Edward Jones Market News: Federal Tax Bill 2025

President signs federal tax bill into law

On July 4, the President signed into law H.R. 1, the One Big Beautiful Bill Act, which extends several provisions of the 2017 Tax Cuts and Jobs Act (TCJA) and includes additional changes that were highlighted during the Trump campaign. As part of the bill, the debt ceiling was also raised by $5 trillion. We offer some highlights:

Extensions of certain TCJA provisions

The bill permanently extends certain provisions of TCJA that were previously set to expire at yearend, including:

For individuals

• Increased standard deduction and expanded child tax credit of up to $2,200 per qualifying child and $500 per other qualifying dependent (with the modification that Social Security numbers will be required to receive this credit);
• Top individual marginal tax rate of 37%;
• Higher estate-tax exemption (set to be $15 million per individual in 2026);
• Increased alternative minimum tax (AMT) exemption and phase-out thresholds;
• Increased adjusted gross income (AGI) limitation of 60% for charitable cash contributions;
• Cap on the state and local tax (SALT) deduction, with a higher cap through 2029 (set to be $40,000 in 2025). Note that the higher cap is reduced for taxpayers with income in excess of $500,000 (but will not be reduced below $10,000) and it will reset to $10,000 beginning in 2030; and
• Elimination of miscellaneous itemized deductions (e.g., investment expenses).

For business owners

• Qualified business deduction (referred to as 199A) of 20%, with a minimum deduction of $400 for individuals with at least $1,000 of qualified business income and higher phase-in thresholds; and
• Reinstatement of TCJA's 100% "bonus" depreciation deduction for qualifying assets placed in service after Jan. 19, 2025.

Additional tax benefits

In addition to extending key provisions of TCJA, the bill includes several other tax benefits, including

• Through 2028, the ability for taxpayers below certain income thresholds to deduct from income (all available to non-itemizers):
  • Overtime income, up to $12,500 for single filers and $25,000 for married couples filing jointly in 2025
  • Qualified tips up to $25,000 regardless of filing status
  • Qualified passenger-vehicle loan interest, up to $10,000 regardless of filing status

  • Up to $6,000 per taxpayer for individuals age 65 or older;

• Extension and enhancements of certain credits, including the adoption credit for individuals as well as the paid family and medical leave credit, and the employer-provided child-care credit for businesses;

• A $1,000 charitable contribution deduction for single filers ($2,000 for joint filers) for non-itemizers beginning in 2026;

• Additional elementary-, secondary- and home-school expenses treated as qualified higher-education expenses and higher annual limits available for elementary and secondary tuition for 529 accounts;

• The creation of a "Trump account", a traditional IRA for children with special rules until age 18, including: non-deductible contributions up to $5,000 in 2025 (which do not count toward normal IRA limits), limited investment options and no distributions until 18. Children born after Dec. 31, 2024, and before Jan. 1, 2029, would receive a $1,000 contribution from the federal government. Trump accounts "switch" to a normal traditional IRA upon age 18. Distributions of earnings and deductible contributions made after 18 would be subject to taxes and early withdrawal penalties; however, IRAs that started as Trump accounts would not be aggregated with other IRAs for pro rata rules.

Spending cuts, revenue raisers and other changes

To help cover the cost of the tax proposals, the bill includes several provisions to cut spending and raise revenue, including

• Reduced spending on Medicaid and nutrition assistance (including new work requirements and more frequent eligibility checks); and
• Termination of numerous clean-energy credits (such as clean-vehicle and energy-efficient home-improvement credits);
• Itemized deductions capped at 35% overall and itemized deduction for charitable contributions only allowed to the extent total contributions exceed 0.5% of the taxpayer's adjusted gross income beginning in 2026; and
• Borrowing limits on federal student loans for graduate and professional students, as well as parents using Parent PLUS loans.

Social Security taxes not eliminated

Contrary to communications from the Social Security Administration, the bill did not eliminate taxes on Social Security benefits. However, Social Security recipients age 65 or older may be eligible to receive the temporary deduction through 2028 (discussed above) to help reduce taxes on their Social Security benefits.

 What this means for you

• If you were considering strategies to accelerate income or lock in the higher estate tax threshold solely to prepare for the TCJA sunset, those strategies may no longer be needed given the extension of those TCJA provisions.
• If your income is below a certain threshold, you may be eligible for new deductions that can reduce your taxes. Those tax savings could be used to help pay current expenses or be put toward your financial goals, like retirement.
• If your child has taxable compensation, a Roth IRA is generally more favorable than a Trump account because Roth IRAs offer the potential for tax-free growth, broader investment choice, and the ability to access assets before 18. Consider a Trump account if your child is already maximizing a Roth IRA, doesn't have taxable compensation, or to receive the free $1,000 contribution. Note that Trump accounts will not be effective until 2026 and may need to be established through the Treasury.
• If you're currently receiving Medicaid or nutrition assistance, be sure to understand the new eligibility requirements. You may also need to explore alternative coverage, providers, or assistance programs to try to cover any gaps.
• If you're a graduate/professional student or parent planning to finance a college education with federal student loans, you may need to contribute more or rely on private student loans (which have fewer protections) if the cost of attending exceeds the borrowing limits.