On February 6, 2025, the White House announced a series of tax cuts primarily benefitting the middle class and retirees. Here’s what’s on the table:
- No tax on tips
- No tax on Social Security benefits for seniors
- No tax on overtime pay
- Renewing the Trump Tax Cuts from the 2017 Tax Cuts and Jobs Act
- Adjusting the SALT cap
- Eliminating special tax breaks for billionaire sports team owners
- Closing the carried interest loophole for hedge fund managers
- Tax cuts for Made in America products
The administration is calling this the largest tax cut in history for working Americans, and with Republicans in control of Congress, these proposals are likely to move forward.
Tax Cuts Means Greater Financial Freedom
As someone who is committed to helping as many people as possible reach financial freedom sooner, it’s hard not to be pro-tax cuts. After all, the more money we keep, the greater wealth we can build to live our desired lifestyles. This isn’t about politics—it’s about economic opportunity and personal finance strategy.
One of the biggest reasons I retired early in 2012 was because I didn’t want to grind away 60+ hours a week, constantly stressed and dealing with chronic pain, only to hand over ~40% of my income in taxes. Instead of complaining, I chose to make less money and negotiate a severance package. Making 80% less money that first year felt weird initially, but not paying six figures in income taxes and enjoying the freedom of public parks on a weekday felt incredible.
Of course, tax cuts mean less government revenue, so the White House is looking for spending cuts to compensate. While USAID (1% of spending) and other discretionary spending programs might see reductions, the real challenge is in cutting major budget items.
U.S. Government Spending Breakdown
The government spent about $6.75 trillion in 2024 according to the Treasury Department, with Social Security, National Defense, and Health comprising of 50% of total spending. Hence, if the White House wants to run a balanced budget, it must find and equal amount of cuts and/or have more economic growth. Here's the top 5 spending breakdown:
- Social Security (21%)
- National Defense (15%)
- Medicare & Health (13%)
- Interest on Debt (13%)
- Income Security & Other Entitlements (9%)
Breaking Down the Proposed Tax Cuts
Let’s now go through each of the proposed tax cuts.
1) No Tax on Tips
Big win for service workers. If you work for tips, you often rely on customer generosity to make a living. You should get to keep 100% of what you earn. Many restaurant servers, bartenders, and hotel workers barely scrape by, so this tax exemption is well deserved.
2) No Tax on Social Security for Seniors
Fantastic move for retirees. Seniors paid into the system their entire lives. Taxing their already modest benefits never made much sense. Given that Social Security benefits already provide a poor return compared to investing in the stock market or even a 60/40 portfolio, letting retirees keep more of their money is a fair policy.
Currently, FICA taxes require employers to withhold 6.2% Social Security tax and 1.45% Medicare tax from an employee’s wages. Employers must match these taxes, bringing total FICA contributions to 15.3%.
The amount of tax-free income retirees can earn will keep going up, which means less financial burden for their children and for society. Retirees deserve to finally keep more of what they’ve paid in.
3) No Tax on Overtime Pay
This is a huge incentive for workers to put in extra hours and work harder – one of my predictions for what a second Trump presidency means for your finances. Eliminating overtime taxes means higher take-home pay, which in turn boosts spending, saving, and investing. It may also lead to a stronger GDP as worker output increases.
I’ve always believed people can work longer than the standard 40 hours a week if they want to get ahead financially. Now, with tax-free overtime, there’s an even greater incentive to hustle. I probably would have easily worked five more years if I got to keep 20 hours a week of earnings tax free.
4) Renewing the Trump Tax Cuts from the 2017 Tax Cuts and Jobs Act
This move brings certainty to taxpayers and businesses, which is good for investors. One of the biggest concerns before 2025 was that the 2017 tax cuts would expire, leaving financial planners, investors, and businesses scrambling. Now, there is not as big of a rush to conduct Roth IRA conversions either.
Key provisions being renewed:
- Lower individual tax rates, including the top rate reduction from 39.6% to 37%.
- Higher standard deduction: $15,000 for individuals, $30,000 for married couples that should keep going up.
- Corporate tax rate remains at 21% (down from 35% pre-2017).
- 20% deduction for pass-through business owners, benefiting entrepreneurs.
- Territorial tax system: U.S. companies no longer pay taxes on foreign earnings.
5) Adjusting the SALT Cap
The State and Local Tax (SALT) deduction cap was introduced in 2017, limiting the amount of property, income, and sales taxes that taxpayers could deduct from their federal tax bill to $10,000 per year.
This disproportionately hurt homeowners in high-tax states like California, New York, Connecticut, Hawaii, Washington, Massachusetts, and New Jersey. If the cap is adjusted, higher-income homeowners could save thousands. Since 2017, home prices everywhere have risen aggressively. Hence, it’s not just the expensive states that will benefit from a higher SALT cap.
Instead of a blanket cap, I’d like to see the SALT cap adjusted based on local home prices. A $10,000 cap in Mississippi is very different from a $10,000 cap in San Francisco. A proportional adjustment makes more sense.
Higher SALT caps could result in a noticeable uptick in demand for real estate in higher priced cities. With the return to the office movement also building momentum, we should see big city real estate shine in the coming years.
6) Eliminating Special Tax Breaks for Billionaire Sports Team Owners
Does anyone care? Probably not. But it raises the question—why did they get tax breaks in the first place? Billionaire team owners don’t need special treatment. Steve Ballmer (L.A. Clippers owner, ~$122 billion net worth) can afford to pay more taxes.
7) Closing the Carried Interest Loophole
The carried interest loophole allows hedge fund managers and private equity investors to have their performance-based compensation taxed at the lower capital gains rate (20%) instead of the higher ordinary income rate (37%).
As a limited partner in eight private funds, I don't mind. It’s an unfair advantage that lets wealthy investors pay lower taxes than salaried workers. Yes, the general partners have to invest for the long term, which helps fund entrepreneurship, innovation, and economic growth. But such a huge difference in tax rates seems egregious. Closing this loophole will generate billions in additional tax revenue without impacting most Americans.
8) Tax Cuts for Made in America Products
This is an incentive to boost domestic manufacturing. By lowering taxes on goods produced in the U.S., companies have more reasons to keep production at home, creating more American jobs. This is another win for the American worker.
What Happens Next?
With Republicans controlling Congress, these tax cuts have a strong chance of passing. However, negotiations over which cuts stay and how they’re funded will likely take months.
For now, the focus is on reducing government spending to help offset lost revenue. While agencies like USAID only account for about 1% of the federal budget, larger cuts will need to come from elsewhere if the administration wants to avoid adding to the national debt.
Less Taxes, More Efficient Government
For middle-class Americans and retirees, these tax cuts could be a major financial win. If you:
- Work a tipped job
- Rely on Social Security
- Put in long hours with overtime pay
- Own a small business or pass-through entity
- Live in a high-tax state affected by the SALT cap
You could see real benefits in the years ahead. Tax cuts like these provide more financial flexibility, helping Americans save, invest, and build wealth faster.
Personally, I’m most excited about no taxes on Social Security benefits and the potential increase in the SALT cap. I don't factor Social Security into my retirement plans, so having this tax-free income starting in my mid 60s means less of a need to save and invest. I’m also thrilled to potentially lower my annual six-figure property tax bill given how inefficient my city government is. Any savings will go toward increased spending on my family.
Given our propensity to spend, we should also consider how these tax cuts might impact inflation. Let’s see if Americans actually get to keep more of our hard-earned money!
Readers, what are your thoughts on these latest tax cuts? Do you agree with them, or do you think some go too far? How much are you paying in taxes each year, and how would these changes impact you? Also, what are your thoughts on DOGE’s aggressive cuts to USAID and other government organizations? Are these the right areas to scale back, or will there be unintended consequences? Let’s discuss!
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Regardless of how good these proposed changes may or may not be, financially speaking, I can’t help think of the costs to get them. Who will be hurt when the bigger expense items are up for cuts? And how can the government be more efficient with less revenue? If it is so inefficient now, wouldn’t it just become more so? I worry that the excitement over potential short-term gains (less taxes, more income) is overshadowing the potential long-term loss of a government that is further unable to invest for our collective futures.
I get the politics of it and having to get a package that can get the necessary votes but the salt tax cap should be decreased to zero and not increased. If it stays double it to 20k for the married field jointly only.
It’s a subsidy to states that over tax their residents already.
Sam, if you buy this, I’ve a bridge to sell…making promises and implementing them are very different. Keeping the tax brackets low will help the Rick new than anyone else but hey, I’ll go for it. Hedge funds giving up their bonuses, we’ll see.
What are your thoughts on why a Republican control Congress would not pass most of these tax cut suggestions?
I agree with all but one of the proposals. Eliminating tax on tips is simply a slap in the face to other low paid workers who do not get similar benefit.
But others are covered by minimum wage laws (local). Many with tips are not paid by minimum wage and tips are were to make up the difference. I do haope that any tip $s that go back into the business (and not to staff) are taxed as income.
Call me a cynic but the “No tax on Tips” is campaign rhetoric and if enacted will likely lead to ubiquitous attempts at tax evasion and fraud. First off, I don’t know anyone in the service industry who accurately reports tips. They all intentionally put an arbitrary low number on their tax return to avoid paying taxes therefore there is no significant benefit to enacting the law. Also, this will be a disincentive for owners to pay their service staff a liveable wage and they will be stuck at $2.13/hr until the end of time. Another consideration is how is “no tax” defined? Are we talking income tax, payroll tax, etc? Is the law going to be specific to those working in the service industry or are savvy/shady business types now going to report that they are being paid in “tips” to avoid paying taxes? I’m looking forward to learning that Jamie Dimon is now being $39 million per year in “tips”.
A non-cynical view of this situation is that it will encourage a debate on the necessity of “tips” in our society. Would it not be better to abolish “tips” completely and pay service workers liveable wages with healthcare and retirement benefits like the vast majority of working Americans enjoy? Raise your hand if one of the reasons you enjoy traveling outside of the US is that other more sophisticated societies don’t allow tipping. I’ll never forget the time I was a study abroad student in Australia and the bartender slid my tip back at me and told that wasn’t necessary in his country. I was flabbergasted and after 27 years it still remains one of the best financial moments in my life.
I’m just getting warmed up on how preposterous this campaign pledge is, so I will stop before my keyboard melts.
Visit Europe Japan, etc. No tips and it is included in the cost of a meal. The price you see on the menu is what you pay: full transparency. Yes this would be far better in the US. It would force business owners to manage and pay their staff rather than customers.
Sam – I would love to hear your take on early retirement and the implications of social security. Is there a magic number like you see with some pensions where say you work 20 years you get $30,000 a year for life but if you make it one more year there’s a jump to $40,000 per year but one more year after that only takes you to $41,000 a year? I’m in the dark how early retirement impacts SS.
I wrote a post about the best time to take Social Security.
In general, I don’t think anybody who strives to retire early should think about or depend on Social Security. Just treat it as a bonus once you become age eligible. If we focus on building our taxable portfolios, rental property portfolios, and other passive income investments to cover our expenses, we’ll be fine.
When I get SS, my plan is to spend/give away 100% of it every deposit I get. The best feeling is to help others and give money away to those in need. At that age, time, and level of wealth, that is my plan.
FS readers should have a goal that they make so much and have accumulated so much wealth that SS doesn’t matter.
As a physician practice owner (business owner), we don’t get the 20% deduction on QBI. I never understood why the government really puts the nail to physicians (ie, low Medicare reimbursements, low VA reimbursements, almost non-existent Medicaid reimbursements). Hopefully they will remove the physician exclusion and put us in with almost all other business owners.
Thanks for explaining all of the proposed tax cut changes in such an easy to understand way and so quickly after the news broke. There’s certainly a lot to take in and I can see the benefits of the changes themselves. Now we’ll just have to wait and see how the govt will “pay” for them in further detail and what actually passes into law. Lots to watch for this year.
Carried interest being fixed is great and should have occurred earlier. Getting an incentive fee paid as if it’s capital gains is not the original intent fair taxation. Everything I see above makes logical sense, but of course people and firms will find ways to use these laws to exploit and reduce their tax bill if they can on overtime and tips – even with tight specifics.
I’m hopeful that common sense continues to be drivers of policy conversations on tax and other matters.