The Trump Tax Plan for 2025: Social Security, Tips, Overtime, SALT Cap, and more….

It looks as though the likely outcome of the 2024 presidential election will be a Trump win, and potentially full control of the Senate and House by the Republicans to complete the “full sweep”.  As I write this article at 6am the day after election day, it looks like Trump will be president, the Senate will be controlled by the Republicans, and the House is too close to call.  If the Republicans complete the full sweep, there is a higher probability that the tax law changes that Trump proposed on his campaign trail will be passed by Congress and signed into law as early as 2025.  Here are the main changes that Trump has proposed to the current tax laws:

• Making Social Security Completely Exempt from Taxation

• Exempting tips from income taxes

• Exempting overtime pay from taxation

• A new itemized deduction for auto loan interest

• Dropping the corporate tax rate from the current 21% down to 15%

• Eliminating the $10,000 SALT Cap

• Extension of the Tax Cut & Jobs Act beyond 2025

Even if the Democrats end up hanging on to the House by a narrow margin, there is still a chance that some of these tax law changes could be passed in 2025.

Social Security Exempt From Taxation

This one is big for retirees. Under current tax law, 85% of Social Security retirement benefits are typically taxed at the federal level. Trump has proposed that all Social Security Benefits would be exempt from taxation, which would put a lot more money into the pocket of many retirees.   For example, if a retiree receives $40,000 in social security benefits each year and they are in the 22% Fed bracket, 85% of their $40,000 is currently taxed at the Federal level ($34,000), not paying tax on their social security benefit would put $7,480 per year back in their pocket.

Note: Most states do not tax social security benefits. This would be a tax change at the federal level.

Exempting Tips from Taxation

For anyone who works in a career that receives tips, such as waiters, bartenders, hair stylists, and the list goes on, under current tax law, you are supposed to claim those tips and pay taxes on those tips.  Trump has proposed making tips exempt from taxation, which for industries that receive 50% or more of their income in tips could be a huge windfall.  The Trump proposed legislation would create an above-the-line deduction for all tip income, including both cash and credit card tips.

Overtime Pay Exempt From Taxation

For hourly employees who work over 40 hours per week and receive overtime pay, Trump has proposed making all overtime wages exempt from taxation, which could be a huge windfall for hourly workers. The Tax Foundation estimates that 34 million Americans receive some form of overtime pay during the year.

Auto Loan Interest Deduction

Trump has also proposed a new itemized deduction for auto loan interest. However, since it’s likely that high standard deductions will be extended beyond 2026, if there is a full Republican sweep, only about 10% of Americans would elect to itemize on their tax return as opposed to taking the standard deduction.  A taxpayer would need to itemize to take advantage of this new proposed tax deduction.

Reducing The Corporate Tax Rate from 21% to 15%

Trump proposed reducing the corporate tax rate from the current 21% to 15%, but only for companies that produce goods within the United States.  For these big corporations, a 6% reduction in their federal tax rates could bring a lot more money to their bottom line.

Eliminating the $10,000 SALT Cap

This would be a huge win for states like New York and California, which have both high property taxes and state income taxes. When the Tax Cut and Jobs Act was passed, it was perhaps one of the largest deductions for individuals who resided in states that had both state income tax and property taxes referred to as the SALT Cap (State and Local Taxes). Trump has proposed extending the Tax Cut and Jobs Act but eliminating the $10,000 SALT cap.   

For example, if you currently live in New York and have property taxes of $10,000 and you pay state income tax of $20,000, prior to the passing of the Tax Cut and Jobs Act, you were able to itemize your tax deductions and take a $30,000 tax deduction at the federal level. When TCJA passed, it capped those deductions at $10,000, so most individuals defaulted into just taking the standard deduction and lost some of that tax benefit.  Under these proposed tax law changes, taxpayers will once again be able to capture the full deduction for their state income taxes and property taxes making itemizing more appealing.

No Sunset For The Tax Cut and Jobs Act

The Tax Cut and Jobs Act was passed by Trump and the Republican Congress during his first term.  That major taxation legislation was scheduled to expire on December 31, 2025, which would have automatically reverted everything back to the old tax brackets, standard deductions, loss of the QBI deduction, etc., prior to the passing of TCJA.   If the Republicans gain control of the House, there is a very high probability that the tax laws associated with TCJA will be extended beyond 2025.

Summary of Proposed 2025 Tax Law Changes

There could be a tremendous number of tax law changes starting in 2025, depending on the ultimate outcome of the election results within the House of Representatives. If a full sweep takes place, a large number of the reforms that were covered in this article could be passed into the law in 2025.  However, if there is a divided Congress, only a few changes may make it through Congress. We should know the outcome within the next 24 to 48 hours.

It’s also important to acknowledge that these are all proposed tax law changes. Before passing them into law, Congress could place income limitations on any number of these new tax benefits, and/or new tax law changes could be introduced. It should be a very interesting 2025 from a tax standpoint.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.