a decade, with the higher end reflecting broader exemptions or lack of strict guardrails.

• Tax-Free Social Security Benefits: Eliminating taxes on Social Security benefits is another headline proposal, projected to reduce federal revenues by $550 billion to $1.5 trillion over ten years. While this would provide relief to about 40% of beneficiaries who currently pay taxes on their benefits (those with substantial additional income), critics warn it could destabilize Social Security trust funds, accelerating insolvency without a means test or other offsets.

What This Means: These exemptions could put more money in the pockets of workers and retirees, particularly those in lower- and middle-income brackets. However, the significant revenue loss raises concerns about long-term fiscal sustainability, especially for Social Security, which faces growing funding challenges as the population ages.

3. Corporate Tax Cuts and Incentives for Domestic Manufacturing

The Trump bill proposes further reductions in corporate taxes to bolster U.S. competitiveness and encourage domestic production:

• Corporate Tax Rate Reduction: The current 21% corporate tax rate, lowered from 35% under the TCJA, would be reduced to 20% for all corporations and potentially to 15% for companies that manufacture in the U.S. This aims to incentivize domestic production and job creation.

• Reinstating 100% Bonus Depreciation: The bill would restore full expensing for eligible business assets, which began phasing out in 2023 (down to 40% in 2025). This allows businesses to immediately deduct the cost of investments, boosting capital investment but adding to the deficit.

• Domestic Production Activities Deduction (DPAD): A proposed reinstatement of a modified DPAD at 28.5% would effectively lower the tax rate for domestic producers, potentially stimulating mergers and acquisitions in manufacturing.

What This Means: These changes could make the U.S. more attractive for business investment and manufacturing, potentially creating jobs. However, the 2017 corporate tax cuts primarily benefited shareholders, and similar outcomes could occur, with limited trickle-down effects for workers. The revenue loss, estimated at hundreds of billions, adds pressure to find offsets.

4. State and Local Tax (SALT) Deduction Debate

The $10,000 cap on the SALT deduction, introduced by the TCJA to offset other tax cuts, remains a contentious issue. The Trump bill does not currently propose changes to this cap, despite earlier campaign promises to eliminate or raise it. Repealing the cap could cost $1 trillion to $1.2 trillion over ten years and primarily benefit high-income households in high-tax states like California, New York, and New Jersey. Some Republicans from these states advocate for a compromise, such as doubling the cap, but opposition persists due to its cost and regressive impact.

What This Means: Maintaining the SALT cap could limit tax relief for upper-middle-income and high earners in high-tax states, while repealing it would disproportionately benefit the wealthy, complicating efforts to balance the bill’s fiscal impact.

5. Estate and Gift Tax Exemption

The bill proposes to extend the TCJA’s doubled estate and gift tax exemption, set at $13.99 million per person in 2025, with inflation adjustments starting in 2027. Without extension, the exemption would drop to around $7 million in 2026, subjecting more estates to the 40% tax rate. This change, costing about $205 billion over ten years, would primarily benefit the ultra-wealthy, as only a small fraction of estates are currently taxable.

What This Means: Extending the exemption would preserve wealth transfers for high-net-worth individuals but do little for the broader population.

6. Tariffs as a Revenue Offset

To offset the estimated $4 trillion to $11.2 trillion cost of the tax cuts, the Trump administration has heavily emphasized tariffs, including a 20% universal tariff on imports (60% for Chinese goods) and 25% tariffs on Canadian and Mexican products (delayed until April 2025).

7. Other Notable Provisions

• Carried Interest Loophole: The bill reportedly includes closing the carried interest loophole, taxing it as ordinary income rather than capital gains, raising about $15 billion over a decade. This targets high-income fund managers but is a modest offset compared to the bill’s overall cost.

• Auto Loan Interest Deduction: A proposed deduction for auto loan interest, estimated at $10 billion annually if broadly applied, aims to support consumers, particularly those buying American-made vehicles.

• Repealing Clean Energy Credits: The bill considers scaling back or repealing tax credits from the 2022 Inflation Reduction Act, such as those for electric vehicles and green energy, to generate savings. This aligns with the administration’s focus on traditional energy but could hinder climate goals.